Credit
Credit Flow to Agriculture – Collateral free agricultural loans
Summary:
Keeping in view the overall inflation and rise in agriculture input cost over the years, it has been decided to raise the limit for collateral free agricultural loans including loans for allied activities from the existing level of ` 1.6 lakh to ` 2 lakh per borrower. Accordingly, banks are advised to waive collateral security and margin requirements for agricultural loans including loans for allied activities upto ` 2 lakh per borrower. The banks are advised to implement the changes by January 1, 2025. The banks are also advised to give adequate publicity to the above changes.
Comments/Rationale:
This move is expected to promote credit flow to the agricultural sector.
Reference/Link:
RBI/2024-2025/96 FIDD.CO.FSD.BC.No.10/05.05.010/2024-25 dated December 6, 2024 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12755&Mode=0
Interest Equalization Scheme (IES) on Pre and Post Shipment Rupee Export Credit
Summary:
The Interest Equalization Scheme (IES) for Pre and Post shipment Rupee Export Credit has been extended until December 31, 2024. The extension is subject to the following conditions:
The total fiscal benefits for each MSME will be limited to ` 50 lakhs for the financial year 2024-25.
MSME exporters who have already received equalisation benefits of ` 50 lakhs or more in 2024-25 up to September 30, 2024 will not be eligible for any further benefits.
The extension is valid for three months or until revised approval is received.
Comments/Rationale:
Extension of the scheme is expected to promote the utilization of sanctioned credit limits for export purposes and boost the export volume in terms of the country’s outbound shipments. This move is important for the struggling MSME segment, given the rising production cost and global headwinds in exports.
Reference/Link:
Trade Notice No. 07/2024-25
https://apeda.gov.in/apedawebsite/DGFT_Tradenotice/Trade_Notice_18_2024_25.pdf
Submission of information to Credit Information Companies (CICs) by ARCs
Introduction:
The Credit Information Companies (Regulation) Act provides that every credit institution in existence shall become a member of at least one credit information company. Thus, all SC/RCs being ‘credit institutions’ are required to become a member of at least one credit information company as per the statute. It is advised that SC/RCs on becoming member/members of any Credit Information Company/ Companies may provide them the current data in the existing format if not already furnished by the banks/FIs from whom SC/RCs acquire the assets. Care should be taken to ensure that accurate data/history regarding borrowers is given to Credit Information Companies.
Summary:
ARCs had been advised to become a member of at least one CIC. In order to align with the guidelines applicable to banks and NBFCs, these guidelines have been revised as under.
Membership of CICs : ARCs shall become members of all CICs and submit the requisite data to CICs as per the Uniform Credit Reporting Format prescribed by the Reserve Bank, as amended from time to time.
Submission of information : ARCs shall keep the information collected/ maintained by them, updated regularly on a fortnightly basis or at such shorter intervals as mutually agreed upon between the ARC and the CIC in terms of Regulation 10( a )( i ) and ( ii ) of the Credit Information Companies Regulations, 2006.
Rectification of rejected data : ARCs shall rectify the rejected data received from CICs and upload the same with the CICs within seven days of receipt of such data.
Adoption of best practices : ARCs shall have a standard operating procedure (SOP) in place for CIC related matters which shall, inter alia , include the following best practices:
ARCs shall provide requisite customer information, including identifier information, to CICs.
ARCs shall ensure that the records submitted to CICs are updated regularly and that no instances of repayment, including that of the last instalment, are left unreported.
Instances of non-updation of repayment information may be avoided by centralising the issue of no-objection certificates and providing information to CICs.
ARCs shall appoint a nodal officer for dealing with CICs.
Customer grievance redressal shall be given top priority especially in respect of complaints relating to updation/alteration of credit information.
Grievance redressal in respect of credit information should be integrated with the existing systems, if any, for grievance redressal.
ARCs should abide by the period stipulated under CICRA and the Rules and Regulations framed thereunder in respect of updation, alteration of credit information, resolving disputes, etc. Procedure prescribed under Rules 20 and 21 of the Credit Information Companies Rules, 2006 in this regard should be adhered to. Deviations from stipulated time limits should be monitored and commented upon in the periodical reports/reviews put up to the Board.
Powers exercised
This circular has been issued in exercise of the powers conferred by Section 12 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002).
Applicability
These guidelines shall be applicable to all ARCs.
Commencement
ARCs shall put in place system and processes to ensure compliance with these guidelines latest by January 1, 2025.
Comments/Rationale:
These guidelines are aimed to maintain a track of borrowers’ credit history after transfer of loans by banks and NBFCs to ARCs.
Reference/Link:
RBI/2024-25/82 DoR.FIN.REC.No.46/26.03.001/2024-25 dated October 10, 2024 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12740&Mode=0
Implementation of Credit Information Reporting Mechanism
Summary
The Credit Information Companies (Regulation) Act, 2005 (CICRA) stipulates that only Credit Institutions (CIs) can furnish credit information to Credit Information Companies (CICs). Section 17(1) of CICRA mandates that CICs can collect credit information from its member CIs or member CICs only. Therefore, only the entities that are covered under the ambit of section 2(f) of CICRA, 2005 can submit credit information to CICs.
In view of the provisions of CICRA, entities whose licence or Certificate of Registration (CoR) has been cancelled by the Reserve Bank of India, can no longer be deemed as CIs under CICRA and their credit information cannot be accepted by the CICs. In such cases, repayment history of borrowers of these entities is not updated even if these borrowers continue to repay/ clear their dues.
In order to redress the hardship faced by such borrowers, the Reserve Bank of India directs CICs and CIs to implement a credit information reporting mechanism subsequent to the cancellation of the licence/CoR of banks/ Non-Banking Finance Companies (NBFCs).
These CIs shall continue to be governed by the provisions of CICRA, Rules and Regulations framed thereunder and directions issued by the Reserve Bank of India from time to time.
These instructions shall be implemented within six (6) months from October 10, 2024.
Reference/Link:
RBI/2024-25/81 DoR.FIN.REC.47/20.16.042/2024-25 dated October 10, 2024 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12739&Mode=0
Gold loans - Irregular practices observed in grant of loans against pledge of gold ornaments and jewellery
Summary
Reserve Bank has recently carried out a review of the adherence to prudential guidelines as well as practices being followed by SEs with regard to loans against pledge of gold ornaments and jewellery. The review, as well as the findings of the onsite examination of select SEs by the Reserve Bank, indicate several irregular practices in this activity.
The major deficiencies include
Shortcomings in use of third parties for sourcing and appraisal of loans.
Valuation of gold without the presence of the customer.
Inadequate due diligence and lack of end use monitoring of gold loans. Lack of transparency during auction of gold ornaments and jewellery on default by the customer.
Weaknesses in monitoring of Loan-To-Value (LTV) ratio.
Incorrect application of risk-weights, etc. The enclosed Annex incorporates further details in this regard.
All SEs are advised to comprehensively review their policies, processes and practices on gold loans to identify gaps, including those highlighted in this advice, and initiate appropriate remedial measures in a time bound manner. Further, the gold loan portfolio should be closely monitored, especially in the light of significant growth in the portfolio in certain SEs. It should also be ensured that adequate controls are in place over outsourced activities and third-party service providers.
Action taken with regard to the above may be informed to the Senior Supervisory Manager (SSM) of Reserve Bank within three months of the date of this circular. Non-compliance with regulatory guidelines in this regard will be viewed seriously and will attract, among other things, supervisory action by RBI.
This circular is effective from September 30, 2024.
Reference/Link:
RBI/2024-25/77 DoS.CO.PPG.SEC.10/11.01.005/2024-25 dated September 30, 2024 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12735&Mode=0#F1
Frequency of reporting of credit information by Credit Institutions to Credit Information Companies
Introduction:
Considering the faster turnaround time in credit underwriting through digital processes, it is imperative that the Credit Information Reports (CIRs) provided by CICs reflect a more current information, enabling lenders to make informed credit decisions. The RBI has directed that CICs and CIs shall keep the credit information collected/maintained by them updated regularly on a fortnightly basis ( i.e. , as on 15th and last day of the respective month) or at such shorter intervals as mutually agreed upon between the CI and the CIC. These instructions shall be effective from January 1, 2025.
Summary:
The fortnightly submission of credit information by CIs to CICs shall be ensured within seven (7) calendar days of the relevant reporting fortnight. Further, CICs are required to ingest credit information data received from the CIs, as per their data acceptance rules, within seven (7) calendar days of its receipt from the CIs. This is now being revised to five (5) calendar days of its receipt.
CICs shall provide a list of CIs which are not adhering to the fortnightly data submission timelines to Department of Supervision, Reserve Bank of India, Central Office at half yearly intervals (as on March 31 and September 30 each year) for information and monitoring purposes.
CICs and CIs that contravene or default in adherence to the above directions shall be liable for penal action as per the provisions of CICRA, 2005.
Comments/Rationale:
The guidelines on reducing the Frequency of reporting of credit information by Credit Institutions to Credit Information Companies will provide a more up-to-date picture of a borrower’s indebtedness.
Reference/Link:
RBI/2024-25/60 DoR.FIN.REC.No.32/20.16.056/2024-25 dated August 08, 2024 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12718&Mode=0
IDEAS
Summary:
India has extended a new Line of Credit for INR 487.60 Crores to the Government of Mauritius for financing of a water pipeline replacement project. This is the first-ever Rupees denominated Line of Credit to have been extended by India for project financing to any country under the Indian Development and Economic Assistance Scheme (IDEAS). The project envisages replacement of approx. 100 km of obsolete water pipeline in Mauritius.
The GOI-supported Line of Credit will be financed by the State Bank of India at concessional terms. External Affairs Minister of India, Dr. S. Jaishankar, made the formal offer to his Mauritian counterpart, Mr. Maneesh Gobin, which has now been accepted by the Government of Mauritius.
This is yet another reflection of India’s long-standing commitment to overall socio-economic development of countries in the Global South. India’s development projects continue to be driven by the aspirations and needs of its partner countries.
Reference/Link:
https://www.mea.gov.in/press-releases.htm?dtl/38432/India+extends+its+firstever+ Rupee+denominated+Line+of+Credit+under+IDEAS
Master Circular for Credit Rating Agencies (CRAs)
Introduction:
Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 (“CRA Regulations”) prescribes guidelines for registration of Credit Rating Agencies (CRAs), general obligations of CRAs, manner of inspection and investigation and code of conduct applicable on CRAs.
Summary:
Registration Requirements
SEBI has operationalized SEBI Intermediary Portal (https://siportal.sebi.gov. in) for the intermediaries, inter alia for CRAs, to submit all the registration applications online. The SEBI Intermediary Portal shall include online application for registration, processing of application, grant of final registration, application for surrender/cancellation, submission of periodical reports, requests for change of name/address/other details, etc.
All registered CRAs are required to obtain prior approval of SEBI in case of change in control.
In case of cancellation of certificate of registration, the credit ratings assigned by the CRA shall be valid till such time the client withdraws the assignment and/or migrates the assignment to other CRA as specified or the CRA is wound-up, whichever is earlier.
If a CRA wishes to surrender the registration voluntarily, it shall transfer, wherever relevant, it’s existing business/client accounts to another SEBI registered intermediary, before they make request to SEBI for accepting the surrender of the certificate of registration.
Rating Operations
The Corporate Bonds and Securitization Advisory Committee of SEBI recommended that the rating symbols and their definitions should be standardized.
CRAs, in terms of Regulation 9(f) of SEBI (Credit Rating Agencies) Regulations, 1999, undertake ratings of various financial instruments under the guidelines of different financial sector regulators or authorities.
Issuer Rating/Corporate Credit Rating indicates the degree of safety of the issuer or the rated entity with regard to timely servicing of all its debt obligations.
A CRA may undertake rating of structured finance products, namely, instruments/ pay-outs resulting from securitization transactions. In such cases, apart from following all the applicable requirements in case of non-structured ratings, the rating symbols shall clearly indicate that the ratings are for structured finance products.
The Operations Manual/Internal governing document, formulated by the CRA, shall, inter alia , cover operating guidelines, criteria, policies and procedures related to the rating process.
CRAs are mandated to have in place a proper rating process and disclose the same on their website.
CRAs have to be proactive in early detection of defaults/delays in making payments. In this regard, CRAs are required to track the servicing of debt obligations for each security rated by them, ISIN-wise, and look for potential deterioration in financials which might lead to defaults/delays, particularly before/around the due date(s) for servicing of debt obligations, on the basis of monitoring of indicators.
In order to enable timely recognition of default by the CRA, the CRA shall seek a ‘No Default Statement (NDS)’ from the Issuer at the end of each month, which shall be provided to the CRA by the Issuer on the first working day of the next month.
Reporting And Disclosures
In order to enable investors to discern the performance of a CRA vis-à-vis a standardized PD benchmark scale, CRAs, in consultation with SEBI, shall prepare and disclose standardized and uniform PD benchmarks for each rating category on their website, for one-year, two-year and three-year cumulative default rates, both for short-run and long-run.
For ratings on structured instruments, various instruments, issued by a trust, with the same degree of seniority and hence having same rating shall not be included separately for default rate calculation. However, various instruments, issued by a trust, having different seniority levels shall be included as separate instances. Further, in order to avoid underestimation of default rates in case of significantly higher number of tranches of differing seniority but same rating, a cap of three tranches per rating category per issuer may be applied.
A CRA shall make all the disclosures stipulated below on their websites. In case of listed securities, the CRA shall also make disclosures to the stock exchanges as specified in the SEBI (Credit Ratings) Regulations, 1999. For ratings assigned and their periodic reviews, the CRA shall issue press releases which shall also be kept on their websites.
Internal Audit for CRAs
The audit envisaged under Regulation 22 of the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 shall be conducted on a half yearly basis.
It shall cover all aspects of CRA operations and procedures, including investor grievance redressal mechanism, compliance with the requirements stipulated in the SEBI Act, Rules and Regulations made thereunder, and guidelines issued by SEBI from time to time.
Comments/Rationale:
The Master Circular for CRAs prepared by SEBI enable the industry and other users to have access to all the applicable circulars/directions at one place. These guidelines shall protect the interest of investors in securities and to promote the development of, and to regulate, the securities market.
Reference/Link:
SEBI/HO/DDHS/DDHS-POD3/P/CIR/2024/47 dated May 16, 2024 https://www.sebi.gov.in/legal/master-circulars/may-2024/master-circular-for-creditrating-agencies-cras-_83417.html
Fair Practices Code for Lenders – Charging of Interest
Introduction:
The guidelines on Fair Practices Code is issued to various Regulated Entities (REs) since 2003, inter alia , advocate fairness and transparency in charging of interest by the lenders, while providing adequate freedom to REs as regards their loan pricing policy. This is effective from April 29, 2024.
Summary:
During the course of the onsite examination of REs for the period ended March 31, 2023, the Reserve Bank came across instances of lenders resorting to certain unfair practices in charging of interest. Some of the unfair practices observed are briefly explained below:
Charging of interest from the date of sanction of loan or date of execution of loan agreement and not from the date of actual disbursement of the funds to the customer. Similarly, in the case of loans being disbursed by cheque, instances were observed where interest was charged from the date of the cheque whereas the cheque was handed over to the customer several days later.
In the case of disbursal or repayment of loans during the course of the month, some REs were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding.
In some cases, it was observed that REs were collecting one or more instalments in advance but reckoning the full loan amount for charging interest.
These and other such non-standard practices of charging interest are not in consonance with the spirit of fairness and transparency while dealing with customers. These are matters of serious concern to the Reserve Bank. Wherever such practices have come to light, RBI through its supervisory teams has advised REs to refund such excess interest and other charges to customers. REs are also being encouraged to use online account transfers in lieu of cheques being issued in a few cases for loan disbursal.
Therefore, in the interest of fairness and transparency, all REs are directed to review their practices regarding mode of disbursal of loans, application of interest and other charges and take corrective action, including system level changes, as may be necessary, to address the issues highlighted above.
Comments/Rationale:
The guidelines on Fair Practices Code will enhance transparency and reduce information asymmetry regarding financial products offered by various regulated entities. This initiative empowers borrowers to make well-informed financial decisions.
Reference/Link:
RBI/2024-25/30 DoS.CO.PPG.SEC.1/11.01.005/2024-25 dated April 29, 2024 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12678&Mode=0
Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024
Introduction:
ARCs play a critical role in the resolution of stressed financial assets of banks and financial institutions, thereby enhancing the overall health of the financial system. To ensure prudent and efficient functioning of ARCs and to protect the interest of investors, Reserve Bank of India has issued the Master Direction – Reserve Bank of India (Asset Reconstruction companies) Directions, 2024.
The provisions of these Directions shall apply to every asset reconstruction company (ARC) registered with the Reserve Bank under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. This is effective from April 24, 2024.
