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    RBI Announces Regulatory Policy Measures in Context of Pandemic

    December 11, 2020

    RBI published a statement that sets out various developmental and regulatory policy measures amid COVID-19 pandemic. The statement covers measures intended to enhance liquidity support to targeted and interconnected sectors of the economy and address ongoing uncertainty by imposing dividend payment restrictions. Consultations on the revised guidelines related to OTC derivatives business by market makers and the enhanced minimum initial capital requirements for licensing of banks were also announced.

    The statement highlights that, in October 2020, RBI had announced the TLTRO on Tap Scheme, which will be available up to March 31, 2021. Accordingly, it was decided to conduct on tap Targeted Long-Term Repo Operations (TLTRO) with tenors of up to three years for a total amount of up to INR 1,000 billion at a floating rate linked to the policy repo rate with flexibility to enhance the amount and period after a review of the response to the scheme. In November 2020, the Central Government launched Emergency Credit Line Guarantee Scheme 2.0 (ECLGS 2.0), under which the corpus of existing ECLGS 1.0 was extended to provide 100% guaranteed collateral free additional credit to stressed sectors. Banks are encouraged to synergize the two schemes by availing funds from RBI under on tap TLTRO and seek guarantee under ECLGS 2.0 to provide credit support to stressed sectors. Liquidity availed by banks under the scheme should be deployed in corporate bonds, commercial papers, and non-convertible debentures issued by the entities in specific sectors. The liquidity availed under the scheme can also be used to extend bank loans and advances to these sectors. All exposures under this facility will also be exempted from reckoning under the large exposure framework.

    The statement also mentions that, in view of the ongoing stress and the heightened uncertainty on account of COVID-19, RBI has decided that scheduled commercial banks (SCBs) and cooperative banks shall not make any dividend payout from the profits pertaining to financial year 2019-20. Guidelines on the above measure will be issued shortly. Furthermore, in line with the international standards and recent changes in the regulations related to interest rate and currency derivatives, the  Comprehensive Guidelines on Derivatives have been reviewed. The revised guidelines seek to promote efficient access to derivative markets while ensuring high standards of governance and conduct in OTC derivative business by market makers. Therefore, RBI also released the draft Reserve Bank of India (Market-makers in OTC Derivatives) Directions 2020, with comments open until January 15, 2021.

    In addition to the statement, RBI has released the report of the Internal Working Group to review extant ownership guidelines and corporate structure for Indian private-sector banks. Among others, the key recommendation is that the minimum initial capital requirement for licensing new banks should be enhanced from INR 5 billion to INR 10 billion for universal banks and from INR 2 billion to INR 3 billion for small finance banks. The working group also recommends that RBI may take steps to ensure harmonization and uniformity in different licensing guidelines, to the extent possible. Whenever new licensing guidelines are issued, if new rules are more relaxed, benefit should be given to existing banks, and if new rules are tougher, legacy banks should also conform to new tighter regulations, but a non-disruptive transition path may be provided to affected banks. Comments on the report may be submitted by January 15, 2021. 


    Keywords: Asia Pacific, India, Banking, Securities, COVID-19, OTC Derivatives, Governance, ESG, Large Exposures, Credit Risk, TLTRO, Dividend Distribution, RBI

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