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  • India’s central bank extends some Paytm Payments Bank restrictions deadline to March 15 | TechCrunch

    India’s central bank extends some Paytm Payments Bank restrictions deadline to March 15 | TechCrunch

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    India’s central bank extended the deadline for some of the business restrictions it’s imposing on Paytm’s Payments Bank to March 15 from February 29, giving the Indian financial services firm an additional 15 days to comply with the rules but squashing chances of any major concessions.

    The Reserve Bank of India said Friday that Paytm Payments Bank, an associate firm of the Indian financial services firm that processes the group’s transactions, will be barred from accepting customer deposits, credit transactions and top ups in bank account, prepaid instruments, wallets, FASTags from March 15, 2024.

    The update follows the RBI widening its curbs on Paytm’s Payments Bank late last month, an update that has wiped Paytm’s market cap by 55% to $2.6 billion in the 16 days since. Paytm, which serves more than 15 million merchants and 330 million wallet customers, went public in 2021 at a valuation of $20 billion. Its cash balance at December’s closure last year stood at more than $1 billion.

    The central bank said in a statement that it was extending the deadline in the “interest of customers (including merchants) of PPBL who may require a little more time to make alternative arrangements and the larger public interest.”

    Many other payments bank’s services will be permitted until March 15 instead of the earlier February 29 deadline, the central bank said (PDF). The RBI also published an FAQ (PDF), detailing how the embargo on Paytm’s Payments Bank will impact merchant and customers. In the FAQ, the central bank said merchants using Paytm’s QR code, soundbox and point-of-sale terminal devices will not be impacted by the disruption at Paytm, provided those machines and instruments are linked to other bank accounts.

    In its order late last month, the RBI directed Paytm as well as Paytm Payments Bank to terminate their nodal accounts not later than February 29. In the clarification posted Friday, the RBI said it’s maintaining the same deadline for the cancellation of nodal accounts, required by payments firms to facilitate transactions. (Paytm said early this month that it plans to tieup with multiple banks and use their nodal accounts.)

    Earlier this week, Macquarie dramatically cut its 12-month price target on Paytm, citing risks of customers leaving the platform in the wake of heightened regulatory scrutiny. Macquarie, which famously predicted the slump at Paytm before the listing, lowered its target to 275 rupees, the most brutal by any major brokerage firm. Shares of Paytm closed trading at 341 Indian rupees, or $4.11, Friday.

    Check back for updates as the story develops.

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  • Retail CBDC transaction volumes have settled below 10 lakh per day

    Retail CBDC transaction volumes have settled below 10 lakh per day

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    After achieving the milestone of 10 lakh CBDC-R (Central Bank Digital Currency – Retail) transactions per day in December 2023, volumes have now settled slightly below this level, Reserve Bank of India Deputy Governor T Rabi Sankar said.

    “When we targeted 10 lakh transactions, a lot of co-ordinated efforts were required for it to be reached. Then we found issues in terms of scalability of technology and banks being able to handle that. So for the last few weeks we have largely been addressing those issues,” Sankar said at the sidelines of a technology event organised by Indian Banks’ Association (IBA).

    “Transactions have settled at a slightly lower level but it’s much better than what was earlier,” he said, adding that the value of transactions is “some crores”. The central bank will soon issue periodic data on the same in the public domain.

    “On the retail side, it’s the technology, how systems cope and how people behave. These are the focus areas, we’re not looking at volumes,” he said adding that matter such as currency use involve a lot of behavioural variables which don’t happen overnight. “They happen slowly, and it’s good that they happen slowly.“

    Wholesale CBDC

    Under the wholesale e-rupee pilot (CBDC-W), the focus is not on volumes but on trying out new use cases as done in the case of government securities and call money markets so far, Sankar said, adding that uptick in the call market has been good with regular transactions of small amounts.

    “Next step we’re thinking of trying out tokenisation of assets, government bonds and such. But we’ll just try them out, we’re not looking to have volumes because the idea is to try out the technology,” he said.

    Sankar added that ultimately the benefit under wholesale CBDC will come through cross-border transactions, wehrein there will be a lot of savings in terms of settlement risk. However, cross-border CBDC will take some time because RBI is still testing the technology and it is yet to settle within India.

    “We are testing and we are trying out new functions. Let it settle down. Cross-border talks are going on. Some countries have shown interest and we are talking to them, that’s a step ahead,” he said.



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  • RBI to bring framework for authentication of digital payment transactions

    RBI to bring framework for authentication of digital payment transactions

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    While SMS-based One Time Password has been the primary way for authenticating digital transactions, the Reserve Bank of India is looking at other mechanisms in line with technological advancements.

    Over the years, the Reserve Bank has prioritised the security of digital payments, in particularly the requirement of an Additional Factor of Authentication (AFA). Though RBI has not prescribed any particular AFA, the payments ecosystem has largely adopted SMS-based One Time Password (OTP).

    “With innovations in technology, alternative authentication mechanisms have emerged in recent years. To facilitate the use of such mechanisms for digital security, it is proposed to adopt a principle-based ‘Framework for authentication of digital payment transactions’. Instructions in this regard will be issued separately,” RBI said in a statement



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  • India’s Paytm is in flux | TechCrunch

    India’s Paytm is in flux | TechCrunch

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    Shares of Paytm plunged 10% on Monday, the third consecutive session of declines, touching an all-time low of 438.35 Indian rupees (or $5.28) after the RBI’s clampdown last week looks to have had a more extensive impact than previously anticipated.

    The trading was halted after Paytm’s shares fell 10%, the artificial limit put on its daily trade by the local exchanges. Even as Paytm initially anticipated RBI’s decision to have a maximum annual impact of $60 million to its business, the financial services firm has shed about $2.5 billion in its market cap in three days, or more than 40% of its value since Wednesday close. (Paytm’s market cap on Monday stood at $3.35 billion, below the $3.4 billion valuation at which it raised capital from Ant Financial in 2015 and far below its IPO valuation of $20 billion. More on numbers here.)

    The Reserve Bank of India (RBI) last week widened its curbs on Paytm’s Payments Bank, which processes transactions for Paytm, barring it from offering many banking services, including accepting fresh deposits and credit transactions across its services. In response, Paytm initially said it will terminate business with its affiliate and seek partnership with other banks.

    However, uncoupling Paytm from its affiliated Paytm Payments Bank appears to engender additional difficulties, both technical and perceptual.

    Shares of ubiquitous financial services firm Paytm, which went public in 2021. (Images, data: Yahoo Finance)

    TechCrunch first reported last week that the RBI is considering canceling Paytm’s Payments Bank license. In early 2018, when Paytm received the Payments Bank license – which allows the holder to offer customers a savings account of up to $2,400 – it had to surrender its PPI license, the permit required to operate the wallet business.

    Paytm Payments Bank houses more than 330 million wallet customers and Paytm cannot transition them to a different banking partner until the central bank returns the firm its PPI license. And it’s unclear if the central bank – which has been uncharacteristically strong-worded in its penalty order on Paytm – will make any concessions by the deadline (February 29). Indian daily Hindu Businessline reported on Sunday that Paytm is trying to sell the wallet business.

    And that is not the only other license at stake. As Bengaluru-based fintech investor Osborne Saldanha adds:

    The obvious, direct impact is that Paytm’s payment banking operations will be halted until RBI releases further instructions. It is however unclear if RBI will allow Paytm to ever resume payment banking operations even post compliance with RBI’s requirements as the notification does state any remedial clauses. It’s entirely possible that RBI may cancel Paytm’s payment banking license altogether. If that happens, bear with me as I’m not able to conclusively decipher, but it seems Paytm might not even have a payment aggregator license, as the payment aggregator license would have resided in the payment bank license and Paytm’s application for a payment aggregator license was returned by RBI.

    In its notification last week. the RBI said Paytm’s “persistent” noncompliance with an earlier order — from March 2022, when the RBI ordered Paytm to stop adding customers to Payments Bank — raised supervisory concerns and warranted further actions. The RBI said an audit found the instances of noncompliances, but didn’t go into details.

    The local media reported last week that Paytm Payments Bank was riddled with issues such as money-laundering and that India’s crime-fighting agency Enforcement Directorate was probing the firm. Paytm declined (PDF) that the ED was conducting any investigation, and in a townhall with employees on Saturday, Paytm’s senior executives assured that the issues reported in media were “old” and had been fixed “long back,” TechCrunch first reported.

    As we attempt to understand the full extent of the potential damage from the RBI’s initial ruling to Paytm, the company is already beginning to bleed customers and merchants. As Macquarie analyst Suresh Ganapathy pointed out on an analyst call last week, many Paytm customers are already harbouring the belief that Paytm is defunct.

    The ongoing episode with Paytm is also shaking the confidence of investors in the Indian fintech market. The RBI has introduced a series of regulatory changes — or clarifications —  in the last three years and fintech as a sector was already becoming hostile for many VCs.

    “I believe this action against Paytm is precedent-setting, harsh and impacts the broader financial services ecosystem in India. I don’t remember the last time RBI canceled the license of a bank for reasons other than adequate capital requirements,” Saldanha added.

    Bipin Singh, co-founder of financial services firm MobiKwik, defended the RBI’s rationale: “Having worked with the regulator closely over the last decade or so, I can say conclusively that RBI is neither against innovation nor against fintechs. If they were, we wouldn’t have the huge fintech ecosystem in India today. Compliance, however, is not negotiable,” he tweeted.



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    Manish Singh

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  • No transactions and settlements in financial markets on Jan 22, says RBI

    No transactions and settlements in financial markets on Jan 22, says RBI

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    The Reserve Bank of India said there will be no transactions and settlements in government securities (primary and secondary), foreign exchange, money markets and Rupee Interest Rate Derivatives on January 22, 2024.

    This comes in the wake of the Maharashtra Government declaring January 22, 2024 as a public holiday to observe “Shree Ram Lalla Pran Pratishtha Din” (Ram temple consecration) under Section 25 of the Negotiable Instruments Act, 1881. 

    Settlement of all outstanding transactions will accordingly get postponed to the next working day — January 23, 2024, per a RBI statement.

    The 3-day Variable Rate Repo (VRR) auction (which infused ₹50,007 crore liquidity into the banking system) conducted on Friday with date of reversal on January 22, 2024 will now be reversed on January 23, 2024.

    The 3-day VRR auction for ₹1.25 lakh crore that was to be conducted on January 22 has been cancelled. Instead, a 2-day VRR auction for ₹1.25 lakh crore will be conducted on January 23, 2024.

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  • Reduce on-lending to smaller peers: RBI tells NBFCs

    Reduce on-lending to smaller peers: RBI tells NBFCs

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    In a bid to further streamline the unsecured loans market, the Reserve Bank of India has asked some of the larger non-banking finance companies to curtail their lending to smaller peers.

    It has been observed that these smaller NBFCs, reckoned as digital lenders and fintech lenders, often play a dominant role in the unsecured loans space, particularly the small-ticket personal and business loans segment. These players often tap the large NBFCs as their primary source of funding, as availing bank funding could be challenge for them.

    “Invariably, such small NBFCs don’t have the required rating strength to directly tap the banking channel for funds at competitive rates and hence they turn to large NBFCs,” said a person directly aware of the development.

    Loan exposure

    At present, loan exposure of large NBFCs to smaller players including microfinance lenders is 15–40 per cent of their total loans, while in exceptional cases such as MAS Financial Services the exposure to non-banks exceeds 70 per cent of its total loans and advances.

    Among the larger names, Piramal Enterprises has about 19 per cent exposure to NBFCs, including loans to NBFC-MFIs, while Aditya Birla Capital has about 27 per cent exposure to mid-market and corporate loans.

    Although the yield may not be very rewarding, for the large NBFCs on-lending to their smaller peers helps in adding bulk to their loan books and adds up as an important business vertical for them.

    In some cases, it has been observed that the NBFCs on-lending to small peers have operational arrangements for loan products as well. For instance, large NBFCs source digital loans through the smaller NBFCs with whom they already have a relationship for loans and advances.

    “The regulator is of the view that such an arrangement could turn dicey for the ecosystem if there should be any major disturbance in the unsecured loans space,” said another person aware of the issue.

    Industry observers say that the directions to large non-banks with respect to their exposure to smaller peers are akin to the guidance given to banks about three years ago when banks were wary of taking direct exposure to small-ticket loans.

    “They were doing so through NBFCs and now with most banks directly engaged in the digital lending business without using fintechs as intermediaries, large NBFCs are filling the shoes of banks for these smaller players,” said a CEO of a retail non-bank who didn’t want to be named.

    Pointers

    Further clamping unsecured loans

    Large NBFCs asked to curtail lending to smaller peers.

    Smaller NBFCs reckoned as digital and fintech lenders play pivotal role in the unsecured loans

    These NBFCs tap the large NBFCs for primary funding channel

    Lack of strong rating a hurdle to access bank funding at competitive rates

    Loan exposure of large NBFCs to smaller players including MFI loans is 15–40 per cent total book

    MAS Financial Services has 70% of its total loans to NBFCs

    Piramal Enterprises exposure to NBFCs at 19% of total book

    Aditya Birla Capital has 27% exposure to mid-market and corporate loans

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  • New AIF norms on dematerialisation of investments, mandatory custodian appointments kick in

    New AIF norms on dematerialisation of investments, mandatory custodian appointments kick in

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    Securities and Exchange Board of India (SEBI) has begun the new year on a strong note, bringing into effect its November 2023 Board decisions that among other things extended the requirement of mandatory appointment of custodians by Alternate Investment Funds (AIFs) to schemes with corpus less than or equal to ₹500 crore. 

    Till now, this mandatory Custodian appointment norm was applicable to Category III AIFs and to Category I and II AIFs with corpus more than ₹500 crore. Now it stands extended to all AIFs.

    The market regulator has effective January 5 this year amended its 2012 framed AIF Regulations to also stipulate that AIFs can hold securities of their investments only in dematerialised form subject to certain exceptions.

    The exclusions are investments by AIFs in instruments which are not eligible for dematerialisation; investments held by a liquidation scheme of AIF that are not available in dematerialised form. 

    SEBI has also now empowered itself to specify in future such other investments by AIFs or such other schemes of AIFs that need not be covered under dematerialisation requirement.

    The move to mandate AIFs to hold their investments in dematerialised form will enhance transparency, reduce risk and provide comfort to investors, say experts.

    This will also encourage digitalisation of financial markets in India, to facilitate access to the market and ease of doing business, they said. The dematerialisation requirement will align AIFs with national priority, it was felt.

    NEW CONDITIONS 

    AIFs can now appoint a Custodian who is an Associate of a Manager or a Sponsor of an alternate fund only when certain conditions are met. 

    At all points of time, the Sponsor or Manager should have minimum net worth of ₹ 20,000 crore. Also, fifty percent or more of the directors of the Custodian do not represent the interest of the Sponsor or Manager or their associates. The Custodian and the Sponsor or Manager of the AIF are not subsidiaries of each other and they do not have common directors. 

    SEBI also now wants the Custodians and the Manager of the AIF sign an undertaking that they would act independently of each other in their dealings of the schemes of the Fund.

    REGULATORY GAPS 

    The latest changes by SEBI in its AIF regulations comes at a time when regulators (including RBI) have moved fast to close various regulatory gaps that led to breaches in the spirit of law and the use of such investments vehicles for escaping regulatory oversight. 

    Recently, RBI in an apparent bid to address concerns of possible ever-greening through the AIF route tightened the norms for banks and NBFCs investing in such investment vehicles.

    The central bank had, in the third week of December 2023, directed banks and NBFCs to not make investments in any AIFs that has downstream investments either directly or indirectly in a borrower of the bank.

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  • RBI asks banks to annually review accounts inoperative for over a year

    RBI asks banks to annually review accounts inoperative for over a year

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    The Reserve Bank of India has asked banks to annually review accounts that have not seen customer-induced transactions for over a year, and term deposit accounts where there is no explicit renewal mandate and the funds have not been withdrawn after maturity.

    It also barred banks from levyingpenal charges for non-maintenance ofminimum balancein anyaccount classified as inoperative or for activation of inoperative accounts.

    The instructions are part of fresh guidelines for inoperative accounts and unclaimed deposits with the aim of reducing the quantum of unclaimed deposits and frauds and improving grievance redressal.

    Revised framework

    The revised framework follows a review by the central bank and includes measures to be put in place by bankson classification of such accounts, their periodic review, ways to prevent fraud, expedite grievance redress, trace account holders or their nominees/heirs, claims settlement, and the account closure process.

    The guidelines are applicable to all commercial and co-operative banks and will come into effect from April 1, 2024.However, they will not be applicable for zero-balance accounts opened for credit of scholarship amount or Direct Benefit Transfer under Central and State government schemes.

    Under the new framework, banks will be required to inform accountand deposit holders through letters, email or on their registered number that there has been no activity in the last one year, and caution them that the account wouldbecome ‘inoperative’ if no operations are carried out during the ‘extended period’ of the next one year.

    “The classification of an account as inoperative shall be for a particular account of the customer and not with reference to the customer,” the central bank said, adding that in case of multiple accounts of a single customer each account/deposit will need to be assessed individually.

    In case of unresponsive customers, banks will need to enquire into the whereabouts of account-holders or nominees/heirs. Inoperative accounts may also later be reactived subject to fresh KYC documentation and a second level of authorisation.

    To reduce frauds

    To reduce the risk of fraud, banks will need to regularly monitor inoperative accounts, which have been reactivated,for at least six months, without the knowledge and notice of thecustomers and the dealing staffand maintain system logs.

    They will also need to ensure that inoperativeand reactivatedaccounts/unclaimeddeposits are subjected toconcurrent audit.Further, banks may also consider imposing a cooling-off periodon reactivation, with restrictions on the number and amount of transactions.

    Banks will also need to display details of unclaimed deposits, which have been transferred to the RBI-maintained Depositor Education and Awareness Fund(DEA), on a monthly basis on their websitesor branches.

    They will also need to provide information on the process for activation of the inoperative account/ unclaimeddeposits and claiming the balances therein.

    Currently, the credit balance in any deposit account that has been inoperative for at least 10 years, or any amount that has been unclaimed for 10 years, is required to be transferred by banks to the DEA Fund.

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  • Sharp spike in speculative trades triggers RBI curbs on unsecured loans 

    Sharp spike in speculative trades triggers RBI curbs on unsecured loans 

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    Unusually high spurt in certain select activities such as crypto currency trades, equity derivatives and online gaming such as teen patti, rummy, ludo and cricket related games over the last 12 months may have alerted the Reserve Bank of India to look into unsecured loans being used for these activities.

    “A lot of these (trades) are done by people less than 40 years of age, who may be relying on borrowed money to engage in these activities,” said a person directly aware of the matter.

    Sources link the Reserve Bank of India’s recent move to increase risk weights in unsecured loans in November as a step towards curbing such speculative trades. “While in certain pockets the over-indebtedness of some borrower categories is increasing, what could be more concerning is availing bank loans to deploy it in F&O trades and crypto trades. Repayment capacity of the borrower in such instances entirely becomes a game of luck and this could become hazardous for the wellbeing of the system,” said a senior official with knowledge of the matter.

    Numbers speak 

    Recently published Financial Stability Report by RBI notes “equity derivatives trading volumes are increasing, with a sharp rise in individual investors’ participation in that segment. The attractiveness of options as derivatives lies in the embedded leverage, which allows traders to take exposure with little upfront cash. The number of active derivatives traders went up nearly six times from 2018-19 levels to 6.9 million by October-end”. 

    Reiterating this, a report titled ‘Gamification of Indian Equities’ by Axis Mutual Fund also highlighted that the derivative market (in India), in notional terms, is over 400 times the cash market, and that is not a healthy way of developing the market.

    Likewise, the Indian crypto currency market witnessed 160 per cent surge trading as per a report by CoinSwitch and a recent report by EY pegged India’s online gaming at ₹16,428 crore in 2023.

    In fact, at various forums Shaktikanta Das, Governor, RBI, has sounded off that with end use monitoring not possible with unsecured loans, it poses a risk to the system.

    Cautious stance 

    According to sources, from mid-2022 the RBI started taking note of an increasing trend in demand for personal loans and by March 2023 the segment was being closely monitored for trends in demand and borrower patterns. “Some of speculative trade data when correlated with trend in demand for unsecured loans supported the inference that speculative trading may have been fuelled using borrowed money,” said another senior official. “Nearly 30–40 per cent of trades in these speculative segments are likely to have been channelised through borrowed money”.

    Post the strictures on unsecured loans, many digital lenders have scaled down their business in the small ticket personal category. “This (less than ₹50,000 personal loans) needs monitoring and could have fuelled these speculative activities,” said a senior banker.

    According to TransUnion CIBIL report, the number of defaulters in the personal loan segment rose to 32.9 per cent in April 2023 against 31.4 per cent a year-ago. Email sent to RBI seeking confirmation remained unanswered till press time.

    What’s comforting for now is that the small ticket personal loans segment is less than five per cent of the total personal loans segment, while unsecured loans account for 34 per cent of total retail loans.

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  • RBI permits lending and borrowing of G-Secs

    RBI permits lending and borrowing of G-Secs

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    In a move that will add depth and liquidity to the government securities (G-Secs) market, the RBI has permitted permit lending and borrowing of G-Secs. 

    This move comes even as India is set to be included in the globally tracked JP Morgan’s Government Bond Index-Emerging Markets (GBI-EM) index, starting June 28, 2024.

    The RBI said G-Secs issued by the Central government excluding Treasury Bills will be eligible for lending/borrowing under a Government Security Lending (GSL) transaction.

    Securities obtained under a repo transaction, including through Reserve Bank’s Liquidity Adjustment Facility, or borrowed under another GSL transaction will also be eligible to be lent under a GSL transaction.

    Collateral placement

    Further, G-Secs issued by the Central Government (including Treasury Bills) and the State Governments will be eligible for placing as collateral under a GSL transaction.

    In addition, Securities obtained under a repo transaction, including through Reserve Bank’s Liquidity Adjustment Facility, or borrowed under another GSL transaction will also be eligible to be placed as collateral under a GSL transaction.

    GSL transactions may be contracted using any mutually agreed trading process/platform, including but not limited to, bilateral or multilateral, quote driven or order driven process, anonymous or otherwise, RBI said in its “Reserve Bank of India (Government Securities Lending) Directions, 2023”.

    RBI Governor Shaktikanta Das, in his February 2023 “Statement on Developmental and Regulatory Policies” had said that RBI proposes to permit lending and borrowing of Government securities which will augment the existing market for ‘special repos’. 

    “A well-functioning market for securities lending and borrowing will add depth and liquidity to the Government securities market, aiding efficient price discovery.

    “… The system is expected to facilitate wider participation in the securities lending market by providing investors an avenue to deploy idle securities and enhance portfolio returns,” Das then said.

    The minimum tenor of a GSL transaction will be one day and the maximum tenor shall be the maximum period prescribed to cover short sales. All GSL transactions will settle on a Delivery versus Delivery basis.

    The central bank said SLR (statutory liquidity ratio) eligible securities borrowed under a GSL transaction will be eligible to be reckoned for SLR by the borrower.

    Accordingly, such securities lent under a GSL transaction will not be eligible to be reckoned for SLR by the lender.

    Further, SLR eligible securities received as collateral under a GSL transaction will be eligible to be reckoned for SLR by the lender.

    Accordingly, such securities placed as collateral under a GSL transaction will not be eligible to be reckoned for SLR by the borrower.

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  • RBI allows card-on-file tokenisation through issuer banks, card networks

    RBI allows card-on-file tokenisation through issuer banks, card networks

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    The Reserve Bank of India has allowed card-on-file tokenisation (CoFT) through card issuing banks or institutions to provide cardholders with an additional choice to tokenise their cards for multiple merchant sites through a single process.

    Earlier, card tokenisation services were provided by card issuers and card networks at merchant websites or at the time of purchase. The central bank had first announced extending this to issuer banks and financial institutions as part of the Statement on Development and Regulatory Policies in October 2023.

    Generation of CoF tokens for a card, through the card issuer or card network, will now be enabled through mobile banking and internet banking channels, at customers’ convenience, either on receipt of the new card or later.

    Card issuers will need to provide a complete list of merchants for whom they can provide tokenisation services and the cardholders will select the merchants where they want to maintain tokens. The tokens, thus generated will need to be made available on the merchant’s payment page, in the cardholder’s account with the merchant.

    However, the tokenisation will need to be done only with explicit customer consent, and with AFA (additional factor authentication) validation, RBI said, adding that if the cardholder selects multiple merchants for which the card is to be tokenised, AFA validation may be combined for all the merchants.

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  • India's Paytm curbing low-value personal loans spells bad news for the industry | TechCrunch

    India's Paytm curbing low-value personal loans spells bad news for the industry | TechCrunch

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    Indian financial services firm Paytm sent shockwaves through the industry on Wednesday after it disclosed that it plans to issue fewer personal loans under 50,000 Indian rupees ($600) in a move that has already started to rattle many fintech investors.

    Paytm’s move followed the RBI recently tightening norms for consumer loans and publicly expressing concerns about the bad, tiny personal loans. Paytm said Wednesday that it was getting “ultra conservative” and will expand its portfolio of higher-ticket personal and commercial loans to lower-risk and high credit-worthy customers.

    On an analyst call Wednesday, Paytm president and chief operating officer said “recent macro development and regulatory guidance” as well as dialogue with lending partners prompted the firm’s move.

    “We believe this reflects growing conservatism in the system as well as Paytm’s large share in the segments,” Jefferies analysts said. Goldman Sachs lowered its estimates of Paytm’s revenue and adjusted EBITDA for FY24 through FY26 by up to c.10%/40%, on sharply lower lending estimates, and said it expects FY25 disbursal growth of 0% YoY vs 37% earlier.

    Industry executives said the move impacts the growth momentum and return on equity profile for unsecured lending for the entire sector and smaller players might be disproportionately impacted.

    “For about 77% of Paytm’s revenue base which includes payments, commerce & cloud, we see no change in outlook, with these segments growing revenues at mid-to-high-teens percentage over the next 2-3 years. However, for the lending segment, we now forecast overall disbursals in 2HFY24 to be 11% lower vs 1H, with FY25 disbursals growing at 0% YoY (vs 37% estimate earlier),” Goldman Sachs analysts wrote Thursday.

    “Lending has been a key driver of Paytm’s improving profitability, and we see low growth visibility in this vertical over the next 6-12 months given the higher-than-expected pressure on small-ticketing lending that Paytm is seeing. While Paytm has guided for 40-50% decline in postpaid disbursals in the near term, the range of outcomes remains wide in our view, with potential for further pressure if the macro environment does not see a meaningful improvement.”

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  • RBI has turned cautious from conscious over retail credit: India Ratings

    RBI has turned cautious from conscious over retail credit: India Ratings

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    The Reserve Bank of India’s recent decision to hike risk weights on certain segments of consumer credit is a reflection that the central bank has “turned cautious from conscious”, India Ratings said. 

    While banks, with their strong capital buffers, should be able to largely absorb the incremental capital requirements, NBFCs will need to borrow more from the capital markets leading to an increase in lending rates amid robust demand.

    “With sustained pressure on inflationary drivers coupled with strong credit growth, the lending rates could only go up in the near term. Believing the policy rate has peaked out, the RBI is expected to use an array of instruments and levers to nudge the lending rates towards the higher side,” said Soumyajit Niyogi, Director, Core Analytical Group.

    The spread between MCLR and repo facility is at a six-year low, suggesting incomplete pass-through of the tightening credit cycle caused by the stiff competition among banks. Even as the repo rate stays at the current level of 6.5 per cent, MCLR could go up modestly, the rating agency said.

    System liquidity

    However, the key monitorable aspect will be system liquidity from the macro side and balance sheet liquidity from the micro side, it said, adding that high-rated borrowers will continue to benefit from the intense competition in terms of lending cost.

    Overall, in its base case scenario, India Ratings does not envisage any large OMO sales, barring regular interventions by the RBI as excess liquidity is likely to correct in Q3 FY24.

    “The sustained strong retail lending seems to have become one of the key monitoring factors for the regulator, which also necessitates close monitoring of short-term rates to ensure proper allocation of short-term capital without stoking inflation or financial stability risk,” it said, adding that the RBI wants to maintain system liquidity at an optimum level to avoid excess liquidity causing any risk to financial stability.

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  • RBI imposes monetary penalty on Citibank, BoB and IOB

    RBI imposes monetary penalty on Citibank, BoB and IOB

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    The Reserve Bank of India (RBI) has imposed a monetary penalty aggregating ₹10.34 crore on three banks —Citibank NA (₹5 crore), Bank of Baroda (₹4.34 crore) and Indian Overseas Bank (₹1 crore) —for non-compliance with some of its Directions.

    RBI said the examination of Citibank’s Risk Assessment report/Inspection report about Statutory Inspection for Supervisory Evaluation (ISE 2021) and all related correspondence in that regard, revealed, inter alia, contravention of the provisions of the BR Act and non-compliance with its directions on ‘Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks read with Know Your Customer (KYC) Direction, 2016’.

    The central bank, in a statement, said Citibank (i) failed to credit the eligible amount to the Depositor Education and Awareness Fund within the prescribed period, (ii) paid remuneration in the form of commission to its certain staff members and (iii) outsourced monitoring and disposal/closure (decision-making function) of AML (Anti-Money Laundering) alerts to a Group company.

    Consequently, a notice was issued to the bank advising it to show cause as to why a penalty should not be imposed on it for failure to comply with the said directions, as stated therein.

    Also read: RBI imposes ₹1 crore penalty on Union Bank

    “After considering the bank’s reply to the notice, additional information provided by the bank and the oral submissions made during the personal hearing, RBI came to the conclusion that the aforesaid charge of contravention of the provisions of the BR Act and non-compliance with RBI directions was substantiated and warranted imposition of monetary penalty,” RBI said.

    Bank of Baroda

    RBI said examination of BoB’s Risk Assessment Report/Inspection Report pertaining to ISE 2021, and all related correspondence in that regard, revealed, inter alia, non-compliance with its Directions on ‘Creation of a Central Repository of Large Common Exposures Across Banks’, ‘Central Repository of Information on Large Credits (CRILC) – Revision in Reporting’, ‘Loans and Advances – Statutory and Other Restrictions’, and ‘Reserve Bank of India (Interest Rate on Deposits) Directions‘.

    The central bank, in a statement, said BoB failed to ensure accuracy and integrity of data on large exposures submitted to RBI with respect to some accounts; sanctioned a term loan to a Corporation (a) in lieu of or to substitute budgetary resources envisaged for certain projects; (b) without undertaking due diligence on the viability and bankability of the projects to ensure that revenue streams from the projects were sufficient to take care of the debt servicing obligations; and (c) the repayment / servicing of which was made out of budgetary resources.

    Also read: bl explainer: What RBI’s increase in risk weights mean to the borrower?

    Further, RBI said, the public sector bank sanctioned a working capital demand loan to a Corporation against amounts receivable from government by way of subsidies, and did not pay interest rate on the deposits accepted from senior citizens, as per the schedule of interest rates disclosed in advance.

    Consequently, a notice was issued to the bank advising it to show cause as to why penalty should not be imposed on it for failure to comply with the said directions, as stated therein.

    “After considering the bank’s reply to the notice, and oral submissions made during the personal hearing, RBI came to the conclusion that the charge of non-compliance with the aforesaid RBI directions was substantiated and warranted imposition of monetary penalty,” RBI said.

    Indian Overseas Bank

    RBI said examination of IOB’s Risk Assessment Report/Inspection Report about ISE 2022, and all related correspondence in that regard, revealed, inter alia, non-compliance with its Directions on ‘Loans and Advances – Statutory and Other Restrictions’

    The central bank said IOB sanctioned term loans to two Corporate entities (i) instead of or to substitute budgetary resources envisaged for certain projects; (ii) without undertaking due diligence on the viability and bankability of the projects to ensure that revenue streams from the projects were sufficient to take care of the debt servicing obligations; and (iii) the repayment/servicing of which was made out of budgetary resources.

    Further, the public sector bank sanctioned a term loan to another Corporate entity (i) without undertaking due diligence on the viability and bankability of the projects to ensure that revenue streams from the projects were sufficient to take care of the debt servicing obligations and (ii) the repayment/servicing of which was made out of budgetary resources.

    Consequently, a notice was issued to the bank advising it to show cause as to why a penalty should not be imposed on it for failure to comply with the said directions, as stated therein.

    Also read: RBI imposes ₹5.39-cr monetary penalty on Paytm Payments Bank

    “After considering the bank’s reply to the notice, and oral submissions made during the personal hearing, RBI came to the conclusion that the charge of non-compliance with the aforesaid RBI directions was substantiated and warranted imposition of monetary penalty,” RBI said.

    In all three cases, RBI said its action is based on the deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers.

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  • RBI’s tightening of norms for unsecured retail loans is credit positive: Moody’s

    RBI’s tightening of norms for unsecured retail loans is credit positive: Moody’s

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    The Reserve Bank of India’s recent measures to tighten norms for unsecured retail loans will help strengthen underwriting norms through higher risk-weighted assets and is “credit positive” because lenders will need to allocate higher capitals for such loans improving their loss-absorbing buffers and may dampen their growth appetite, Moody’s Investor Service said in a note.

    “The unsecured segment has been growing very rapidly in the past few years exposing financial institutions to a potential spike in credit costs in case of sudden economic or interest rate shocks,” it said.

    The RBI on November 16, raised risk weights on riskier unsecured retail loans and credit cards by banks and NBFCs by 25 percentage points.

    India’s unsecured lending segment has become very competitive over the past few years with banks, NBFCs and fintechs, including several new entrants, aggressively growing loans in this category. In the past two years, personal loans grew around 24 per cent and credit card loans grew 28 per cent on average compared with overall banking sector’s credit growth of around 15 per cent.

    “Several NBFCs, which until now focused on secured lending categories such as infrastructure, real estate and vehicle loans, have also pivoted to these riskier segments. The net interest margins for such loans are also declining because of steep competition,”Moody’s said.

    Further, several banks and NBFCs are sourcing unsecured loans through fintech companies’ apps. However, fintechs’ loan origination and collection models are largely untested and could expose the NBFCs and banks to asset quality volatility, it added.

    Capital impact

    Moody’s expects banks to be able to absorb higher risk weights on their capital because the overall banking sector’s exposure to unsecured retail credit is small at around 10 per cent as of September 2023. Moreover, the sector’s overall capitalisation is at a historically high level, with a Common Equity Tier 1 (CET-1) ratio of 13.9 per cent as of March 2023.

    However, the impact of the new underwriting rules could vary among individual lenders depending on their exposure to unsecured loans, it said.

    The central bank’s decision to also increase risk weights on banks’ exposure to NBFCs by 25 percentage points will be applicable to NBFCs which until now benefitted from risk weights below 100 per cent because of their higher domestic ratings. The strain, though, should be minimal because the higher risk weights are not applicable to loans extended for housing finance and priority sectors such as agriculture and MSMEs, among others.

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  • Banks’ capital requirements to rise on higher risk weights, loan rates to increase

    Banks’ capital requirements to rise on higher risk weights, loan rates to increase

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    The capital requirement of banks is expected to increase by 5 per cent, or ₹84,000 crore of additional capital, due to the increase in risk weights for certain consumer loans by the RBI on Thursday. The common equity tier-I (CET-1) capital level is also expected to decline by 35–100 bps for various banks.

    Currently, the banking system capital is estimated to be ₹15.2-lakh crore, and the regulatory measures will lead to banks’ CRAR (capital adequacy ratio) requirements increasing by 55–60 bps.

    “Trends in consumer credit show it has been growing at 25 per cent plus since May 2022. The share of loans impacted (about ₹14.8-lakh crore) to total outstanding loans (₹1,51.5-lakh crore) is only around 9.8 per cent in September 2023,” SBI Research said, pegging the quantum of impacted personal loans at 31 per cent of the total portfolio of ₹48.3 lakh crore.

    On Thursday, the RBI hiked the risk weights on unsecured consumer loans, including credit cards, by 25 percentage points for both banks and NBFCs to 125 per cent.

    Risk-weighted assets for the top banks are expected to increase by 2-4 per cent based on loan mix, as a result of which brokerage firms expect common equity tier-I (CET-1) capital levels to decline by 35–100 bps. While this will lead to some moderation in credit growth to these segments, analysts don’t expect any significant slowdown as long as credit costs remain low and risk-adjusted returns remain healthy. Further, part of the impact is expected to be passed on by banks via higher lending rates to ensure return on capital is not adversely impacted.

    The move will lead to prudent unsecured lending and may slow down the growth of unsecured lending over the next 3–6 months as lenders become more selective on unsecured credit, analysts said. They flagged a higher impact on ICICI Bank due to the higher share of loans of NBFCs, State Bank of India, and Axis Bank due to their relatively lower CET-1 capital levels, RBL Bank owing to the large share of credit cards, and IDFC First Bank for the high share of personal loans.

    Among NBFCs, SBI Card and Bajaj Finance are seen as the most impacted, given their meaningful exposure to unsecured and personal credit. The CET-1 impact of risk weight is estimated to be around 416 bps for SBI Card and 240 bps for Bajaj Finance, whereas for other NBFCs it is seen at around 25–85 bps.

    The cost of borrowing for NBFCs will also go up as banks look to increase lending rates, while a higher risk weight leads to higher capital consumption, analysts said, estimating an increase of 10–20 bps in the cost of funds. At present, bank borrowings form 32–65 per cent of the NBFC borrowing mix.

    Banks downplay impact

    Banks, however, downplayed the impact. “Given our strong capital adequacy, either on an immediate basis or in the foreseeable future, we do not expect any impact of the increased risk weights on our growth trajectory and profitability,” said Poonawala Fincorp.

    SBI Chairman Dinesh Khara told reuters that even after accounting for the increased capital requirement, the bank has enough buffers and does not see the need to accelerate fund raising.

    But shares of most banks and financial companies declined on Friday, with the Bank Nifty Index ending down 1.3 per cent as all constituents barring AU Small Finance Bank ended 0.2–3.7 per cent lower.

    Consumers to pay more

    Consumers are bracing for expensive loans as banks increase rates to compensate for the slower loan growth. “By raising the risk weightage for loans to NBFCs, the money supply will get throttled, and result in higher capital requirements for banks. For banks to maintain risk-adjusted returns, lending rates need to go up. At this stage, it is safe to assume that the lending rates can go up anywhere between 40 and 75 bps, but the actual scenario will be market-driven,” said Virat Diwanji, Group President and Head of Consumer Banking at Kotak Mahindra Bank, adding that it will definitely impact the ROE (return on equity) of lenders.

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  • RBI’s directive to BoB on mobile app likely to impact its ability to sustain growth: Ind-Ra

    RBI’s directive to BoB on mobile app likely to impact its ability to sustain growth: Ind-Ra

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    The Reserve Bank of India‘s direction to Bank of Baroda to suspend onboarding of customers through its mobile application, bob World, is likely to impact the bank’s ability to sustain its liability growth, primarily CASA (current account, savings account) generation through onboarding of new salary accounts in urban and metro regions, according to India Ratings & Research (Ind-Ra).

     The credit rating agency said about 98 per cent and 91 per cent of savings account (SA) and current account (CA) are being sourced digitally.

    Moreover, 58 per cent of fixed deposits and 42 per cent of recurring deposits, which are being booked through bob World, are likely to be negatively impacted, it added.

    However, in terms of assets, the impact would be limited as cross-selling for retail products (personal loans and credit cards) to existing bob World customers would be sufficient to meet growth requirements in the medium term.

    Ind-Ra emphasised that the continuing of transactions through internet banking, tab banking and branch banking would remain unaffected.

    The agency said it understands that BOB has already taken remedial measures and is awaiting a review of the measures taken by the RBI to resolve the issue.

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  • Retail lending has grown more in rural areas relative to urban areas: CAFRAL report

    Retail lending has grown more in rural areas relative to urban areas: CAFRAL report

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    Retail lending has grown more in the rural areas relative to the urban areas across lenders, as creditors started tapping the underserved market segment, with the rural-urban differential growth highest for NBFC (non-banking finance company) and Fintech NBFC lenders, per a report by CAFRAL.

    The year-on-year (y-o-y) growth in loans sanctioned for rural and urban areas was about 70 per cent and 65 per cent, respectively, for NBFCs in 2022, according to the charts in the India Finance Report 2023, which has been put together by the Centre for Advanced Financial Research and Learning. CAFRAL is an independent body of the Reserve Bank of India.

    The y-o-y growth in loans sanctioned for rural and urban areas was about 200 per cent and 140 per cent, respectively, for Fintech NBFCs in 2022.

    CAFRAL’s researchers, however, noted that despite the recent growth spurt in credit to rural areas, total retail credit to rural areas was merely 18.8 per cent ( ₹66.52 lakh crore) of the total credit in 2021.

    Of the 57.58 lakh crore sanctioned by NBFCs in 2021, the share of rural credit accounted for only 20.8 per cent ( ₹11.99 lakh crore), clearly highlighting the urban-rural divide in access to credit, opined the researchers.

    They observed that fostering NBFC growth can potentially help narrow the rural-urban credit gap, as NBFCs reach out to rural borrowers through their deep penetration in rural areas.

    The researchers observed that RBI has previously used branch expansion policy as a tool to improve financial access in rural areas. For example, the most recent data from RBI shows that about 30 per cent of all bank branches are in rural areas where over 60 per cent of the population lives.

    “This lack of access to formal financial institutions amongst rural households also implies constrained access to credit.”

    “A credit supply shock leads to large consumption responses in rural compared to urban households. Rural consumption response estimate for NBFC loans is nearly double that in the urban areas,” they said.

    The report said that data-driven underwriting processes and new financial products and credit delivery methods are reaching credit-constrained borrowers.

    Though rural retail lending has seen strong growth, especially for NBFCs, credit access is still concentrated in urban areas, and much of the population remains underserved.

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  • PayGlocal gets RBI nod for payment aggregator license

    PayGlocal gets RBI nod for payment aggregator license

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    PayGlocal, a cross-border focused payments platform provider, has received in-principle approval from the Reserve Bank of India for Payment Aggregator (PA) license.

    This process, once completed, will enable PayGlocal to onboard merchants onto its platform for online payment processing.

    Founded in 2021 by Prachi Dharani, Rohit Sukhija and Yogesh Lokhande, PayGlocal offers its technology platform to various players in the market for payment processing and transaction risk management. This helps them accept online payments securely through various payment instruments including cards and global alternative payment methods, per the company.

    Also read: Rising bank financing for NBFCs raises concerns about systemic contagion: RBI’s research body

    Prachi Dharani, co-founder and CEO, PayGlocal said, “Driven by growing GDP, global commerce from India will continue to grow and the company remains focused on providing the right payment solutions to enable this growth. “

    RBI’s in-principle license will help the company create more innovative solutions as it continues to work towards getting full authorization, said Dharani.

    Additionally, RBI’s new guidelines on PA-CB (Payment Aggregator-Cross Border) is a huge step in the right direction from a regulatory framework standpoint in taking the Cross Border payment agenda of the country forward, she said.

    The company has raised capital from marquee investors like PeakXV (fka Sequoia Capital India) and Tiger Global.

    PayGlocal’s technology platform offers a comprehensive suite of services designed to meet the evolving needs of merchants, payment aggregators, and banks.

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  • RBI ups minimum amount for offering non-callable term deposits from ₹15 lakh to ₹1 crore

    RBI ups minimum amount for offering non-callable term deposits from ₹15 lakh to ₹1 crore

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    The Reserve Bank of India (RBI) has increased the minimum amount for offering non-callable/without premature withdrawal option term deposits (TDs) from ₹15 lakh to ₹1 crore.

    What this means is that all domestic term deposits accepted from individuals for amount of ₹1 crore and below shall have premature-withdrawal-facility.

    The central bank said its instructions in this regard shall also be applicable for Non-Resident (External) Rupee (NRE) Deposit / Ordinary Non-Resident (NRO) Deposits.

    As per the RBI’s Master Direction “on Interest Rate on Deposits”, banks are permitted to offer differential rate on interest on TDs based on non-callability of deposits (i.e., non-availability of premature withdrawal option) in addition to tenor and size of deposits.

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