India – AKP Banking & Finance Digest- August 05, 2024.
1. Regulatory Updates
1.1. India
1.1.1. RBI releases report on Currency and Finance 2023-24
Reserve Bank of India (“RBI”) has released its report on Currency and Finance for 2023-24, titled “India’s Digital Revolution.” The report underscores India’s position as a global leader in digital innovation, driven by its robust digital infrastructure, vibrant FinTech sector, and supportive policies. It highlights how digital technologies enhance financial inclusion, fiscal transfers, and cross-border transactions. The report also examines emerging opportunities and challenges, noting that a strong regulatory framework boosts consumer confidence and financial market efficiency. It further addresses cybersecurity, data privacy, and the need for ongoing skills development. RBI
1.1.2. RBI releases draft directions for Due Diligence of AePS Touchpoint Operators
RBI has released draft directions to enhance the security of the Aadhaar Enabled Payment System (“AePS”). The new guidelines focus on streamlining the onboarding process for AePS Touchpoint Operators to prevent fraud linked to identity theft and compromised credentials. Key measures include rigorous due diligence by acquiring banks, mandatory Know Your Customer (“KYC”) updates, and limits on transaction volumes based on risk profiles. The guidelines also mandate that each touchpoint operator must be onboarded by only one acquiring bank and adhere to the National Payments Corporation of India (“NPCI”) regulations. RBI
1.1.3. RBI releases draft framework for Alternative Digital Payment Authentications
RBI has proposed a new draft framework to enhance digital payment security beyond SMS-based one-time passwords. The framework emphasises dynamic, transaction-specific authentication factors and mandates that issuers obtain explicit customer consent for new methods. It requires real-time transaction alerts and bans exclusive agreements with service providers that might limit alternative authentication options. However, small-value contactless transactions up to INR 5,000 (Indian Rupees Five Thousand only) are exempt from these additional requirements. RBI
1.1.4. RBI releases Master Directions on handling wilful and large defaulters
The “Reserve Bank of India (Treatment of Wilful Defaulters and Large Defaulters) Directions, 2024” establishes a new framework for managing borrowers who intentionally default on their obligations. Effective 90 (ninety) days after publication, these guidelines apply to all RBI-regulated entities and focus on clearly identifying and reporting wilful defaulters. They replace earlier instructions and require strict classification processes, including using an identification and review committee and detailed reporting to credit information companies. Lenders must also rigorously monitor fund usage, involve statutory auditors for account falsification, and hold third parties accountable for facilitating defaults, ensuring transparency and integrity in financial practices. RBI
1.1.5. RBI releases master directions on cybersecurity standards for payment operators
RBI has released new Master Directions on ‘Cyber Resilience and Digital Payment Security Controls’ for non-bank payment system operators (“PSOs”) dated July 30th 2024. Aimed at strengthening cybersecurity across the digital payment sector, these guidelines cover governance, risk management, and security controls, with different compliance deadlines for large, medium, and small PSOs. The measures are designed to enhance the security and trustworthiness of digital transactions, ensuring robust protection as the digital payment ecosystem continues to expand. RBI
1.1.6. RBI releases instructions on bad and doubtful debt reserve for co-operative banks
RBI has issued revised instructions on bad and doubtful debt reserve (“BDDR”) by Co-operative banks. Under the revised guidelines, all provisions as per income recognition, asset classification, and provisioning norms must be recognised as expenses in the profit and loss account. This shift ensures compliance with Accounting Standard (AS) 52 and uniform treatment of BDDR across banks. Existing BDDR balances, as of March 31, 2024, will be adjusted to align with the new standards, with provisions netted off from Gross Non-performing assets. The revised instructions aims to standardise accounting practices and strengthen regulatory compliance among Primary (Urban), State, and Central Co-operative Banks. RBI
1.1.7. RBI has issued guidelines for dividend equalisation fund treatment for UCBs
Effective immediately, the RBI has updated guidelines concerning the Dividend Equalisation Fund (“DEF”) for Primary (Urban) Co-operative Banks (“UCBs”). Previously, UCBs could not use DEF balances for dividend payments and were required to declare dividends only from current-year net profits. Under the new one-time measure, UCBs can transfer DEF balances to general or free reserves, qualifying as Tier-I capital. This adjustment aims to improve regulatory capital treatment and will be reflected in the ‘Notes on Accounts’ as per the RBI’s disclosure requirements. RBI
1.1.8. Monetary Penalties
RBI imposes monetary penalties on the following financial institutions:
| Name of the Financial Institution | Penalty Imposed | Reasons |
| Hindusthan Co-operative Bank Limited, Mumbai, Maharashtra | INR 4,00,000/- (Indian Rupees Four Lakh only) | Contravention of/non-adherence with certain directions issued by RBI on ‘Exposure Norms and Statutory / Other Restrictions – UCBs’, ‘Limits on exposure to single and group borrowers/parties and large exposures -UCBs’ and ‘Know Your Customer (KYC) Norms’. |
| Alibag Co-operative Urban Bank Limited, Alibag, Maharashtra | INR 2,00,000/- (Indian Rupees Two Lakh only) | Contravention of/non-adherence with directions issued by RBI on ‘Management of Advances-UCBs’. |
| Shrikrishna Co-operative Bank Limited, Umrer, Maharashtra | INR 2,08,000/- (Indian Rupees Two Lakh and Eight thousand only) | Contravention of/non-adherence with certain directions issued by RBI on ‘Loans and advances to directors, their relatives, and firms /concerns in which they are interested’. |
| Nagnath Urban Co-operative Bank Limited, Hingoli, Maharashtra | INR 1,00,000/- (Indian Rupees One Lakh only) | Contravention of/non-adherence with provisions of section 26A read with section 56 of the Banking Regulation Act, 1949. |
| Urban Co-operative Bank Ltd., Mainpuri, Uttar Pradesh | INR 5,00,000/- (Indian Rupees Five Lakh only) | Contravention of/non-adherence with certain directions issued by RBI on ‘Investments by Primary (Urban) Co-operative Banks’. |
1.2. Bangladesh
1.2.1. Bangladesh Bank issues circular regarding timely reporting for imports and exports
Bangladesh Bank (“BB”) has mandated that banks submit details on letters of credit for imports and exports into the central bank’s dashboard within eight hours. This measure addresses issues caused by incorrect and delayed data, which have affected balance of payments calculations and monetary policy. Exports for the first 11 (eleven) months of Fiscal Year (“FY”) 2024 were initially reported at USD 51.54 billion (United States Fifty-One Billion, Five Hundred Forty Million only) but were later revised to USD 40.72 billion (United States Dollar Forty Billion, Seventy-Two Million only), showing a USD 10.82 billion (United States Ten Billion, Eight Twenty Million only) shortfall. Banks must now ensure timely and accurate reporting, with supervision systems in place at each bank’s head office. Dhaka Tribune
1.3. Sri Lanka
1.3.1. Port City Colombo launches Offshore Banking Regulations
Port City Colombo, a special economic zone (“SEZ”) in the Sri Lanka has released new regulations, namely Offshore banking Regulations and Offshore Banking Prudent Management and Confidence Regulations allowing for commercial offshore banking activities within the SEZ. They support Port City Colombo’s development as a regional financial center by boosting investor confidence and increasing foreign direct investment. The regulations permit transactions in foreign currencies with offshore units or non-residents, acceptance of deposits, and other banking activities authorized by the Colombo Port Economic Commission and the Central Bank of Sri Lanka. Port City Colombo
2. Trends
2.1. Three suitors for IDBI bank acquisition receive ‘fit & proper’ certification from RBI
RBI has approved Fairfax Financial Holdings, Emirates NBD, and Kotak Mahindra Bank as eligible bidders for a majority stake in IDBI Bank. The Indian government, which owns 45.48 per cent (forty-five-point four eight per cent) of IDBI Bank, and Life Insurance Corp of India, holding 49.24 per cent (forty-nine point two four per cent), plans to sell 60.7 per cent (sixty-point seven per cent only) of the bank. This sale process, first announced in 2022, is expected to proceed with financial bids called before the end of FY25. Reuters
2.2. Yes Bank stake sale depends on bidders meeting local banking norms
RBI has asked investors aiming for a controlling stake in Yes Bank to revise their demands, potentially delaying the deal. Investors want to retain over 51 per cent (fifty-one per cent only) but must reduce their stake to 26 per cent (twenty-six per cent only) within 15 (fifteen) years per regulations. RBI proposes a gradual reduction, making a permanent 51 per cent (fifty-one per cent) holding unlikely. Investors also seek voting rights equal to their stake, but the RBI limits this to 26 per cent (twenty-six per cent only). Bidders are expected to address these issues with the regulator soon. Money Control
3. Sector Overview
3.1. Indian lenders need USD one billion upgrade to core bank systems, per BCG Report
Indian lenders will require USD 1 billion (United States Dollar One Billion only) over the next five to ten years to modernise outdated core banking systems, according to Vipin V, managing director and partner at Boston Consulting Group (“BCG”). Indian banks currently invest up to 5 per cent (five per cent) of their revenue in information technology (“IT”), compared to 7-9 per cent (seven to nine per cent) by global banks. BCG’s report highlights that Indian banks have focused their IT budgets on front-end systems, neglecting core systems. This has led to legacy infrastructure with high costs, scalability issues, inflexibility in supporting new products and increased transaction volumes. Boston Consulting Group
3.2. RBI’s stricter liquidity norms credit positive for banks, as per Moody’s report
Moody’s described the RBI’s new draft guidelines on liquidity management as credit-positive for banks. The guidelines include a requirement for banks to reduce the stability of retail deposits with internet and mobile banking access by an additional 5 per cent (five per cent). Moody’s noted that these tighter norms will enhance banks’ resilience against unexpected deposit outflows and improve liquidity buffers. Retail and small business deposits, which make up about two-thirds of total deposits and over 50 per cent (fifty per cent) of which are internet and mobile banking enabled, are expected to lead banks to adjust their credit growth before the guidelines take effect on April 1 next year, thus improving credit-to-deposit ratios. Business Standard
3.3. NPCI restores connectivity for C-Edge Technologies following ransomware attack
NPCI has reinstated connectivity with its electronic payments systems for C-Edge Technologies. C-Edge, a technology service provider for over 200 cooperative and regional rural banks, was previously disconnected from the payment systems after reporting a ransomware attack. This isolation interrupted banking services for the over 200 (two hundred) entities relying on C-Edge for core systems. The NPCI’s restoration of services followed a security review conducted by an independent forensic auditing firm. The Times of India
4. Business Updates
4.1. Adani’s super app kicks off digital lending pilots with Fintechs, NBFCs
Following its ventures into bill payments and credit cards, Adani One, the super app of Adani Group, has initiated pilot programs with digital lending firms and NBFCs to provide loans on its platform. The company has partnered with KrazyBee Services, the NBFC arm of fintech company KreditBee, to co-lend personal loans. Under this arrangement, Adani Digital will function as a lending service provider, while personal loans ranging from INR 1,000 (Indian Rupees One Thousand only) to INR 5,00,000 (Indian Rupees Five Lakh only) will be provided from KrazyBee’s portfolio. The commission structure will vary based on the contract and loan amount. Adani One is also discussing with other NBFCs and fintech firms to expand its credit offerings. Money Control
4.2. Paytm introduces India’s first NFC card soundbox for offline merchants
One97 Communications Limited (OCL), the owner of the Paytm brand, has launched India’s first Near Field Communication (NFC) enabled soundbox. The soundbox integrates mobile and card payment functionalities into a single device, eliminating the need for merchants to manage multiple machines. This new soundbox enhances the user experience by delivering audio transaction confirmations in local languages, making the process more accessible and user-friendly. Paytm
Disclaimer
The note is prepared for knowledge dissemination and does not constitute legal, financial or commercial advice. AK & Partners or its associates are not responsible for any action taken based on its contents.
