 "A year of setting up a new system of regulation")
A big theme in 2023 was governance with Governor Shaktikanta Das’s two separate addresses to the boards of state-run and private banks in May, marking a first-of-its-kind initiative. Governance is the bedrock of a sound banking system, and the Reserve Bank of India (RBI) sought to ring in a cultural change to ensure continued governance vigour through a process-based approach. The background to this were the guidelines on the operative aspects: Composition of the board and certain committees (of the board); age, tenure and remuneration of directors; the appointment and compensation of whole-time directors, chief executive officers, material risk takers, control function staff, and others.
Significant measures were taken to foster a sustainable digital lending landscape. Such lending has seen an exponential rise post the pandemic, both in the scale and velocity of digital credit and raised a host of regulatory dilemmas. A balancing had to be done: Weighing the benefits brought about by the innovative business model of fintech, and emerging conduct and regulatory concerns. It led to digital lending guidelines, followed by those for first-loss default guarantee covering prudential concerns, facets of outsourcing, data privacy and lending operations. The RBI’s regulatory objective is to rein in the negative externalities while retaining the salutary effects of innovative digital models.
There was a reimagining of regulations with a pro-customer perspective. Instructions were issued on the responsibilities of regulated entities (REs) when employing recovery agents, who were prohibited from intimidating or harassing customers. Master directions on card issuance strengthened conduct regulations. Plus, you saw instructions to ensure responsible pricing of loan-related products, return of related security documents, and customer grievances with regard to credit scoring and other issues. The guidelines issued on the ‘framework for compensation to customers for delayed updation/rectification of credit information’, ‘strengthening of customer service rendered by credit information companies and credit institutions’; and ‘fair lending practice: penal charges in loan accounts’ are extremely important directions.
In order to facilitate the diversification of credit risk originating in banking and ensure market-based credit products for a varied set of investors having commensurate capacity and risk appetite, there’s now a recognised need for further development of this market. The RBI followed up on the directions on ‘securitisation of standard assets’ and the 'master directions on transfer of loan exposures’ to put an enabling framework for a wider set of market participants. Further, the central bank brought together a core group of major banks to set up a self-regulatory body called the Secondary Loan Market Association (SLMA), as per the recommendations of the taskforce on the development of secondary market for corporate loans. This will play a major role in the standardisation of documentation, market practices, setting up the market infrastructure, promoting growth, liquidity and efficiency of the secondary market. The SLMA was formed to promote and grow the secondary market for corporate loans. One can expect similar developments in the bad loans space as well. The high growth seen in consumer credit and increasing dependency of shadow banks’ borrowings resulted in regulatory measures towards consumer credit and bank credit to these entities.
Responding to the impact of climate risk, a dedicated Sustainable Finance Group has been institutionalised. Besides participating in dialogues with various stakeholders, the focus has been to kindle a brainstorming among REs to review their policies towards sustainable finance. RBI’s task would be to integrate climate risks into the regulatory framework.
To sum up, the RBI’s efforts during the year were directed at strengthening the regulatory framework to support fair practices, innovation and controlling risks while focusing on the mandate of financial stability.
The writer is partner, Duvvuru & Reddy LLP; and member of the second Regulatory Review Authority set up by the RBI