[Key Highlights] RBI’s Statement on Developmental and Regulatory Policies

What are RBI’s Developmental and Regulatory Policies?

The Reserve Bank of India (RBI)'s Statement on Developmental and Regulatory Policies is a comprehensive document that outlines various proposals and changes intended to guide and enhance the development and regulation of India's financial sector. These statements are typically released alongside the RBI's monetary policy decisions and provide detailed insights into the planned initiatives across different aspects of the financial ecosystem.

The focus areas often include:

– Financial Markets: This section might detail measures aimed at improving the functioning, liquidity, and stability of financial markets, including the government securities market, forex markets, and derivatives markets

– Banking Regulation: Proposals under this category could aim at enhancing the regulatory and supervisory framework for banks and non-banking financial companies (NBFCs), addressing issues related to governance, risk management, and capital adequacy standards

– Payment and Settlement Systems: Here, the RBI may introduce initiatives to promote the efficiency, security, and inclusiveness of payment and settlement systems, which could involve innovations in digital payments, FinTech developments, and improvements in payment infrastructure

– Credit Delivery and Financial Inclusion: This part might focus on measures to improve credit delivery to various sectors of the economy, enhance financial inclusion, and provide easier access to banking services for the underbanked and unbanked populations

– Consumer Protection: Proposals could also be aimed at strengthening the framework for consumer protection in the banking and financial sectors, addressing issues related to customer service, grievance redressal mechanisms, and transparency

– Other Developmental Measures: Depending on the current economic conditions and strategic priorities, the RBI might introduce other targeted measures aimed at addressing specific areas of concern or opportunity within the financial system

Each statement reflects the RBI's ongoing assessment of the Indian economy, its financial stability, and its development needs. The policies and measures proposed are aimed at promoting economic growth, ensuring financial stability, enhancing the operational efficiency of financial markets, and fostering innovation and inclusiveness in the financial sector.

Table of Contents

Introduction

1. RBI Proposes to Allow Eligible Foreign Investors in IFSC to Invest in ‘Sovereign Green Bonds’
2. Introduction of a Mobile Application for ‘Retail Direct Scheme’
3. Proposal to Modify Liquidity Coverage Ratio (LCR) Framework for Better Liquidity Risk Management
4. Small Finance Banks to be Allowed to Deal in ‘Permissible Rupee Interest Rate Derivative Products’
5. Facilitating Cash Deposit Facility Through Use of Unified Payments Interface (UPI)
6. Permit Linking of Prepaid Payment Instruments (PPIs) via Third-Party Applications
7. Allowing Distribution of CBDCs Through Non-bank Payment System Operators

Introduction

RBI vide. Press Release no. 2024-2025/43, dated April 5, 2024, has released a Statement on various developmental and regulatory policies relating to:

1. Financial Markets;
2. Regulation;
3. Payment Systems and FinTech.

The proposals aim to promote stability and sustainability in the financial ecosystem. Some of the key proposals include

• allowing eligible foreign investors in IFSC to invest in ‘Sovereign Green Bonds’,
• the introduction of a mobile application for the Retail Direct Scheme, and
• proposing modifications in the Liquidity Coverage Ratio (LCR) framework for better liquidity risk management.

The key proposals as laid down in the Statement on Developmental and Regulatory Policies are discussed in detail hereunder:

1. RBI Proposes to Allow Eligible Foreign Investors in IFSC to Invest in ‘Sovereign Green Bonds’

Presently, foreign portfolio investors (FPIs) registered with SEBI are permitted to invest in Sovereign Green Bonds (SGrBs) under the different investment routes available for FPIs in government securities. To facilitate wider non-resident participation in SGrBs, RBI has decided to permit eligible foreign investors in the International Financial Services Centre (IFSC) to also invest in such bonds.

Further, a scheme for investment and trading in SGrBs by eligible foreign investors in IFSC is being notified separately in consultation with the Government and the IFSC Authority.

Comments
This move not only aims to boost non-resident participation in Sovereign Green Bonds but also signifies India’s commitment to fostering environmentally sustainable projects. By making these bonds more accessible, India is helping to drive investment in green initiatives, paving the way for a cleaner and greener future.

2. Introduction of a Mobile Application for ‘Retail Direct Scheme’

RBI Retail Direct Scheme, launched in November 2021, provides access to individual investors to maintain gilt accounts with RBI and invest in government securities. The scheme enables investors to buy securities in primary auctions as well as buy/sell securities through the NDS-OM platform. To further enhance accessibility, RBI has proposed developing a mobile application for the Retail Direct portal.

Further, the application will enable investors to buy and sell instruments on the go at their convenience. The application will be available for use shortly.

Comments
RBI’s proposal to develop a mobile app for the Retail Direct Scheme would enhance accessibility and convenience for individual investors. This initiative aims to streamline investment processes, allowing investors to manage gilt accounts with ease. Further, the app will enable investors to buy and sell instruments on the go, fostering greater flexibility in the financial markets.

3. Proposal to Modify Liquidity Coverage Ratio (LCR) Framework for Better Liquidity Risk Management

Banks covered under the Liquidity Coverage Ratio (LCR) framework are required to maintain a stock of high-quality liquid assets (HQLA) to cover expected net cash outflows in the next 30 calendar days.

However, recent episodes in some jurisdictions have demonstrated the increased ability of depositors to withdraw quickly or transfer deposits during times of stress, using digital banking channels. These emerging risks may require a revision of certain assumptions under the LCR framework.

As a result, the RBI has proposed certain modifications to the LCR framework aimed at facilitating better management of liquidity risk by banks. A draft circular in this regard shall be issued shortly for comments from all the stakeholders.

Comments
The RBI’s proposed modifications to the LCR framework reflect its commitment to ensuring the stability and soundness of the banking sector. By inviting comments from all stakeholders, the RBI underscores its dedication to effective liquidity risk management, safeguarding the interests of all stakeholders.

4. Small Finance Banks to be Allowed to Deal in ‘Permissible Rupee Interest Rate Derivative Products’

The extant guidelines permit Small Finance Banks (SFBs) to use only Interest Rate Futures (IRFs) for proprietary hedging. In order to expand the options available to SFBs for effectively hedging interest rate risks in their balance sheet and commercial operations as well as to provide them with greater flexibility, the RBI has decided to allow them to deal in permissible rupee interest derivative products as outlined in the Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019.

Comments
The RBI’s move to permit Small Finance Banks (SFBs) to deal in permissible rupee interest derivative products not only provides them with greater flexibility in managing interest rate risks but also aligns with efforts to enhance their risk management capabilities.

5. Facilitating Cash Deposit Facility Through Use of Unified Payments Interface (UPI)

Cash Deposit Machines (CDMs) deployed by banks enhance customer convenience while reducing the cash-handling load on bank branches. Presently, the facility of cash deposit is only available through the use of debit cards.

Recognising the popularity and acceptance of UPI, along with the benefits observed from the availability of UPI for cardless cash withdrawals at ATMs, the RBI has now proposed to facilitate a cash deposit facility through the use of UPI. Further, operational instructions will be issued shortly.

Comments
This initiative marks a significant step towards enhancing customer convenience and reducing reliance on traditional debit-card-based transactions. This move is expected to streamline cash transactions, offering greater flexibility and efficiency in the banking landscape.

6. Permit Linking of Prepaid Payment Instruments (PPIs) via Third-Party Applications

Presently, UPI payments from bank accounts can be made by linking a bank account through the UPI app of the bank or using any third-party UPI application. However, the same facility is not available for Prepaid Payment Instruments (PPIs). Currently, PPIs can be used to make UPI transactions only by using the application provided by the PPI issuer.

To provide more flexibility to PPI holders, the RBI has now proposed to permit the linking of PPIs via third-party UPI applications. This would enable PPI holders to make UPI payments like bank account holders. Further, instructions in this regard will be issued shortly.

Comments
The RBI’s proposal to allow the linking of PPIs via third-party applications marks a significant move towards enhancing flexibility for PPI holders. By extending this capability, PPI holders will gain access to a wider range of UPI applications, similar to bank account holders, thus streamlining the payment process.

7. Allowing Distribution of CBDCs Through Non-bank Payment System Operators

The RBI, in an effort to expand the usage of Central Bank Digital Currency (CBDC), has proposed to allow the distribution of CBDCs through Non-bank Payment System Operators.

CBDC pilots in both Retail and Wholesale segments are currently underway, with more use cases and participating banks. Continuing with this initiative, the RBI has proposed making CBDC Retail accessible to a broader segment of users in a sustained
manner by enabling non-bank payment system operators to offer CBDC wallets.

This move is expected to improve access and provide users with more choices, while also testing the resilience of the CBDC platform to handle multi-channel transactions. The necessary changes will be made to the system to facilitate this.

Comments
This move aims to broaden the usage and accessibility of Central Bank Digital Currency (CBDC). By enabling CBDC wallets through Non-bank Payment System Operators, this initiative seeks to offer users more choices and improve access to digital currency. Further, this approach not only expands the reach of digital currency but also fosters innovation in the payment ecosystem.