RBI to Introduce Key Fact Statement (KFS) for Retail and MSME Loans & Advances

Press Release: 2023-2024/1827, Dated 08.02.2024

The Reserve Bank of India has released a Statement on Developmental and Regulatory Policies. The Statement sets out various developmental and regulatory policy measures relating to Financial Markets, Regulations, and Payment Systems & Fintech.

The key highlights of the Statement on Developmental and Regulatory Policies include:

1. Review of Regulatory Framework for Electronic Trading Platforms

In October 2018, the Reserve Bank implemented a regulatory framework concerning electronic trading platforms (ETPs) facilitating transactions in financial instruments under its jurisdiction. This framework was designed to promote fair access, transparency, safety, and efficiency within trading processes while establishing robust infrastructures and preventing market abuse.

In recent years, there’s been greater integration of onshore and offshore forex markets, tech advancements, and more product diversity. Market makers have also requested to access offshore ETPs offering permitted Indian Rupee (INR) products. Responding to these trends, the RBI reviewed the regulatory framework for ETPs. The revised regulatory framework will be issued separately for public feedback.

Comments:

This move highlights the Reserve Bank’s commitment to adapt to evolving market dynamics and ensure effective oversight in the financial sector.

2. Expansion of Gold Price Risk Hedging Options for Resident Entities

In December 2022, resident entities were granted the ability to hedge their exposures to gold price risk efficiently by accessing recognized exchanges in the International Financial Services Centre (IFSC). Building upon this, the RBI has been decided to extend this flexibility by allowing resident entities to hedge the price of gold in the over-the-counter (OTC) segment within the IFSC. Detailed instructions regarding this update will be issued separately.

Comments:

This expansion will offer resident entities increased flexibility and simplified access to derivative products for hedging their exposure to gold prices. This move aims to provide residents with increased flexibility and efficiency in managing their exposure to gold price fluctuations.

3. Enhanced Transparency in Loan Pricing: Key Fact Statement Requirement Expanded

The Reserve Bank has recently introduced measures to enhance transparency and disclosure practices among regulated entities (REs) regarding loan pricing and associated charges.

One such measure involves the provision of a Key Fact Statement (KFS) to borrowers. KFS ensures clear and concise communication of essential loan details, including the total cost of borrowing. Initially, the KFS was specifically mandated regarding loans by scheduled commercial banks to individual borrowers; digital lending by REs; and microfinance loans. The requirement for KFS will now extend to all REs offering retail and MSME loans.

Comments:

This move is expected to empower borrowers with vital information, facilitating informed decision-making when engaging with lenders. This will ensure that borrowers can make informed decisions by understanding the total cost of borrowing upfront, ultimately promoting responsible lending practices and empowering consumers in the financial decision-making process.

4. Proposed Measures to Enhance Security in Aadhaar Enabled Payment System

Aadhaar Enabled Payment System (AePS), operated by NPCI, facilitated over 37 crore transactions in 2023, showcasing its crucial role in financial inclusion. To bolster security, the RBI has proposed to streamline the onboarding process, including mandatory due diligence, for AePS touchpoint operators, to be followed by banks. Additional fraud risk management requirements will also be considered.

Comments:

By implementing mandatory due diligence and potentially introducing additional fraud risk management requirements, the RBI aims to fortify the system against potential vulnerabilities. These actions will build confidence in AePS transactions, ensuring greater reliability and security for users.

5. Proposal of a new Framework for Secure Digital Payments Authentication

The Reserve Bank has consistently emphasized the necessity of Additional Factor of Authentication (AFA). While the RBI hasn’t mandated a specific AFA method, the payments landscape has predominantly relied on SMS-based One Time Passwords (OTPs).

However, with advancements in technology, alternative authentication methods have surfaced. To promote the adoption of these innovative security measures in digital transactions, the RBI proposed a principle-based “Framework for authentication of digital payment transactions”. Detailed instructions on this framework will follow separately.

Comments:

By encouraging the adoption of innovative authentication methods beyond traditional SMS-based OTPs, this framework aims to enhance the overall security posture of digital transactions. This initiative not only demonstrates the RBI’s commitment to keeping pace with technological advancements but also underscores its dedication to protecting consumer interests in the ever-changing digital payment landscape.

6. Proposal to Expand CBDC-R Pilot Features for Enhanced Accessibility

The CBDC Retail (CBDC-R) pilot currently facilitates Person to Person (P2P) and Person to Merchant (P2M) transactions using Digital Rupee wallets offered by pilot banks. Now, the RBI has proposed to enable additional use cases using programmability and offline functionality. Programmability will permit users like, for instance, government agencies to ensure that payments are made for defined benefits.

Similarly, corporates will be able to program specified expenditures like business travel for their employees. Additional features like validity periods or geographical areas within which CDBC may be used can also be programmed. Second, it is proposed to introduce an offline functionality in CBDC-R for enabling transactions.

Additionally, an offline functionality will be introduced to facilitate transactions in areas with limited internet connectivity. Various offline solutions, including proximity and non-proximity-based options, will be tested across different geographical locations. These functionalities will be gradually introduced through the pilot programs.

Comments:

By introducing programmability, entities like government agencies and corporations can streamline payment processes and ensure targeted spending. Moreover, the introduction of offline functionality addresses the challenges posed by limited internet connectivity in certain areas, thus expanding the reach of digital transactions.

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