Update – 1 RBI has put forth a plan to streamline the authorization process for money changers
The Reserve Bank of India (RBI) has introduced draft norms to streamline the authorization process for money changers, considering the widespread accessibility of banking services and the need to explore alternative models for foreign exchange-related services. The current authorization framework under the Foreign Exchange Management Act (FEMA), last reviewed in March 2006, is under scrutiny by the RBI to enhance the ease of foreign exchange transactions while fortifying regulatory oversight over authorized persons (APs). The proposed norms take into account the expanded reach of financial services due to financial inclusion initiatives, the growing integration of the Indian economy with the global one, digitization of payment systems, and evolving institutional structures over the past two decades.
Feedback on the draft norms is open for submission until January 31, 2024. The proposed changes include the introduction of a new category of money changers, operating through an agency model as forex correspondents (FxCs) of category-I and category-II authorized dealers. These entities will not require separate authorization from the RBI. In a bid to reduce regulatory burdens and improve the ease of conducting business, the RBI suggests the perpetual renewal of existing authorizations as AD category-II.
Authorized dealers category-II can issue forex prepaid cards to residents traveling abroad for private or business visits, subject to KYC/AML/CFT requirements. Settlement for forex prepaid cards is to be done through AD Category-I banks. The draft also allows existing full-fledged money changers (FFMCs) to seek an upgrade of authorization to AD Category-II. Additionally, AD Category-II entities can now facilitate trade-related transactions up to a value of Rs 15 lakh per transaction.
To expand the reach of foreign exchange services, the proposed forex correspondent scheme adopts a principal-agency model. Under this model, AD category-I or AD Category-II will act as the principal for FxCs. FxCs, acting as agents for the principal AD, will not require separate RBI authorization under FEMA rules. Transactions conducted by FxCs on behalf of the AD will be reflected in the books of the principal AD. Eligible entities to function as FxCs include companies defined under the Companies Act 2013, NBFCs, banks, and existing FFMCs or AD category-IIs upon surrender or after the expiry of their authorization. The draft aims to enhance the efficiency and accessibility of foreign exchange services through these proposed changes.
Update – 2 RBI grants an additional three months to banks and NBFCs to implement revised norms on penal charges in loan accounts.
The Reserve Bank granted an extension of three months, until April 1, 2024, for banks and NBFCs to implement modified norms regarding penal charges in loan accounts, as part of fair lending practices. In August, the central bank issued a circular on ‘Fair Lending Practice – Penal Charges in Loan Accounts,’ originally set to be effective from January 1, 2024.
The RBI stated that due to requests for clarifications and additional time from some regulated entities (REs) to reconfigure their internal systems in compliance with the circular, the timeline for implementation has been extended by three months. Regulated entities, including banks and NBFCs, are now instructed to ensure implementation of these norms for all fresh loans availed from April 1, 2024, onward.
For existing loans, the RBI emphasized that the transition to the new penal charges regime should occur on the next review/renewal date falling on or after April 1, 2024, but no later than June 30, 2024. Expressing concern over the use of penal interest by banks and NBFCs as a revenue enhancement tool, the Reserve Bank, on August 18, revised norms allowing lenders to levy only “reasonable” penal charges in the event of loan repayment default.
Starting from January 1, 2024, banks and lending institutions are prohibited from levying penal interest. The August circular clarified that penalties for non-compliance with material terms and conditions of the loan contract by the borrower should be treated as ‘penal charges’ and not added as ‘penal interest’ to the interest rate on advances.
It further stipulated that the quantum of penal charges should be reasonable and proportionate to the noncompliance without discrimination within a specific loan/product category. Importantly, there should be no capitalization of penal charges, meaning no additional interest computed on such charges.
These instructions do not extend to credit cards, external commercial borrowings, trade credits, and structured obligations, as these are covered under product-specific directions.
Conclusion
The Reserve Bank of India (RBI) is steering financial transformations on two fronts, introducing draft norms to modernize the authorization process for money changers and extending the implementation timeline for fair lending practices. The proposed changes in money changer authorization seek to enhance efficiency, accessibility, and ease of doing business in foreign exchange transactions. Simultaneously, the extension granted for implementing revised penal charge norms aligns with the RBI’s commitment to fostering fair lending practices, ensuring that banks and NBFCs adhere to reasonable penal charges, benefiting borrowers and promoting financial prudence. These dual initiatives underscore the RBI’s proactive approach in adapting to evolving financial landscapes and prioritizing both regulatory advancements and consumer protection.
