Despite a moderate revival in economic activity coupled with an upturn in credit growth during the year, the
Indian banking sector continued to battle with significant deterioration in loan quality. Consequently, the
Reserve Bank had to undertake supervisory measures including an asset quality review (AQR) for restoring the
health of the banking system over the medium term. On the regulatory front, the Reserve Bank continued its
efforts to strengthen the prudential policy framework to effectively address the challenge of rising stressed assets and
facilitate the restoration of stalled projects. The process of transition of banks in India to the Indian Accounting
Standards (Ind AS) converged with International Financial Reporting Standards (IFRS) was initiated. The
commitment to enhancing financial inclusion and competition in the banking sector was reinforced with the
approval to set up small finance and payments banks and a move to on-tap licensing of universal banks. With the
objective of encouraging competition while reducing regulatory arbitrage, the process of aligning the regulatory
frameworks for various segments of the financial system was carried forward. The year also witnessed complete
operationalisation of the Charter of Customer Rights, which will play a pivotal role in ensuring consumer
protection in the banking sector in the years to come.
VI.1 Notwithstanding the moderate pick-up in
economic growth and credit conditions, the banking
sector continued to grapple with the challenge of
rising non-performing assets (NPAs) during 2015-
16. To address the concerns of asset quality, the
Reserve Bank initiated supervisory action in the
form of an asset quality review (AQR) during the
year. Based on the observations made during
the AQR, banks proactively recognised stressed
assets, which resulted in a predictable increase
in provisioning and a decline in profitability,
particularly of public sector banks (PSBs). While
stressed assets affected the overall performance
of banks, there was an improvement in capital
positions during the year due to changes in the
regulations governing capital adequacy which
aligned them with global regulatory norms.
VI.2 While being vigilant about the regulation
and supervision of commercial banks, the Reserve
Bank remained committed to the ongoing agenda of
harmonising prudential regulations across various
segments of the financial sector, viz., co-operative
banks, non-banking financial companies (NBFCs)
and commercial banks. The year witnessed the entry of new players in the banking sector with
the establishment of small finance and payments
banks. These banks are expected to cater to
niche domains and under-served segments of the
population, and thereby further financial inclusion
while fostering competition in the banking sector.
VI.3 An important concern in achieving financial
inclusion and stability relates to customer services
and protection. Towards this end, the Reserve
Bank fully operationalised the Charter of Customer
Rights. It also undertook a comprehensive review
of the Banking Ombudsman (BO) scheme to
address challenges posed by the recent growth in
banking consumers following the implementation
of the Pradhan Mantri Jan-Dhan Yojana (PMJDY).
VI.4 Thus, the year witnessed a slew of policy
actions in pursuance of the three pillars envisaged
by the Reserve Bank for improving the regulation
and supervision of the financial sector, viz.,
strengthening the banking structure through new
players; expanding financial access; and improving
the system’s ability to deal with distress.
FINANCIAL STABILITY UNIT
VI.5 The Financial Stability Unit (FSU)
within the Reserve Bank is entrusted with the
responsibility of macro-prudential surveillance
through systemic stress tests and other tools as
well as dissemination of information relating to
the status of and challenges to financial stability
through the bi-annual Financial Stability Report
(FSR). It also acts as a secretariat to the Sub-
Committee of the apex institutional mechanism for
financial stability in the country, viz., the Financial
Stability and Development Council (FSDC).
Agenda for 2015-16: Implementation Status
VI.6 In 2015-16, the FSR was published in
December 2015 (along with the Report on Trend
and Progress of Banking in India) and June 2016,
as planned. The stress testing framework was
refined by incorporating sectoral probability of
defaults and modelling corporate sector distress.
In addition, distress in select industrial sectors and
its impact on the banking sector was examined.
VI.7 The Sub-Committee of FSDC held two
meetings in 2015-16 and reviewed various issues
relating to, inter alia, central know your customer
registry (CKYCR), International Financial
Services Centre, development of corporate bond
market, peer-to-peer (P2P) lending, regulation
of credit guarantee schemes, risks in deposit
mobilisation by multi-state co-operative societies
and the Stewardship Code.1 The Sub-Committee
recommended the formation of an inter-regulatory
group on financial technology (Fin Tech) to examine
the models followed internationally and determine
an appropriate regulatory framework in this regard
(also see Box VI.2). The Sub-Committee also
agreed to set up a working group to formulate an effective and comprehensive ‘National Gold Policy’.
Furthermore, a Working Group on Corporate
Bonds (Chairman: H. R. Khan) with representation
from the central government and various financial
sector regulators was constituted following the
recommendations of the Sub-Committee.
VI.8 Through its two meetings, the Inter-
Regulatory Technical Group (IRTG) – a sub-group
of the FSDC Sub-Committee – deliberated upon
a range of issues, such as legal entity identifier
(LEI), a regulatory framework for NBFC-account
aggregator (AA), securitisation, a single entity
undertaking multiple activities and progress on
the Shadow Banking Implementation Group.
Agenda for 2016-17
VI.9 Going forward, besides macro-prudential
surveillance, the publication of the bi-annual FSR
is envisaged along with conducting meetings of
the FSDC Sub-Committee. The study of select
industries, especially with regard to the banking
sector’s exposure to these industries, will also be
undertaken during the year.
REGULATION OF FINANCIAL INTERMEDIARIES
Commercial Banks: Department of Banking
Regulation (DBR)
VI.10 DBR, which is the nodal department
for regulation of commercial banks, has been
proactively addressing both the time and cross-sectional
dimensions of risks to preserve systemic
stability. Apart from stability, its focus has also
been on developing an inclusive and competitive
banking structure through appropriate regulatory
measures. The regulatory framework is also
tweaked in tune with the requirements of the Indian economy while suitably adopting international
best practices.
Agenda for 2015-16: Implementation Status
Financial Stress and Reinforcements
VI.11 During 2015-16, the Reserve Bank
continued to fortify the regulatory framework for
dealing with stressed assets, inter alia, by way of
a more effective joint lenders’ forum (JLF) with
senior-level representation from banks, change of
ownership in borrowing entities even outside the
strategic debt restructuring (SDR) scheme, and
specifying the criterion for divestment of banks’
holdings in favour of new promoters under the SDR scheme. Furthermore, to strengthen the ability of
lenders for deep financial restructuring, the Reserve
Bank introduced the Scheme for Sustainable
Structuring of Stressed Assets (S4A). The
Insolvency and Bankruptcy Code was also passed
during the year to strengthen the framework for
resolution of corporate entities, partnership firms
and individuals in a time-bound manner. To further
improve recovery, amendments to the Securitisation
and Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Act,
2002 and Recovery of Debts Due to Banks and
Financial Institutions (RDDBFI) Act, 1993 have
been passed by Parliament (Box VI.1).
Box VI.1
Enforcement of Security Interest and Recovery of Debts Laws and
Miscellaneous Provisions (Amendment) Bill, 2016
In view of the difficulties faced by banks and financial
institutions in recovering loans and enforcing securities
charged with them, a need was felt to amend the existing
debt laws. Accordingly, the Enforcement of Security Interest
and Recovery of Debts Laws and Miscellaneous Provisions
(Amendment) Bill, 2016 has been passed by Parliament in
August 2016.
A. Amendments to the SARFAESI Act, 2002 are proposed
to improve recovery and augment ease of doing
business. These, inter alia, include:
-
Registration of creation, modification and satisfaction
of security interest by all secured creditors and
provision for integration of registration systems
under different laws relating to property rights with
the Central Registry to create a central database of
security interests on property rights;
-
Enabling non-institutional investors to invest in
security receipts;
-
Bringing hire purchase, financial lease and
conditional sale under its ambit;
-
Strengthening the regulation of asset reconstruction
companies (ARCs) by the Reserve Bank, including
powers to audit, inspect, change directors, issue
directions for regulation of management fee and
impose penalties;
-
Making debenture trustees at par with secured
creditors;
-
Specifying the timeline for taking possession of
secured assets; and
-
According priority to secured creditors in repayment
of debts over all other debts.
B. Amendments to the RDDBFI Act, 1993 are proposed to
reduce stressed assets in the banking system. These,
inter alia, include:
-
Expeditious adjudication of recovery applications
and empowering the central government to provide
uniform procedural rules for conducting proceedings
in Debt Recovery Tribunals (DRTs) and Debt
Recovery Appellate Tribunals (DRATs);
-
Instituting electronic filing of recovery applications,
documents and written statements; issuing summons
by the tribunals in electronic forms; and display of
interim and final orders of DRTs and DRATs on their
websites; and
-
According priority to secured creditors in repayment
of debts over all other claimants including claims of
the central government, state government or local
authorities.
C. The Bill also seeks to amend the Indian Stamp Act, 1899
to exempt assignment of loans in favour of ARCs from
stamp duty; and the Depositories Act, 1996 to facilitate
the transfer of shares held in pledge or on conversion
of debt into shares in favour of banks and financial
institutions.
VI.12 A discussion paper (DP) on ‘Large
Exposures Framework and Enhancing Credit
Supply through Market Mechanism’ was released
by the Reserve Bank in March 2015. The DP
included proposals on the convergence of extant
exposure norms with the ‘Large Exposures
Framework’ (LEF) of the Basel Committee on
Banking Supervision (BCBS) as also a proposal
to encourage market mechanism for reducing
the reliance of large corporate borrowers on the
banking system. While the former addressed the
concentration risks for individual banks, the latter
dealt with those at the systemic level.
VI.13 In view of the importance of concentration
risks at the systemic level, a separate DP was
also released in May 2016 on the ‘Framework
for Enhancing Credit Supply for Large Borrowers
through Market Mechanism’. This DP defined a
‘specified borrower’ and a ‘normally permitted
lending limit’ (NPLL) for such a borrower.
Furthermore, it proposed a disincentive
mechanism for incremental borrowing by such a
borrower from the banking system beyond NPLL.
Small Finance and Payments Banks
VI.14 As part of its initiatives towards financial
inclusion through a bouquet of banking products,
including small credit, small savings and payments/
remittances, the Reserve Bank issued in-principle
approval for setting up of 11 payments banks and
ten small finance banks (SFBs) in September
2015 and October 2015, respectively. The Reserve
Bank also worked towards finalising the regulatory
framework for these new entities. Furthermore, in
March 2016, the first SFB licence was granted to
Capital Small Finance Bank Limited – a case of
conversion of a local area bank (LAB) into a SFB.
The first payments bank licence was granted to
Airtel Payment Bank Ltd. in April 2016. In June
2016, the second SFB licence was granted to
Equitas Small Finance Bank.
Lending Rate based on Marginal Cost of Funds
VI.15 In order to improve transparency in the
methodology followed for determining lending rates
and strengthening monetary policy transmission,
banks were mandated to price their credit using
the marginal cost of funds based lending rate
(MCLR) as the internal benchmark. Details about
MCLR are given in Chapter III.
On-tap Licensing of Banks
VI.16 With the objective of encouraging greater
competition and innovation in the banking system,
guidelines for on-tap licensing of universal
banks were released in August 2016. Apart from
instituting a continuous process of licensing of
banks in the private sector, these guidelines have
mooted, inter alia, inclusion of resident individuals/
professionals with experience in banking and
finance but exclusion of large industrial/business
houses as eligible promoters, and making a non-operative
financial holding company (NOFHC)
mandatory only under certain conditions.
Transition to Indian Accounting Standards (Ind AS)
VI.17 To pave the way for a time-bound transition
of the existing accounting framework for banks
in India to the Indian Accounting Standards (Ind
AS) converged with IFRS, banks were advised
in February 2016 to comply with the Ind AS in
the preparation of financial statements for the
accounting periods beginning April 1, 2018 with
comparatives for the period ending March 31,
2018. Banks were also advised to initiate the
implementation process with immediate effect
under the oversight of the audit committees of
their boards.
Master Directions
VI.18 Following the announcement in the
Reserve Bank’s Annual Report 2014-15, ten
Master Directions, viz., on interest rate on deposits
and advances; KYC (consolidating all relevant instructions issued by different departments of the
Reserve Bank); amalgamation; issue and pricing
of shares of private sector banks; ownership in
private sector banks; prior approval for acquisition
of shares or voting rights in private sector banks;
Gold Monetisation Scheme; financial services
provided by banks; and presentation, disclosure
and reporting by All-India Financial Institutions
(AIFIs) were issued during the year. These
directions are expected to impart more clarity and
focus to communication with stakeholders.
Future of Local Area Banks (LABs) and Ownership
in Private Banks
VI.19 Consultations with the central government
on broad options for the future set-up of LABs were
underway during the year. The extant guidelines on
ownership in private sector banks were revisited
with a view to meeting the need for additional
capital consequent to the implementation of Basel
III capital regulations and rationalisation of the
ownership limits for these banks.
Governance Reforms in Public Sector Banks
VI.20 Following the recommendations made by
the Committee to Review Governance of Boards
of Banks in India (Chairman: Shri P. J. Nayak), the
Banks Board Bureau (BBB) was set up by the
central government with support from the Reserve
Bank to infuse greater professionalism in the
constitution and operation of the boards of PSBs.
The BBB started functioning from April 8, 2016.
Agenda for 2016-17
VI.21 In pursuance of the regulatory stance
in 2015-16, the Reserve Bank will continue to
monitor and respond to banks’ asset quality issues
in 2016-17. Furthermore, the policy on prudential
and implementation aspects of the expected
credit loss (ECL) approach, as envisaged in Ind
AS 109, is intended to be finalised. A review of the
guidelines/instructions on various aspects relating
to Ind AS will be undertaken during the year. Efforts will also be initiated for capacity building
on Ind AS both internally and in banks.
VI.22 Draft guidelines for computing exposure
for counterparty credit risk (CCR) arising from
derivative transactions and capital requirements
for bank exposures to central counterparties
(CCPs) were issued for comments in June 2016.
The final guidelines shall be issued by end-
December 2016 for implementation from April 1,
2017. A discussion paper on margin requirements
for non-centrally cleared derivatives was also
released in May 2016. Final guidelines in this
regard will be issued during the first half of 2016-
17. Furthermore, draft guidelines on the LEF and
the revised securitisation framework in alignment
with the BCBS standards are also proposed to be
issued during the year.
VI.23 In May 2015, draft guidelines on the net
stable funding ratio (NSFR) were issued, taking
into account the BCBS’s final rules of October
2014. The objective of NSFR is to ensure that
banks maintain stable funding profiles in relation
to the composition of their assets and off-balance
sheet activities, limiting their over-reliance on
short-term wholesale funding. The final guidelines
on NSFR will be issued in the second half of 2016-
17 after a consultative process, for implementation
from January 1, 2018.
VI.24 It is proposed to review and rationalise
the branch authorisation framework for domestic
scheduled commercial banks and the existing
guidelines with regard to export credit. It is also
planned to extend the Basel III framework to
AIFIs in 2016-17. Banking, like many other fields,
has been revolutionised by digital innovations in
recent years. To assess the potential in this sector,
the Reserve Bank has set up an Inter-regulatory
Working Group on Fin Tech and Digital Banking
(Box VI.2). The report of the Working Group
will help in designing an appropriate regulatory
framework for these innovative institutions and products. The possibilities of licensing other
differentiated banks such as custodian banks, and
wholesale and long-term financing banks will be
explored in a paper to be released for comments
by September 2016.
Box VI.2
Fin Tech and Digital Innovation – Opportunities, Challenges and Risks
Financial services, including banking services, are at the
cusp of a revolutionary change driven by technological and
digital innovations. Fin Tech is an umbrella term coined
to denote new competitors (typically non-financial firms)
bringing technological innovations having a bearing on
financial services. Digital banking, block chain technology,
distributed ledgers, big data and P2P/business-to-business
(B2B)/business-to-consumers (B2C) platforms
which bring together lenders and borrowers are some
of the more recent innovations in Fin Tech. These offer
tremendous opportunities and benefits for the financial
sector. Convenience and speed of performance, real-time
transactions, lower transaction costs, distributed ledger
data availability for information and decision making,
product tailoring and absence of intermediaries are some
of the benefits of Fin Tech.
Fin Tech is of particular relevance in India given the national
aspiration for universal financial inclusion, ensuring last mile
reach of finance at affordable costs. A combination of cloud
computing, hand-held devices and mobile smartphones
have aided the expansion of Fin Tech in India. The newly
introduced payments banks are expected to be important players in the arena of Fin Tech given the central role of
technology in their operations.
However, Fin Tech brings with it several challenges for the
regulator given its departure from the traditional process
of financial intermediation. The risks entailed therein are
not just limited to technology but could, inter alia, involve:
issues arising from transactions in financial products by
unregulated financial and non-financial entities; outsourcing
of products/services; and acquisition of software solutions
without access to/awareness about source codes.
In view of the ‘disruptive’ potential of Fin Tech, it is necessary
to examine the need for regulation and design an appropriate
regulatory framework, if required. Hence, the Reserve Bank
has set up an Inter-regulatory Working Group on Fin Tech
and Digital Banking (Chairman: Shri S. Sen) in July 2016.
The Group, inter alia, will assess the opportunities and
risks from Fin Tech for customers and other stakeholders.
Furthermore, it will examine the implications and challenges
of Fin Tech for various financial sector functions, including
intermediation, clearing and payments being taken up by
non-financial entities, and suggest appropriate regulatory
response, if any.
VI.25 It is observed that some sections of
the Indian society have remained financially
excluded for religious reasons that preclude them
from using banking products with an element of
interest. Towards mainstreaming these excluded
sections, it is proposed to explore the modalities
of introducing interest-free banking products in
India in consultation with the Government.
Co-operative Banks: Department of Cooperative
Bank Regulation (DCBR)
VI.26 Over the years, the Reserve Bank has
played a key role in the revival and strengthening
of the co-operative banking sector by instituting an appropriate regulatory and supervisory framework.
In 2015-16 as well, DCBR, the department in-charge
of prudential regulation of co-operative
banks comprising urban co-operative banks
(UCBs), state co-operative banks (StCBs) and
district central co-operative banks (DCCBs), took
several initiatives for strengthening the framework
further.
Agenda for 2015-16: Implementation Status
VI.27 The report of the High Powered
Committee on UCBs (HPC) was placed on the
Bank’s website and comments of the public
were obtained. A meeting was held in May 2016
with the stakeholders to elicit their views on the
implementation of recommendations of the HPC.
Furthermore, workshops were conducted for
statutory auditors of UCBs to improve the quality
of audit.
Harmonisation of Regulatory Policies
VI.28 The Reserve Bank has been in the process
of harmonising regulations within the co-operative
space, i.e., between urban and rural co-operative
banks as well as aligning regulations in a carefully
calibrated manner between co-operative and
commercial banks. Accordingly, harmonisation of
the following regulations was accomplished during
the year: (i) valuation of gold jewellery accepted as
security/collateral; (ii) provision of internet banking
to customers; (iii) issue of ATM-cum-debit cards;
(iv) provision of value-added services through
ATMs; and (v) investments in market infrastructure
companies (MICs).
Revival and Licensing of Unlicensed DCCBs
VI.29 In order to ensure that only licensed
entities occupy the co-operative banking space
in the interest of depositors, the licensing norms
for co-operative banks were revised in 2009. The
positive fallout of these policy efforts could be seen in the decline in the number of unlicensed
StCBs and DCCBs. For the revival and licensing
of 23 DCCBs that continued to be unlicensed, a
scheme was launched by the central government
in 2014, the details and outcome of which are
given in Box VI.3.
Developments relating to Scheduling, Licensing
and Mergers
VI.30 Five non-scheduled co-operative banks,
viz., Apna Sahakari Bank Ltd., Mumbai; Vasai
Vikas Sahakari Bank Ltd., Thane; Jalgaon Peoples
Co-operative Bank Ltd., Jalgaon; Rajarambapu
Sahakari Bank Ltd., Peth, Sangli; and Uttarakhand
State Co-operative Bank Limited, Haldwani were
included in the Second Schedule to the RBI Act,
1934 during the year. Following the formation of
the state of Telangana, the Telangana State Cooperative
Apex Bank Ltd., which commenced its
operations on April 2, 2015, was issued a banking
licence on April 18, 2016. Five proposals for mergers of UCBs were approved during the year
and out of these, three were implemented.
Box VI.3
Revival and Licensing of Unlicensed DCCBs
With the rollout of a revival package by the central government
for short-term co-operative credit institutions in 2006 (based
on the recommendations of the Task Force on Revival of
Rural Co-operative Credit Institutions (Chairman: Professor
A. Vaidyanathan)), and the revision in licensing norms by the
Reserve Bank in 2009, the number of unlicensed entities in
the co-operative banking space has been on a decline. While
the number of unlicensed StCBs reduced from 17 to zero, the
number of unlicensed DCCBs came down sharply from 296
to 23 by June 2013.
In November 2014, the central government announced
another scheme for the revival of 23 unlicensed DCCBs in
four states (16 in Uttar Pradesh, three each in Jammu and
Kashmir and Maharashtra, and one in West Bengal). Under
the scheme, the estimated capital infusion for DCCBs was
placed at ₹23.76 billion of which, ₹6.73 billion was to be
contributed by the central government, ₹14.65 billion by
state governments and ₹2.38 billion by the National Bank
for Agriculture and Rural Development (NABARD). As per
the scheme, the central government’s contribution will be
released through NABARD as an interest-free loan and will
be converted into a grant on the fulfilment of conditions/ deliverables outlined in the scheme. Among the conditions
outlined, the DCCBs have been asked to (a) reduce their NPA
ratios by at least 50 per cent by March 31, 2017; (b) achieve
a growth of 15 per cent in their deposits in the following two
years; (c) prepare monthly monitorable action plans; (d)
ensure the appointment of competent CEOs fulfilling ‘fit and
proper’ criteria; and (e) put in place appropriate corporate
governance systems.
NABARD’s contribution will be in the form of loans to respective
state governments. Furthermore, state governments are
expected to finance the additional fund requirements for
meeting the capital to risk-weighted assets ratio (CRAR) of 7
per cent as on March 31, 2015. For implementing the scheme,
a tripartite agreement in the form of a memorandum of
understanding (MoU), stipulating the conditions/deliverables,
was signed between the central government, the concerned
state government and NABARD. Subsequent to the release
of funds by the central government, the state governments
of Maharashtra and Uttar Pradesh, and NABARD, licences
were issued in 2015-16 to three DCCBs in Maharashtra and
11 DCCBs in Uttar Pradesh bringing down the number of
unlicensed DCCBs to nine as on June 30, 2016.
Agenda for 2016-17
VI.31 The on-going process of harmonisation of
regulations for co-operative banks will be continued
in 2016-17. Implementation of the revival scheme
of the central government will be pursued with a
view to ensuring that the DCCBs covered under
the scheme are licensed. Implementation of some
recommendations of the HPC will be considered
based on the feedback received from stakeholders.
Non-Banking Financial Companies (NBFCs):
Department of Non-Banking Regulation
(DNBR)
VI.32 NBFCs play a critical role in catering
to under-served niche sectors. An orderly
development of NBFCs has been a priority for
the Reserve Bank as shadow banking operations
have a bearing on the stability of the financial
system. In 2015-16, the focus of DNBR was to
take forward the process of harmonisation of regulations across NBFCs and banks and move
towards activity-based regulation.
Agenda for 2015-16: Implementation Status
Continued Harmonisation of Prudential Regulations
VI.33 During the year, harmonisation of the
following prudential regulations pertaining to
NBFCs was undertaken: early recognition of
financial distress; prompt steps for resolution and
fair recovery for lenders, including guidelines on
the formation of JLF and corrective action plan
(CAP); factoring activities by banks and those for
NBFC-factors; risk weights assigned to exposures
to central/state government/s and claims
guaranteed by state governments; risk weights
with respect to investments in corporate bonds
by standalone primary dealers; and strategic debt
restructuring and refinancing of project loans.
NBFC-Account Aggregator and P2P Lending
VI.34 Towards a consolidated view of financial
assets, a new category of NBFC, viz., NBFC-AA
was proposed (Box VI.4). In addition, a consultation paper for designing a suitable
regulatory framework for P2P lending was also
released (Box VI.5).
Box VI.4
NBFC-Account Aggregator
At present, financial asset holders such as holders of savings
bank deposits, fixed deposits, mutual funds and insurance
policies, get a scattered view of their financial asset holdings if
the entities with whom these accounts are held fall under the
purview of different financial sector regulators. This gap will
be filled by account aggregators who will provide information
on various accounts held by a customer in a consolidated,
organised and retrievable manner. The option to avail the
services of an account aggregator by a customer will be
purely voluntary.
The draft directions governing NBFC-account aggregator
(AA) were issued by the Reserve Bank in March 2016.
Accordingly, the activities of NBFC-AA will be regulated by
the Reserve Bank to ensure that the nature and terms of
its services conform to prescribed standards. As per these
guidelines, the business of an account aggregator will be
entirely driven by information technology (IT). The account
aggregator will not support any transaction in financial assets
by its customers. The account aggregator will not undertake any business other than the business of account aggregation.
However, deployment of investible surplus by the aggregator
in instruments, not for trading, will be permitted. Pricing of
services will be as per the board-approved policy of the
account aggregator.
The account aggregator will ensure that the provision of
services to a customer who has made a specific application
for availing such services, will be backed by appropriate
agreements/authorisations between the aggregator, customer
and financial service provider. The information will be shared
by the account aggregator only with the customer to whom it
relates or any other person authorised by the customer. The
account aggregator will be bound by the terms and conditions
of the licence (such as customer protection, grievance
redressal, data security, audit control, corporate governance
and risk management framework). The account aggregator
will have a Citizen Charter that explicitly guarantees the
protection of the rights of customers.
Box VI.5
Peer-to-Peer Lending
Peer-to-peer (P2P) lending is an innovative form of crowd-funding
with financial returns. It involves the use of an online
platform to bring lenders and borrowers together and help in
mobilising unsecured finance. The borrower can either be an
individual or a business requiring a loan. The platform enables
a preliminary assessment of the borrower’s creditworthiness
and collection of loan repayments. Accordingly, a fee is paid
to the platform by both borrowers and lenders. Interest
rates range from a flat interest rate fixed by the platform to
dynamic interest rates as agreed upon by borrowers and
lenders using a cost-plus model (operational costs plus
margin for the platform and returns for lenders).
One of the main advantages of P2P lending for borrowers
is that the rates are lower than those offered by money
lenders/unorganised sector, while the lenders benefit from
higher returns than those obtained from a savings account
or from any other investment.
Although there has been significant growth in online lending
platforms globally, there is no uniformity in the regulatory
stance with regard to this sector across countries. While
P2P lending platforms are banned in Japan and Israel, they are regulated as banks in France, Germany and Italy, and
are exempt from any regulation in China and South Korea.
Differences in regulatory stance emanate ideologically. It is
argued that regulation may stifle the growth of this nascent
sector. On the other hand, proponents of regulation argue
that the unregulated growth of this sector may breed
unhealthy practices by market players and may, in the long-run,
have systemic concerns given the susceptibility of this
sector to attract high risk borrowers and also weaken the
monetary policy transmission mechanism.
In India, there are currently many online P2P lending
platforms and the sector has been growing at a rapid
pace. The Reserve Bank released a consultation paper
on P2P lending in April 2016. The paper deliberated the
advantages and disadvantages of regulating P2P platforms
and underscored the need to develop a balanced regulatory
approach that would protect lenders and borrowers without
curbing the underlying innovations. Accordingly, P2P
platforms are proposed to be regulated as a separate
category of NBFCs. The feedback received on the paper
from various stakeholders is being examined to finalise the
regulatory framework.
Simplification of the Registration Process
VI.35 The process of issuing certificates of
registration (CoRs) for NBFCs was simplified
and rationalised. Accordingly, the number of
documents to be submitted for CoR were reduced
from 45 to about eight. Furthermore, NBFCs were
divided into two categories for the purpose of
CoR, viz., Type I and Type II. It was also decided to
fast track applications of Type I NBFCs, which do
not access public funds and do not have customer
interface.
Agenda for 2016-17
VI.36 As in the past, the process of regulatory
convergence between NBFCs and banks will
be carried forward in 2016-17. Furthermore, the year will also witness policy measures towards
grouping NBFCs into fewer categories. As part
of public consultation process, the feedback from
stakeholders and public on the draft directions
for NBFC-AA and the consultation paper on P2P
lending has been received. The feedback is being
examined to finalise the directions and initiate the
process of granting in-principle approval for NBFCAA
and also to finalise the contours of regulation
of P2P platforms.
SUPERVISION OF FINANCIAL
INTERMEDIARIES
Commercial Banks: Department of Banking
Supervision (DBS)
VI.37 In India’s bank-dominated financial
system, DBS – entrusted with the responsibility
of supervising scheduled commercial banks
(SCBs) – plays a central role in ensuring systemic stability. Apart from SCBs, DBS also renders
supervisory oversight of AIFIs and acts as the
secretariat to the Inter-Regulatory Forum (IRF)
set up under the aegis of the Sub-Committee of
the FSDC for coordinated supervision of financial
conglomerates (FCs).
Agenda for 2015-16: Implementation Status
VI.38 In the backdrop of continuing concerns
about asset quality, the Reserve Bank conducted
AQR during July-September 2015 of banks’ loan
assets against applicable norms stipulated by it.
This exercise covered 36 major banks. The status
of large borrowal accounts across banks was
examined in a coordinated manner, extensively
analysing off-site data available from the central
repository for information on large credits (CRILC)
and other data dumps. The exercise revealed
significant divergence between the reported levels
of impairment and actual positions. Hence, after
multiple levels of review, the banks were advised
to appropriately adjust the impairments in their
books. While the immediate impact of the AQR
was seen in the third quarter results, the major
impact was expected to be reflected in the last
quarter results for 2015-16. Furthermore, based
on the experience gained over the past years,
an Early Warning System (EWS) was set up
and a modified Prompt Corrective Action (PCA)
framework for banks is being finalised.
VI.39 During 2015-16, 34 more banks (including
28 small foreign banks with one/two branches) have
been brought under the Supervisory Programme
for Assessment of Risk and Capital (SPARC)
framework. This marked the successful completion
of the third cycle of Risk-Based Supervision (RBS)
for banks operating in India since its introduction
in 2012-13. An integral part of the RBS framework
has been the capacity building of bank officials
as well as Reserve Bank’s supervisory staff.
Accordingly, the Reserve Bank provided broad guidance on designing training programmes for
internal skill enhancement, including the intended
objectives, tentative coverage, methodology
and resources for conceptualisation of these
programmes. The Reserve Bank also conducted
three focused workshops covering nearly its entire
staff associated with the RBS. The workshops
deployed case studies, quizzes and concept
checker methods to achieve the desired skill
transmission and assimilation.
VI.40 The Reserve Bank conducted
sensitisation sessions for banks already under
the RBS on the theme ‘Ensuring Accuracy and
Integrity of Information Submissions’. For new
banks to be brought under the RBS from 2016-
17, orientation workshops on SPARC covering
the top management coupled with theme-based
symposiums were conducted. Furthermore, the
Reserve Bank arranged training programmes on
analytical tools and information system (IS) audits
for bank officials. During the year, the Reserve
Bank also rolled out the systems audit and testing
of systems in banks for information technology
vulnerability/penetration.
VI.41 The Reserve Bank introduced the revised
format for CRILC reporting for improved data
collection from banks from the quarter ended
September 2015. During the year, there were
discussions between the Reserve Bank and the
Insurance Regulatory and Development Authority
(IRDA) for bringing insurance companies into the
ambit of the CRILC system. A training programme
for five insurance companies was also conducted
to familiarise them with the system.
VI.42 The year witnessed successful migration
of the off-site monitoring and surveillance system
(OSMOS) returns to the eXtensible business
reporting language (XBRL) platform. Banks also
started reporting through the automated data flow
(ADF) process.
VI.43 From the graded panels of ‘experienced’
and ‘new’ auditors received from the Comptroller
and Auditor General of India, 126 audit firms were
approved by the Reserve Bank for working as
statutory central auditors in PSBs for 2015-16.
VI.44 On direction from the Board for Financial
Supervision (BFS), the format for the biennial
financial inspection of AIFIs, viz., NABARD, Small
Industries’ Development Bank of India (SIDBI) and
National Housing Bank (NHB) was redesigned
and snap audits based on this format were carried
out to test and fine-tune it. AIFIs were advised to
submit returns under both the existing system of
FID_OSMOS as well as XBRL platform from the
quarter ended June 30, 2015.
VI.45 A new framework for fraud detection,
reporting and monitoring was rolled out in May
2015. A Central Fraud Registry for the use of
banks was operationalised on January 20, 2016.
VI.46 During the year, as part of cross-border
supervisory co-operation and exchange of
supervisory information, the Reserve Bank signed
MoUs with seven overseas banking supervisory
authorities, viz., the Nepal Rastra Bank, Bank
of Botswana, Central Bank of the United Arab
Emirates (UAE), Bangladesh Bank, Prudential
Regulation Authority and Financial Conduct
Authority of the UK and the supervisor of banks
at the Bank of Israel. The Reserve Bank has so
far executed 32 MoUs, one letter of supervisory
co-operation and one statement of co-operation
with overseas supervisors/regulators.
VI.47 To review group-level and inter-regulatory
issues in the operations of FCs, the Reserve Bank,
in co-ordination with other domestic regulators,
organised a meeting with one bank-led FC and
participated in meetings with three insurance
company-led FCs and securities company-led
FCs each organised by IRDA and Securities and
Exchange Board of India (SEBI), respectively.
Agenda for 2016-17
VI.48 The Reserve Bank has set up an Expert
Panel on IT Examination and Cyber Security
(Chairperson: Smt. Meena Hemchandra) drawing
experts from the industry as members. The
Panel is expected to provide assistance in IT
examination/cyber security initiatives of banks,
review examination reports and suggest actionable
items. Accordingly, a detailed IT examination was
initiated in two banks in October and December
2015. It is proposed to roll out the IT examination
in 30 major banks during 2016-17. Furthermore, it
is proposed to carry out IT examination in all banks
by 2017-18. The Reserve Bank also proposes to
set up a Cyber Security Lab, which will assist IT
examiners in conducting analysis of cyber security
of banks.
VI.49 During the supervisory cycle of 2016-17,
the remaining 26 banks will be brought under
the SPARC framework, thus, bringing all SCBs
(excluding regional rural banks (RRBs) and LABs)
under the RBS. With the migration of all banks
to SPARC in 2016-17, the SPARC framework
is proposed to be taken to the next level by: (a)
developing risk-based mechanisms for scoring
the data quality of banks; (b) improving the offsite
risk assessment framework; (c) developing
a framework for continuous supervision; (d)
developing a menu of supervisory actions
based on business risks; (e) benchmarking
the control environment in banks; (f) improving
the communication of risk profiles to banks; (g)
structuring risk mitigation plans to make them
more definitive; and (h) finalising the approach for
supervising payments banks and SFBs.
VI.50 A back-office support system has been
planned to facilitate a focused analysis of data
to strengthen the supervision of individual banks.
This will also help in an analysis of data dumps
obtained from banks in a systematic manner to bring out supervisory concerns, if any. Supervisory
returns, other than OSMOS returns, will be taken
up for migration to the XBRL platform in Phase III
of the XBRL project. All returns relating to frauds
will be migrated to the XBRL platform. An audit
management system and document management
system will be implemented during the year.
VI.51 The Reserve Bank, in coordination with
other domestic regulators, has initiated the
process of finalising the criteria for identification
of FCs in various market segments, viz., banking,
non-banking finance, insurance business,
securities and pension funds. Based on these
criteria, FCs will be identified for consolidated
supervision and monitoring. A joint working group
with representation from all member regulators
has been constituted for finalising the format and
structure of the draft data template for capturing
systemic risks and changes to/rationalisation of
FC returns.
VI.52 Changes in the domestic and global
financial sector environment necessitate the
formalisation of an improved supervisory
framework for taking enforcement action against
banks for non-compliance with instructions
and guidelines issued by the Reserve Bank.
Accordingly, the Reserve Bank is in the process
of developing a framework, which will delineate its
approach to enforcement action and enforcement
processes. The framework is intended to meet the
principles of natural justice and global standards
of transparency, predictability, standardisation,
consistency, severity and timeliness of action.
VI.53 In line with the BCBS principles on cross-border
supervisory co-operation, the Reserve
Bank has set up supervisory colleges for Indian
banks with considerable overseas presence, viz.,
State Bank of India (SBI), ICICI Bank, Bank of
Baroda, Bank of India, Punjab National Bank and
Axis Bank. All these colleges are scheduled to be
conducted in 2016-17 as well.
Co-operative Banks: Department of Cooperative
Bank Supervision (DCBS)
VI.54 DCBS is entrusted with the primary
responsibility of supervising primary (urban) cooperative
banks (UCBs) as well as ensuring the
development of a safe and well-managed cooperative
banking sector. Towards this objective,
the Department undertakes supervision of UCBs
through periodic on-site and continuous off-site
monitoring.
Agenda for 2015-16: Implementation Status
VI.55 In an endeavour to develop a financially
sound co-operative banking sector, the number
of UCBs with negative net worth, which were not
under all-inclusive directions, was reduced from
27 to 18 during the year. All returns received by
DCBS were brought on the XBRL platform during
the year. In all, 109 programmes were conducted
by various Regional Offices of the Reserve Bank
to impart training to the management/staff of
UCBs and their statutory auditors.
Agenda for 2016-17
VI.56 Towards increasing the strength of the cooperative
banking sector, select ‘C’ rated UCBs
across India will be identified for focused attention,
enabling them to improve their functioning. In
addition, the initiatives for capacity building of both
supervisor and supervised (UCBs) will be carried
forward during the year.
NBFCs: Department of Non-Banking
Supervision (DNBS)
VI.57 DNBS – the Reserve Bank’s supervisory
department for NBFCs – focuses on ensuring an
enabling environment for a healthy NBFC sector.
Recent years have witnessed a significant growth
of the NBFC sector as also the introduction of
newer types of NBFCs imparting a critical role to
this Department.
Agenda for 2015-16: Implementation Status
VI.58 For ensuring better coordination among
various regulators and gathering market
intelligence, a website, hosted by the Reserve
Bank was operationalised during the year for use
by state-level coordination committees (chaired
by the chief secretaries of state governments).
A CRILC platform to furnish information on large
borrowers was made active during the year for
eligible NBFCs. A consultative approach involving
regular interaction with participants from the
NBFC sector was formalised and meetings were
organised accordingly. During the year, a simplified
annual return was prescribed for small NBFCs.
VI.59 During 2015-16, ARCs continued to be
active in the takeover of stressed assets from
banks (Table VI.1).
Agenda for 2016-17
VI.60 During the year, it is proposed to review
the role of statutory auditors in the certification
process so as to have a wider supervisory
oversight of a large number of small NBFCs.
The process of leveraging IT for processing of necessary approvals by the Reserve Bank, which
has been initiated, will be taken forward during the
year. Furthermore, compliance of NBFCs with the
Fair Practices Code is set to be improved through
enhanced supervision. A formal PCA framework
will be developed for NBFCs.
Table VI.1: Key Financial Parameters for the
ARC Sector |
(₹ billion) |
Item |
2014-15 |
2015-16 |
1 |
2 |
3 |
Owned funds |
33.6 |
36.8 |
Acquisition cost of assets acquired by SCs/RCs |
226.5 |
142.2 |
Total SRs issued |
224.3 |
140.9 |
SRs held by SCs/RCs in own account |
29.8 |
20.5 |
SRs held by seller banks/FIs |
191.7 |
117.7 |
Amount of SRs issued to other QIBs |
2.8 |
0.6 |
SRs held by FIIs |
- |
2.1 |
SRs redeemed |
16.5 |
19.1 |
Note: 1. SRs: Security Receipts; QIBs: Qualified Institutional
Buyers; FIIs: Foreign Institutional Investors.
2. Figures for owned funds are as at end-March.
Source: COSMOS returns (quarterly). |
CONSUMER EDUCATION AND PROTECTION
Consumer Education and Protection Department (CEPD)
VI.61 As the financial sector grows in size, depth
and complexity, ensuring consumer protection
assumes a key priority for the financial sector
regulator. The Reserve Bank, through its proactive
policy measures directly aimed at consumer
protection along with its constant vigil of overall
financial stability has rendered the financial system
a safer place for consumers over the years.
Agenda for 2015-16: Implementation Status
Full-fledged Operationalisation of the Charter of
Customer Rights
VI.62 In 2014-15, the Reserve Bank had issued
the Charter of Customer Rights. To ensure its full-fledged operationalisation, banks were advised
to formulate with the approval of their respective
boards, a Customer Rights Policy on the lines of
the Model Policy developed by the Indian Banks’
Association (IBA) and the Banking Codes and
Standards Board of India (BCSBI). In 2015-16,
apart from an internal periodic review, banks were
advised that aberrations and non-adherence to
the Charter would also be monitored during the
supervisory process.
Comprehensive Review of the Banking
Ombudsman (BO) Scheme
VI.63 A comprehensive review of the BO scheme
was undertaken in 2015-16 (Box VI.6). Towards
expanding the reach of the offices of the Banking
Ombudsman (OBOs) in rural and semi-urban
areas as also for rationalising the jurisdiction of some of the existing offices, new OBOs are being
opened in Ranchi, Raipur, Jammu and Dehradun,
and an additional BO is being posted in New Delhi.
Box VI.6
Banking Ombudsman Scheme – A Review
The BO scheme – a dispute redressal mechanism notified
under Section 35(A) of the Banking Regulation Act, 1949
– has been in existence since 1995. Since its inception,
the scheme has been reviewed periodically; the last being
in 2009. The banking landscape has undergone significant
transformation in recent years with the introduction of a
large customer base following the adoption of financial
inclusion plans as well as the PMJDY. There has also been
an increased penetration of technology-based products for
financial inclusion during this period. All these developments
taken together necessitated a review of the BO scheme. The
issues identified for the current review were:
a. Pecuniary jurisdiction of the award passed by the BO;
b. Compensation available under the present scheme for
loss of time and money, mental anguish and harassment
of the complainant;
c. Inclusion of additional grounds for complaints under the
present scheme;
d. Rationalisation of the clauses provided for rejection of
complaints by the BO and inclusion of the clauses as
appealable under the scheme; and
e. Rationalisation of Clause 11 of the scheme (Settlement
of Complaint by Agreement).
It is proposed to notify the revised scheme after concurrence
from the Government of India.
Field-level Evidence on Consumer Protection and
Internal Ombudsman in Banks
VI.64 The Reserve Bank has been conducting
focused studies on various issues relevant for
consumer protection. In 2015-16, incognito visits
to rural and semi-urban areas with regard to mis-selling
of third party products by banks were carried
out. Similarly, a study on the functioning of ATMs
was conducted during February-March 2016. The
findings from this study are under examination to
ascertain an appropriate supervisory response.
VI.65 With a view to strengthening the internal
grievance redressal mechanism of banks as
also ensuring limited escalation of complaints
to the BO, the Reserve Bank advised all PSBs,
select private banks and foreign banks to appoint
chief customer service officers (CCSO – internal
ombudsman). Accordingly, all concerned banks
appointed CCSOs and operationalised their
functioning during the year.
Enhancing Awareness
VI.66 Against the backdrop of a large number
of complaints about fictitious offers of money, a
month-long awareness campaign through All-
India radio /FM radio was undertaken to sensitise
and caution the public not to fall prey to such
offers made in the name of the Reserve Bank or
any other public authority.
Standardisation of Forms
VI.67 As basic application forms vary from
bank to bank posing avoidable hindrance to
customers, the Reserve Bank in consultation
with IBA reviewed the commonly used forms and
suggested standardisation of select forms. Banks
will be shortly advised through IBA to implement
the standardised forms.
Agenda for 2016-17
VI.68 The Reserve Bank will monitor the
implementation of the Charter of Customer Rights
by banks, undertake full-fledged implementation
of the amended BO scheme and work towards
the operationalisation of new OBOs. More forms commonly used by bank customers will
be standardised across banks during the year.
Setting up of an appropriate ombudsman scheme
for the NBFC sector is also on the agenda. Need-based
studies through incognito visits to bank
branches on various customer service issues will
be undertaken to assess the field-level situation.
Based on the assessment, an appropriate
regulatory or supervisory response will be
designed.
Deposit Insurance and Credit Guarantee
Corporation (DICGC)
VI.69 Deposit insurance is central to the
framework for consumer protection in a financial
system. In India, DICGC – a wholly-owned
subsidiary of the Reserve Bank – insures
depositors of all commercial banks, including
LABs and RRBs, and co-operative banks.
With the present limit of deposit insurance of
₹0.1 million, the total number of fully protected
accounts was 1,553 million as on March 31,
2016, which constituted 92.3 per cent of the total
number of accounts (1,682 million) as against
the international benchmark of 80 per cent. The
amount of insured deposits was ₹28,264 billion
as at end-March 2016, which worked out to 30
per cent of the assessable deposits (of ₹94,053
billion) well within the international benchmark of
20-30 per cent.
VI.70 The corpus of the deposit insurance fund
(DIF) built by DICGC through surplus transfers
was ₹602.5 billion as on March 31, 2016. The
fund is used for settlement of claims of depositors
of banks taken into liquidation/reconstruction/
amalgamation. In 2015-16, the claims settled
by the Corporation amounted to ₹0.47 billion as
compared to ₹3.2 billion in the previous year. In
September 2015, the Committee on Differential
Premium System for Banks in India (Chairman:
Shri Jasbir Singh) submitted its report. In the light of the Committee’s report, the modalities for a
differential premium system based on risk profiles
of banks are being worked out.
VI.71 The key areas of focus in 2016-17 will
be enhancing public awareness about deposit
insurance and revamping the website of DICGC
towards achieving this objective; ensuring intensive
co-operation with the International Association
of Deposit Insurers (IADI) and making efforts to
adhere to Core Principles for Effective Deposit
Insurance Systems.
Integrated Application Software Solution
VI.72 The integrated application software
solution (IASS) was initiated in 2015-16 to have
a cross-functional and seamless integration of
all existing functions of the Corporation. This
system will also enable the processing of claims
by reducing manual intervention as well as online
submission of deposit insurance returns.
National Housing Bank (NHB)
VI.73 NHB – the apex institution for housing
finance – registers, regulates and supervises
housing finance companies (HFCs). It also extends
refinance to HFCs, SCBs and co-operative sector
institutions against their housing loans, and project
lending to borrowers in the public sector and
public-private space. Over the years, NHB’s key
concern has been to promote innovative market-based
solutions for affordable housing finance to
low income housing segments. The Reserve Bank
contributed ₹10 billion towards the paid-up capital
of NHB on January 12, 2016, thereby increasing
its shareholding from ₹4.5 billion to ₹14.5 billion.
VI.74 Out of the total refinance of ₹215.9 billion
extended by NHB in 2015-16 (July-June), 17.4
per cent (₹37.5 billion) was made under the rural
housing fund (RHF) and 6.4 per cent (₹13.8 billion)
under the urban housing fund (UHF). The central
government has identified NHB as the nodal agency for implementing the credit-linked subsidy
scheme (CLSS) under the Pradhan Mantri Awas
Yojana (Urban) – Housing for All Mission, and the
solar capital subsidy scheme. As part of CLSS,
NHB released subsidy claims of ₹1.2 billion
pertaining to 7,062 households to 57 primary
lending institutions till end-June 2016.
VI.75 NHB also extended refinance to HFCs
at reduced rates under the Urban Housing Fund scheme to step up the flow of housing finance to
flood-affected districts of Tamil Nadu. As at end-
June 2016, ₹440 million was disbursed as part of
this scheme. NHB launched RESIDEX in July 2007
for tracking residential property prices across 26
cities in India on a quarterly basis. After a recent
review of the index, it was decided to revamp it
by bringing out comprehensive housing-related
indices.
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