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    RBI on Internal Controls, Regulatory Sandbox and Digital Lending Rules

    January 13, 2021

    RBI issued a statement on strengthening governance arrangements with respect to the risk-based internal audit framework. The statement highlights that while the RBI guidance note on risk-based internal audit lays out the basic approach for risk-based internal audit functions, banks are expected to re-orient their approach, in line with the evolving best practices, as a part of their overall governance and internal control framework. Banks are encouraged to adopt the International Internal Audit standards, like those issued by BCBS and the Institute of Internal Auditors (IIA). In a separate statement, RBI announced the opening of a Second Cohort under the Regulatory Sandbox with cross-border payments as its theme. The window for submission of applications for the Cohort shall be open from until February 15, 2021.

    RBI also decided to select “micro, small, and medium enterprise (MSME) lending” as the theme for the Third Cohort, the details of which shall be announced in due course. In addition, RBI notified that a working group is being set up to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players so that an appropriate regulatory approach can be put in place. The terms of reference would require the working group to:

    • Evaluate digital lending activities and assess the penetration and standards of outsourced digital lending activities in RBI regulated entities
    • Identify risks posed by unregulated digital lending to financial stability, regulated entities, and consumers
    • Suggest regulatory changes, if any, to promote orderly growth of digital lending
    • Recommend measures, if any, for expansion of specific regulatory or statutory perimeter and suggest the role of various regulatory and government agencies
    • Recommend measures for robust data governance, data privacy and data security standards for deployment of digital lending services

    Keywords: Asia Pacific, India, Banking, Governance, Internal Audit, Internal Control, Regulatory Sandbox, Cross-Border Payments, Digital Lending, Credit Risk, Regtech, RBI

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