Regulatory Updates

The Reserve Bank of India (“RBI”) on 05^th January 2021 issued a circular introducing the Legal Entity Identifier (LEI), which is a 20-digit number used to uniquely identify parties to financial transactions worldwide.

RBI has decided to introduce the LEI system for all payment transactions of value of Rs.50 crore and above undertaken by entities (non-individuals) using the Central Processing System run by RBI – Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT).

Member Banks who participate in RTGS and NEFT and who undertake large value transactions of Rs.50 crore and above, have been advised to:

• obtain the LEI in time, if they don’t already have one;
• include remitter and beneficiary LEI information in RTGS and NEFT payment messages;
• maintain records of all transactions of Rs.50 crore and above through RTGS and/or NEFT.

Entities can obtain LEI from any of the Local Operating Units accredited by the Global Legal Entity Identifier Foundation, which is the body tasked to support the implementation and use of LEI. In India, LEI can be obtained from Legal Entity Identifier India Ltd. (LEIL) (https://www.ccilindia-lei.co.in), which is also recognised as an issuer of LEI by the Reserve Bank under the Payment and Settlement Systems Act, 2007.

To read the full RBI circular, please click on the link.

The Reserve Bank of India (“RBI”) on 14^th December 2020 issued a circular directed to all Scheduled Commercial Banks and Payments Banks (and applicable to these banks only) wherein the RBI has issued a list of bank accounts which can be opened without any restrictions as was outline in the RBI circular dated 06^th August 2020. The link to the circular is – https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11945&Mode=0

The list of such bank accounts shall be as follows:

• Accounts for real estate projects mandated under the Real Estate (Regulation and Development) Act, 2016 for the purpose of maintaining 70% of advance payments collected from the home buyers.
• Nodal or Escrow accounts of payment aggregators/prepaid payment instrument issuers for specific activities as permitted by Department of Payments and Settlement Systems (DPSS), Reserve Bank of India under Payment and Settlement Systems Act, 2007.
• Accounts for settlement of dues related to debit card/ATM card/credit card issuers/acquirers.
• Accounts permitted under FEMA, 1999.
• Accounts for the purpose of IPO/NFO/FPO/share buyback/dividend payment/issuance of commercial papers/allotment of debentures/gratuity etc., which are mandated by respective statutes or regulators and are meant for specific/limited transactions only.
• Accounts for payment of taxes, duties, statutory dues etc., opened with banks authorized to collect the same, for borrowers of such banks which are not authorized to collect such taxes, duties, statutory dues, etc.
• Accounts of White Label ATM Operators and their agents for sourcing of currency.

These restriction free permissions shall be subject to the condition that the accounts are used for the permitted or specified transactions only.

Banks shall need to flag these accounts in the CBS for easy monitoring. Banks have also been advised to monitor all current accounts and CC/ODs regularly, at least on a half-yearly basis to ensure compliance with the instructions given in this regard in the RBI circular dated 06th August 2020, link to which is provided above in this article.

RBI has clarified a few Frequently Asked Questions in this regard, a few of which are as follows:

• Banks shall no longer be required to obtain No Objection Certificate (NOC) as was advised earlier.
• Banks may compute the aggregate exposure for the purpose of these guidelines based on the information available from Central Repository of Information on Large Credits, Credit Information Companies, National E-Governance Services Ltd. etc., and by obtaining customers’ declaration, if required.
• All fund based and non-fund based credit facilities sanctioned by the banks and carried in their Indian books shall be included for the purpose of aggregate exposure.
• The revised guidelines are applicable to all borrowers, not just entities as was the case with previous guidelines on obtaining NOC.
• Banks are not permitted to open current accounts for borrowers who have availed any fund or non-fund-based credit in the form of overdraft facilities.
• In case of proprietary firms, the aggregate exposure shall include all the credit facilities availed by him/her, for business purpose or otherwise.
• In case bank’s exposure to the borrower is less than 10%, funds may be remitted to the account maintained with the bank having the highest share in the exposure of the banking system to the borrower. Credits and debits will be freely permitted in the said account. Alternatively, the borrower is free to avail working capital only in the form of WCDL/WCTL and open current accounts as per the provisions of paragraph 1(v) of the circular based on the aggregate exposure.
• Banks may open a current account for receiving/monitoring cash flows of a specific project, provided the borrower has not availed any CC/OD facility for that specific project. Banks opening project specific current/escrow account shall ensure that cash flows coming in the account are from that project only.
• Banks are free to open current accounts for borrowers having credit facilities only from NBFCs/FIs/Co-operative banks/Non-bank institutions. However, if such borrowers avail facilities from the banks covered under the guidelines, all the provisions of the circular shall be applicable.
• For borrowers with multiple projects/multiple business units, banks may open multiple escrow accounts for monitoring of project-wise/unit-wise cash flows. Banks opening project specific current/escrow account shall ensure that cash flows coming in the account are from that project/unit only.
• All lending banks should be part of the escrow agreement. The terms and conditions may be decided mutually by lending banks and the borrower. Borrowers shall be free to choose their escrow managing banks. Non-lender banks are not permitted to escrow accounts.
• In cases where term loans are meant for purposes other than for supply of goods and services and where the payment destination is unidentifiable, banks may route such term loans through CC/OD or current accounts of the borrower opened as per the provisions of the circular. Banks shall ensure that where the payment destination is identifiable (i.e. refinance of existing debt, etc.), payment is made directly, without routing it through CC/OD accounts.
• All banks, whether lending banks or other account holding banks, are required to monitor the accounts on regular basis as prescribed in the circular.
• In case of change in exposure of banks/aggregate exposure of the banking system to the borrower, the borrowers shall be free to choose the bank(s) for the purpose of maintaining their operating current account/escrow account/CC/OD accounts within the overall framework of the circular. Further, banks will have to implement the new arrangements within a period of three months from the date of change in exposure.
• Collections accounts can be debited only for transferring the funds to the escrow account of the borrower.

To read the full RBI circular, please click on the link.

The Reserve Bank of India (“RBI”) on 05^th September 2020 issued a circular directed to all Scheduled Banks and Non-Banking Financing Companies regarding joint contribution of credit by both the lenders. This is in continuation of the RBI circular issued on September 21, 2018 on co-origination of loans by Banks and NBFCs.

The 2018 scheme has now been revised to provide improved flow of credit to the unserved and undeserved sector of the economy so as to make the funds available to them at a lower cost, by availing benefits from both the lending channels.

The Scheme has permitted banks to co-lend with all registered NBFCs including the Housing Finance Companies where banks have been advised to take their share of the individual loans on a back-to-back basis in their books. However, NBFCs have been advised to retain a minimum of 20% share of the individual loans on their books.

Both the lenders have been advised to formulate policies in the regard and make the same available on their websites. Based on the board approved policies, a Master Agreement shall be entered into between the parties which shall outline all the details of such an arrangement between the two partner institutions including the terms and conditions, partner selection criteria, areas of operation etc. It shall also contain full disclosure of the arrangement between the two parties and shall clearly specify the manner of appropriation between the co-lenders, contain necessary clauses on representation and warranties etc.

Some Key Pointers:

• Banks shall not be allowed to enter into co-lending arrangement with an NBFC belonging to the promoter Group.
• This new co-lending model shall not be applicable to foreign banks, including Wholly Owned Subsidiaries, with less than 20 branches.
• The NBFCs shall be the single point of interface for the customers.
• Customer’s explicit consent to be taken after full disclosure, under this co-lending model.
• The co-lending banks and NBFCs shall maintain each individual borrower’s account for their respective exposures.

To read the full RBI circular, please click on the link.

To read the 2018 RBI circular, please click on the link.

RBI CIRCULAR ON INTEREST SUBVENTION SCHEME FOR MSMEs

The Reserve Bank of India (“RBI”) on October 07, 2020 issued a circular directed to all Co-operative Banks wherein the RBI has provided some relief to the Micro Small and Medium Enterprises by extending Interest Subvention Scheme on loans extended by co-operative banks.

It has been specifically outlined that decision has been taken to include Co-operative Banks as eligible lending institutions effective March 03, 2020. The Scheme provides an interest relief of 2% p.a. (two percent per annum) to eligible MSMEs on their outstanding fresh or incremental term loan or working capital during the period of its validity, which is limited to all term loans or working capital to the extent of Rs.100 lakhs. That is to say that any amount beyond Rs.100 lakhs shall not be covered under this Scheme.

The loan amounts to be eligible for this relief, should not have been declared as a Non-Performing Asset. No interest subvention shall be admissible for any period during which the account remains NPA.

The Interest Subvention Scheme for MSMEs, 2018 that was issue by the RBI on November 02, 2018 has been modified by the Government as below:

• The validity of the Scheme has been extended till March 31, 2021.
• Fresh or incremental term loan or working capital limit extended by co-operative banks with effect from March 03,2020 shall be eligible for coverage under the Scheme.
• Acceptance of claims in multiple lots for a given half-year by eligible institutions shall be permitted.
• Requirement of Udyog Aadhaar Number (UAN) may be dispensed with for units eligible for GST. However, units that are not required to obtain GST may either submit Income Tax PAN or their loan account must be categorized as MSME by the concerned bank.
• Trading activities have also been allowed to be covered under the scheme without UAN.

It has been specified that Small Industries Development Bank of India (SIDBI) shall be the single national level nodal implementation agency for this Scheme. Nodal office of eligible lending institutions shall submit half-yearly claims to SIDBI as per guidelines laid down in that regard.

Co-operative Banks have been advised to take necessary and appropriate actions for the successful implementation of the Scheme.

To read the full detail, please find link to the RBI Circular.