Finance | April – June 2024

Regulatory Updates

Master Circular – Guarantees and Co-acceptances

The RBI, vide ‘Master Circular on Guarantees and Co-acceptances’ dated 1 April 2024, consolidated guidelines/ instructions issued to all scheduled commercial banks (excluding payments banks and regional rural banks) till 31 March 2024, on matters relating to guarantees and co-acceptances.

Some of the key provisions of the master circular are:

Bank guarantees should not normally have a maturity of more than 10 years. However, in case banks extend loans for a period longer than 10 years for projects, banks may issue guarantees for such longer period.

Banks should refrain from issuing non-fund-based facilities to/ on behalf of constituents who do not enjoy credit facilities with them. However, non-fund-based facilities may be granted to customers who do not avail any fund-based facility from any bank in India.

Bank guarantee or letter of credit may be issued by scheduled commercial banks to clients of co-operative banks against counter guarantee of the co-operative bank.

The guarantee of parent companies may be obtained in the case of subsidiaries whose own financial condition is not considered satisfactory.

In addition to the above, the master circular also inter alia provides for (i) precautions and safeguards which should be taken by banks while issuing guarantees on behalf of their customers, (ii) guidelines relating to obtaining of personal guarantees of promoters, directors, other managerial personnel, and shareholders of borrowing concerns, (iii) guidelines for issuing bid bonds and performance guarantees for export, (iv) restrictions on guarantees to be executed by banks for placement of funds with NBFCs or other non-bank entities, and (v) precautions to be taken in the case of letter of credit for import of goods.

Master Circular on Basel III Capital Regulations

The RBI, vide ‘Master Circular on Basel III Capital Regulations’ dated 1 April 2024, consolidated the prudential guidelines on Basel III capital adequacy issued to banks till that date.

The regulations under master circular are based on three-mutually reinforcing pillars, viz. minimum capital requirements, supervisory review of capital adequacy and market discipline. The master circular inter alia compiles guidelines on composition of regulatory capital, capital charge of credit risk, external credit assessments, credit risk mitigation, capital charge for market risk etc.

Some of the key guidelines provided in the master circular are:

Banks are required to maintain a minimum capital to risk-weighted assets ratio of 9% on an on-going basis (other than capital conservation buffer and countercyclical capital buffer etc).

The capital conservation buffer has been set as 2.5% of risk weighted assets, requiring banks to build up capital buffers during periods of economic expansion.

The minimum leverage ratio has been set as 4% for domestic systemically important banks and 3.5% for other banks.

As per the master circular, small finance banks and payments banks may refer to their respective licensing guidelines and operating guidelines issued by the RBI, for prudential guidelines on capital adequacy.

Master Direction on the scheme of penalties for bank branches and currency chests for deficiency in customer service to public

On 1 April 2024, RBI issued the master direction on the scheme of penalties for bank branches and currency chests for deficiency in rendering customer service to members of public (“Penalties Master Directions”) for ensuring that all bank branches / currency chests provide proper customer service in view of the objectives of clean note policy and enhancing operational efficiency.

Under the Penalties Master Directions, the RBI has prescribed penalties for bank branches for deficiencies in remittances sent to RBI, compliance with operational guidelines and memorandum of agreement, exchange of notes and coins, operations of currency chests, replenishment of cash in ATMs, etc.

The Penalties Master Directions have also laid down that the Officer-in-Charge of the Issue Department of the Regional Office under whose jurisdiction the defaulting currency chest/bank branch is located shall decide upon the nature of irregularity and any appeal against this decision may be made by the controlling office of the currency chest/branch to the Regional Director/Chief General Manager/Officer-in-Charge of the concerned Regional Officer, within one month from the date of debit.

Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances

The RBI, vide ‘Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’ dated 2 April 2024, consolidated the guidelines issued to all commercial banks (excluding regional rural banks) on matters relating to prudential norms on income recognition, asset classification and provisioning pertaining to advances, issued up to 31 March 2024.

Some of the key provisions of the master circular are:

Non-performing assets (“NPAs“) have been divided in three categories: (i) substandard assets (assets which have remained NPA for a period less than or equal to 12 months), (ii) doubtful assets (assets which have remained in the substandard category for a period of 12 months), and (iii) loss assets (assets where loss has been identified by the bank or internal or external auditors or the RBI inspection, but the amount has not been written off wholly).

The policy of income recognition has to be objective and based on the record of recovery. Banks should not charge and take to their income account, interest on any NPA.

The master circular also contains further guidelines in relation to write-off of NPAs, prudential norms applicable to restructuring, wilful defaulters and non-cooperative borrowers, bank loans for financing promoters’ contribution, conversion of principal into debt / equity, etc.

Mandatory Key Facts Statement for Loans and Advances

On 15 April 2024, RBI issued a notification regarding the key facts statement (“KFS” and such notification, “KFS Notification“) for loans and advances with an intent to harmonize the instructions on the said subject and reduce information asymmetry on financial products being offered by different REs. All new retail and MSME term loans sanctioned on or after 1 October 2024, including fresh loans to existing customers, need to comply with the KFS Notification without any exception.

According to the KFS Notification, REs are mandated to provide a KFS to all prospective borrowers to help them take an informed view before executing the loan agreement, as per the standardised format given in the KFS Notification. The contents of the KFS shall also be explained and an acknowledgement shall be obtained from the borrower of the same. The KFS shall be provided with a unique proposal number and shall have a validity period of at least three working days for loans having tenor of seven days or more, and a validity period of one working day for loans having tenor of less than seven days.

Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024

The RBI, vide ‘Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024’ dated 24 April 2024, issued certain directions to ensure prudent and efficient functioning of Asset Reconstruction Companies (“ARCs“) and to protect the interest of investors, which are applicable to all ARCs registered with the RBI under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Some of the key provisions of the master direction are:

ARCs are required to have a minimum net owned fund (“NOF“) of INR 300 crore and thereafter, on an ongoing basis.

ARCs shall maintain, on an ongoing basis, a capital adequacy ratio of minimum 15% of its total risk weighted assets.

ARCs shall frame a Board-approved ‘financial asset acquisition policy’ within 90 days of grant of the certificate of registration, which shall provide that transactions take place in a transparent manner and at a fair price in a well-informed market and the transactions are executed on arm’s length basis by exercise of due diligence.

Further, certain conditions have been prescribed to determine eligibility of ARCs to undertake activities as a resolution applicant under the provisions of the IBC (eg., minimum NOF of INR 1000 crores). Conditions have been prescribed for eligibility of an ARC to sell financial assets to another ARC (eg., transaction should be settled on cash basis).

The master direction also contains directions and guidelines in relation to asset reconstruction and securitisation, governance and conduct, accounting and disclosures, prudential regulations, etc.

Limits for investment in debt and sale of Credit Default Swaps by FPIs

The RBI, vide circular dated 26 April 2024, has notified investment limits for the Financial Year (“FY“) 2024-25 in debt and sale of credit default swaps by foreign portfolio investors (“FPIs“), inter alia providing for the following:

The limits for FPI investment in government securities (“g-secs“), state government securities (“SGSs“) and corporate bonds shall remain unchanged at 6%, 2% and 15% respectively, of the outstanding stocks of securities for FY 2024-25.

As hitherto, all investments by eligible investors in the ‘specified securities’ shall be reckoned under the Fully Accessible Route (“FAR“).

The allocation of incremental changes in the g-sec limit (in absolute terms) over the two sub-categories – ‘General’ and ‘Long-term’ – shall be retained at 50:50 for FY 2024-25.

The aggregate limit of the notional amount of Credit Default Swaps sold by FPIs shall be 5% of the outstanding stock of corporate bonds. Accordingly, an additional limit of ₹2,54,500 crore is set out for FY 2024-25.

New RBI instructions regarding charging of interest by lenders

With a view of upholding transparency and fairness in the lending operations of Regulated Entities (“REs“), the RBI,vide circular dated 29 April 2024, has issued directions regarding charging of interest (“Fair Practices Circular“).

According to the Fair Practices Circular, RBI has come across instances of lenders resorting to certain unfair practices in charging of interest, for instance: Charging of interest from the date of sanction of loan and not from the date of actual disbursement of the funds to the customer;

Charging of interest for the entire month, rather than only for the period for which the loan was outstanding; and

Collecting one or more instalments in advance but reckoning the full loan amount for charging interest.

Accordingly, the RBI has advised REs to refund excess interest and other charges to customers in cases of such non-standard practices of charging interest, noting that the same are not in consonance with the spirit of fairness and transparency. RBI has also encouraged the REs to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal. Further, RBI has directed the REs to review their practices regarding mode of disbursal of loans, application of interest and other charges and take corrective action.

Amendment of the term ‘Bulk Deposit’

The RBI has vide instructions dated 7 June 2024 amended the definition of ‘Bulk Deposits’ for all Scheduled Commercial Banks (excluding Regional Rural Banks), Small Finance Banks and Local Area Banks as has been provided for in the Master Direction- Reserve Bank of India (Interest Rate on Deposits) Directions, 2016 (“Interest Rate Directions“). Prior to the amendment, ‘Bulk Deposits’ meant:

single Rupee term deposits of INR 2 crore two crores and above for Scheduled Commercial Banks (excluding Regional Rural Banks) and Small Finance Banks; and

single Rupee term deposits of INR 1 crore and above for Regional Rural Banks.

However, post the amendment to the Interest Rate Directions, the definition of ‘Bulk Deposits’ has been amended to mean:

single Rupee term deposits of INR 3 crore and above for Scheduled Commercial Banks (excluding Regional Rural Banks) and Small Finance Banks; and
single Rupee term deposits of INR 1 crore and above for Regional Rural Banks and Local Area Banks.

Priority Sector Lending – Amendments to the Master Directions

On 21 June 2024, RBI issued a notification to amend the master directions on priority sector lending (“PSL“). The following amendments have been made –

Adjustments for weights in PSL Achievement: FY 2024-25 onwards, a higher weight (125%) would be assigned to the incremental priority sector credit in the identified districts where the credit flow is comparatively lower (per capita PSL less than INR 9 thousand, and a lower weight (90%) would be assigned for incremental priority sector credit in the identified districts where the credit flow is comparatively higher (per capita PSL greater than INR 42 thousand. This aims to reduce regional disparities in credit flow. Unidentified districts will continue to have existing weightage of 100%. Lists containing the districts with comparatively high and low PSL credit have been updated and will remain valid until FY 2026-27.

Micro, Small & Medium Enterprises (“MSME“): The definition of MSMEs has been referenced to the Master Direction – Lending to Micro, Small & Medium Enterprises (MSME) Sector, for clarity.

Monitoring of Priority Sector Lending targets: Urban Co-operative Banks (“UCBs“) shall be guided by Master Direction – Reserve Bank of India (Filing of Supervisory Returns) Directions – 2024 dated February 27, 2024, as updated from time to time, as regards filing of applicable returns for reporting PSL data.

For more information contact:

Jhinook Roy
Practice Head – Finance
jhinook.roy@veritaslegal.in

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