Highlights of the 2nd Bi-Monthly Monetary Policy of FY24

The Reserve Bank of India’s (RBI) 6-members Monetary Policy Committee (MPC) met on 6th, 7th and 8th June 2023 and released its second bi-monthly monetary policy statement for FY24 (Financial year 2023-2024).

Policy Rates:

i.The MPC has decided to keep the policy rates under the liquidity adjustment facility (LAF) unchanged (maintains status quo) with the stance remain focused on the withdrawal of accommodation.

ii.The Unchanged Policy rates are as follows:

Member of MPC: 

The MPC meeting was headed by RBI Governor Shaktikanta Das the other 5 members of the committee include,

• Shashanka Bhide, Ashima Goyal, Prof. Jayanth R. Varma, Michael Debabrata Patra, and Dr. Rajiv Ranjan.

a.MPC’s Assessments on Growth and Inflation:     

Growth: 

i.India’s real gross domestic product (GDP) growth for FY24 was projected at 6.5% with 8 percent in Q1, 6.5 percent in Q2, 6 percent in Q3, and 5.7 percent in Q4.

ii.India’s real GDP recorded a growth of 7.2% in FY23, stronger than the earlier estimation of 7.0%.

iii.Real GDP growth in Q4  FY23 accelerated to 6.1% (y-o-y) from 4.5% in Q3 FY23, supported by fixed investment and higher net exports.

iv.On the supply side, real gross value added (GVA) increased from 4.7% in Q3 FY23 to 6.5% in Q4 FY23, due to improvement in manufacturing activity.

v.The 8 core industries’ output expanded by 3.5% y-o-y in April 2023 as compared with 3.6% in March 2023.

vi.The Purchasing Managers’ Index (PMI) for manufacturing rose to a 31-month high of 58.7 in May 2023.

-Inflation

i.Consumer Price Index (CPI) inflation was projected at 5.1 percent in FY24, with 4.6 percent in Q1, 5.2 percent in Q2, 5.4 percent in Q3, and 5.2 percent in Q4.

• The Monetary Policy Committee (MPC) has set a target to bring down inflation to 4%.

ii.India’s foreign exchange reserves were placed at USD 595.1 billion on June 2, 2023.

iii.The average daily absorption under the LAF increased to Rs 1.7 lakh crore during April-May 2023 from Rs 1.4 lakh crore in February-March 2023.

b.Developmental and Regulatory Policies

-RBI issued Guidelines on DLG/FLDG in Digital Lending

Reserve Bank of India (RBI) has made the decision to explicitly allow the implementation of the First Loss Default Guarantee (FLDG) program. However, the RBI has also established strict guidelines and regulations that govern the operation of this program.

• RBI has examined the arrangements between Regulated Entities (REs) and Lending Service Providers (LSPs) or between two REs involving default loss guarantee (DLG), commonly known as First Loss Default Guarantee (FLDG) and approved the regulatory framework for permitting DLG arrangements in Digital Lending.

What is  DLG?

The term DLG refers to a contractual arrangement, between a RE and an entity (that meets certain criteria specified in the below guidelines on DLG) in which the entity will guarantee to compensate the RE for loss due to default upto a certain percentage of the loan portfolio of the RE that is specified earlier.

Guidelines on DLG in Digital Lending:

i.Eligibility as DLG Provider: RE could enter into DLG arrangements only with a Lending Service Provider (LSP)/ other RE with which it has entered into an outsourcing (LSP) arrangement.

• The LSP providing DLG must be incorporated as a company under the Companies Act, 2013.

ii.Forms of DLG: RE shall accept DLG only in one or more of the following forms:

• Cash deposited with the RE.
• Fixed Deposits maintained with a Scheduled Commercial Bank with a lien marked in favour of the RE.
• Bank Guarantee in favour of the RE.

iii.Cap on DLG: 

• RE should ensure that the total amount of DLG cover on any outstanding portfolio which is specified upfront should not exceed 5% of the amount of that loan portfolio.
• In the case of implicit guarantee arrangements, the DLG Provider should not bear a performance risk of more than the equivalent amount of 5% of the underlying loan portfolio.

iv.Invocation of DLG: The RE should invoke DLG within a maximum overdue period of 120 days unless made good by the borrower before that.

v.Tenor of DLG: DLG agreement would remain in force for not less than the longest tenor of the loan in the underlying loan portfolio.

vi.Requirements:

• REs should put in place a Board approved policy before entering into any DLG arrangement. Such policy should include, at the minimum, the eligibility criteria for the DLG provider, the nature and extent of DLG cover, the process of monitoring and reviewing the DLG arrangement, and the details of the fees, if any, payable to the DLG provider.
• This regulatory framework is based on the principle that lending business can be carried out only by entities that are either regulated by the Reserve Bank or entities permitted to do so under any other law.

v.FLDG scheme allows Indian fintech to partner with banks and NBFCs. As per the RBI’s statement, FLDG arrangements conforming to these guidelines shall not be treated as ‘synthetic securitization’ and/or shall also not attract the provisions of ‘loan participation’.

• RBI emphasizes that FLDG arrangements should not be confused with guarantees offered by entities such as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH), and National Credit Guarantee Trustee Company Ltd (NCGTC).
• The mentioned schemes, such as CGTMSE, CRGFTLIH, and NCGTC, operate independently of the FLDG framework.

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-RBI Issues Framework for Compromise Settlements and Technical Write-offs

RBI introduced a comprehensive regulatory framework for ‘compromise settlements/one-time settlements (OTS) and technical write-offs’, under which all REs including cooperative lenders could be able to resolve non-performing assets (NPA) and streamline instructions for regulated entities.

Key Frameworks:

i.The framework mandates the REs to establish board-approved policies for undertaking compromise settlements and technical write-offs.

• Compromise settlements refers to any negotiated arrangement with the borrower to fully settle the claims of the RE against the borrower in cash. 
• Technical write-off, refers to writing off NPA for accounting purposes without waiving claims against the borrower.

ii.The board should mandate a reporting format to track trends, including the number and amounts of such settlements, recovery in technically written-off accounts, and classification of accounts based on fraud or wilful default.

• REs may undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors.

iii.RBI proposed to rationalise the extant prudential norms on restructuring of borrower accounts affected by natural calamities.

iv.Compromise settlements where the time for payment of the agreed settlement amount exceeds 3 months shall be treated as restructuring.

v.Cooling Period: In respect of borrowers subject to compromise settlements, there should be a cooling period as determined by the respective Board approved policies before the REs can assume fresh exposures to such borrowers.

• Borrowers who enter into a compromise settlements should need to go through a cooling period of a minimum 12 months in case of farm credit exposures.

vi.The OTS framework has now been extended to urban co-operative banks (UCBs).

Additional info:

• The process of declassifying the loan as an ‘asset’ in the bank’s books is what is termed as write-off.
• Banks that have a high level of NPA used to have low deposit rates and keep lending rates high to recover the losses on those assets.

-Extended PSL Targets for UCBs

RBI has extended the phase-in time for achievement of the Priority Sector Lending (PSL) Targets for Primary (Urban) Cooperative Banks (UCBs) by two years, i.e. from March 31, 2024 to March 31, 2026.

• RBI is set to provide suitable incentives to UCBs that have met the prescribed targets as on March 31, 2023.
• The PSL targets for UCBs were revised in 2020 to ensure a non-disruptive transition, a path provided till March 31, 2024, to achieve the revised targets.

-PPIs to issue e-RUPI vouchers

i.To increase the scope of e-RUPI vouchers,  RBI proposed to expand the scope and reach of e-RUPI vouchers by permitting non-bank Prepaid Payment Instrument (PPI) issuers to issue e-RUPI vouchers and enabling issuance of e-RUPI vouchers on behalf of individuals.

• The e-RUPI, a digital voucher launched in August 2021, rides on the Unified Payments Interface (UPI) system of the National Payments Corporation of India (NPCI).   Click here to know more

ii.With over 35 non-bank PPI issuers, including Amazon Pay, Bajaj Finance, Ola Financial Services, PayU Payments Pvt Ltd, and Phone Pe Pvt Ltd, this move is set to significantly widen the scope of e-RUPI vouchers.

• At present, purpose-specific vouchers are issued by banks on behalf of Central and State Governments and to a limited extent on behalf of corporates.

-Banks to issue RuPay forex cards

RBI decided to allow the issuance of RuPay Prepaid Forex (Foreign Exchange) cards by banks in India for use at ATMs, PoS machines and online merchants overseas to expand payment options for Indians travelling abroad.

• Further, RuPay Debit, Credit, and Prepaid Cards will be enabled for issuance in foreign jurisdictions, which can be used internationally, including in India. These measures will expand the reach and acceptance of RuPay cards globally.
• RuPay Debit and Credit cards issued by banks in India have gained international acceptance through bilateral arrangements with international partners and co-badging arrangements with international card schemes.
• The e-RUPI, a digital voucher launched in August 2021, rides on the Unified Payments Interface (UPI) system of National Payments Corporation of India (NPCI).
• Till now, purpose-specific e-RUPI vouchers are issued by 11 banks in partnership with the NPCI. The 11 banks are Axis Bank, Bank of Baroda, Canara Bank, HDFC Bank, ICICI Bank, Indian Bank, IndusInd Bank, Kotak Mahindra Bank, Punjab National Bank, State Bank of India and Union Bank of India.

-RBI opens TReDS for all players in factoring, including insurers

i.RBI has allowed all participants who are undertaking factoring business to participate as financiers in the Trade Receivables Discounting System (TReDS) platform to improve access to funds for micro, small and medium enterprises (MSMEs).

• Due to this, insurance companies are getting permitted as the ‘fourth participant’ in TReDS, besides MSME sellers, buyers and financiers.
• The insurance facility would encourage discounting of payables of buyers irrespective of their credit ratings.

ii.RBI has also allowed secondary market transactions on the TReDS platform.

-Streamlining the Bharat Bill Payment System

i.To enhance the efficiency of the Bharat Bill Payment System (BBPS) and also to encourage greater participation, the process flow of transactions and membership criteria for onboarding operating units in BBPS was set to be streamlined.

• BBPS is an ‘anytime anywhere’ bill payments platform which is operational since August 2017. Currently, BBPS has onboarded over 20,500 billers and processes over 9.8 crore transactions every month.

-Own Limits for Call, Term, Notice Money

Scheduled commercial banks (excluding Small Finance Banks) are allowed to set their own limits for borrowing in Call and Notice Money Markets within the prescribed prudential limits for inter-bank liabilities.

What is  Call, Term, Notice Money:

• Call Money means borrowing or lending in unsecured funds on overnight basis;
• Notice Money means borrowing or lending in unsecured funds for tenors up to and inclusive of 14 days excluding overnight borrowing or lending;
• Term Money means borrowing or lending in unsecured funds for periods exceeding 14 days and up to one year.

Additional Measures:

i.To develop the onshore rupee non-deliverable derivatives contract market and to provide residents with the flexibility to efficiently plan their hedging activities, RBI has permitted banks that are operating International Financial Services Centre (IFSC) to offer non-deliverable derivatives contracts utilising rupees to resident non-retail-users-for-hedging.

• The newly-permitted transactions will be cash-settled in rupees and shall have the flexibility of cash settlement between two relevant banks and between a bank and a person residing outside India in rupees or any foreign currency.

ii.RBI has decided to rationalise and simplify the licensing framework for authorized persons under Foreign Exchange Management Act (FEMA), 1999, to improve the efficiency in the delivery of foreign exchange facilities to various segments of users including common persons, tourists and businesses.

iii.RBI has conducted a four-day variable rate reverse repo (VRRR) auction for Rs 1 lakh crore (USD 12.12 billion) on June 12, 2023.

• RBI conducted a 14-day VRRR auction of Rs 2.0 lakh crore on June 2, 2023; 4-day VRRR of Rs 1.0 lakh crore on June 5, 2023; 3-day VRRR of Rs 75,000 crore on June 6, 2023; and 2-day VRRR of Rs 75,000 crore on June 7, 2023, considering the overall build-up of surplus liquidity.

Additional info: As per the statement of RBI Governor Shaktikanta Das, as on March 31, 2023, there was a total of 3.62 lakh crore of Rs 2000 notes in circulation. After the announcement of withdrawal, so far about 1.8 lakh crore of Rs 2000 notes have come back, which is roughly about half of the Rs 2000 notes in circulation as on March 31, 2023.

• About 85% of the Rs 2000 notes have come back as deposits into bank accounts

Note – The next meeting of the MPC is scheduled during August 8-10, 2023.

Recent Related News:

On May 19, 2023, the Reserve Bank of India (RBI) notified the withdrawal of Rs 2000 denomination banknotes from circulation and directed banks to stop issuing this banknote with immediate effect.

On April 10, 2023, the Reserve Bank of India (RBI) issued the directions named RBI (Outsourcing of Information Technology Services) Directions, 2023 for the outsourcing of Information Technology (IT) services by banks, NBFCs (Non-bank financial companies) and Regulated Entities (REs) to ensure that such arrangements do not undermine their responsibilities and obligations to customers.

About the Reserve Bank of India (RBI):

Governor– Shaktikanta Das
Deputy Governors– Mahesh Kumar Jain, Michael Debabrata Patra, M. Rajeshwar Rao, T. Rabi Sankar
Headquarters– Mumbai, Maharashtra
Establishment– 1st April 1935