Bank CXOs: Keep a tab on these digital related guidelines released in a recent RBI report

In the times of pandemic, when digitisation will further accelerate and as we step into 2021, Bank CXOs would do well to clip and save the discussed digital mediums and review them regularly to keep up with RBI directions to avoid penalties and be adherent to the directions of  RBI

The Financial Stability Board (FSB) was established by RBI as part of a key institutional reform to monitor the implementation of the financial sector reforms. The FSB introduced a toolkit of measures in November 2018, which supervisors and firms can use to strengthen the governance frameworks of financial institutions by increasing accountability of senior management for misconduct within their firms. The recommendations identify a core set of data for the effective supervision of compensation practices. The toolkit complements other elements of the FSB’s Misconduct Action Plan, including compensation recommendations that align risk and reward better. From a recent survey of its members, the FSB reports that the use of Supervisory Technology (SupTech) for ‘misconduct analysis’ and ‘microprudential supervision’ has increased in recent years, mainly due to the relatively rule-based nature of assessments in these areas. Whereas, the use of traditional market surveillance mechanisms that were prevalent earlier have reduced somewhat. Further, there has been an increase in the use of supervised Machine Learning (ML) tools to detect mis-selling of financial products and identify financial advisers (consultants) with higher risk of committing misconduct.

SupTech Adoption for Proactive Monitoring
The offsite supervision architecture relies heavily on pre-defined templates to collect data, which are susceptible to inaccuracies and incompleteness of reporting. The Reserve Bank is striving to establish mechanisms to securely extract specific data sets directly from source systems for a more proactive risk-based supervision. The use of artificial intelligence and machine learning techniques are being explored to identify anomalies in the regulatory/ supervisory reporting data which can be used for predictive analysis. These techniques should preemptively help in micro-prudential supervision, identifying vulnerable branches, stressed exposures, unmitigated operational risks, suspicious transactions and misdemeanors. The Reserve Bank is also using state-of-the-art data visualisation techniques to identify risk areas and entities.

Looking ahead, the banking and nonbanking sectors face both challenging times and new opportunities as the Indian economy returns to full vitality. New vistas of financial intermediation, leveraging on technology will open up to be exploited, and new business models will emerge. The Reserve Bank is positioning itself to provide an enabling environment in which regulated entities are catalysed to exploit these new avenues, while maintaining and preserving financial stability.

Bolstering the Supervisory Framework of the Reserve Bank
Early Identification of Risks and Vulnerabilities.
The Reserve Bank has developed a system for early identification of vulnerabilities to take timely and proactive action. It has been deploying advances in data analytics to quarterly offsite returns to provide sharper and more comprehensive inputs to onsite supervisory teams. An early warning framework—which tracks macroeconomic variables, and market and banking indicators— complements the analysis. Bank-wise as well as system wide supervisory stress testing add a forward-looking dimension for identification of vulnerable areas.

Harmonised and Consolidated Supervision
The supervisory functions pertaining to SCBs, UCBs and NBFCs are now integrated, with the objective of harmonising the supervisory approach based on the activities / size of the SEs. Steps are also being taken to progressively harmonise instructions issued, albeit with proper grading, so that supervisory arbitrage is reduced. Like SCBs, senior supervisory managers (SSM) are being appointed in all other SEs for continuous monitoring. Further, entities belonging to a group / conglomerate have a single point of supervision through the SSM, which is expected to reduce any potential supervisory arbitrage.

Risk Based Supervision for KYC and AML
With the increasing level of complexity in banking business, the need to assess systemic risks emanating from non-compliance to know your customer (KYC) and anti-money laundering (AML) directions has assumed importance. A dedicated supervisory structure is being created by the Reserve Bank to develop a risk-based approach for KYC/AML supervision of banks, in line with the Basel Committee on Banking Supervision (BCBS) principles and Financial Action Task Force (FATF) requirements for prudential supervision. The goal is to facilitate comprehensive and pre-emptive risk discovery and assessment so as to detect and address money-laundering and terror financing risks in the banking sector.

Specialised Structure for KYC/AML Risk
A risk based supervision framework focussing on KYC/AML risk has been created, in line with the principles of BCBS and Financial Action Task Force (FATF) requirements for prudential supervision. Leveraging SupTech Fintech is being embraced in the form of innovative technologies for regulation (RegTech) and supervision (SupTech). An Integrated Compliance Management and Tracking System (ICMTS) and a Centralised Information Management System (CIMS) are two major SupTech initiatives being implemented for seamless reporting between SEs and the Reserve Bank and for enhancing data management and data analytics capabilities, respectively.

Positive Pay System for Cheque Truncation System
The mechanism of positive pay, which involves reconfirming key details of cheques of value of `50,000 and above, was announced on September 25, 2020 to be implemented from January 1, 2021. While the positive pay system is optional for customers, banks may consider making it mandatory for cheques of `5,00,000 and above.

Enabling Video-Based KYC
Video-based Customer Identification Process (V-CIP) for individuals was introduced by the Reserve Bank on January 9, 2020 to facilitate digital on-boarding of customers and improve customer convenience. The use of Aadhaar authentication / offline verification and the mandatory Permanent Account Number (PAN) requirement is expected to mitigate the risks associated with this process of on-boarding customers remotely. Further, the live location capturing of the customer (Geotagging) will ensure that the customer is physically present in India.

Co-operative Banking Sector Challenges
The recent collapse of a large UCB due to fraud and deficient corporate governance has dented public confidence in UCBs. Legal impediments and idiosyncratic factors tend to impede expeditious resolution. Mobilisation of additional capital is constrained by shareholding patterns and legal provisions governing them. The recent amendment to the Banking Regulation Act, 2020 has somewhat eased capital raising constraints. The Reserve Bank has been empowered to reconstruct or amalgamate these banks. Furthermore, the Reserve Bank has revised the supervisory action framework (SAF) for UCBs, which will facilitate quick regulatory supervisory responses for financially distressed UCBs.

UCBs lagged behind their peers in technology adoption. It is in this context that the Reserve Bank has accorded high priority to the implementation of core banking solutions (CBS) in the sector. More than 99 per cent of these banks are now compliant. In case of rural cooperatives, all except one bank is CBS compliant. Notwithstanding this progress, technological upgradation of co-operative banks remains a challenge.

Harnessing RegTech for Efficient Reporting
Recognizing that cutting-edge technology has enormous potential for preventive compliance, transaction monitoring and automated data flows, the Reserve Bank has accorded priority to adoption of RegTech. Framing of machine readable regulations is envisaged for facilitating digital reporting to serve greater consistency and improved compliance.

Entities regulated by the Reserve Bank are already harnessing technological tools like artificial intelligence, machine learning, big data analysis for KYC/ALM purposes, regulatory reporting and management information system, payments and account aggregation as well as to judge the creditworthiness of borrowers. Notwithstanding its many advantages in terms of data and privacy protection, cyber risks are a major challenge in technology adoption. The Reserve Bank plans to undertake a broad-based survey on RegTech adoption and based on the findings, broad principles to encourage adoption of these tools will be developed.

Strengthening Cyber Security Resilience
Key cyber risk indicators were introduced for all SCBs since June 2019. A comprehensive cyber security framework on a graded approach for UCBs and instructions on cyber security controls for third party ATM switch providers for all SEs were released in December 2019. Further, a certification / awareness programme on cyber security was made mandatory for members of the Board, senior management and CXOs in August 2018, which has been attended to by more than 2,500 bank officials till date.

Adherence to Fair Practices Code and Outsourcing Guidelines for Loans Sourced Over Digital Lending Platforms
All SCBs (excluding RRBs) and NBFCs (including HFCs) were advised to adhere to FPC and Outsourcing Guidelines for loans sourced over digital lending platforms either through their own or under an outsourcing arrangement. Lending institutions were mandated to, inter alia, disclose names of digital lending platforms engaged as agents on their websites, direct the digital lending platforms to upfront disclose the name of actual lender to borrowers, issue sanction letter to borrowers on their letterhead, furnish a copy of agreement to borrowers and take steps towards creating awareness about the grievance redressal mechanism and ensure effective monitoring of digital lending platforms.

Guidelines on Doorstep Banking
The Reserve Bank had issued instructions on providing doorstep banking facility for senior citizens and differently abled persons on November 9, 2017. Reviewing its progress, the Reserve Bank observed that the services as envisaged by the policy were either yet to be offered by banks or were restricted to select branches. To improve the effectiveness of the policy, the Reserve Bank on March 31, 2020 advised banks to offer these services on a pan-India basis. Banks are also required to develop a Board approved framework for determining the nature of branches where these services will be provided mandatorily and those where it will be provided on a best effort basis. Banks were also advised to update the list of branches offering such services on their website regularly and publicise the availability of such services in their awareness campaigns.

Online Dispute Resolution (ODR) System for Digital Payments
On August 6, 2020 the Reserve Bank directed all Payment System Operators (PSOs) and Payment System Participants (PSPs) to implement a transparent, rule-based, system driven, user-friendly and unbiased ODR system for disputes and grievances related to failed transactions in their respective payment systems by January 1, 2021. Any entity setting up a payment system in India or participating therein is required to make available the ODR system at the commencement of its operations. Based on experience gained, ODR arrangement would be extended to cover disputes and grievances other than those related to failed transactions.

Internal Ombudsman Scheme for Non- Bank Pre-Paid Payment Instruments Issuers
The Internal ombudsman (IO) scheme envisages creation of an apex independent authority within the regulated entity for strengthening the grievance redressal within the entity or organisation. In October 2019, the scheme was extended to cover non-bank issuers with more than one crore outstanding pre-paid payment instruments (PPIs). Customer complaints that are partly or wholly rejected by the issuer are referred to the IO for a final decision before being conveyed to the complainants.

Harmonisation of Turn Around Time for Failed Transactions
A large number of customer complaints originate on account of unsuccessful or ‘failed’ transactions due to, inter alia, disruption of communication links, non-availability of cash in ATMs and time-out of sessions, which may not be directly assignable to the customer. Moreover, the process of rectification and amount of compensation to the customer for these ‘failed’ transactions were not uniform. Accordingly, the Reserve Bank introduced a framework on Turnaround Time (TAT) for resolution of customer complaints and compensation for failed transactions across all authorised payment systems on September 20, 2019. This framework aims to provide prompt and efficient customer service in all electronic payment systems. Under the framework, TAT for failed transactions and compensation was finalised to improve consumer confidence and bring consistency in processing of the failed transactions.

IVRS for online support to complainant
During 2019-20, the Interactive Voice Response System (IVRS) under the aegis of the CMS was established as an on-tap source of information for consumers of financial services. Any person can dial 14440 and obtain basic guidance on a variety of issues, inter alia, the ombudsman scheme; consumer protection regulations such as limited liability of customer in fraudulent electronic transactions; and basic savings bank deposit accounts.

Payment and Settlement Systems
India has been at the forefront of new innovations in payment and settlement systems, with the Reserve Bank creating the enabling environment. Aided by cutting edge technology, payment systems have ensured faster, cheaper and more convenient payment transactions. The focus is on adding newer services as well as expanding the reach and spread of existing services to unleash their full potential, rationalising the cost of transactions, and protecting the interests of the customers. Concomitantly, being mindful of the risks involved in unbridled growth of these services, the Reserve Bank has been proactive in effectively regulating them.

Availability of NEFT on a 24x7x365 Basis
The National Electronic Funds Transfer (NEFT) is a retail system with half-hourly settlement batches and prescribes no floor or ceiling on the amount that can be transferred. In a milestone achievement, NEFT, which was operating in 23 half-hourly batches earlier, was made available 24x7x365 with effect from December 16, 2019. The system now operates in 48 half-hourly batches with the first batch of the day starting at 00:30 hours and the last batch of the day ending at 24:00 hours.

Increase in Operating Hours of RTGS
In view of increasing customer demand, the timings for customer transactions in the Real Time Gross Settlement (RTGS) system had been extended and the RTGS system was made available from 7:00 am to 6:00 pm with effect from August 6, 2019. The Reserve Bank has 39 POLICY ENVIRONMENT subsequently made available the RTGS system on 24×7 basis on all days with effect from December 14, 2020. Round the clock availability of RTGS system will facilitate India’s efforts to develop international financial centres and provide wider payment flexibility to domestic corporates and institutions.

Waiver of Charges in RTGS and NEFT systems
With effect from July 01, 2019 the Reserve Bank waived processing charges and time varying charges, levied by it on banks for outward transactions undertaken using the RTGS system as also the processing charges levied by it for transactions processed in the NEFT system to provide an impetus to the digital funds movement. Banks were advised to pass on this benefit to their customers. III.85 Furthermore, member banks were directed to not levy any charges on their savings bank account holders for online-initiated funds transfers (through internet banking and/or mobile apps of the banks) done through NEFT system, effective January 01, 2020.

Introduction of PPIs solely for purchase of goods and services
In December 2019, the Reserve Bank introduced a new type of semi-closed PPI aimed at enhancing ease of small value transactions. Such instruments, which can be loaded or reloaded only from a bank account and/or a credit card, can be used only for purchase of goods and services and not for funds transfer. Other features of the PPI include issuance only after obtaining minimum details from the customer, limits for amount loaded during any month and the amount outstanding at any point of time, and the option to close the instrument and transfer funds ‘back to source’.

Cash Withdrawal using Point of Sale (PoS) Terminals
Earlier, banks were required to obtain one-time permission from the Reserve Bank for offering the facility of cash withdrawal at PoS terminals deployed by them. On January 31, 2020 the Reserve Bank dispensed with this requirement and directed banks to provide cash withdrawal facility at PoS terminals, based on the approval of their Board. The designated merchant establishments are required to clearly display the availability of this facility along with the charges, if any, payable by the customer.

On-tap Authorisation of Payment Systems
In order to diversify risk and to encourage innovation and competition in payment systems, the Reserve Bank issued instructions for providing on-tap authorisation to desirous entities on October 15, 2019. The authorisation is subject to criteria such as merits of the proposal, capital and KYC requirements, and the interoperability among different retail payment systems. So far, issuance of PPIs; Bharat Bill Payment Operating Units (BBPOU); Trade Receivables Discounting Systems (TReDS); and White Label ATMs (WLAs) have been offered on-tap authorisation.

Self-Regulatory Organisation (SRO) for Payment System Operators
An SRO is a non-governmental organisation that sets and enforces rules and 40 Report on Trend and Progress of Banking in India 2019-20 standards relating to the conduct of member entities in the industry, with the aim of protecting the customer and promoting ethical and professional standards. On October 22, 2020 the Reserve Bank put in place a framework for recognition of SRO for PSOs to promote industry-wide smooth operations and ecosystem development. Under the framework, eligibility criteria, management guidelines, functions and responsibilities of the SRO have been laid down.

Streamlining QR Code Infrastructure
On October 22, 2020 the Reserve Bank decided to continue with the two interoperable Quick Response (QR) codes in India viz. UPI QR and Bharat QR based on the recommendations of the Committee for Analysis of QR Codes (Chairman: Prof Deepak Phatak) and feedback received from stakeholders. PSOs that use proprietary QR codes were advised to shift to one or more interoperable QR codes by March 31, 2022, and the launch of new proprietary QR codes by any PSO was prohibited.

Pilot Scheme for Offline Retail Payments
On August 6, 2020 the Reserve Bank announced a pilot scheme to be conducted for a limited period under which authorised PSOs will be able to provide offline payment solutions using cards, wallets or mobile devices for remote or proximity payments till March 31, 2021. A decision regarding formalising such a system will be taken subject to fulfilment of conditions and based on the experience gained.

Regulatory Sandbox for Financial Service Providers
On November 4, 2019 the Reserve Bank announced the opening of the first cohort under the regulatory sandbox (RS) for financial service providers, with retail payments as its theme. It is expected to spur innovation in the digital payments space and offer payment services to the unserved and underserved segment of the population. A total of 32 applications were received for the cohort, covering a range of products which included innovative use of Near Field Communication (NFC), Unified Payments Interface (UPI) architecture, offline payments through PPIs and feature phones to effect payments using voice, and Unstructured Supplementary Service Data (USSD) and mobile network. The RS framework provides for a fivestage sandbox process, including preliminary screening, test design, application assessment, testing and evaluation. The test design stage was completed for products of the selected 6 applicants and two entities commenced testing their products from November 16, 2020. Other entities are expected to start the test phase shortly. The Reserve Bank has also subsequently announced the second cohort with cross-border payments as the theme.

National Electronic Toll Collection (NETC) System
In December 2019, the Reserve Bank permitted all authorised payment systems and instruments (non-bank PPIs, cards and UPI) to link with FASTags to broad base the NETC system as well as to foster competition among the system participants by allowing a bouquet of payment choices for customers. These passive tags, affixed on a vehicle’s windscreen, use radio frequency identification technology (RFIT) to pay toll fares directly from a pre-paid account to the toll plaza, thus saving fuel and time. These instruments can also be enabled for payment of parking fees and filling of fuel.

OPERATIONS AND PERFORMANCE OF COMMERCIAL BANKS
Financial Inclusion
Sound financial inclusion policies have a multiplier effect on economic growth reducing poverty and income inequality, while also being conducive for financial stability. The latest Financial Access Survey (FAS) data of the IMF8 show that various initiatives taken by the Reserve Bank and the Government in the direction of financial inclusion have borne fruit. The number of bank branches per 100,000 adults rose to 14.6 in 2019 from 13.6 in 2015, which is higher than Germany, China and South Africa (Chart IV.35a). With a strong government push to increase bank account among unbanked adults through Pradhan Mantri Jan Dhan Yojana (PMJDY), the number of persons with deposit accounts at banks significantly increased, becoming comparable with emerging economy peers and even some of the advanced economies (Chart IV.35b). Even in terms of access to credit, noticeable progress has been made, although it remains much lower than its peers (Chart IV.35c). In terms of use of digital payments too, India made noteworthy progress due to various Government initiatives and promotion of usage of digital medium for payments. Between 2015 and 2019, the number of mobile and internet banking transactions per 1,000 adults has increased to 6,184 in 2019 from 183 in 2015 (Chart IV.35d).

In order to systematically accelerate the level of financial inclusion in the country in a sustainable manner, the National Strategy for Financial Inclusion (NSFI) 2019-24 was released in January 2020. Further, with a view to align the Reserve Bank’s policies with the vision outlined in the NSFI document, the Financial Inclusion Plan (FIP) template has been revised and rechristened as ‘Monitoring Progress of Financial Inclusion (MPFI)’ to capture more granular data and qualitative aspects at the ground level.

The new branch authorisation policy of 2017 – which recognises Business Correspondent (BCs) that provide banking services for a minimum of four hours per day and for at least five days a week as banking outlets – coupled with emphasis on digitisation and modernisation of technological infrastructure has progressively obviated the need to set up brick and mortar branches. As has been observed for the last few years, during 2019-20 also, branch expansion in rural areas remained subdued as BC model made further inroads in villages with population more than 2,000. The BC phenomenon did not remain restricted to rural areas alone and model gained popularity even in urban areas. Further, the growth in the number of Basic Savings Bank Deposit Accounts (BSBDAs) and deposits mobilised through BCs remained higher than BSBDAs in physical bank branches (Table IV.25). Based on experience gained during the COVID-19 pandemic, the BC model is likely to strengthen further as physical access to banks is constrained by social distancing.

The article is compiled and directly imported from the ‘RBI Report on Trend and Progress of Banking in India 2019 – 20’, published on the RBI website.