In a momentous stride towards safeguarding digital privacy and data security, India has taken a significant leap by enacting its first comprehensive data protection regime. While the industry prepares to implement the Digital Personal Data Protection Act, 2023, it also grapples with heightened regulatory scrutiny from the perspective of the Prevention of Money Laundering Act, 2002 ("PMLA") owing to a recent judicial pronouncement. In the meanwhile, the FinTech sector seems to have slowed down considerably compared to the first and second quarter of FY 2023-24. However, the Reserve Bank of India ("RBI") and the Securities and Exchange Board of India ("SEBI") have focused more on enforcement and have picked up pace in rolling out regulatory revisions and updates. 

This edition of the newsletter highlights significant shifts in regulations, prevailing industry hurdles, and noteworthy market dynamics within the realm of Indian FinTech, spanning the period from July 01, 2023, to August 31, 2023.

RECENT LEGAL & REGULATORY DEVELOPMENTS

RBI issues draft circular on arrangements with card networks

The RBI on July 05, 2023, issued a draft circular on the arrangements that bank and non-bank issuers of debit cards, credit cards and prepaid cards have with card networks such as Rupay, Visa, Mastercard etc. ("Draft Circular").1

RBI, in the Draft Circular has observed that the choice of card networks is primarily dependent on the arrangements that exist between card issuers and card networks and is usually not conducive to the availability of choice for customers.

In this regard, the RBI has prescribed certain directions to card issuers and card networks such as: (i) prohibition on card issuers from entering into arrangements or agreements with card networks that restrain them from availing services of other card networks; (ii) requirement for card issuers to issue cards across more than one card network; (iii) card issuers providing an option to customers to choose any one of the multiple card networks that the card issuer has partnered with; and (iv) allowing customers to make a choice of card networks either at the time of issuance of the card or at any subsequent time.

RBI has received feedback and comments from relevant stakeholders on the Draft Circular and the same was intended to be made effective from October 01, 2023.2 However, given that the Draft Circular has not been implemented yet, it is to be seen if it will undergo any changes based on stakeholder comments before it is made operational.

While the Draft Circular and the directions issued by the RBI thereunder are advantageous from the point of view of a customer and would also boost competition among card networks, it may drive up costs for card issuers who will now have to enter into arrangements / agreements with multiple card networks.

RBI issues instructions on penal charges in loan accounts

The RBI on a review of the practices followed by regulated entities ("REs") observed that penal interest / charges are often imposed by REs more as a revenue enhancement tool (to recover more money than the contracted rate of interest) as opposed to them being levied to serve as a deterrent on the borrower from defaulting or serving as a sense of credit discipline measure. To solve for such practices, the RBI, by way of a circular dated August 18, 2023 ("Penal Charges Circular"), has issued the following instructions to REs:

  • If penalty is charged for non-compliance of material terms and conditions of loan agreement by the borrower, then the same shall be treated as 'penal charges' and shall not be levied in the form of 'penal interest' that is added to the rate of interest charged on the advances. Additionally, no further interest shall be computed on such penal charges. That said, the normal procedures for compounding of interest in the loan account shall remain unaffected by this measure.
  • Any additional component to the rate of interest shall not be introduced by REs.
  • A board approved policy on penal charges or similar charges on loans shall be formulated by REs
  • REs shall ensure that the quantum of penal charges is reasonable and commensurate with the noncompliance of material terms and conditions of the loan agreement, without being discriminatory within a particular loan / product category.
  • The quantum and reason of penal charges shall be clearly communicated to the borrower in the loan agreement, most important terms and conditions / key fact statement, and shall be displayed on the REs' website under the section on interest rates and service charges.
  • In case of loans sanctioned to 'individual borrowers, for purposes other than 'business', the penal charges shall not be higher than such charges applicable to non-individual borrowers for similar non-compliance of material terms and conditions.
  • REs shall communicate applicable penal charges to the borrower, whenever reminders for noncompliance of material terms and conditions of loan are sent to such borrowers.
  • REs shall ensure compliance to the instructions in both letter and spirit.

To effectuate the above-mentioned instructions, REs have been given time to undertake revisions to their policy framework, till January 01, 2024. REs are required to ensure implementation of the instructions in respect of all the fresh loans availed / renewed from such effective

date, and for existing loans, REs are required to ensure that the new penal charges regime is made applicable on next review or renewal date or 6 (six) months from the effective date of the Penal Charges Circular, whichever is earlier. It is also relevant to note that credit cards, external commercial borrowings, trade credits and structured obligations have been kept outside the ambit of the Penal Charges Circular as they are covered under product specific directions.

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Footnote

1. https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=4280

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.