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RGNUL-SAM CONCLAVE ON BANKING AND FINANCE IN INDIA, 2023
SPECIAL ISSUE 2023

INDIA'S TRANSITION TOWARDS AN EXPECTED LOSS APPROACH: A STEP IN THE RIGHT DIRECTION?

Vinita Singh & Jeeri Sanjana Reddy

The authors are third-year students of B.A. LL.B. at Damodaram Sanjivayya National Law University, Visakhapatnam.

The Reserve Bank of India (“RBI”), as one of the nation’s financial and economic watchdogs,is aware of all pertinent elements, including the recent credit trends, which inform its policy decisions. In January 2023, the Reserve Bank of India published a discussion paper proposing a framework for adopting an anticipated credit loss approach for loan loss provisioning by banks in the event of bad loans. The discussion paper does an in-depth analysis of global experience with the adoption and implementation of International Financial Reporting Standard 9 – Financial Instruments (“IFRS 9”) accounting standard along with the Expected Credit Loss (“ECL”) approach and reasons for exiting from the current Incurred Loss Approach (“ILA”) method of loan loss provisioning. While the discussion paper has elaborately crucial elements involved in the very shift from ILA to ECL and related implications of the same, the authors believe that there are certain issues that were not addressed but are inevitable to arise once the shift takes place. The paper throws light on these potential problems that may arise and has tried to suggest measures to deal with them.

REGULATE NOW BENEFIT LATER: SCRUTINIZING THE REGULATORY CONCERNS IN THE BUY NOW PAY LATER INDUSTRY AND SUGGESTING REFORM

Hrishikesh Reddy Kothwal

The author is a third-year student of B.A.LL.B. at National Law University and Judicial Academy, Assam.

Buy Now Pay Later (“BNPL”) is a payment mechanism through which consumers can purchase goods and services immediately and defer their payments for later. The BNPL industry has garnered widespread popularity in recent times thanks to innovation by fintech companies and the advent of online BNPL. This mechanism has the potential to bring about much-needed financial inclusivity in India by helping bring the credit-unserved population into the fold of formalized credit. However, due to their novelty and uniqueness, these BNPL companies currently operate in a regulatory grey area and are majorly unregulated. This unregulated operation of BNPL companies in a vulnerable sector such as payments could lead to infelicitous outcomes. Consumers may take up more credit than they have an appetite for, leading to debt traps, and the companies could issue unchecked credit services and pose security risks to the payment system. Therefore, this paper aims to develop a deeper understanding of this industry which is fast becoming a crucial part of the global payments system. The paper examines the benefits and the need of the BNPL mechanism and its economic structure in India. The paper then discusses regulatory concerns that exist for the functioning of the BNPL industry. Finally, by taking inspiration from present credit regulations and regulations in foreign jurisdictions, the paper suggests a regulatory framework to protect the interests of the consumer and at the same time preserve the innovation in BNPL. 

CBDC REGULATIONS IN INDIA: THE ROADBLOCKS AND OPPORTUNITIES FOR RBI

Shivkant Sharma & Anupriya Dasila

The authors are third-year students of B.A. LL.B. at Damodaram Sanjivayya National Law University, Visakhapatnam.

The introduction of Central Bank Digital Currencies (“CBDCs”) as e-rupee, caused financial technology to spread its wings in the currency regulation of India. This development happened amidst several niche cryptocurrencies, which have taken the world by storm, with their increasing valuation. Although this wheel of cryptocurrency investments was marred with many crises, prime dent has been caused by the recent FTX crisis, which spilt out its volatile and unregulated nature. These incidents pushed the government to launch a digital currency which is backed by the sovereign and is recognised as a legal tender. In India, the citizens are becoming very adept with technology through the UPI payment systems, and its predecessors by facilitating financial inclusion via digital means. This growing connectivity between the banks and customers set a solid foundation for CBDCs. In this regard, RBI being the main regulator of currency, has released a concept note on CBDCs before their implementation on a pilot basis. The note exhaustively discusses several aspects, like the working infrastructure, possible merits and implications, along with relevant instances from several countries. However, the concept note of RBI is merely an epiphany of ideas, while the real scenario can turn out to be different. This paper presents the genesis of CBDCs and the difference between cryptocurrency and CBDCs besides providing a critical analysis of the concept note.

UNIFIED PAYMENT INTERFACE: AN INDIAN SUCCESS STORY OF REVOLUTIONIZING THE PAYMENT INDUSTRY

Ananya Bhat

The author is a third-year student of B.A. LL.B. at National University of Advanced Legal Studies, Kochi.

Governments across the globe are gearing towards real-time technology to boost economic growth and prosperity by providing consumers and businesses with cheaper and more effective payment options. The development of financial technology, the blistering rate of internet data penetration and cell phones have directly impacted the revolutionary shifts in international payments and transactions. Under the aegis of the National Payment Corporation of India, the Unified Payment Interface was launched as one of the most successful models of real-time payment systems globally. While attributing its success to the collaborative efforts of the Government, central, public-sector banks, private institutions and consumers, India is the undisputed leader in real-time payments. With its latest entry into cross-border remittances, India has progressed from domestic success to a global sensation. This paper intends to comprehensively analyze the progressive acceptance and proliferation of UPI, a form of real-time payment across India against their global counterparts. It shall also discuss the viability of a fee-per-transaction clause on UPI transactions to revitalize the assets of stressed banks and financial institutions, in light of the latest NPCI press release and the future of this ubiquitous model in India.

CLOSING THE GREEN FINANCE GAP: BRIDGING THE DIVIDE BETWEEN CLIMATE ACTION AND URBAN FINANCING

Tejaswini Kaushal

The author is a second-year student of B.A. LL.B. (Hons.)  at  Ram Manohar Lohiya, National Law University, Lucknow.

With urban centers accommodating a majority of the global population, these cities are responsible for substantial waste generation, energy consumption, and greenhouse gas emissions, making them highly susceptible to climate change effects such as heat waves, flooding, and health crises. However, urban local bodies (ULBs) in developing countries face significant challenges in ensuring financial support for low-emission and climate-resilient urban infrastructure projects. ‘Green financing,’ which involves instruments like green bonds and green loans, is an upcoming solution, and several international and national institutions and frameworks have already been established to regulate it. With the rolling out of green financing guidelines by SEBI and RBI, green financing has also been enjoying much significant limelight in the national context. However, due to the uncertain taxation policies, dearth of regulatory frameworks, inadequate technological and infrastructural appendages, and lack of efficient finance models at the municipal levels, a dissonance in demand and supply of green finance has led to a Green Finance Gap. This paper explores the concept of Green Finance in the national and international context, focusing chiefly on the Green Finance Gap and its impact on urban financing in an effort to address the urgent need for immediate action to create sustainable solutions for our future.

MACRO STRESS TESTING DURING CLIMATE RISKS: REEXPLORING THE TRADITIONAL MECHANISM

Akshat Kothari & Alay Raje

The authors are fourth  students of B.A. LL.B. (Hons.) at  Institute of Law, Nirma University.

 

Global financial system stability is severely threatened by climate change, and conventional methods for managing financial risk may not be sufficient to handle the problems this presents. Macro stress testing can be used to analyse the possible effects of climate change on financial stability as well as to determine how resilient financial institutions are to major shocks. The report makes the case that macro stress testing should be expanded to evaluate risks associated with climate change, such as liability risks, transition risks, and physical risks. Macro stress testing can shed light on the repercussions of climate change on financial markets and institutions. Regulators and financial institutions can more accurately assess their resilience to climate-related disruptions and take the required steps to mitigate these risks by including climate hazards into stress testing scenarios. The paper also makes the case that green finance legislation can be crucial in enabling the use of macro stress testing to evaluate risks associated with climate change. The paper examines several distinct green finance regulations that enable macro stress testing incorporate climate change risks. The paper has lastly demonstrated that macro stress testing is a crucial instrument for evaluating the threats to financial stability posed by climate change. Green finance regulations must be created to make it easier to incorporate climate risks into macro stress testing in order to do this. To strengthen financial stability and resilience in the face of climate change, governments and financial regulators must collaborate to establish and execute such regulations.

INDIA’S NEW FRAMEWORK ON SOVEREIGN GREEN BONDS: A HIT-AND-MISS?

Akshata Modi

The author is a third-year student of B.A. LL.B. at Gujrat National Law University, Gandhinagar.

The Indian Government recently released a set framework for the issuance and management of sovereign green bonds in order to encourage sustainable finance and environmental protection within the country. These guidelines provide a mechanism for the government to issue green bonds, and are expected to increase investment in environmentally-friendly infrastructure while attempting to offer to investors a trustworthy option for investing in eco-friendly projects. While the framework has the potential to promote investment in environmentally responsible projects and improve transparency in green financing, there are also several loopholes that may impede the success of the system. this article argues that there are loopholes in this framework which may impede its functioning and development of investor trust into the system. the author highlights these loopholes and assesses the potential of these bonds in India, by analysing (a) the shortcomings in the proposed mechanism, (b) the major misses of the framework, which discusses some of the specific areas where the framework failed to deliver, and (c) the potential which India’s green bond market carries. Overall, the author has attempted to provide a practical analysis of the framework and its potential for promoting sustainable finance in India.

ARE THE LESSONS LEARNED: REGULATORY REFORMS IN THE INDIAN NBFC SECTOR POST-GREAT INDIAN NBFC CRISIS

Deepanshu

The author is a second-year student of B.A. LL.B. at Indian Institute of Management, Rohtak.

The 2008 global financial crisis impacted the Indian financial system, leading to policy adjustments to ensure financial stability and reduce systemic risks. Non-banking financial companies (“NBFCs”) emerged as a significant source of credit in India’s financial sector, but the recent Great Indian NBFC Crisis raised concerns about the effectiveness of regulatory controls and NBFC sector resilience. The Reserve Bank of India (“RBI”) implemented regulatory measures to restore public trust and address the crisis, including risk management principle adjustments, capital adequacy standards, and liquidity frameworks. However, uncertainty remains about the effectiveness of these measures in preventing future crises. The author aims to analyze the Great Indian NBFC Crisis, including the factors that caused it, the evolution and potential of NBFCs in India, and how to strengthen the sector post-crisis. The author will also assess if the government and regulatory authorities have learned from the crisis and evaluate the effectiveness of the measures implemented by the RBI and regulatory authorities. The study the author aims to provide valuable insights into the regulatory changes in the Indian NBFC market and the causes and difficulties faced by NBFCs in India.

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