PwC’s Banking Insights   Click to launch
February 2018
Impact assessment of
     Preface          regulatory changes in
                         February 2018

                 3                       5
Other notifications
 in February 2018

               20                      21
                        Earlier this month, the Reserve Bank of
                        India (RBI) barred banks from issuing
                        letters of undertaking (LoUs), in light of the
                        recently perpetrated 2 billion USD fraud by
 Impact assessment      one of India’s public sector banks.
of regulatory changes
                        This move by the Regulator is likely to
   in February 2018
                        have an impact on trade financing in India
                        and raise credit costs for importers who
                        have relied on LoUs for cheaper overseas
                        credit to pay suppliers. The move also puts
 Other notifications    companies that have received credit based
 in February 2018       on LoUs in a spot as they have to now repay
                        their borrowings since there will be no
                        rollover of existing LoUs.
                        The Regulator has also barred lenders from
                        issuing letters of comfort (LoCs) as trade
      Contacts          credit for importing goods into India with
                        immediate effect. It has, however, allowed
                        banks to continue to issue letters of credit
                        and bank guarantees. Borrowers will now
                        have to explore alternative instruments like
                        bank guarantees and letters of credit, and,
                        in the long run, foreign funding like external
                        commercial borrowings (ECBs).
                        The Ministry of Finance has also directed all
                        public sector banks to probe all NPAs and        250 crore INR and red flags whenever the        in his recent speech has also stressed on
                        NPA accounts amounting to 50 crore INR           original covenants of the loans are violated.   the need for ownership neutrality to ensure
                        and above for possible frauds and report         This directive could have an unnerving          a level-playing field in its supervisory
                        all such cases to the Central Bureau of          effect on lending by public sector bankers      enforcement and have enough control to
                        Investigation (CBI). Besides, the ministry       as the priority is now likely to shift to       put in place preventive measures to
                        had asked banks to monitor loans above           unearthing fraud. RBI Governor Urjit Patel      pre-empt frauds.

     3 PwC                                                                                                                                         PwC’s Banking Insights
                        The Regulator has been getting a lot of          fraud. The revised stressed asset framework
                        heat in light of this fraud. The fact that the   is a great move in this direction and will lay
                        three-level scrutiny, adopted for audit of       down a steady-step approach. This approach
                        banks in India, failed to unearth this fraud     is aimed at ensuring early resolution of
 Impact assessment      is particularly alarming. Banks’ concurrent      stressed assets in a transparent and time-
of regulatory changes
                        auditors are expected to run daily checks        bound manner so that maximum value
   in February 2018
                        on all transactions. Further, quarterly          could be realised by the lenders while also
                        inspections by statutory auditors and an         recognising the potential value of stressed
                        annual inspection by the Regulator is also       assets, as well as strengthening the credit
                        expected to be conducted. Considering this,      culture in the economy for both borrowers
 Other notifications    there is an increasing need for a strong audit   and banks.
 in February 2018       framework, as well as the need to record off
                                                                         This issue covers an impact analysis of
                        balance sheet exposure items, which were at
                                                                         key regulations issued in the month of
                        the centre of the fraud, somewhere within
                                                                         February 2018, including those around the
                        the formal reporting mechanisms.
                                                                         payment of agency commission for small
                        Further, as rightly pointed out by the           saving schemes, relief to MSME borrowers
      Contacts          Regulator, there is a strong link between        under the Goods and Service Tax (GST)
                        such corporate frauds and the stressed           framework, as well as revised guidelines
                        assets problem that the economy is               relating to the participation of a person
                        grappling with. Some common causes of            resident in India and foreign portfolio
                        frauds include serious gaps in underwriting      investors (FPIs) in the Exchange Traded
                        standards and liberal cash flow projections      Currency Derivatives (ETCD) market. Our
                        at the credit assessment stage. Almost all       thought leadership on the revised stressed
                        of these fraud cases get seasoned for 2 to 3     assets framework is also part of
                        years as NPAs before they are reported as        this document.

     4 PwC                                                                                                                PwC’s Banking Insights
Impact assessment of regulatory changes in February 2018

                        Special article: Resolution of Stressed Assets – Revised Framework 1
                        Circular reference:                                          Applicability:
 Impact assessment
of regulatory changes   RBI/2017-18/131 DBR.No.BP                                    All Scheduled Commercial Banks (Excluding Regional Rural Banks (RRB), All-India
   in February 2018     BC.101/21.04.048/2017-18                                     Financial Institutions (Exim Bank, NABARD, NHB and SIDBI)
                        Dated 12 February 2018

 Other notifications    Non-performing assets (NPAs) have                            Soon, most projects were getting stuck,
 in February 2018       become a major challenge for both public                     especially in power and highways. Banks
                        and private sector banks in India. In the                    found their loans going sour, which led to
                        exuberant milieu that started way back                       the whole situation of NPAs. Initially, the
                        in 2004–05 and continued for three years                     extent of NPA was hidden by ‘ever-greening’.
                        until the global financial crisis of 2008,                   It was revealed later as the Reserve Bank of
                        large corporations conceived major project                   India (RBI) tightened the norms.
                        proposals in capital-intensive sectors such as
                                                                                     In the recent past too, Indian banks have
                        power, ports, airports, housing and highway
                                                                                     been saddled with increasing levels of
                        construction. Banks were only too keen to
                                                                                     stressed assets and NPAs. Indian banks’
                        lend, often without sufficient evaluation of
                                                                                     gross NPAs stood at 8.40 lakh crore INR as
                        risks and returns. Things started worsening
                                                                                     on 30 September 2017. The ratio of NPAs
                        with the policy paralysis brought about by
                                                                                     was particularly disturbing when it came to
                        the spectrum and coal mining scandals.
                                                                                     public sector banks (PSBs):

                                                                                                         Gross NPAs (in lakh crore INR)

                                                 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17                         Sep-17

                         Public Sector Banks      2.28     2.27      2.35     2.51      2.73      2.78   2.96   3.14     4.95    5.40     5.92   6.30   6.46   6.19      7.33       7.34

                         Private Banks            0.24     0.23      0.26     0.27      0.30      0.32   0.35   0.37     0.46    0.56     0.62   0.75   0.87   0.92      0.96       1.06

                         Total                    2.52     2.51      2.61     2.78      3.03      3.11   3.31   3.51     5.41    5.96     6.54   7.06   7.33   7.11      8.29       8.40


     5 PwC                                                                                                                                                            PwC’s Banking Insights
                        In this context, the RBI and the government                                      accounts be taken to the bankruptcy courts                           advances (GNPAs) of the banking sector
                        are proactively taking steps to resolve NPA                                      (Insolvency and Bankruptcy Code                                      rose along with the worsening of the
                        challenges in the banking sector.                                                [IBC], 2016).                                                        banking stability indicator (BSI) between
                        The government has empowered the RBI to                                                                                                               September 2016 and March 2017 due
 Impact assessment                                                                                       During 2016–17, while deposit growth
                        chalk out plans for addressing the bad loans                                                                                                          to deterioration in asset quality and
of regulatory changes                                                                                    of scheduled commercial banks (SCBs)
   in February 2018     problem, with a focus on large stressed                                                                                                               profitability. The macro stress test2 indicates
                                                                                                         picked up, credit growth remained sluggish,
                        accounts that have been classified partly                                                                                                             that under the baseline scenario, GNPAs of
                                                                                                         putting pressure on net interest income
                        or wholly as non-performing from amongst                                                                                                              SCBs may rise from 9.6% in March 2017 (as
                                                                                                         (NII), particularly of PSBs, and they also
                        the top 500 exposures in the banking                                                                                                                  shown in the chart below) to 10.2%
                                                                                                         continued to show a negative return on
                        system, and mandated that a dozen such                                                                                                                by March 2018.
 Other notifications                                                                                     assets (RoA). The gross non-performing
 in February 2018
                               Stressed assets
























                                                                     PSBs                                           PVBs                                         FBs                                          All SCBs

                                                          GNPA to total advances                  Restructured standard advances to total advances                                                            Source:

                        2. Financial Stability Report, RBI, June 2017

     6 PwC                                                                                                                                                                                                                PwC’s Banking Insights
                        The RBI also reinforced its supervisory        recruiting staff and giving increments to          was amended in 2016 as it took banks years
                        and enforcement frameworks by revising         employees. Further, the bank can disburse          to recover the assets.
                        the prompt corrective action (PCA)             loans only to those companies whose
                                                                                                                          Experts have pointed out that the NPA
                        framework and establishing an Enforcement      borrowing is above investment grades.
 Impact assessment                                                                                                        problem has to be tackled before the time a
                        Department. Once PCA is triggered by the
of regulatory changes                                                  The Securitisation and Reconstruction              company starts defaulting. This needed risk
   in February 2018     regulator, the bank faces restrictions on
                                                                       of Financial Assets and Enforcement of             assessment by the lenders and red-flagging
                        spending money on opening branches,
                                                                       Security Interest Act (SARFAESI) Act, 2002,        of the early signs of a possible default.

                        Why did the existing schemes fail?
 Other notifications
                        The NPA story is not new in India and several steps have been taken by the government on legal, financial and policy-level reforms. Taking
 in February 2018
                        note of the existing stressed assets and NPA situation, the RBI introduced a host of schemes and frameworks with the aim of curtailing the
                        growing NPAs. These are tabled as under:

                                     Joint Lenders‘ Forum          Strategic Debt                Insolvency and                   Scheme for Sustainable
                                     and Corrective                Restructuring (SDR)           Bankruptcy Code, 2016            Structuring of Stressed
      Contacts                       Action Plan                                                                                  Assets (S4A)

                                     Banks would need to           This was introduced           This is the strongest            RBI introduced (S4A) for
                                     constitute a                  with the aim of               measure taken so far,            the resolution of bad
                                     committee called JLF          helping banks to              yet due to lack of               loans of large projects.
                                     and roll out a CAP            recover their loans           operational guidelines           This is aimed at
                                     comprising                    by taking control of          and a legal                      strengthening the lenders’
                                     rectification,                distressed listed             framework, the code              ability to deal with
                                     restructuring and             companies.                    too has its fair share           stressed assets by
                                     recovery of loans.                                          of critics.                      providing an avenue for
                                                                                                                                  reworking the financial
                                                                                                                                  structure of entities facing
                                                                                                                                  genuine difficulties.

                                             January                         June                          May                               June
                                              2014                           2015                          2016                              2016

     7 PwC                                                                                                                                              PwC’s Banking Insights
                        However, these measures have been riddled           because of differences among creditors on
                        with their own set of problems:                     how best to resolve them. As per the JLF
                                                                            framework, at least 75% of creditors by
                        • As NPAs kept on increasing, the RBI rolled
                                                                            value of the loan and 60% by number of
 Impact assessment        out quite a few measures to improve the asset
                                                                            lenders in the JLF were needed to agree to
of regulatory changes     quality of banks. The RBI had strong notions
   in February 2018                                                         the restructuring plan. Obtaining consensus
                          that some of the banks are underreporting
                                                                            of creditors was a major bone of contention
                          their NPAs. Asset classification practices
                                                                            for the JLF, which in turn reduced the
                          were not as per the set standards and several
                                                                            effectiveness of the forum.
                          banks resorted to ever-greening of accounts.
 Other notifications      Here, banks were postponing bad-loan             • The Strategic Debt Restructuring (SDR)
 in February 2018         classification while depicting accounts as         mechanism introduced soon after was also
                          performing. To resolve this, during 2015,          not lucrative for lenders. While the scheme
                          the RBI had conducted an inspection of             seemed interesting to begin with, it was soon
                          selected banks’ balance sheets at random           evident that there were no buyers in cases
                          and released an Asset Quality Review (AQR)         where it was being invoked.
                          report. This report revealed a higher level of
      Contacts                                                             • Soon after, the RBI introduced the S4A
                          asset quality deterioration or NPAs with the
                                                                             Scheme. This scheme, however, only covered
                          inspected banks. As per the review, almost all
                                                                             projects that had already started commercial
                          PSBs had higher NPAs than reported. In the
                                                                             production. Further, the scheme was also
                          case of private sector banks, the impact was
                                                                             silent about unsecured creditors, who could
                          limited to big lenders in the industry.
                                                                             always approach a court of law and play
                        • The so-called Joint Lenders’ Forums (JLFs)         spoilsport. Ultimately, by being unsecured
                          mandated that banks adopt measures for             creditors, they would not get their dues, but
                          early identification to tackle stressed loans,     they could certainly delay the process; the
                          which gave them a jumpstart, especially in         banks would then lose time, precious for the
                          large and complex cases of corporate debt,         revival of a company.

     8 PwC                                                                                                                   PwC’s Banking Insights

                        The revised framework
                        The RBI has issued various instructions aimed at the resolution of stressed assets in the economy, including the introduction of certain
                        schemes at different points of time. In view of the enactment of the IBC, it has been decided to substitute the existing guidelines with a
 Impact assessment      harmonised and simplified generic framework for the resolution of stressed assets.
of regulatory changes
   in February 2018
                        What’s in store for lenders under the revised framework?
                        • As per the Framework for Revitalising            • Further, banks would also have to                  revised clause eliminates chances of banks
                          Distressed Assets in the Economy –                 incorporate changes in their reporting             interpreting assets. Currently, while one
                          Guidelines on Joint Lenders’ Forum (JLF)           process to include the following:                  bank classified an account as stressed, or
 Other notifications
                          and Corrective Action Plan (CAP), banks                                                               NPA, others continued to show them as
 in February 2018                                                           -- The CRILC Main report will now
                          were required to identify incipient stress in                                                         standard. This required the RBI auditors to
                                                                               be sent monthly, as against the
                          the account by creating three sub-categories                                                          force show them as divergence in
                                                                               quarterly frequency.
                          under the Special Mention Account (SMA),                                                              NPA reporting.
                          before a loan turned into an NPA, as stated in    -- Banks will also need to submit a weekly
                                                                                                                               -- RPs framed by banks against defaulting
                          the table below:                                     report on all borrower entities in default
                                                                                                                                  entities shall be deemed to have been
      Contacts                                                                 with an exposure of 50 million INR and
                                                                                                                                  implemented only on satisfaction of
                            Sub-          Basis for classification –           above. The first such weekly report shall be
                                                                                                                                  conditions laid down by the RBI. This
                            categories    principal or interest payment        submitted for the week ending 23 February
                                          or any other amount wholly                                                              involves ensuring that the borrower is no
                                                                               2018. This will ensure early identification
                                          or partly overdue between                                                               longer in default. In case the RP involves
                                                                               and reporting of stressed assets by banks.
                                                                                                                                  restructuring, banks will also need to
                            SMA-0         1–30 days                        • Formation and implementation of resolution           ensure that all related documentation has
                                                                             plans (RPs) by lenders                               been completed by all lenders and the
                            SMA-1         31–60 days
                                                                            -- Under the revised framework, all lenders           new capital structure and/or terms and
                                                                               must put in place board-approved policies          conditions post-restructuring are duly
                            SMA-2         61–90 days                                                                              reflected in the books of accounts. Banks
                                                                               for the resolution of stressed assets,
                                                                               including the timelines for resolution. As         will need to disclose the implementation of
                         The revised framework, however, requires              soon as there is a default in the borrower         RPs in their notes to accounts.
                         banks to identify signs of incipient stress in        entity’s account with any lender, all lenders
                         loan accounts and classify stressed assets as         − singly or jointly − shall initiate steps
                         SMAs, immediately on default.                         to cure the default. This means that the

     9 PwC                                                                                                                                                PwC’s Banking Insights

                        -- In case of RPs involving restructuring,       ••If there is a default within the specified    ••Strategic Debt Restructuring
                           banks will need to engage with a CRA for        period, the lenders should file an              (SDR) Scheme
 Impact assessment         an independent credit evaluation of the         insolvency application.
of regulatory changes
                                                                                                                         ••Change in ownership outside SDR
                           residual debt. Additionally, where the
   in February 2018                                                      ••For accounts with exposure of 100 crore
                           exposure is 5 billion INR and above, banks                                                    ••Scheme for Sustainable Structuring of
                                                                           INR to 2,000 crore INR, a timeline for
                           will need to obtain 2 such independent                                                          Stressed Assets (S4A)
                                                                           resolution will be announced over a
                           credit evaluations (ICEs). Further, banks                                                     ••The JLF which was overseeing stressed
                                                                           two-year period.
                           need to ensure that RPs with a credit                                                           asset negotiations in the case of large
 Other notifications       opinion of RP4 or better only are taken up    ••These timelines will lead to speedy
                                                                                                                           consortium loans also stands disbanded.
 in February 2018          for implementation.                             recovery of the loan from the borrower.
                        -- The new framework puts down strict           -- The revised framework lays down
                           timelines over which insolvency                 additional requirements for upgrading
                           proceedings must be initiated. These            large accounts, post NPA classification.
                           timelines come into effect starting             Banks will need to ensure that, in
      Contacts             1 March 2018.                                   addition to demonstrating satisfactory
                                                                           performance, the credit facilities of the
                         ••For accounts with an exposure of 2,000
                                                                           borrowers shall also be rated as investment
                           crore INR or more, banks will have to
                                                                           grade (BBB or better) by CRAs at the end
                           ensure that a resolution plan is in place
                                                                           of the specified period.
                           within 180 days after a ‘default’.
                                                                        -- The new framework will subsume almost
                         ••If the resolution plan is not implemented
                                                                           all stressed asset schemes.
                           within 180 days, the account must be
                                                                           This includes:
                           referred to the IBC within 15 days.
                                                                         ••Corporate Debt Restructuring Scheme
                         ••For large accounts where a resolution
                           plan is being implemented, the account        ••Flexible structuring of existing long-term
                           should not be in default at any point           project loans
                           during the specified period.

     10 PwC                                                                                                                                      PwC’s Banking Insights

                        With the new framework in place, the RBI        The entire process should involve a high           Central Repository of Information on Large
                        aims at a harmonised and simplified generic     degree of transparency and precision. With         Credits (CRILC) reporting. Strengthening
 Impact assessment      mechanism for the resolution of stressed        the intensity of frauds and scams increasing       this would ensure early and accurate
of regulatory changes   assets. This framework has been introduced      in the banking sector, it is essential to ensure   identification of bad loans and NPAs and
   in February 2018     keeping in mind the regulator’s stance on       the accuracy and integrity of reporting.           subsequent remedial action by the RBI and
                        ensuring speedy resolution of bad loans in      There must be a strong audit framework             the government.
                        the future. A predominant theme of the new      in place to ensure that banks accurately
                                                                                                                           While bank books might get worse over the
                        framework is reliance on the IBC to resolve     report the required information to the RBI
                                                                                                                           next 12 months, in the long term, the new
 Other notifications    stressed assets while doing away with           as well as integrate regulatory submissions
                                                                                                                           NPA rules will ensure that the books reflect
 in February 2018       a number of interim schemes introduced          like risk-based supervision (RBS) and
                                                                                                                           the actual underlying asset quality.
                        before India adopted a bankruptcy
                        code in 2016.
                        In the long run, the new reforms will bring a
                        good structural change that can strengthen
      Contacts          the banking system in future. The new
                        rules will instil a sense of transparency and
                        more investor confidence in the financials
                        of banks and change the way banks do
                        business. There will be greater prudence
                        in lending. Cowboy lending, especially
                        towards larger projects where banks lack
                        the capacity to conduct proper appraisals,
                        could be on its way out. Chief financial
                        officers will read loan covenants more
                        carefully because the tolerance for defaults
                        is being lowered considerably. They will
                        need to ensure loan repayment terms are
                        more realistic.

     11 PwC                                                                                                                                           PwC’s Banking Insights

                        Small savings schemes – Payment of agency commission3
                        Circular reference:                                        Background and objective:
 Impact assessment
of regulatory changes   DGBA.GBD.No.1972/15.02.005/2017-18                         All public sector banks, ICICI Bank Ltd.,       Samriddhi Account Scheme, 2016, Public
   in February 2018     Dated 1 February 2018                                      Axis Bank Ltd. and HDFC Bank Ltd. were          Provident Fund Scheme, 1968, and Senior
                                                                                   authorised to receive subscriptions under       Citizen Savings Scheme Rules, 2004, etc.
                                                                                   four small savings schemes—namely,
                                                                                                                                   As a result of this, the RBI has decided to
                        Applicability:                                             National Saving Time Deposit Scheme,
                                                                                                                                   pay agency commission to the authorised
                                                                                   1981, National Saving (Monthly Income
 Other notifications    All Agency Banks handling Small                                                                            banks for handling the work relating to the
                                                                                   Account) Scheme, 1987, National Saving
 in February 2018       Saving Schemes                                                                                             additional four small saving schemes along
                                                                                   Recurring Deposit Scheme, 1981 and
                                                                                                                                   with the existing ones as per the extant
                                                                                   National Saving Certificates (VIII Issue)
                                                                                                                                   rates advised by the RBI Department of
                                                                                   Scheme, 1989, in addition to the existing
                                                                                                                                   Government and Bank Accounts circular.
                                                                                   small saving schemes such as the Sukanya

      Contacts          Extract from the regulation:
                        • Please refer to Government of India                      • In view of the above, it has been decided       Reserve Bank of India, Nagpur on a daily
                          Notification F. No. 7/10/2014-NS dated                     to pay agency commission to authorized          basis like the transactions of Public Provident
                          October 10, 2017, wherein, all Public Sector               banks for handling the work relating to the     Fund, 1968, in order to have uniformity in
                          Banks, ICICI Bank Ltd., Axis Bank Ltd., and                above four small saving schemes also as         reporting, reconciliation and accounting.
                          HDFC Bank Ltd., were authorized to receive                 per the extant rates advised by our Master
                                                                                                                                   • The Agency banks are required to observe
                          subscriptions under National Saving Time                   Circular RBI/2017-18/2 DGBA.GBD.
                                                                                                                                     the rules and regulations of the respective
                          Deposit Scheme, 1981, National Saving                      No.2/31.12.010/2017-18 dated July 1, 2017.
                                                                                                                                     scheme. Non-observance of rules and
                          (Monthly Income Account) Scheme, 1987,                     Agency banks are advised to expedite the
                                                                                                                                     regulations would attract penal action.
                          National Saving Recurring Deposit Scheme,                  implementation of the above schemes.
                                                                                                                                     Pecuniary liabilities, if any, arising from such
                          1981 and National Saving Certificates (VIII
                                                                                   • All the transactions i.e. receipt, payment,     non-observance shall be borne entirely by
                          Issue) Scheme, 1989 in addition to the
                                                                                     penalty, interest, etc. may be directly         the bank.
                          existing small saving schemes.
                                                                                     reported to the Central Account Section,


     12 PwC                                                                                                                                                      PwC’s Banking Insights

                        Impact assessment
                        • All the authorised banks have to report all          non-core banking solution branches.
                          their transactions—that is, receipt, payment,
 Impact assessment                                                           • Every bank shall also submit periodic
of regulatory changes     penalty, interest, etc. to the Central Account
                                                                               reports to the Central Government
   in February 2018       Section, RBI, Nagpur.
                                                                               concerning the deposits of subscription and
                        • The bank has to ensure that it has a                 withdrawals etc. under the said scheme. In
                          dedicated software for the operation and             case of any pecuniary liability arising from
                          accounting of small savings schemes with             the non-observance of reporting under the
 Other notifications      specific functionalities for each scheme.            schemes, it is to be entirely borne by the
 in February 2018                                                              respective bank.
                        • All banks shall ensure that remittances are
                          credited to the government account of the          • Also, all banks are entitled to receive
                          RBI, Central Accounts Section, Nagpur,               agency commission as per the following
                          within one day in case of core banking               rates based on their reports submitted to
                          solution branches and three days in case of          the RBI: Rates for agency commission
                        Sr. no.   Type of transaction            Unit                          Revised rate
                        a.        (i) Receipts - Physical mode   Per transaction               ₹ 50/-
                                  (ii) Receipts - e-mode         Per transaction               ₹ 12/-
                        b.        Pension payments               Per transaction               ₹ 65/-
                        c.        Payments other than pension    Per ₹100 turnover             5.5 paise

     13 PwC                                                                                                                   PwC’s Banking Insights

                        Relief for MSME Borrowers registered under Goods and Services Tax (GST)4
                        Circular reference:                                        Extract from the regulation:                       borrower does not exceed INR 250 million as
 Impact assessment                                                                                                                    on January 31, 2018.
of regulatory changes   RBI/2017-18/129 DBR.No.BP.                                 It has been represented to us that
   in February 2018     BC.100/21.04.048/2017-18                                   formalisation of business through                • The borrower’s account was standard as on
                        Dated 7 February 2018                                      registration under GST had adversely               August 31, 2017.
                                                                                   impacted the cash flows of the smaller           • The amount from the borrower overdue as
                        Applicability:                                             entities during the transition phase with          on September 1, 2017 and payments from
                                                                                   consequent difficulties in meeting their           the borrower due between September 1,
 Other notifications    All banks and NBFCs regulated by the                       repayment obligations to banks and
 in February 2018       Reserve Bank of India                                                                                         2017 and January 31, 2018 are paid not later
                                                                                   NBFCs. As a measure of support to these            than 180 days from their respective original
                                                                                   entities in their transition to a formalised       due dates.
                        Background and objective:                                  business environment, it has been decided
                                                                                   that the exposure of banks and NBFCs to          • A provision of 5% shall be made by the
                        The government’s move to GST created                                                                          banks/ NBFCs against the exposures not
                        upheaval among unorganised and small                       a borrower classified as micro, small and
      Contacts                                                                     medium enterprise under the Micro, Small           classified as NPA in terms of this circular. The
                        business entities to the extent that the                                                                      provision in respect of the account may be
                        entities started facing severe liquidity                   and Medium Enterprises Development
                                                                                   (MSMED) Act, 2006, shall continue to be            reversed as and when no amount is overdue
                        crunch. Consequently, the quality of the                                                                      beyond the 90/120 day norm, as the case
                        loans extended by the banks or NBFCs to                    classified as a standard asset in the books of
                                                                                   banks and NBFCs subject to the                     may be.
                        these MSME borrowers also deteriorated,
                        thereby creating pressure to qualify assets as             following conditions:                            • The additional time is being provided for the
                        non-performing. However, in line with the                  • The borrower is registered under the GST         purpose of asset classification only and not
                        government’s intention to support MSMEs,                     regime as on January 31, 2018.                   for income recognition, i.e., if the interest
                        the RBI has rolled out some relief in the                                                                     from the borrower is overdue for more
                                                                                   • The aggregate exposure, including non-fund       than 90/120 days, the same shall not be
                        non-performing asset (NPA) classification
                                                                                     based facilities, of banks and NBFCs, to the     recognised on accrual basis.
                        for MSME borrowers.


     14 PwC                                                                                                                                                       PwC’s Banking Insights

                        Impact assessment
 Impact assessment
of regulatory changes   Consequent to the regulation, the banks          • Despite the relief in NPA classification, the
   in February 2018     need not classify overdues from the entities       regulator has continued its prudent stance
                        classified as MSME, subject to the fulfilment      by mandating banks/NBFCs to create
                        of certain conditions:                             provision of 5% for assets which fall into
                                                                           such a category. Also, there is no change in
                        • The relief can only be passed on to the
                                                                           the income recognition for NPAs—that is, if
 Other notifications      borrowers who hold a valid registration
                                                                           the account is overdue for more than 90/120
 in February 2018         under GST, as on 31 January 2018.
                                                                           days, income shall be recognised on a cash
                        • The lenders shall continue to classify the       basis only, even though the loan account
                          assets as standard, despite the fact that        continues to be standard.
                          the advance has been overdue for a period
                          more than 90/120 days from the due date.
      Contacts            However, the lender should ensure that the
                          loan was standard as on 31 August 2017.
                        • Payments due between 1 September 2017
                          and 31 January 2018 need to be repaid
                          by the borrower within 180 days from the
                          due date. The benefit of not classifying the
                          account as an NPA shall not be applicable if
                          dues are not paid within 180 days from the
                          due date.

     15 PwC                                                                                                                PwC’s Banking Insights

                        Levy of Penal Interest – Delayed Reporting5
                        Circular reference:                                        Extract from the regulation:
 Impact assessment
of regulatory changes   RBI/2017-18/130 DCM (CC) No.                               • Presently, penal interest is levied for all cases
   in February 2018     2885/03.35.01/2017-18                                        where the bank has enjoyed “ineligible”
                        Dated 9 February 2018                                        credit in its current account with the RBI on
                                                                                     account of wrong/delayed/non-reporting
                        Applicability:                                               of transactions i.e. the currency chest had
                                                                                     reported a net deposit. However, instances of
 Other notifications    All Banks having currency chests and                         delayed reporting where the currency chest
 in February 2018       Director Treasuries (State Governments)                      had “net deposit” i.e. the currency chest did
                                                                                     not enjoy RBI funds, are being dealt with
                        Background and objective:                                    differently by issue offices due to absence of
                        With the objective of making good quality                    clear instructions on the subject.
                        currency notes and coins available to                      • On a review, it has been decided that, penal
                        citizens and withdrawing soiled notes from                   interest at the prevailing rate for delayed
                        circulation, the RBI formulated a Clean                      reporting of the instances where the
                        Note Policy.                                                 currency chest had reported “net deposit”
                        For realising the objectives of the Clean                    may not be charged. However, in order
                        Note Policy and ensuring discipline among                    to ensure proper discipline in reporting
                        banks on timely and accurate reporting of                    currency chest transactions, a flat penalty
                        currency chest transactions, the RBI has                     of ₹ 50,000 may be levied on the currency
                        issued guidelines/instructions on the levy                   chests for delayed reporting as in the case of
                        of penal interest for delayed reporting/                     wrong reporting of soiled note remittances to
                        wrong reporting/non-reporting of currency                    RBI/diversions shown as “Withdrawal” (para
                        chest transactions and inclusion of ineligible               1.5 of the Master Direction).
                        amounts in currency chest balances.                        • Other instructions contained in the Master
                        These guidelines are updated from time to                    Direction remain unchanged.
                        time and as and when fresh instructions
                        are issued.


     16 PwC                                                                                                                              PwC’s Banking Insights

                        Impact assessment
 Impact assessment
of regulatory changes   • As per RBI’s notification - RBI/2017-18/130    irrespective of the value of remittance and        -- The sub-treasury offices (STOs) should
   in February 2018       DCM (CC) No. 2885/03.35.01/2017-18             period of such delayed reporting.                     report all transactions directly to the issue
                          dated 9 February 2018, banks having                                                                  office of the RBI by 11 PM on the same day.
                                                                        • Banks having currency chests will continue
                          currency chests will no longer have to pay
                                                                          to adhere to the following timelines for         • All the other instructions contained in the
                          penal interest at the rate of 2% over the
                                                                          reporting their currency chest transactions:       RBI’s Master Direction on the Levy of Penal
                          prevailing bank rate for the period of
 Other notifications                                                                                                         Interest for Delayed Reporting/Wrong
                          delayed reporting of ineligible amounts in     -- All currency chest transactions shall be
 in February 2018                                                                                                            Reporting/Non-Reporting of Currency Chest
                          chest balances.                                   invariably reported through Integrated
                                                                                                                             Transactions and Inclusion of Ineligible
                          However, they will continue to report             Computerised Currency Operations and
                                                                                                                             Amounts in Currency Chest Balances will
                          all currency chest transactions as per            Management System (ICCOMS) on the
                                                                                                                             remain unchanged.
                          the timelines defined by the RBI in its           same day by 9 PM by uploading data
                          Master Direction, RBI/DCM/2017-                   through secured website (SWs) to their         • The banks will have to make operational
      Contacts            18/59 Master Direction DCM (CC) No.               respective link offices. Link offices should     changes in light of this revision. The changes
                          G - 2/03.35.01/2017-18, failing which             invariably report the consolidated position      will include keeping a record of penalties
                          they will attract a penalty of 50,000 INR         to the issue offices latest by 11 PM on the      with respect to any delayed reporting after
                                                                            same day.                                        9 February 2018.

     17 PwC                                                                                                                                             PwC’s Banking Insights

                        Risk Management and Inter-bank Dealings: Revised guidelines relating to
                        participation of a person resident in India and Foreign Portfolio Investor (FPI) in the
 Impact assessment
of regulatory changes
                        Exchange Traded Currency Derivatives (ETCD) Market6
   in February 2018
                        Circular reference:                                        Extract from the regulation:
                        RBI/2017-18/134 A. P. (DIR Series)                         • Currently, persons resident in India and       • The onus of complying with the provisions
                        Circular No. 18                                              FPIs are allowed to take a long (bought) or      of this circular rests with the participant
 Other notifications    Dated 26 February 2018                                       short (sold) position in USD-INR up to USD       in the ETCD market and in case of any
 in February 2018                                                                    15 million per exchange without having to        contravention the participant shall be
                        Applicability:                                               establish existence of underlying exposure.      liable to any action that may be warranted
                                                                                     In addition, residents & FPIs are allowed        as per the provisions of Foreign Exchange
                        All Category-I Authorised Dealer Banks                       to take long or short positions in EUR-INR,      Management Act, 1999 and the regulations,
                                                                                     GBP-INR and JPY-INR pairs, all put together,     directions, etc. issued thereunder. These
                        Background and objective:                                    up to USD 5 million equivalent per exchange      limits shall also be monitored by the
                        Persons resident in India and foreign                        without having to establish existence of any     exchanges, and breaches, if any, may be
                        portfolio investors (FPIs) are permitted                     underlying exposure.                             reported to the Reserve Bank of India.
                        to take positions (long and short) up to a                 • It has now been decided to permit persons      • All other operational guidelines, terms and
                        certain limit with defined thresholds for                    resident in India and FPIs to take positions     conditions shall remain unchanged.
                        each currency pair (USD-INR, GBP-INR)                        (long or short), without having to establish
                                                                                                                                    • This circular has been issued under Sections
                        per exchange. However, the limits have now                   existence of underlying exposure, up to a
                                                                                                                                      10(4) and 11(1) of the Foreign Exchange
                        been revised in terms of value and the limits                single limit of USD 100 million equivalent
                                                                                                                                      Management Act, 1999 (42 of 1999) and is
                        per exchange have been revised for                           across all currency pairs involving INR, put
                                                                                                                                      without prejudice to permissions/approvals,
                        all exchanges.                                               together, and combined across all exchanges.
                                                                                                                                      if any, required under any other law.


     18 PwC                                                                                                                                                     PwC’s Banking Insights

 Impact assessment
of regulatory changes
   in February 2018
                        Impact assessment
                        • Persons resident in India and FPIs can now     • If the participants contravene with the
                          take long (bought) or short (sold) positions     provisions of this circular, they shall be liable
 Other notifications      without having to establish the existence        to any action that may be warranted as
 in February 2018         of underlying exposure, up to a single limit     per the provisions of the Foreign Exchange
                          of 100 million USD equivalent across all         Management Act, 1999, and the regulations,
                          currency pairs—that is, USD-INR, EUR-INR,        directions, etc. issued thereunder.
                          GBP-INR and JPY-INR combined across all
                                                                         • It is expected that after the revision of the
                                                                           currency derivatives trading limit, the Indian
      Contacts          • The participants of the ETCD market,             market will receive a boost. This move made
                          including all category-I authorised dealer       by the RBI will make investing in stock
                          banks shall transact in accordance with          exchanges more attractive compared to other
                          and ensure compliance with the revised           exchanges (Singapore and Dubai) which
                          guidelines under this notification.              offer lower tax rates. The Indian market
                                                                           will also have an advantage of getting more
                        • The exchanges will monitor these limits and
                                                                           volumes in the derivatives segment as a
                          report any breaches to the RBI.
                                                                           result of the positive news.

     19 PwC                                                                                                                    PwC’s Banking Insights
Other notifications in February 2018
                        Circular ref. no.
                        Dated 15 February 2018 7
 Impact assessment
of regulatory changes
   in February 2018     Name of the circular
                        Acceptance of coins

                        Brief instructions
 Other notifications
                        ••Banks to issue a direction to all its branches
 in February 2018
                          to accept coins of all denominations tendered
                          at their counters either for exchange or for
                          deposit in accounts.
                        ••Banks to arrange for polythene bags where
                          such denominations may be kept and a
                          notice to this effect should be displayed
                          suitably inside as also on the outside of the
                          branch premises for the information of
                          the public.
                        ••Banks should modify their existing policies
                          and procedures around the currency chest
                          procedure to also allow coins to be remitted
                          as part of the process.


     20 PwC                                                                                        PwC’s Banking Insights

                                       Vivek Iyer                                                Dnyanesh Pandit
 Impact assessment
of regulatory changes                  Partner                                                   Director
   in February 2018                                        
                                       Mobile: +91 9167745318                                    Mobile: +91 9819446928

 Other notifications
 in February 2018
                                       Vernon Dcosta                                             Rajeev Khare
                                       Director                                                  Manager
                                       Mobile: +91 9920651117                                    Mobile: +91 9702942146

                                       Dhruv Khandelwal                                          Sharon Mathias
                                       Assistant Manager                                         Experienced Consultant
                                       Mobile: +91 9820589399                                    Mobile: +91 9870170625

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     21 PwC                                                                                                                                 PwC’s Banking Insights
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