Statement on developmental and regulatory policies
The introduction of securities lending and borrowing in government securities, which refers to a process where investors temporarily transfer securities to another investor in exchange for a fee or collateral. This process can help to add depth and liquidity to the market by allowing investors to borrow securities that they need for short periods of time, which can aid in efficient price discovery.
The proposal is expected to augment the existing market for ‘special repos’, which refers to a type of repurchase agreement where securities are sold and repurchased at a future date. This new system is expected to facilitate wider participation in the securities lending market, providing investors with an avenue to deploy idle securities and enhance portfolio returns.
The Reserve Bank of India, which is responsible for regulating financial markets in India, plans to issue draft directions separately for stakeholder comments. These draft directions will provide detailed guidelines for how the securities lending and borrowing system will operate and how investors can participate in the market. Overall, the proposal is intended to improve the efficiency and liquidity of the government securities market in India.
Recovery of Penal Charges on Loans
The Reserve Bank of India (RBI) has reviewed the guidelines on the levy of penal interest on loan defaults by Regulated Entities (REs). REs are entities that are regulated by the RBI, such as banks and other financial institutions. The RBI has observed divergent practices among REs regarding the levy of penal interest, which can sometimes be excessive and lead to customer grievances and disputes.
To address this issue, the RBI has decided that any penalty for delay or default in servicing loans or any other non-compliance of material terms and conditions of loan contracts by borrowers shall be in the form of ‘penal charges’ and not be added to the rate of interest being charged on the advances. The aim is to ensure that such charges are levied in a reasonable and transparent manner and are not used as a revenue enhancement tool by REs.
The RBI will issue draft guidelines for public comments on this matter, and the guidelines will apply to all REs under RBI regulation. If any borrower’s credit risk profile deteriorates, REs will be allowed to alter the credit risk premium under the existing guidelines on interest rates. However, the RBI has clarified that there shall be no capitalisation of penal charges, i.e., the same shall be recovered separately and shall not be added to the principal outstanding.
Regulatory Initiatives on Climate Risk and Sustainable Finance
The RBI recognizes that climate change can have financial stability implications and can create climate-related financial risks for REs.
To address these risks, the RBI has placed a Discussion Paper on Climate Risk and Sustainable Finance on its website for public comments and feedback. Based on the feedback received, the RBI has decided to issue guidelines for REs on a broad framework for accepting Green Deposits, a disclosure framework on climate-related financial risks, and guidance on climate scenario analysis and stress testing.
The guidelines will be issued in a phased manner, and the RBI will have a dedicated webpage on its website that will consolidate all instructions, press releases, publications, speeches, and related communication on climate risk and sustainable finance. The aim is to ensure that REs can effectively manage climate risks and contribute to sustainable finance in India.
Payment and Settlement Systems
The Reserve Bank of India (RBI) has announced several regulatory and policy initiatives to enhance financial market infrastructure and services in its latest monetary policy statement. In the section on financial markets, the RBI stated that it plans to introduce securities lending and borrowing for government securities to add depth and liquidity to the market. The RBI will also issue draft guidelines for stakeholder comments on the recovery of penal charges on loans.
In terms of climate risk and sustainable finance, the RBI will issue guidelines in a phased manner for regulated entities, including a framework for acceptance of green deposits, a disclosure framework on climate-related financial risks, and guidance on climate scenario analysis and stress testing.
The RBI also announced the expansion of the Trade Receivables Discounting System (TReDS), which facilitates the financing of trade receivables for micro, small, and medium-sized enterprises (MSMEs). The proposed measures include permitting insurance companies to participate as a fourth participant on TReDS, allowing all entities eligible to undertake factoring business to participate as financiers, and enabling secondary market operations on TReDS platforms.
Finally, the RBI announced an enhancement to the Unified Payments Interface (UPI) to allow all inbound travellers to India to access UPI for merchant payments while in the country. This facility will be initially extended to travellers from G-20 countries arriving at select international airports, with plans to enable the facility across all entry points in the country.
The Reserve Bank of India (RBI) is collaborating with leading banks to launch a pilot project on a QR Code-based Coin Vending Machine (QCVM) to improve the distribution of coins among the public. The machine is cashless and works by dispensing coins against a debit to the customer’s bank account using Unified Payments Interface (UPI). This eliminates the need for physical tendering of banknotes and their authentication, making it a more convenient option. Customers will have the option to withdraw coins in the required quantity and denomination in QCVMs. The pilot project is set to initially roll out at 19 locations in 12 cities across India at public places such as railway stations, shopping malls, and marketplaces. Guidelines for better coin distribution will be issued to banks based on the learning’s from the pilot tests.