Financial Markets

 The  introduction of  Securities lending and borrowing in government securities, which refers to a process where investors temporarily transfer securities to another investor in exchange for a fee or collateral. This process can help to add depth and liquidity to the market by allowing investors to borrow securities that they need for short periods of time, which can aid in efficient price discovery.

The proposal is expected to augment the existing market for ‘special repos’, which refers to a type of repurchase agreement where securities are sold and repurchased at a future date. This new system is expected to facilitate wider participation in the securities lending market, providing investors with an avenue to deploy idle securities and enhance portfolio returns.

The Reserve Bank of India, which is responsible for regulating financial markets in India, plans to issue draft directions separately for stakeholder comments. These draft directions will provide detailed guidelines for how the securities lending and borrowing system will operate and how investors can participate in the market. Overall, the proposal is intended to improve the efficiency and liquidity of the government securities market in India.

Recovery of Penal Charges on Loans

The Reserve Bank of India (RBI) has reviewed the guidelines on the levy of penal interest on loan defaults by Regulated Entities (REs). REs are entities that are regulated by the RBI, such as banks and other financial institutions. The RBI has observed divergent practices among REs regarding the levy of penal interest, which can sometimes be excessive and lead to customer grievances and disputes.

To address this issue, the RBI has decided that any penalty for delay or default in servicing loans or any other non-compliance of material terms and conditions of loan contracts by borrowers shall be in the form of ‘penal charges’ and not be added to the rate of interest being charged on the advances. The aim is to ensure that such charges are levied in a reasonable and transparent manner and are not used as a revenue enhancement tool by REs.

The RBI will issue draft guidelines for public comments on this matter, and the guidelines will apply to all REs under RBI regulation. If any borrower’s credit risk profile deteriorates, REs will be allowed to alter the credit risk premium under the existing guidelines on interest rates. However, the RBI has clarified that there shall be no capitalisation of penal charges, i.e., the same shall be recovered separately and shall not be added to the principal outstanding.

Regulatory Initiatives on Climate Risk and Sustainable Finance

The RBI recognizes that climate change can have financial stability implications and can create climate-related financial risks for REs.

To address these risks, the RBI has placed a Discussion Paper on Climate Risk and Sustainable Finance on its website for public comments and feedback. Based on the feedback received, the RBI has decided to issue guidelines for REs on a broad framework for accepting Green Deposits, a disclosure framework on climate-related financial risks, and guidance on climate scenario analysis and stress testing.

The guidelines will be issued in a phased manner, and the RBI will have a dedicated webpage on its website that will consolidate all instructions, press releases, publications, speeches, and related communication on climate risk and sustainable finance. The aim is to ensure that REs can effectively manage climate risks and contribute to sustainable finance in India.

The Reserve Bank of India (RBI) has announced several regulatory and policy initiatives to enhance financial market infrastructure and services in its latest monetary policy statement. In the section on financial markets, the RBI stated that it plans to introduce securities lending and borrowing for government securities to add depth and liquidity to the market. The RBI will also issue draft guidelines for stakeholder comments on the recovery of penal charges on loans.

In terms of climate risk and sustainable finance, the RBI will issue guidelines in a phased manner for regulated entities, including a framework for acceptance of green deposits, a disclosure framework on climate-related financial risks, and guidance on climate scenario analysis and stress testing.

The RBI also announced the expansion of the Trade Receivables Discounting System (TReDS), which facilitates the financing of trade receivables for micro, small, and medium-sized enterprises (MSMEs). The proposed measures include permitting insurance companies to participate as a fourth participant on TReDS, allowing all entities eligible to undertake factoring business to participate as financiers, and enabling secondary market operations on TReDS platforms.

Finally, the RBI announced an enhancement to the Unified Payments Interface (UPI) to allow all inbound travellers to India to access UPI for merchant payments while in the country. This facility will be initially extended to travellers from G-20 countries arriving at select international airports, with plans to enable the facility across all entry points in the country.

Currency Management

The Reserve Bank of India (RBI) is collaborating with leading banks to launch a pilot project on a QR Code-based Coin Vending Machine (QCVM) to improve the distribution of coins among the public. The machine is cashless and works by dispensing coins against a debit to the customer’s bank account using Unified Payments Interface (UPI). This eliminates the need for physical tendering of banknotes and their authentication, making it a more convenient option. Customers will have the option to withdraw coins in the required quantity and denomination in QCVMs. The pilot project is set to initially roll out at 19 locations in 12 cities across India at public places such as railway stations, shopping malls, and marketplaces. Guidelines for better coin distribution will be issued to banks based on the learning’s from the pilot tests.

Quiz: statement on developmental and regulatory policies

1. Securities lending and borrowing in government securities refers to:

a) Selling government securities at a future date

b) Temporarily transferring securities to another investor for a fee or collateral

c) Acquiring government securities through a repurchase agreement

d) Investing in government securities for short periods of time

Answer: b)

2. What is the primary purpose of securities lending and borrowing in the market?

a) Facilitating wider participation in the market

b) Generating higher returns on investments

c) Enhancing price discovery efficiency

d) Augmenting the market for special repos

Answer: c)

3. ‘Special repos’ are a type of repurchase agreement where:

a) Securities are sold and repurchased at a future date

b) Securities are borrowed for short periods of time

c) Securities are exchanged between two investors

d) Securities are lent to the government

Answer: d)

4. The proposal for securities lending and borrowing aims to:

a) Increase the number of government securities available for lending

b) Improve the efficiency and liquidity of the government securities market

c) Restrict the participation of investors in the lending market

d) Enhance portfolio returns for borrowers

Answer: b)

5. Which regulatory body is responsible for overseeing financial markets in India?

a) Securities and Exchange Board of India (SEBI)

b) Reserve Bank of India (RBI)

c) National Stock Exchange of India (NSE)

d) Ministry of Finance, Government of India

Answer: a)

6. The Reserve Bank of India decided to change the penalty for loan defaults by Regulated Entities (REs) to:

a) Reduce customer grievances and disputes

b) Increase the revenue of REs

c) Streamline loan servicing processes

d) Enhance the credit risk profile of borrowers

Answer: d)

7. According to the RBI’s decision, penal charges for loan defaults shall:

a) Be added to the principal outstanding

b) Not be recovered separately

c) Be levied in a reasonable and transparent manner

d) Be capitalized along with the interest rate

Answer: c)

8. The RBI’s initiatives on climate risk and sustainable finance include:

a) Issuing guidelines for accepting Green Deposits

b) Regulating interest rates for REs

c) Facilitating foreign investments in renewable energy

d) Introducing tax incentives for sustainable businesses

Answer: a)

9. The expansion of the Trade Receivables Discounting System (TReDS) aims to:

a) Improve liquidity for micro, small, and medium-sized enterprises (MSMEs)

b) Restrict the financing of trade receivables

c) Promote cash transactions in the market

d) Exclude insurance companies from participating in TReDS

Answer: a)

10. The enhancement to the Unified Payments Interface (UPI) allows inbound travellers to India to:

a) Access UPI for merchant payments

b) Use UPI for international remittances

c) Bypass currency exchange regulations

d) Withdraw cash from ATMs using UPI

Answer: b)

Additional questions:

11. The Reserve Bank of India (RBI) plans to introduce securities lending and borrowing for which type of securities?

a) Corporate bonds

b) Government securities

c) Equity shares

d) Derivatives contracts

Answer: b)

12. The primary objective of introducing securities lending and borrowing is to:

a) Reduce the liquidity of the market

b) Increase the cost of borrowing securities

c) Facilitate short-selling in the market

d) Enhance market depth and liquidity

Answer: d)

13. What action will the RBI take after issuing draft guidelines for securities lending and borrowing?

a) Implement the guidelines immediately without any revisions

b) Seek feedback from stakeholders on the draft guidelines

c) Suspend the implementation of securities lending and borrowing

d) Revise the guidelines based on public comments

Answer: b)

14. The RBI’s decision regarding penal charges on loan defaults aims to:

a) Increase the interest rates charged on advances

b) Improve transparency in the loan default process

c) Remove penal charges altogether for borrowers

d) Address excessive and unfair practices by regulated entities

Answer: d)

15. Which of the following entities will be affected by the RBI’s guidelines on penal charges?

a) Non-regulated entities only

b) Regulated entities and non-regulated entities

c) Banks and financial institutions only

d) Regulated entities under RBI regulation

Answer: d)

16. The RBI’s regulatory initiatives on climate risk and sustainable finance aim to:

a) Increase financial instability caused by climate change

b) Minimize financial risks for regulated entities

c) Discourage REs from adopting sustainable practices

d) Promote fossil fuel investments in India

Answer: b)

17. The RBI’s guidelines for accepting Green Deposits aim to encourage:

a) Investments in environmentally friendly projects

b) Higher interest rates on deposits for REs

c) Reduction of interest rates on loans for borrowers

d) Participation of non-regulated entities in the market

Answer: a)

18. The expansion of the Trade Receivables Discounting System (TReDS) is intended to benefit:

a) Large corporations only

b) Micro, small, and medium-sized enterprises (MSMEs)

c) International investors in the Indian market

d) Government organizations and agencies

Answer: b)

19. Secondary market operations on TReDS platforms refer to:

a) Buying and selling government securities

b) Trading in foreign exchange and derivatives

c) Selling trade receivables to third-party investors

d) Conducting auctions for distressed assets

Answer: c)

20. The RBI’s enhancement to the Unified Payments Interface (UPI) primarily benefits:

a) Outbound travellers from India

b) Foreign tourists visiting India

c) Indian merchants accepting international payments

d) Domestic consumers making online payments

Answer:b)