BANKING, ASSET QUALITY, RESTRUCTURING AND MONETARY POLICY

1.URBAN CO-OPERATIVE BANKS (UCBS)

“RBI Implements Revised Regulatory Framework for Urban Co-operative Banks Based on N S Vishwanathan Panel Recommendations”

Key highlights of revised norms.

RBI has implemented a new four-tiered regulatory framework for Primary (Urban) Co-operative Banks (UCBs) in order to strengthen their financial soundness. The new framework includes differentiated regulatory prescriptions and minimum net worth requirements of ₹2 crore for Tier 1 UCBs and ₹5 crore for others. Capital to Risk Weighted Assets Ratio (CRAR) requirements have also been revised with Tier 1 UCBs maintaining a minimum of 9% and Tier 2 to 4 UCBs maintaining a minimum of 12%. UCBs that do not meet the revised CRAR requirements must achieve them in a phased manner. To determine the Financially Sound and Well Managed (FSWM) status, the criteria include net NPA of not more than 3%, no default in maintenance of CRR/SLR, a sound internal control system with two professional directors on the board, and full implementation of Core Banking Solution (CBS). The new regulatory framework is applicable to all Primary (Urban) Co-operative Banks.

About Cooperative Banks.

Co-operative banks are financial entities owned by their members who are also their customers. They are primarily registered as cooperative societies under the State Cooperative Societies Act or the Multi State Cooperative Societies Act, 2002. The regulation of UCBs is split between the RBI and the Centre/State Governments, while smaller cooperative banks are regulated by NABARD and State governments. UCBs come under the regulatory ambit of RBI under the Banking Regulations Act, 1949 and the Banking Laws (Co-operative Societies) Act, 1955, with Urban and Multi State Cooperative Banks under direct supervision of RBI.

Regulatory Framework	UCBs (Urban Cooperative Banks)	UNBs (Urban Cooperative Banks)	SFBs (Small Finance Banks)	RRBs (Regional Rural Banks)
Registration	Cooperative Societies Act or Multi State Cooperative Societies Act	Cooperative Societies Act or Multi State Cooperative Societies Act	Companies Act, 2013	Regional Rural Banks Act, 1976
Regulatory Authority	Reserve Bank of India (RBI)	National Bank for Agriculture and Rural Development (NABARD)	Reserve Bank of India (RBI)	National Bank for Agriculture and Rural Development (NABARD)
Tiered regulatory framework	Yes, four-tiered regulatory framework	No, single regulatory framework	No, single regulatory framework	No, single regulatory framework
Minimum net worth requirements	₹2 crore for Tier 1 UCBs and ₹5 crore for others	₹50 crore for UNBs	₹200 crore	₹1 crore
Capital to Risk Weighted Assets Ratio (CRAR)	Tier 1 UCBs: minimum CRAR of 9% of RWAs, Tier 2 to 4 UCBs: minimum CRAR of 12% of RWAs	Minimum CRAR of 9% of RWAs	Minimum CRAR of 15% of RWAs	Minimum CRAR of 9% of RWAs
Non-Performing Asset (NPA) classification	Same as for Scheduled Commercial Banks	Same as for Scheduled Commercial Banks	Same as for Scheduled Commercial Banks	Same as for Scheduled Commercial Banks
Applicability	Applicable to Primary (Urban) Cooperative Banks	Applicable to Urban Cooperative Banks	Applicable to Small Finance Banks	Applicable to Regional Rural Banks

2.REGIONAL RURAL BANKS (RRB)

Indian Banks Association (IBA) asked to aid sustainability push for RRBs by Union Government.

The Indian government plans to infuse record ₹10,890 crore into Regional Rural Banks (RRBs) during FY22 and FY23 to make them financially sustainable. This will be done through a contribution of ₹5,445 crore from the Centre and the remaining from states and sponsor banks. RRBs were established in 1976 to provide sufficient banking and credit facilities in rural and semi-urban areas, and they carry out government operations like MGNREGA wage disbursement and pension distribution. They are region-based and rural-oriented, with features of a cooperative bank in customer experience and commercial banks in mobilization of financial resources. RRBs play a significant role in extending institutional credit to weaker sections, providing financial inclusion, creating employment in rural India, and providing easy finance to co-operative societies and Self-Help Groups (SHGs). However, RRBs face financial viability issues due to high operational costs, poor return on assets, and non-fulfillment of the Capital Adequacy Ratio. RRBs are supervised by NABARD, while their annual plans and financials are monitored by both the RBI and NABARD, creating regulatory discrepancies.

3.NON-BANKING FINANCIAL COMPANIES (NBFCS)

Supreme Court Rules That State Enactments Do Not Apply to NBFCs and RBI Act, 1934 Supersedes them.

Recently, the Supreme Court has ruled that state enactments do not apply to Non-Banking Financial Companies (NBFCs), which are registered entities under the Companies Act and provide bank-like financial services without a banking license. NBFCs cannot accept demand deposits, issue cheques, or offer deposit insurance. They are primarily regulated and governed by the Reserve Bank of India (RBI), and some are also regulated by other authorities such as SEBI, IRDAI, and National Housing Bank. The RBI has tightened the lending and disclosure guidelines for NBFCs through scale-based regulations, whereby NBFCs are graded into three layers. The guidelines include limits on aggregate exposure to entities and groups, restrictions on loans to directors and their relatives, and requirements for prior permission for loans to the real estate sector.

4.AMENDMENT TO NIDHI RULES, 2014

Central Government Amends Nidhi Rules, 2014 in Response to Sharp Increase in Number of ‘Nidhi’ Companies.

Key amendments

Under the amended rules, the promoters and directors of a public company set up as a Nidhi must meet certain criteria. These criteria may include having a minimum net worth, not being a promoter or director of any other Nidhi company, and not having been convicted of any offence under the Companies Act or any other law. Additionally, the directors must have the necessary experience and expertise to manage the affairs of the company. The purpose of these criteria is to ensure that the company’s governance is improved and that the public interest is safeguarded.

About Nidhi company

A Nidhi company is similar to an NBFC and is formed to borrow and lend money to its members. The company works on the principle of mutual benefit and aims to inculcate saving habits among its members. While they don’t need an RBI license, they do require approval under the Companies Act. The Ministry of Corporate Affairs regulates its operational matters, while the RBI has the power to issue directions for its deposit-taking activities. Nidhi companies are strictly prohibited from dealing with chit funds, hire-purchase finance, leasing finance, insurance, or securities business. They can only accept deposits from and lend funds to individual members and not any other person. Therefore, only individual members are allowed to be a part of Nidhi companies.

5.FINANCIAL SERVICES INSTITUTION BUREAU (FSIB)

Approval for Financial Services Institutions Bureau (FSIB) to replace Banks Board Bureau (BBB) by Appointments Committee of the Cabinet (ACC).

The Financial Services Institutions Bureau (FSIB) has been set up under the Department of Financial Services in the Ministry of Finance to promote excellence in corporate governance in public sector financial institutions. Its main functions include recommending persons for appointment as whole-time directors and non-executive chairpersons on the boards of financial services institutions, advising on personnel management, and building a databank containing data related to the performance of these institutions. Additionally, FSIB advises the government on matters such as management structure, code of conduct and ethics for directors, and formulation and enforcement of business strategies and capital raising plans for public sector banks, financial institutions, and public sector insurers.

Composition of FSIB

Position	Eligibility Criteria
Chairperson	– Retired official from the banking sector or regulatory institution – Businessperson of repute with sufficient knowledge of financial sector – Person with at least 25 years of experience in public administration with experience in banking and financial sector
Ex Officio Members	– Secretary in charge of DFS – Department of Public Enterprise – Chairperson of IRDAI – Deputy Governor of RBI
Part-Time Members	– 3 persons with subject matter knowledge relating to PSBs and FIs (nominated by Central Government) – 3 persons with subject matter knowledge relating to PSIs (nominated by Central Government)

6.BANKING SYSTEM LIQUIDITY

Indian Banking System Liquidity Shifts from Surplus to Deficit Mode in September 2022.

About Banking System Liquidity and its Significance

The liquidity of the Indian banking system is determined through the Liquidity Adjustment Facility (LAF), which is the primary instrument used by the RBI to inject or absorb liquidity into the system. When the banking system is a net borrower from the RBI under LAF, the system liquidity is said to be in deficit, and when it is a net lender to the RBI, the system liquidity is in surplus.

Impact of Liquidity Deficit

There are several factors that contribute to the difficulties faced by the RBI in maintaining low borrowing costs for growth while continuing with its monetary tightening cycle. These include an increase in deposit rates or special deposit schemes offered by banks to attract money, a rise in money market rates leading to an increased cost of borrowed funds, the potential for a repo rate change from the RBI resulting in higher loan interest rates for consumers, reduced demand leading to a contraction of economic activities, and the challenge of balancing growth with monetary tightening.

7.NON-PERFORMING ASSETS (NPAS)

Decline in Banking Gross NPAs Highlighted in RBI’s ‘Report on Trend and Progress of Banking in India 2021-2022’.

A loan or advance is classified as a non-performing asset (NPA) for banks if the principal or interest payment is overdue for a period of 90 days or more. This applies to all types of loans, except for agricultural loans where the NPA period is extended to two crop seasons for short-duration crops and one crop season for long-duration crops. NPAs are further categorized under different heads.

8.DEBTS RECOVERY TRIBUNALS (DRTS)

Creation of exclusive benches at 3 DRTs to resolve cases above ₹100 crore.

The Recovery of Debts and Bankruptcy Act (RDB Act), 1993 provides for the establishment of DRTs and DRATs to provide expeditious adjudication and recovery of debts due to Banks and Financial Institutions. The objective of these tribunals is to ensure speedy resolution of cases related to loan defaulters. The SARFAESI Act, 2002 allows financial institutions to take control of securities pledged against the loan and manage or sell them to recover dues without court intervention. It is applicable throughout the country and covers all assets promised as security. Currently, there are 39 DRTs and 5 DRATs functioning across the country.

9.ASSET RECONSTRUCTION COMPANIES (ARCS)

RBI has amended regulatory framework for ARCs based on the Sudarshan Sen Committee recommendations.

ARC, which stands for Asset Reconstruction Company, is a company registered under Section 3 of SARFAESI Act, 2002, established to provide a focused approach to Non-Performing Assets resolution. It is regulated by RBI as a Non-Banking Financial Company. The eligible ARCs require a minimum net owned fund of ₹1000 crore to act as resolution applicants under the Insolvency and Bankruptcy Code (IBC) 2016. The IBC provides for a time-bound process for resolving insolvency in companies and among individuals. Recently, the minimum capital requirement for setting up an ARC has been raised to ₹300 crore from the existing ₹100 crore in a phased manner. Changes in corporate governance norms, such as constituting an Audit Committee comprising only non-executive directors, have been introduced.

10.INFLATION TARGETING

“India’s CPI-Inflation Stays Above 6% for Three Consecutive Quarters Amid Supply Shocks from Pandemic Lockdowns, Supply Chain Disruptions, Elevated Commodity Prices, and Ukraine War”

The Inflation Targeting Framework is a monetary policy strategy where the central bank sets an annual inflation rate as a goal and adjusts its policy to achieve it. In India, this framework is based on the recommendations of the Urjit Patel committee, and the RBI Act was amended in 2016 to make inflation targeting the nominal anchor of the RBI’s policy. The framework includes a six-member Monetary Policy Committee (MPC) responsible for setting the policy rate (repo rate) to achieve the inflation target while keeping in mind growth objectives. Currently, the inflation target in India is 4% CPI inflation, with a +/- 2% tolerance limit. If inflation remains above or below this limit for three consecutive quarters, the RBI must report to the government on the reasons for failure to achieve the target, proposed remedial actions, and the estimated time-period to achieve the target.

11.PRICE MONITORING CENTRES (PMC)

Ministry of Consumer Affairs proposes Price Monitoring Centers for critical goods in all Indian districts.

The Indian government plans to establish 750 price monitoring centers across the country by March 31st, 2023, with funding split equally between the state and central governments for infrastructure. The Price Monitoring Division (PMD) in the Department of Consumer Affairs is responsible for monitoring the prices of essential commodities, including retail and wholesale prices, and spot and future prices on a daily basis. The PMD collects data on 22 essential food products from 340 market centers spread across the country, and the accuracy of prices reported by state and UT centers is cross-checked by the Food Corporation of India (FCI) and the National Agricultural Cooperative Marketing Federation of India Ltd (NAFED).

12.STANDING DEPOSIT FACILITY (SDF)

Monetary Policy Committee introduces Standing Deposit Facility as floor in LAF corridor in first bi-monthly policy review FY23.

The Monetary Policy Committee (MPC) has introduced the Standing Deposit Facility (SDF) as a liquidity management instrument to absorb liquidity from Scheduled Commercial banks without any collateral or government securities in return. SDF was recommended by the Urjit Patel Committee in 2014, and the RBI Act was amended in 2018 to empower the RBI to introduce it. SDF will replace Fixed Rate Reverse Repo as the floor of the LAF corridor, and deposits under SDF will not be eligible for CRR maintenance but will be an eligible asset for SLR maintenance. The need for SDF arises from managing surplus liquidity due to Covid-19, and other liquidity management instruments include TLTROs, OMOs, etc.

13.RBI MONETARY POLICY

Repo rate raised by 25 basis points; FY23 GDP growth estimate raised.

The RBI Governor announced a 25 basis points increase in the repo rate in the Q1 FY23 Monetary Policy, along with a revised SDF rate of 6.25% and an MSF rate of 6.75%. The RBI expects a GDP growth rate of 7% in FY23 and 6.4% in 2023-24, with a projected inflation rate of 6.5% for FY23 and 5.3% for FY24. The retail inflation rate decreased to 5.72% in December, staying within the RBI’s comfort zone, and the current account deficit is expected to remain moderate. The RBI aims to be flexible and responsive to inflation and has rolled out a prototype program for coin-operated machines that use QR codes in 12 cities.

14.KEY CONCEPTS ON BANKING AND MONETARY POLICY

Term	Definition/Description
Counter-Cyclical Capital Buffer (CCCB)	A part of Basel-III norms that requires banks to maintain a buffer of capital as a fixed percentage of their risk-weighted loan book. It aims to maintain credit flow in difficult times and restricts excessive lending during periods of high credit growth.
Bancassurance	An arrangement between a bank and an insurance company where the insurance company can sell its products to the bank’s clients, helping both parties expand their customer base and earn additional revenue.
Credit-Deposit (CD) Ratio	A ratio that tells how much of the money raised by a bank in the form of deposits has been deployed as loans. A low CD ratio indicates poor credit growth, while a high ratio indicates strong demand for credit.
Prompt Corrective Action (PCA) Framework	A framework imposed by regulators when a bank breaches certain thresholds on capital adequacy, net NPAs, and return on assets. The actions taken may include restrictions on dividend distribution, branch expansion, and remittance of profits.
Loan Waive-off	A complete cancellation of a loan account, typically provided by the government to farmers in times of natural calamities.
Loan Write-off	The movement of a defaulted loan or NPA from the assets side and reporting it as a loss by the lender. Banks write off a loan when there is little chance of recovery, but it does not take away the bank’s right of recovery through legal means.

Marginal Cost of Funds Based Lending Rate (MCLR)	Lowest interest rate a bank/lender can offer, except in some cases allowed by RBI. Internal benchmark/reference rate. Calculated based on four components. Transparent method of determining interest rates.
Financial Stability Report (FSR)	Bi-annual report from RBI that reflects risks to financial stability and the resilience of the Indian financial system. Latest FSR highlighted improved ability of banking system to absorb macro shocks.
Reserve Bank-Integrated Ombudsman Scheme	Integrates the existing three Ombudsman schemes of RBI for a single window for resolution of complaints not resolved within 30 days. Centralized processing center. Improves grievance redress mechanism.
DAKSH	Web-based workflow application by RBI to monitor compliance requirements in a more focused manner. Enables seamless communication, inspection planning, execution, and analysis.
Small Finance Banks (SFBs)	Registered public limited companies under the Companies Act, 2013 and licensed under Section 22 of the Banking Regulation Act, 1949. Primarily serve unserved and underserved sections of the population.
Account Aggregator (AA) System	RBI regulated entity that helps an individual securely and digitally access and share information from one financial institution to another in the AA network. Consolidated dashboard of all bank accounts.

Cost Inflation Index (CII)	– Used to adjust capital gains for inflation – Calculated annually based on CPI (urban) – Indian equivalent is MIBOR
London Interbank Offered Rate (LIBOR)	– Global reference rate for short-term interbank borrowing – Administered by Intercontinental Exchange – Used as benchmark for interest rates and currency swaps – Indian equivalent is MIBOR
Bond Yield Curve Inversion	– Graphical representation of bond yields – Inversion occurs when shorter-term bonds pay higher yields than longer-term bonds – Strong predictor of recessions
Yield Curve Control (YCC)	– Policy to control interest rates along a portion of the yield curve – Involves targeting a longer-term interest rate and buying/selling bonds to hit the target – Different from QE and short-term interest rate targets – Aims to prevent or lessen the impact of recession
Global Stagflation	– Slowdown in growth and increase in consumer price inflation – Can impact domestic growth and inflation through multiple channels – Higher global inflation and interest rates can impact capital flows and domestic currency
Provisions related to Design of Rupee Notes and Coins	– Any change in design must be approved by RBI’s Central Board and Central government – RBI has sole right to issue banknotes – Coinage Act gives central government power to design and mint coins
Handbook of Statistics on Indian States	– Released annually by RBI since 2016 – Contains comparable data for different states on various dimensions over time – Includes new sections on health and environment in current edition
Legal Entity Identifier (LEI)	– 20-character alpha-numeric code used to uniquely identify legal entities in financial transactions – Improves quality and accuracy of financial data reporting systems – RBI has extended guidelines to large borrowers of NBFCs and UCBs

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