Overview
The Reserve Bank of India ('RBI') identified high inflation rates as a primary risk to the country's macroeconomic stability. A Governor's Statement1 was issued in October 2023 to inculcate microeconomic stability and inclusive growth.
In light of the Governor's Statement, the RBI further announced a series of measures to bolster risk management within the banking and Non-Banking Financial Company ('NBFC') sector by issuing a notification2 in November 2023, as 'Regulatory measures towards consumer credit and bank credit to NBFCs', that took effect immediately. The notification underscored the importance of stronger credit standards, the need for prudent risk management, and the establishment of board-approved limits for sub-segments under consumer credit.
The measures outlined in the notification were also issued in response to the concerns raised by the RBI's intentions in the Governor's Statement regarding components of consumer credit and internal surveillance mechanisms. Key highlights are listed below.
Monetary Policy Actions
- Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances - Projects Under Implementation, Directions 2024
The Reserve Bank laid down guidelines1 on 3rd May'24 directing a framework for Income Recognition, Asset Classification, and Provisioning about Advances in Projects under Implementation. This move legitimises the need for a principle-based regime to resolve stressed assets.
In 2019, a prudential framework was developed and issued, providing early recognition of stressed assets in the borrowers' accounts. There was an exclusion for restructuring of exposures relating to projects under Implementation based on the commencement date of commercial operations ('DCCO'). The bank fixes the DCCO for all the loan projects at the time of sanction. The exposure herein is the maximum potential loss to a lender in case of borrowers' default payment.
The recently updated guidelines reveal the regulators' decision to rationalise and harmonise the current guidelines for all Regulated Entities ('RE') covered under them. As per the revised prudential norms, the scope of financial entities covered under the guidelines now includes Scheduled Commercial Banks ('SCB'), Non-Banking Financial Companies, Primary (Urban) Cooperative Banks, and All India Financial Institutions ('AIFIs').
- Credit Concentration Norms – Credit Risk Transfer
RBI guidelines on the Large Exposures Framework for Non-Banking Financial Company—Upper Layer ('NBFC-UL'), issued as a circular Credit/Investment Concentration Norms – Credit Risk Transfer2, allow exposures to the original counterparty to be offset with particular credit risk transfers. Current credit concentration norms for NBFC in the Middle and Base Layers do not envisage much infrastructure. RBI decided to permit NBFCs in the Middle Layer and Base Layer to offset their exposures with eligible credit risk transfer to harmonise the norms among these layers.
- Gold Loan – Bullet Repayment Scheme – UCBs
Under this issue, Urban cooperative banks ('UCB') are allowed a path to achieving Priority Sector Lending ('PSL') targets.3 To incentivise UCBs that have achieved the prescribed PSL target, the government has decided to increase the ceiling for gold loans that can be granted under the bullet repayment scheme from two lakhs to four lakhs.
- Framework for recognition of SROs for Regulated Entities (REs) of Reserve Bank
The Reserve Bank introduced an omnibus framework for Self-Regulatory Organizations ('SROs') in regulated entities to enhance efficiency and compliance in the financial sector. SROs will be crucial in supervising members and ensuring adherence to regulatory standards. This move aligns with global practices and aims to foster a more robust regulatory environment. The framework outlines the eligibility criteria, functions, governance structure, and operational guidelines for SROs. It seeks to promote self-regulation while maintaining regulatory oversight. SROs must demonstrate financial viability and competence to carry out their duties effectively. The RBI will oversee and regulate these SROs to ensure they uphold the financial system's integrity. This initiative is poised to streamline regulatory processes and bolster consumer protection in the financial sector.
These policy steps intend to proactively nudge financial institutions to tighten credit filters rather than ease the credit flow. Exemptions and incentives given to the priority sector indicate support for retail loans for productive purposes. Collectively, these measures aim to prioritise financial stability rather than maximising short-term growth.
Conclusion
The RBI's new regulatory measures mark a critical shift towards ensuring long-term financial stability and prudent risk management in India's credit landscape. With tighter credit standards and a focus on stability, these steps lay the groundwork for a more resilient financial system. As we move into 2025, the real impact of these measures remains to be seen—will they effectively balance growth with caution? Only time will tell.
Footnotes
1 RBI Press Release: 2023-2024/1051, Oct 6, 2023 - Governor's Statement https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=56501#F5
2 RBI Press Release RBI/2023-24/85 - DOR.STR.REC.57/21.06.001/2023-24 - Regulatory measures towards consumer credit and bank credit to NBFCs - https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12567&Mode=0
3 RBI Press Release RBI/2023-24/66 - DOR.CRE.REC.42/07.10.002/2023-24 - Gold Loan – Bullet Repayment – Primary (Urban) Co-operative Banks (UCBs) - https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12542&Mode=0#:~:text=Accordingly%2C%20as%20announced%20vide%20para,met%20the%20overall%20PSL%20target
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