ATMs to loans: Union Budget, Mint Road, and evolving financial landscape

A South Block and Mint Road tango is in the offing in 2025, foregrounded by deeper consultations with various stakeholders

Union Budget and Mint Road

 

In the Union Budget for Financial Year 2023-24 (FY24), Finance Minister Nirmala Sitharaman had held forth on the need for better governance and investor protection in the banking sector. She had proposed certain amendments to the Reserve Bank of India Act (RBI Act), 1934; the Banking Regulation Act (BR Act), 1949; and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. It was felt that these issues would gather speed when a new government was sworn in after the results of the general elections in June 2024. We may get to see forward moment in the upcoming Union Budget in February.

 

Moves on the re-look of the key Acts will have to be read together with the recommendations of the RBI’s Internal Working Group (IWG) to ‘Review extant ownership guidelines and corporate structure for Indian private sector banks’. The IWG had on November 20, 2020 made a case for large corporate and industrial houses as promoters of banks. And that large non-banking financial companies (NBFCs) with an asset size of Rs 50,000 crore and above, including those owned by corporate houses, may be considered for conversion into banks.

 

On the regulatory front, clarity is seen coming through on the expected credit loss framework (ECL). At present, banks are required to make loan-loss provisions based on an “incurred loss” approach (this used to be the standard globally till recently). Under this approach, banks provide for losses that have occurred or incurred. Under ECL, banks have to recognise the increase in credit risk and start making provisions for losses expected much before the default happens, let alone the subsequent classification of the exposure as non-performing assets. This may call for additional capital in some cases; in the case of state-run banks, the issue of recapitalisation could rear its head. It is speculated that the RBI may give a flight path to comply with the ECL framework. Mint Road’s draft guidelines on project finance on May 3, 2024 will also be in the spotlight. The draft was for higher capital being set aside for during a project’s construction phase: Five per cent of the funded exposure. This has implications for the financial closure of large infrastructure projects, even those undertaken by the government. The RBI has been conservative on its part, but India Inc sees it as a hurdle.

 

On the interest rate front, a cut of 25 basis points (bps) is almost taken as given at the next meeting of the Monetary Policy Committee (MPC) slotted for February 5-7, 2025.

 

> What to expect: Amendments to the RBI Act, 1934; the BR Act, 1949; and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.

 

> From Mint Road: More clarity on ECL and draft guidelines on project finance

 

> Interest rates: A cumulative 75-100 bps cut in the interest rate cycle may be in offing, starting from the February MPC meeting

 

Widening regulatory scope

 

The Regulatory Review Authority (RRA 2.0) drew from some of the best practices of global central banks: Be it on consultation before policy formulation, feedback from regulated entities (REs), structured meetings with banks’ corner room occupants and senior compliance officials, key stakeholders and trade bodies. Over 400 circulars were withdrawn. It was the “open-door policy” of the RBI to foster a better engagement of REs with it. RRA 2.0 was a follow through on Y V Reddy’s decision as deputy RBI governor to set up its first edition in 1999 (he was later appointed governor in September 2003 and served in that position for five years). The polestar for Reddy may well have been the 96th Report of the Law Commission of India (1984): “Every legislature is expected to undertake what may be called the periodical spring-cleaning of the corpus of its Statute Law, in order that dead wood may be removed, and citizens may be spared of the inconvenience of taking notice of laws which have ceased to bear any relevance to current conditions.”

 

Now what? With increased interconnectedness in the financial market, there is a case for a RRA which ropes in the Securities and Exchange Board of India (Sebi), the Insurance Regulatory and Development Authority (Irdai), and Pension Fund Regulatory and Development Authority (PFRDA).

 

There are whispers that this is an idea which is ripe for exploration. All the more so, given the spotlight on self-regulatory organisations (SROs). According to Mint Road, by pivoting towards a culture of self-governance, fintechs could proactively set up and adhere to industry standards and best practices. This approach could empower them to demonstrate commitment to responsible conduct and innovation, even in the absence of formal regulation. Through collaboration, the industry could collectively identify and address challenges, foster an environment where innovation flourishes, and guide shared commitment to ethical business practices. The point is there is soon going to be a proliferation of SROs. The Fintech Association for Consumer Empowerment was approved as an SRO, and the Digital Lenders Association of India may become one too.

 

Then you have the Finance Industry Development Council, Business Correspondent Federation of India, and the National Urban Cooperative Finance and Development Corporation which have lined up for SRO status. Even as microfinance institutions have two SROs going: Microfinance Institutions Network and Sa-Dhan.

 

> Why a larger RRA: To get in other financial regulators like Sebi, Irdai and PFRDA, given the interconnectedness

 

> What will it do: It can help do away with outdated regulations and bring in best practices across the financial sector

 

> Coordination: Financial conglomerates have entities that report to many financial regulators. Given that the SRO framework has been rolled out for RBI-regulated entities, may be a bigger RRA can examine some of the pain points as well

 

A wait that may finally end

 

A hike in the ATM interchange – the payment made by a card-issuing bank when you swipe on another banks’ machines (including those set up by white-label players) – has been in the works for some time now. It was raised to Rs 17 from August 1, 2021 from Rs 15, which had held for nearly a decade. The demand is now to up it to Rs 20-22. The argument against a hike is that banks are saving a lot on costs when they push business to digital modes and the ATM channel from branches. The flip side is digital modes are not cheap and you have to account for investments in technology. For ATMs, it is higher lease rentals, power charges, and cash-loading costs. Of the installed base of nearly 265,000 ATMs, around 20 per cent are currency-recycling machines which not only dispense cash but also allow you to deposit cash. They cost more though.

 

Incidentally, the rollout for ATM cassette-swaps remains largely on paper. The lockable cassette-swap was to do away with the practice of open-cash replenishment into ATMs. Cash-in-transit (CIT) firm personnel who load cash into ATMs will not have to touch it anymore. It is to be done by CITs at cash centres, and the task of taking into account the amount of cash remaining from the last cassette-load will also be made simpler. The four-phased plan across 30 cities was to cover the entire network of ATMs in the country by FY24. The idea of cassette-swaps at ATMs was set in motion six years ago (April 2018) and the first deadline was FY21. A hike in the interchange will breathe life into cassette swaps as well.

 

> Watch out for: The report of the Committee to review ATM interchange fee structure (2019) headed by former Indian Banks’ Association’s chief executive officer V G Kannan will be in play

 

> What the Kannan committee said: It was for a review of the interchange and ATM usage charges at stipulated intervals to be decided by Mint Road

 

> The block in the ATM channel: Costs have gone up because of higher lease rentals, power charges, cash-loading charges and Home Ministry security protocols

 

End of the plastic smile?

 

A Supreme Court (SC) decision to overrule the National Consumer Disputes Redressal Commission's (NCDRC’s) ruling of 2008, which placed a 30 per cent cap on late credit card payments, has put the spotlight back on the consumer. But first on the SC: The NCDRC’s order had no legal backing to set such a cap. Banks disclose interest rate terms to customers before they sign up. But the question now is: How much will you have to pay when you have not made card payments on time?

 

The larger setting is as follows. The RBI has in recent times called attention to micro lenders and non-bank financiers charging high, 'usurious' interest rates on small-value loans. The reality is that even when lenders – be they banks, NBFCs (including new-age fintech companies) – make clear the terms of engagement, many in the new-to-credit segment or those with “thin files” (little or poor credit histories) are not familiar with the nuances involved. It could be a reason why in September 2024, Mint Road sought details on NBFCs’ retail book: Product-wise and the annualised interest charged on them. The annualised interest slabs being: Less than ten per cent, 10-20 per cent, 20-30 per cent, 30-40 per cent, 40-50 per cent, and above 50 per cent.

 

The SC’s move on credit cards will have a bearing on delinquencies as well. The TransUnion CIBIL Credit Market Indicator (CMI) report for the quarter ending June 2024 (the latest on offer) has it that the CMI for consumer performance improved by six points to 102 in June 2024, from 96 in June 2023. And was reflecting the continued improvement in overall balance-level serious delinquencies (measured as 90 days or more past due) across most product categories. But then “In contrast to all other credit products, credit cards showed a marginal increase in delinquencies, continuing the trend set over the last four quarters to 1.8 per cent, up 17 bps year-on-year,” the report said.

 

The Financial Stability Report (FSR: June 2024) had pointed out concerns in the consumer credit segment. Among them, “a little more than a half of the borrowers in this segment have three “live loans” at the time of origination and more than one-third of the borrowers have availed of more than three loans in the last six months”. Now, credit card exposures are not loans per se. If the three “live loans” the FSR refers to include “personal loans” (again unsecured), it could be that these are being used to square off credit card outstanding. Banks and customers – with the banking regulator in the plot – will have to figure out the pricing mechanism on late payments on plastic.

 

> What does the SC decision mean? Consumers will have to shell out more for late payments on credit cards

 

> Will Mint Road step in? This is not clear but the RBI has called attention to the “usurious” rates being charged by some players. Maybe the Indian Banks’ Association will have to deliberate on the matter.

 

> Delinquencies: FSR: June 2024 had pointed out concerns in the consumer credit segment. If delayed payment charges were to be higher than 30 per cent, delinquencies could inch up.