INTRODUCTION
As the Indian fintech landscape continues to evolve rapidly, the beginning of the financial year 2024-2025 was no exception and was inundated with a host of power moves from the Reserve Bank of India ("RBI"), re-emphasising its commitment to safeguard customer interests and foster trust in the digital ecosystem for financial inclusion.
The RBI's proposal to extend the payment aggregation framework to offline services, the introduction of standardized formats for loan key fact statements, clarification on default loss guarantee and proposed revisions to the electronic trading platform regulations were among the notable initiatives. Additionally, the recent measures taken against Kotak Bank demonstrate RBI's commitment towards customer protection and it's aversion to any potential service disruptions that could significantly impact any bank's operational efficiency and the broader financial ecosystem of digital banking and payment systems. Overall, the actions taken by the RBI reflects an amplified emphasis on security, governance, and compliance within the fintech environment. With such proactive measures, the Indian fintech industry is poised to become one of the largest and safest ecosystems globally.
Below, we delve into some of the key developments and market updates which unfolded in April 2024.
REGULATORY UPDATES
Issuance of draft directions for regulation of payment aggregators
The RBI, through its press release, has issued draft directions to regulate payment aggregators ("PAs") that facilitate payments at physical points of sale (referred to as "PA-P"). The press release also proposes to amend the existing regulatory framework applicable to PAs that facilitate payments at online points of sale transactions (referred to as "PA-O"). The proposed directions are prescribed in two parts (collectively referred to as "Draft Directions"), namely: (i) new draft directions on regulation of PA-Ps (" Proposed PA Directions"); and (ii) amendments to the existing directions on PAs, (" Proposed Amendments") namely, the 'Guidelines on Regulation of Payment Aggregators and Payment Gateways' dated March 17, 2020 ( "PA Guidelines").
The PA Guidelines are applicable to PAs processing online or e-commerce transactions and do not cover offline PAs which handle proximity/face-to-face transactions. Such offline PAs play a significant role in the spread of digital payments. Accordingly, to integrate offline PAs into the payment ecosystem and provide a structured approach to such offline transactions, the Draft Directions propose to regulate the PA-Ps with the same standards as the PA-Os. Some of the major changes suggested through the Draft Directions include authorisation requirements and net-worth criteria for non-bank PA-Ps, mandating the routing of funds through escrow accounts for both non-bank PA-Os and PA-Ps, inclusion of DvP transactions for PA-Ps (which were outside the ambit of the PA Guidelines) etc.
The Draft Directions intends to categorise the merchants in different categories based on their turnovers (i.e., small merchant and medium merchant) and has prescribed a risk-based approach to undertake due diligence process and KYC through contact point verification process by collecting minimal documents as prescribed. Assisted Video based Customer Identification Process "V-CIP" is also intended to be permitted, where PAs take assistance from agents facilitating the V-CIP process at the merchant's end. Further, it appears that for the merchants who do not fall under the definition of the small or medium merchants, the PAs are required to undertake KYC for such merchants in accordance with the Master Directions on Know Your Customer, 2016.i Requirement for on-going monitoring for the onboarded merchants and registration with the Financial Intelligence Unit-India (FIU-IND) is also proposed to be applicable to the PAPs as per the Draft Directions. Additionally, the Draft Directions propose to remove the existing provision allowing debits from the escrow account for payments to any other account based on specific directions from the merchant as per the PA Guidelines. The revised framework will impact several prevalent business models in the industry, mandating them to obtain authorisation under the Draft Directions. Further, removal of the permissible debit transactions to designated accounts from the escrow accounts, will also require the existing PAs to relook at their structure and align their business models with the revised provisions. The RBI has sought comments and feedback on the Draft Directions by May 31, 2024.
FAQs on Guidelines on Default Loss Guarantee ("DLG")
The RBI has issued FAQs (" FAQs") on Guidelines on Default Loss Guarantee ("DLG") in digital lending ("DLG Guideline"). DLG typically refers to a contractual arrangement between a regulated entity ("RE") and a lending service provider ("LSP"), wherein the LSP upfront guarantees the REs to compensate losses up to 5% (five percent) ("DLG Cover") of the loan portfolio, in the event of default in the loan portfolio. However, there was lack of clarity on how to calculate this DLG Cover in case of a portfolio of loans. The FAQs now clarify that DLG Cover should be calculated based on the total amount disbursed from the DLG Set at any given time. 'DLG Set' refers to identifiable and measurable loan assets which have been sanctioned. Further, the FAQ also inter-alia clarifies that DLG is not allowed for (a) loans arranged on NBFC-P2P platforms; (b) credit cards; (c) revolving credit facilities offered through digital lending channel; or (d) any loans which are outside the purview of the Guidelines on Digital Lending issued in September 2022ii.
Standardized formats for Key Facts Statement ("KFS")
Following the announcement of the RBI on harmonizing the instructions on KFS and disclosure of Annual Percentage Rate ("APR") through the Statement on Developmental and Regulatory Policies dated February 08, 2024 ("Policy"), the RBI has further notified the standardized formats for KFS and the details to be included thereunder (" KFS Circular"). The KFS was mandated in respect of loans by scheduled commercial banks to individual borrowers; digital lending by REs; and microfinance loans. To further enhance transparency, RBI aimed to mandate all REs to provide the KFS to the borrowers for all retail and MSME loans and accordingly, the KFS Circular was issued. The KFS Circular also contains an illustrative calculation of APR and disclosure of the repayment schedule for a hypothetical loan. It is specified that the KFS will have to be included as a summary box and exhibited as part of the loan agreement. Moreover, according to the KFS Circular, the REs are required to provide the KFS in a language that borrowers understand. The contents of the KFS must be thoroughly explained to the borrowers, and their acknowledgment of the same must be obtained. The circular also clarifies that credit card receivables are exempted from the provisions contained under this circular.
Master circular for bank finance to Non-Banking Financial Companies ("NBFCs")
RBI has issued the revised 'Master Circular - Bank Finance to NBFCs' dated April 24, 2024 (" NBFC Master Circular") to regulate financing of NBFCs by banks. The NBFC Master Circular highlights norms regarding bank finance to (i) NBFCs registered with the RBI; (ii) NBFCs not requiring registration (such as Securitisation and Reconstruction Companies, Nidhi Companies, Chit Companies etc. as provided under Master Direction - Exemptions from the provisions of RBI Act, 1934iii); and (iii) factoring companies.
Through this circular, the RBI has removed any ceiling on bank credit for the permissible activities (see the indicative list below for the activities which are not eligible for bank credits) linked to net owned funds of NBFCs in respect of all NBFCs which are statutorily registered with the RBI and are engaged in the principal business of asset financing, loan, factoring (subject to conditions as prescribed under the NBFC Master Circular) and investment activities, subject to the conditions mentioned in the master circular. For NBFCs which do not require any registration with the RBI, banks are allowed to take decisions regarding financing basis factors including purpose of credit, nature, and quality of underlying assets.
The NBFC Master Circular also lists activities which are not eligible for any bank credit including loan by NBFCs to their subsidiaries, financing to be granted to NBFCs for further lending for subscribing to initial public offerings and commercial vehicles. It also enumerates other prohibitions and prudential ceilings on financing.
RBI releases Draft Master Direction – Reserve Bank of India (Electronic Trading Platforms) Directions, 2024
The RBI, in October 2018, had put in place a regulatory framework for electronic trading platforms ("ETPs")iv for executing transactions in eligible instruments, which inter-alia include securities, money market instruments, foreign exchange instruments, derivatives, etc. regulated by it. Due to increased integration of the onshore forex market with offshore markets and consistent requests from the market makers to access offshore ETPs offering permitted Indian Rupee (INR) products, the RBI had decided to review the regulatory framework for ETPs.
Accordingly, through a press release dated April 29, 2024, the RBI has released the Draft Master Direction – Reserve Bank of India (Electronic Trading Platforms) Directions, 2024 (" Draft ETP Direction"). The Draft ETP Direction outlines the general conditions which need to be complied with any entity seeking to operate an ETP such as a prior authorisation from the RBI, among others. The Draft ETP Direction also lays down inter alia the eligibility criteria for authorisation of ETPs along with other obligations in relation to ensuring transparency, surveillance, technology, and security measures. While majority of the provisions as prescribed under the current framework for ETPs are continued in the Draft ETP Directions, one of the key proposals is the types of eligible instruments that an ETP can offer on its platform. In this regard, it is provided that the authorised ETP operators shall ensure that the ETPs are permitted to offer only such eligible instruments, that are specifically approved by the RBI during the authorisation process. Further, additional conditions are proposed to be included for the offshore ETPs seeking authorisation from the RBI, which inter-alia includes permissibility to offer only eligible derivative instruments involving rupee and/or rupee interest rates between residents and non-residents, requirement to conduct information technology or information system audits annually, prohibition from facilitating transactions between Indian residents etc. Public feedback is sought by the RBI on the Draft ETP Directions, which must be submitted by May 31, 2024.
SCORES 2.0: Upgrades to strengthen the SEBI Complaint Redressal System for Investors
The Securities and Exchange Board of India ("SEBI") has launched a new version of the SEBI Complaint Redress System - SCORES 2.0 through a press release dated April 01, 2024 (" SCORES"), to enhance the efficiency of the existing complaint redressal mechanism in the securities market through auto-routing, auto-escalation, monitoring by the SEBI designated bodies (i.e., a committee as may be designated by the SEBI) and reduction in timelines for resolution. The upgraded system also provides for integration with Know Your Customer - Registration Agency databases, for easy registration of the investor on to SCORES 2.0. The new version of SCORES went live on April 01, 2024.
Issuance of 'Draft Guidelines on 'Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders'
RBI has invited comments on the draft guidelines on 'Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders', floated by it on April 26, 2024 (" Draft Circular") to regulate loan aggregation services being provided by LSPs or any RE acting as an LSP with the objective of enabling the borrowers to have prior information about the potential lenders in order to make an informed decision. It is observed that for loan aggregation, LSP, or an RE acting as an LSP, has outsourcing arrangements with several lenders and the digital lending app/ platform ("DLA") of the LSP / RE, wherein it matches the borrower to one of the lenders. In such cases, particularly where an LSP has arrangements with multiple lenders, the identity of the potential lender(s) to the borrower may not be made known to the borrower, upfront.
To avoid ambiguity in such scenarios and protect borrowers, the RBI has proposed to impose certain additional obligations on REs, whereunder the REs are to ensure that the LSPs to inter alia include (a) provision of a digital view of all the loan offers to the borrowers; (b) adoption of mechanism to ascertain the willingness of the lenders to offer a loan and implementation of a consistent approach; (c) inclusion of name(s) of the RE(s) extending the loan offer, amount and tenor of loan, the APR and other key terms and conditions over the digital view, including a link to the KFS; (d) provision of unbiased content without directly/indirectly promoting or pushing products of a particular RE, while providing such services. RBI has invited public comments on the Draft Circular which can be submitted by May 31, 2024 over email at strcrgdor@rbi.org.in.1
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Footnotes
i. https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11566
ii. https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12382&Mode=0
iii. https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10565
1. IndusLaw is in the process of submitting comments to Draft Guidelines on 'Digital Lending – Transparency in Aggregation of Loan Products from Mul tiple Lenders on behalf of its clients, and if you have any queries or inputs, feel free to reach out to us at fintech.queries@induslaw.com
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