Banking Law

[By Gurumurthy Cherukuthota] The author is a student of Symbiosis Law School, Pune.   Introduction On July 11, 2022, India’s Central Bank, the Reserve Bank of India (RBI), issued a circular announcing its decision to introduce an international trade settlement mechanism for invoicing, payment, and settlement of exports and imports in Indian Rupees (INR). The RBI’s strategic move illustrates India’s commitment to promoting cross-border transactions and fostering international trade in INR, with the visionary ambition being to establish the INR as a truly global, international currency. In pursuit of this goal, India has outlined a comprehensive plan involving several measures, including promoting the use of the rupee in international trade, relaxing restrictions, and improving accessibility to Indian markets for foreign investors by liberalising foreign exchange regulations (such as the Foreign Exchange Management (Deposit) Regulations, 2016). Two critical instruments pivotal in achieving these goals are the Special Rupee Vostro Accounts (SRVAs) and Correspondent Banking. By promoting the adoption of SRVAs and Correspondent Banking, India aims not only to boost the visibility and acceptance of the INR as an international currency but also to solidify its position as a burgeoning global economic superpower. Notably, India has already demonstrated its commitment by engaging in bilateral trade with Russia in INR. While financial liberalisation does not inevitably guarantee currency internationalisation, correspondent banking emerges as a crucial factor in facilitating cross-border transactions. The general decline in correspondent banking, influenced by factors such as anti-money laundering regulations, risk perceptions, and uncertainties, underscores the need for a workable and efficient framework. Recognizing the limited role of the Indian Rupee in trade invoicing and settlements due to convertibility and risk management issues, India’s strategic move towards trade settlement in INR with Russia, amid global uncertainties, stands out. This not only safeguards bilateral trade but also positions India strategically to leverage the vulnerabilities in global monetary supply chains, opening up avenues for trade with BRICS and other Asian nations. In essence, the trajectory set by India, as guided by the RBI’s Circular, demonstrates a determined effort to elevate the INR’s status on the international stage. This move aligns with the evolving landscape of the global financial infrastructure, emphasising the role of correspondent banking and innovative approaches in shaping the future of international economic and financial activities. In this context, the article examines the role of correspondent banking in the process of currency internationalisation, conducting a comprehensive analysis of the potential challenges and solutions for establishing the INR as an international currency, drawing insights from India’s experience with Russia. Correspondent Banking and Internationalising INR Correspondent Banking is vital to India’s efforts to globalize the INR. It encompasses a financial relationship between two institutions, where one bank (correspondent bank) offers banking services to another (respondent bank). In India’s case, the RBI has been encouraging the use of Correspondent Banking as a means to promote the international use of the INR. The RBI has introduced the concept of SRVAs, which are rupee-denominated accounts held by foreign banks in India. Regulation 7(1) of the Foreign Exchange Management (Deposit) Regulations, 2016 empowers Authorised Dealer (AD) banks to open Rupee Vostro Accounts. These accounts allow foreign banks to hold INR balances and facilitate cross border and international trade settlement in INR with India, thereby eliminating the need for using other currencies like the USD and the Euros, among others. India’s Experience with Russia: Challenges to Overcome In pursuit of internationalising the INR, India has been actively promoting trade settlements with other countries in INR, such as Russia and several other Asian and neighbouring countries. In 2022, India and Russia entered into an agreement to settle bilateral trade in INR to reduce dependency on the USD and avoid currency exchange risk/volatility. In furtherance of the same, several Russian banks have already opened Vostro accounts in India. This move is expected to reduce transaction costs, increase the volume of trade between the two countries and encourage other countries also to adopt this model. A critical appraisal of India’s experience with Russia would be incomplete without examining the inherent challenges associated with this model. One of the foremost challenges lies in the limited acceptance and liquidity of the INR in the global markets. The INR has not yet attained widespread recognition as an international currency, consequently restricting its liquidity in global markets. Russia’s willingness to transact with India in INR is not rooted in the strength and global standing of the currency but rather emerges from the global economic sanctions imposed on Russia, along with being banned from using the SWIFT gateway, as a result of the Russia-Ukraine war. Therefore, the real test would be to assess Russia’s commitment to this model once the sanctions are lifted. Another significant challenge surfaces in the form of India’s substantial oil imports from Russia, which have considerably augmented India’s current account trade deficit with Russia. Settling all imports in INR would potentially lead to excessive accumulation of INR for Russia, limiting its utility as a medium of exchange with nations that accept INR for trade. This predicament has already forced India to partially compensate Russia in UAE’s Dirhams, underscoring the necessity for wider acceptability of the currency to ensure the success of this model. The inadequate development of India’s financial infrastructure emerges as an additional obstacle. To facilitate international trade transactions in INR, substantial investments in technology and human resources are imperative, highlighting the need for a robust and comprehensive financial infrastructure and framework. Moreover, regulatory and operational challenges must also be addressed to support international trade settlements, necessitating the establishment of Correspondent Banking (CB) relationships through modifications to existing frameworks in India and the participating nations. Key areas demanding adaptation include further amendments to regulations under the Foreign Exchange Management Act, 1999 (FEMA) for accommodating INR settlements, the formulation of specific guidelines for cross-border transactions in INR, and the development of a structured regulatory framework for CB relationships addressing anti-money laundering (AML) and counter-terrorist financing (CTF) compliance. Harmonising regulatory standards among participating countries is also crucial. Additionally, addressing inadequacies

[By Chetna Alagh] The author is a student of UPES, Dehradun.   The process of schemes of arrangement, which falls under the purview of the Companies Act, 2013, has a significant role to play in the dynamic world of corporate complexities. These arrangements provide businesses with a methodical way to restructure their operational and financial situations. A company is legally allowed to restructure its financial debts using a scheme of arrangement if it can reach an agreement with all its stakeholders, including creditors, debtors, and holders of debentures. Once the proposed plan gets approved, it becomes enforceable against all parties. Section 230 of the Companies Act, when read in consonance with Regulation 2-B of the Insolvency and Bankruptcy Board of India’s (IBBI hereinafter) Liquidation Process Regulations 2016, establishes guidelines for the approval of time period in relation to “Schemes of Compromise or Arrangement”. Regulation 2B specifically addresses the time period for the scheme of arrangement when the company is in liquidation. It specifies that the proposed scheme of compromise or arrangement shall be completed within 90 days of the order of Liquidation. The persons who are not eligible under the Insolvency and Bankruptcy Code of India, 2016 (IBC, 2016 hereinafter) to submit the Resolution Plan shall not be a party to such compromise or arrangement. A significant question that arises with regard to schemes of arrangements or compromise is the fundamental character of the 90-day period required by Regulation 2B i.e., whether or not this period is directory or mandatory in nature. In the case of Arun Kumar Jagatramka vs. Jindal Steel & Power Ltd., the apex court talked about the interplay between the IBC, 2016, and Section 230 of the Companies Act, 2013. The court stated that the IBC and Section 230 must be construed in harmony. It was determined that suggested compromise or arrangement solutions should follow the IBC’s guiding principles, particularly in situations when companies are in liquidation. This was held keeping in view with the objective of safeguarding businesses against poor management and going into liquidation. The court ruled that Section 230 and the IBC are inextricably linked when addressing firms that are in liquidation, rejecting the claim that Section 230 stands alone and has no relationship to the IBC. In the case of Bharat Sharma Resolution Applicant vs. Reshma Mittal RP & Anr the National Company Law Tribunal (NCLT) order was the subject of the case’s appeal. The main question was whether the appellant, an MSME, should have been permitted to propose a compromise/arrangement scheme under Regulation 2B of the IBBI (Liquidation Process) Regulations, 2016, and whether the rejected Resolution Plan of the appellant should have been taken into consideration. The Liquidator argued that liquidation was the best option given the failure of the plan. It was held that the 90-day window under Regulation 2B was flexible and that the appellant should be permitted to submit a compromise/arrangement scheme within a month as per Section 230 of the Companies Act. Even though the 90-day window had passed, the appellant was allowed to submit a scheme of arrangement within one month, the tribunal did not view the 90-day window as an inflexible requirement, but rather as a directory provision. Further, in the case of Kshitiz Gupta (Liquidator in the matter of Abhishek Corporation Ltd.) Vs. Asset Reconstruction Company (India) Limited and Ors, the tribunal was asked to rule on how the Companies Act of 2013’s Sections 230 to 232 should be applied when a corporate debtor is being liquidated under IBC, 2016. The issue was whether the liquidator should try to save the business by reaching a scheme of arrangement with the creditors in accordance with Sections 230-232, and if that failed, move forward with the asset sale. It was held that the liquidator should prioritize trying to revive the company using the procedures outlined in Sections 230-232 of the Companies Act, 2013, and that these proceedings could take longer than the usual 90 days and emphasized that asset sales should only be pursued in cases where Sections 230–232 revival efforts have failed. This interpretation permitted a more adaptable strategy, acknowledging that the precise timetable for revival efforts and legal actions could change depending on the situation. The decision emphasized that when considering the revival and arrangement processes under the Companies Act, 2013, adherence to the strict 90-day period was not required. In the context of an ongoing liquidation processing the case of Small Industrial Development Bank of India and Ors vs. Delicious Cocoo Water Pvt. Ltd. and Ors, the tribunal was asked to decide whether to accept or not a Scheme of Arrangement pursuant to Section 230 of the Companies Act, 2013. The main issue was whether the submission deadline outlined in Regulation 2B (1) of the IBBI (Liquidation Process) Regulations, 2016, was mandatory or merely directory in nature. It was held that the timeline can be extended if it serves the scheme’s purpose as there was no specific timeline prescribed in the IBC, 2016 itself for submitting such a scheme. The tribunal’s decision emphasized the IBC’s goals of maximizing the value of a corporate debtor’s assets and favouring resolution over liquidation. As a result, the tribunal ordered the liquidator to present the proposed plan as soon as possible for the creditors’ consideration, maintaining the status quo with regard to the corporate debtor’s assets until the creditors decided regarding the plan’s viability. However, in the case of Mr. Harish Sharma vs. C&C Constructions Ltd. & Ors, the appellant sought an extension of the timeline for a scheme of compromise. It was held that the appellant had not met the requirements to request an extension of the deadline for submitting a compromise and arrangement plan, i.e., a formulated and ready plan was not demonstrated by the appellant, and their proposed plan was not approved by at least 75% of the secured creditors. Furthermore, no proof of the scheme’s readiness had been provided by the end of the process’s prescribed 90-day period. Therefore, it was concluded

[By Rishabh Shivani] The author is a student of National Law School of India University, Bengaluru.   Introduction Bank guarantees are special contracts where a bank guarantees performance by one party in a separate, underlying contract and agrees to furnish payment unconditionally on the demand of the beneficiary. However, egregious fraud and special equities are two exceptions based on which injunctions restraining the  encashment of a guarantee can be granted. While egregious fraud  necessitates fraud by the beneficiary in the underlying contract, special equities conventionally demand exceptional circumstances leading to irretrievable injustice or financial harm to the party claiming the injunction, if such injunction is not granted. Irretrievable injustice has, therefore, been considered a necessary consequence of establishing special equities. In Standard Chartered Bank v Heavy Engineering Corporation Ltd (“Standard Chartered”), the Supreme Court deviated from this rule and recognised special equities as a distinct circumstance from irretrievable injustice, thereby increasing the number of exceptions from two to three. However, the scope of special equities is still unclear, with no single principle laid down to determine when special equities can be claimed. In this piece, I attempt to clarify the meaning of “special equities” after the Standard Chartered ruling and lay down a test of prima facie breach now being used by Courts to establish special equities. Firstly, I provide a brief evolution of the law on special equities, and the changes brought by Standard Chartered. I then look at cases post-Standard Chartered and argue that the single guiding principle for Courts to establish special equities now is when no prima facie breach is attributable to the party claiming the injunction. I conclude by arguing that this changed meaning of special equities was much needed and does not affect the unconditional nature of bank guarantees. Evolution of Special Equities as a Ground for Injunctions The phrase “special equities” neither originates from English common law nor is statutorily defined. It is merely a product of judicial creation and was mentioned for the first time in Texmaco Ltd v State Bank of India, where the Calcutta High Court recognised “special equities” as a second exception where injunctions could be awarded. However, the Court did not elaborate upon what it meant by special equities. It was only after the ruling in Itek Corporation v First National Bank of Boston that there was some clarity. Here, a US District Court held that injunctions may be granted when the encashment would cause irretrievable injustice, such that the party would not be able to reimburse itself later. This dictum has been uniformly applied by Indian Courts. For example, in UP Cooperation Federation v Singh Consultants, the Supreme Court held that parties claiming injunctions will have to prove special equities, the consequence of which is irretrievable injustice, to successfully claim injunctions. In subsequent cases such as UP State Sugar Corporation v Sumac International and Svenska Handelsbanken v Indian Charge Chrome Ltd, courts have focused only on the irretrievability of damages for establishing special equities. Hence, special equities were established only in cases of irretrievable injustice, not otherwise. In fact, in Indu Projects v Union of India, the Delhi High Court went to the lengths of holding that special equities are interchangeably used with irretrievable injustice and are not larger in scope than the latter. Special equities were, therefore, practically ignored by Indian courts as an independent ground for awarding injunctions. However, this position was entirely changed in Standard Chartered. Here, the Supreme Court deviated from its rulings and held that injunctions can be granted when there is fraud, irretrievable injustice and special equities. It recognised special equities as a distinct circumstance from irretrievable injustice and hence, as a third exception. Establishing Special Equities Post Standard Chartered While Standard Chartered has transformed special equities by recognising it as a third exception, the extent of such transformation is, solely by the judgement, unclear as the Court did not define what it meant by special equities and how it was different from irretrievable injustice. Hence, it must be understood by analysing relevant case law post-Standard Chartered’s ruling. Standard Chartered was first applied by the Delhi High Court in Halliburton Offshore Services Inc Limited v Vedanta Limited and Others (“Halliburton”). Here, the imposition of the COVID-19 lockdown made it impossible for Halliburton to perform the contract. Consequently, Vedanta claimed breach and sought to encash the bank guarantees, and in response, Halliburton approached the Court seeking an injunction. Now, as per the pre-Standard Chartered position, the injunction would not have been granted as the damages were not irretrievable. However, the Court here recognised the distinction created in Standard Chartered and held that as Halliburton was willing to perform the contract but was genuinely disabled from doing so due to the lockdown, the encashment of bank guarantees would have caused unfair prejudice to it, and hence there were special equities in its favour. The injunction was, therefore, granted on the ground of special equities. However, the mere existence of COVID-19 is not sufficient to establish special equities. In Shaarc Projects Limited v Indian Oil Corporation (“Shaarc”), there were bank guarantees furnished by Shaarc in favour of Indian Oil. When several breaches were flagged by Indian Oil, Shaarc sought an injunction against the invocation of the bank guarantee, claiming that the performance became burdensome due to COVID-19. The Court rejected this plea holding that the increased burden does not make out a case of special equities. Why did the Court hold differently in these cases, given that both were marred by COVID-19? The differentiating factor was the existence of a prima facie breach. In Halliburton, the breach allegations were unfounded because Halliburton was genuinely disabled from performing the contract due to COVID-19. However, in Shaarc, the pandemic – did not disable Shaarc from performing the contract. The breach allegations were reasonable and well-founded. This prima facie breach principle has also been used in cases where there are arbitral awards in favour of the claimant. In Technimont Pvt Ltd v ONGC Petro Additions, the Delhi High Court

[By Tanya Verma] The author is a student of Dr. Ram Manohar Lohiya National Law University.   Introduction In Digital Lending (DL) context, individuals can conveniently secure loans through online platforms. These platforms, typically accessible as applications or websites, are managed by entities known as Loan Service Providers (LSPs). The digital lending process necessitates borrowers to furnish requisite documentation and request specific financial solutions, including Buy Now Pay Later loans (BNPL), Small Medium Enterprise (SME) loans, Personal loans, Trade loans, and more. These LSPs, duly authorized by Financial Institutions (FIs), evaluate the financial history of applicants along with the submitted documents. Upon thorough assessment, loans are digitally approved through the platform. Following the guidelines established by the Reserve Bank of India (RBI) for Digital Lending, Financial Institutions (FIs) are designated as Regulated Entities (RE). These REs primarily extend loans to entities deemed to have low risk, thereby safeguarding the return of invested funds. However, there are instances where borrowers cannot fulfill their loan obligations, resulting in potential losses for the REs. To mitigate this scenario, LSPs offer a guarantee to REs through an agreement referred to as a Default Loss Guarantee (DLG). The DLG agreement ensures loan protection up to a specified limit. Yet, before August 2022, LSPs introduced a synthetic securitization process involving transferring credit risk for digitally provided loans using credit derivatives or guarantees while retaining the loan portfolio on their own balance sheet. This process included a 100% risk guarantee. In response, the RBI prohibited this approach due to its adverse impact on bank balance sheets and implications for the risk management commitments made by LSPs. This piece attempts to shed light on the broader implications of the same, starting with that of lenders, then loan service providers, and lastly for borrowers, which eventually turn out to be on the brighter side. Before that, a look at the major terms of the guidelines: The LSP providing DLG must be a company incorporated under the Companies Act, 2013. DLG agreements must be legally enforceable contracts between the RE and DLG provider. The DLG arrangement should not exceed 5% of the loan portfolio. The DLG arrangement’s tenor should match the longest tenor of the loan portfolio. DLG can be accepted as cash deposits, fixed deposits, or bank guarantees. REs can invoke DLG within 120 days of overdue. LSPs must publish information about DLG portfolios and amounts on their websites. REs are responsible for identifying loan assets as Non-Performing Assets (NPAs). REs need a board-approved policy before entering any DLG arrangement, covering selection criteria, guarantee scope, monitoring processes, and fees. DLG arrangements are governed by RBI’s Digital Lending Guidelines and other relevant regulations for customer protection and grievance redressal. Implications For brevity of expression, I shall analyze the implications in three parts. First, I shall deal with the implications on lenders, second, for loan service providers, and lastly, for borrowers. For Lenders: We see three major implications for the lenders. First, the RBI’s 5% cap on DLG addresses the issue of high guarantee rates, preventing banks from writing off loans through synthetic securitization. In simpler terms, in a synthetic securitization, a bank buys credit protection on a portfolio of loans from an investor, thereby implying that when a loan in the portfolio defaults, the investor reimburses the bank for the losses incurred on loans in that portfolio up to a maximum, which is the amount invested. This suggests that the RBI’s decision to limit the DLG to 5% of the loan portfolio is a strategic move to curb the practice of offering excessively high guarantee rates by LSPs. By imposing this cap, the RBI aims to prevent banks from taking advantage of synthetic securitization, a process where credit risk is transferred through derivatives or guarantees. The implication is that the RBI seeks to ensure a more controlled and realistic financial environment by discouraging risky lending practices that could lead to potential loan write-offs. Second, it can be seen that the DLG contracts offer security, allowing lenders to enforce terms and impose penalties on breaching LSPs. This highlights the contractual security provided by DLG agreements. Lenders can use these agreements to establish clear terms and conditions with LSPs. In case of any breaches, lenders have the authority to enforce penalties as per the agreement terms. This creates a framework that encourages LSPs to adhere to their commitments, ensuring higher accountability and reducing the risk of non-compliance or misconduct. Thirdly, REs must still identify NPAs for asset classification, excluding guaranteed amounts from LSPs. This point emphasizes that while Digital Lending Guarantee (DLG) agreements provide assurance for loan repayment, it’s still the responsibility of the Regulated Entities (REs) to identify Non-Performing Assets (NPAs) for proper asset classification. The guaranteed amounts from LSPs are excluded from this classification process, indicating that the guarantees do not affect the overall assessment of the financial health of the loans. This separation maintains asset quality and risk assessment transparency, regardless of the guarantees provided. Adding onto the above, it can be seen that board-approved policies and auditor-certified disclosures enhance credit standards and reliability. Here, the focus is on robust credit underwriting standards and transparency in the DLG arrangement process. The requirement for board-approved policies ensures that the entire DLG process adheres to specific criteria, from selecting providers to monitoring and review mechanisms. Auditor-certified disclosures add another layer of reliability by ensuring that the financial information provided by the DLG provider is accurate and trustworthy. This enhancement in credit standards and transparency improves the overall credibility and effectiveness of the DLG arrangements. For Loan Service Providers The situation of LSPs is not the same too, for they can no longer offer exorbitant DLG rates, affecting their risk exposure and credit management. This highlights a significant change for LSPs resulting from implementing the RBI’s DLG guidelines. The guidelines impose a maximum cap on the rates at which DLG arrangements can be offered by LSPs. This cap effectively curtails the ability of LSPs to provide excessively high guarantee rates to

[By Yuvraj Sharma & Jatin Patil] The authors are students of School of Law, Narsee Monjee Institute of Management & Studies, Hyderabad.   Introduction On August 18, 2023, the Reserve Bank of India (“RBI”) has recently released fresh directives regarding the imposition of Penal interest rates on loan accounts. These guidelines will affect from January 1, 2024. According to these new guidelines, any penalties incurred by borrowers due to Not adhering to loan terms will be classified as “penal charges” rather than “penal interest”, added to the existing interest rate on the loans. These guidelines, titled “Fair Lending Practice- Penal Charges in Loan Accounts”, also emphasise that penal charges should not be subjected to interest accumulation, effectively preventing additional interest from being calculated on these charges. This blog analyses critically evaluates the benefit and drawbacks of these guidelines and proposed potentials for enhancements for their effectiveness. Background The Reserve Bank of India has issued guidelines to regulated entities to ensure transparency and fairness in disclosing penal interest. The current regulations provide lending institution with the authority to formulate board approved policies governing the application of Penal Interest rates. However, The RBI has observed that a significant number of Real Estate (“RE”) firms levy penal interest rates alongside the regular interest rate for instances of default or non-compliance with credit terms. The purpose of penal interest Is to promote credit discipline among borrowers and ensure equitable compensation for lenders. Not to serve as a revenue enhancement mechanism beyond the contracted interest rate. The Supervisory assessment conducted by the RBI have unveiled a wide range of practices within the real estate sector concerning the imposition of penal charges or interest. This disparity in approaches has given rise to customer grievances and dispute, highlighting the need for standardization and better regulatory oversight. Presently, these rates and charges vary across banks and other lenders. They are applied in scenarios like missed or delayed EMI repayment, check bounces, repayment of loans. The Term “Penal Charges” and “Penal Interest” ‘Penal charges’ represent extra fees imposed by lenders upon borrowers. These charges become applicable when a borrower experience delays in repaying a loan or the equated monthly installment linked to a loan or other financial instruments. These specific of penal charges for payment defaults differ across banks and non-banking financial companies letting standardized guidelines. These charges are usually stipulated in the agreement terms for payment default. Nevertheless, instances have arisen where lenders attempted to impose higher charges than outlined in the agreement as reported by borrowers. ‘Penal Interest’, In the event that the borrower does not receive the installments in accordance with the specified repayment terms by the end of the month, they will incur an additional charge known as Penal Interest on the delayed installments. This practice is designed to ensure timely to ensure repayment and discourage delays in meeting financial obligations. Triggered Reason for RBI Guidelines The Central Bank has issues new regulations due to the discovery that numerous lending institutions it regulates were imposing extra penal interest rates on borrowers who defaulted or failed to comply with the terms of their credit agreements. These regulations state that penal charges should not be compounded, meaning no additional interest should be calculated based on these charges. However, the standard interest compounding procedure for the loan account remains unaffected. The guidelines set by the regulatory authority RBI concerning penal charges for non-compliance with non-contract terms. These guidelines, effective from January 1, 2024, apply to various financial entities under RBI regulation, including commercial banks, cooperative banks and NBFC’s, housing financial companies and board. The guidelines prohibited imposing penal interest as an additional interest rate on top of the loans rate and institute maintained reasonable “penal charges” for breach of loan terms. These charges must be non-discriminatory and proportional to the severity of non-compliance. The instruction requires entities to disclose the nature and amount of penal charges in loan agreements, important terms and their websites. Furthermore, communication of applicable charges and reason is mandatory when notifying borrowers about non-compliance. Existing loans will transition to the new regime. Their next review or renewal date or within six months of the circular effective date. Notably, these rules exclude credit card, external commercial borrowings, trade units and structure obligations which are covered by civil specific product directions. In essence, the RBI mandates that financial entities regulated by it implement guidelines to ensure fair and transparent penal Charges for Loan Non-Compliance while providing clear disclosure to borrowers. The new rules are applicable to various financial institutions under the RBI jurisdiction except for specific financial product outlines in the text. Fostering Equitable Borrowing Practice: Promoting Uniformity and Fairness through new lending guidelines The new guidelines have been introduced with the intention of covering divergent practice among lending institutions and ensuring that borrowers are not burdened with excessive charges for defaults or non-compliance. This progressive step aims to establish uniformity in the penalties being charged, thus preventing the abuse of process. While instances of process abuse have been noted in the past, these guidelines seek to comprehensively address the issue. As stated, the RBI intention in implementing these guidelines is not to employ them as a tool for revenue enhancement beyond the contracted interest rate. The primary objective of achieving uniformity is a crucial step, although it is important to note that these guidelines do not extend to areas such as credit cards external, commercial borrowings, trade credit, etc. This approach is distinctly centered around individual borrowers aiming to safeguard their interest. These guidelines also mandate that both the rational and the quantum of charges must be transparently disclosed to the borrower within the loan agreement. This major ensures the overall well-being of the borrower and is warmly welcomed. Moreover, these guidelines are the purpose of installing senses of credit discipline among borrowers, emphasizing fairness and the paramount factor, these guidelines have been introduced to uphold the principle of fairness Conclusion In conclusion, The Reserve Bank of India has introduced vital guidelines with the

[By Dhanush Thonaparthi] The author is a student of NALSAR University of Law.   Introduction Economic Social and Governance (ESG) policy is a concept of growing relevance among business houses, replacing the more traditional Corporate Social Responsibility (CSR) concept. It is reflected in the legislative and policy space of the government, with the most prominent example of this being the introduction of the Business Responsibility & Sustainability reporting mandated by The Securities and Exchange Board of India (SEBI), for India’s top 1000 listed companies by market capitalization. In this context, the article argues that banks should incorporate the ESG performance of a company alongside other factors when considering a lending decision, with persuasive reasons for the same and examples as to how ESG is already becoming a key factor in credit ratings and lending decisions. What is ESG and how is it relevant for companies?  ESG includes three components, its pillars, namely Environmental, Social and Governance. ESG refers to a set of standards regarding a company’s activities and behavior concerning the components of ESG. These factors, in the corporate context, are used to look at the long-term sustainability of a company. With an increased global push towards environmental consciousness, respecting social considerations, and better governance in companies, this framework becomes important in evaluating a company’s future performance and opportunities. Achieving high ESG standards also becomes important for companies in the context of the stakeholder theory[1], which postulates that corporate success is not dependent only on shareholder and management satisfaction, but also on its relationships with its customers, the Government, creditors, and the public. The long-term survival and profitability of a company depend on it maintaining a good relationship with all its stakeholder groups. This is where ESG standards play an important role, considering that they address the environmental aspect, (which has been a major point of concern across countries and the public) the social aspect (mostly relating to the general public welfare, which is important for a company’s reputation and goodwill) and the governance aspect (better governance instills public and corporate confidence, meaning access to cheaper lending, more and better customers and more investment options). How is ESG relevant to banks when making lending decisions  Banks are financial institutions driven by profit motives and financial considerations. A major concern for banks is non-performing assets and delays in repayments by borrowers, reducing the profitability of the bank. This can lead to unrealized gains and/or unnecessary litigation for recovery, both of which any bank will want to avoid. Therefore, banks would want metrics that help determine whether a lending decision could translate into an unprofitable venture. A key factor that can be incorporated into such metrics is ESG. A review of the literature on ESG as a factor in corporate lending has found that better ESG performance may correlate with lower credit risk, legal risk, and downside risk.[2] Additionally, a survey by Morningstar indicates that better sustainable performance leads to better risk mitigation. We are currently undergoing the largest wealth transfer in history, with experts suggesting that nearly sixty eight trillion dollars of wealth will be transferred to the newer generations. We are in the middle of the largest wealth transfer in history. This is important for financial institutions as millennials fear climate change and would be willing to sacrifice financial benefits in favour of sustainability, and a company that is able to gain a leadership position in sustainability will be more preferred by millennials. Before delving into more specific reasons as to why ESG is important for banks in their lending decisions, we have to, first consider the Environmental pillar of ESG. Companies that are compliant with existing laws and regulations are less likely to be penalized and fined for any potential violation. The future outlook regarding environmental legislation is that it will be more protective of the environment, leading to more restrictions for a company, which translates into more potential liabilities for companies that do not comply and additional costs for compliance. For banks, this becomes important as a compliant company is less likely to incur these additional liabilities that add to the company’s costs. A company that goes beyond legally mandated environmental norms is more insulated from changes in regulation making it less susceptible to changes in legislation. Secondly, the Social pillar of ESG is important for banks, as it helps determine the brand value of the company and to assess how much public goodwill the company enjoys. If companies do not value the rights of people, it leads to public resentment and outcry, which forces the governments to intervene, leading to unnecessary interference and even litigation and reparations. An example in this regard is the case of Facebook. Facebook had to pay nearly 725 million dollars to settle a class action lawsuit after it disclosed that information relating to 87 million users (about twice the population of California) was improperly shared with Cambridge Analytica. Thirdly, Governance is an important pillar for banks to take cognizance of when lending, primarily because better governance means better company performance, a higher level of employee quality, and reliable company disclosures. If a company has bad governance practices, it can spell disaster for banks that choose to make lending decisions based on the company’s financials as disclosed by the company itself. A good example of bad governance translating into unreliable disclosures is the well-known Satyam scandal. In this case, the company had falsified accounts, inflated the share price, and invested enormous amounts in property. Upon admission by the company’s chairman, the fraud became known, leading to a collapse of the market’s reputation and confidence in the company. This is a prime example, demonstrating how dishonest and inefficient governance practices can lead to the collapse of a company, putting lenders at immense risk of their loans turning into non-performing assets or defunct loans. Fourthly, companies must be able to align themselves with the social values of the public and contribute towards the welfare of the society they operate in, because company perception plays

[By Saiyam Shah] The author is a student of Auro University.   Introduction Insurance, particularly health and life insurance, plays a pivotal role in alleviating stress for most individuals and families, assisting them in coping with unforeseen and unfortunate circumstances. People with disabilities (PWD), especially those with congenital disabilities, are often denied access to health and life insurance policies solely based on their disabilities, without any proper risk analysis or objective justifications. Testimonials of the PWD, who were denied insurance or were not given the amount they were entitled to when required on inconsequential grounds are many. Though the judicial intervention has provided some relief, the attitude of the Insurance Regulatory and Development Authority of India (IRDAI) was not impressive until the intervention of the Delhi High Court.. This article delves into the recent developments concerning discrimination against PWD in insurance-related matters and highlights what IRDAI can learn from the practices of the Australian Human Rights Commission (AHRC) to curb instances of discrimination. The initial section highlights the importance of health and life insurance and sheds light on the direct and indirect discrimination faced by PWD. Subsequently, it briefs about the provisions pertaining to discrimination. In the next part, it delves into two significant decisions by the Delhi High Court on the issue of discrimination and concludes by addressing recent developments and advocating for IRDAI to consider issuing binding circulars or non-binding guidelines akin to those adopted by the AHRC to take substantial steps towards reducing instances of discrimination and fostering a fair and inclusive insurance environment for all. Importance of insurance for the PWD As it is for every individual, health and life insurance are essential for PWD to mitigate accidents and other such uncertain events. As noted by Thomas Weston in the context of the UK, but also applicable generally, the PWD (1) are less likely to be employed by the private sector, (2) their income may be lower than their counterparts, and (3) specific needs for assistive equipment, care, and therapy add to their daily cost burden. Therefore, it becomes all the more necessary for them to have health insurance to financially deal with the uncertain events requiring immediate payment of a large amount. Direct and indirect discrimination Often, PWD are denied health or life insurance solely based on their disability without conducting an objective assessment of the risk factors and considering the possibility of providing a policy with a higher premium and non-standard terms. The PWD are discriminated against by: (1) denying to provide the insurance policy, (2) providing the policy with non-standard terms and/or a higher premium and (3) not paying the legitimate insured amount when required on inconsequential grounds. The discrimination is also visible in instances involving family insurance plans. The legal provisions Section 3 of the Rights of Persons with Disabilities Act (RPWD Act) prohibits any kind of discrimination based on disability unless one satisfies that the same act or omission is a proportionate means of achieving a legitimate aim. Section 24(k) of the Act mandates the appropriate government to make a comprehensive insurance scheme for the PWD, and 26 mandates it to make insurance schemes for employees with disabilities. However, the customised insurance policies, customer service, and range of options available in the private sector make it imperative to ensure that they are available to everyone, including PWD. India has ratified the UN Convention on the Rights of Persons with Disabilities, article 3 of which obligates the states to abide by the principles of non-discrimination and full and effective participation and inclusion in society. Article 25(e) of the CRPD obligates the states to prohibit discrimination against PWD in the provision of health and life insurance where such insurance is permitted by national law. Due to the lack of express provision addressing this issue, the litigants seek relief U/A 14 and 21 of the Constitution against such practices. Protection in foreign jurisdictions The Australian Disability Discrimination Act (ADDA) allows discrimination in life and health insurance only if (i) it (1) is based upon actuarial or statistical data and (2) is reasonable having regard to the matter of the data and other relevant factors; or (ii) if the same is not available and cannot be reasonably obtained, the discrimination is reasonable having regard to any other relevant factors. The US’s Affordable Care Act prohibits insurance companies from not providing insurance to people with pre-existing conditions. Other countries or states, that have some express provision against such discrimination include Hong Kong, Japan, Spain, the UK, Portugal etc. Judiciary on disability discrimination Are PWD more prone to accidental risks? In Vikas Gupta v. Union of India (2012), the petitioner filed a PIL against the discrimination in premium as well as the maximum amount ensured in the Postal Life Insurance Policy for government employees. The respondent defended their actions on the ground that PWD are more prone to accidental risks. As rightly countered by the petitioner, (1) there is no such empirical data to support such a general statement, and (2) living with a disability and suffering from a disease are not synonymous. Can a class be excluded on the ground of the contractual relation The bench referred to LIC v. Consumer Education & Research Centre and observed that though insurance is a contract between the insurer and the insured, the conditions prohibiting a class from entering into such a contract are unconstitutional. The LIC had distinguished the persons working in government, semi- government and reputed commercial firms from those living in vast rural and urban areas engaged in unorganized or self-employed sectors and denied insurance policy to the latter. The court struck down the classification as violative of Article 14 of the Constitution. The bench, applying the same case, held that charging a higher premium and discriminating on the basis of the disability is unconstitutional. Saurabh Shukla v. Max/Niva Bupa Health Insurance & Co.; IRDAI’s failure as a sectoral regulator Regulations ; a paper tiger IRDAI’s 2016 Health Insurance Regulations, Para 8(b) and (C), used

[By Vaibhav Gautam] The author is a student of NALSAR University of Law.   INTRODUCTION Earlier last month, the Reserve Bank of India released a comprehensive circular (“Circular”), on the compromise settlements and technical write-offs, to provide the lenders with multiple options to recover the maximum possible amount from their distressed assets without delay. The RBI’s primary objective behind this move appears to ensure greater transparency in the process of resolving distressed assets. However, this circular can also be seen as an attempt to widen the applicability of the compromise settlements as envisaged under the Prudential Framework for Resolution of Stressed Assets, 2019, (“Prudential Framework”). At the same time, the circular has stirred controversy and invited criticism from several stakeholders, such as major bank unions, like, All India Bank Officer’s Confederation (AIBOC), and All India Bank Employees Association (AIBEA), which are representative of around 6 lakh bank employees. There is a genuine concern among bank unions that a willful defaulter’s refusal to pay the owed amount might potentially lead to a loss of the general public’s money and confidence in the banks. Through this article, the author aims to analyze the said circular, as envisioned by the RBI and also attempts to demystify some of the concerns that have been associated with the circular. BACKGROUND The term “compromise settlement,” as explained by the RBI, basically means that the Regulated Entities (“REs”), primarily the banks, can enter into a negotiated agreement with the borrowers. The main purpose of such a resolution process is to effectively streamline the resolution process and also to rectify the problems that are caused by the distressed assets, such as huge losses for the lenders, financial instability in the economy, etc. Compromise Settlements resolve this by allowing the lender to recover the maximum possible amount of such distressed assets by reaching a mutually beneficial agreement involving a waiver of claims by the borrower, and a partial waiver of the amount by the banks. This is not the first instance of the RBI introducing such a concept. In 2007, RBI provided for compromise settlements as a valid resolution practice, where the banks were allowed to enter into compromise settlements with the borrowers, contingent on the decision of the management board of the bank. In the present circular, RBI has clarified its position regarding the compromise settlements, however this time they have also taken other REs into account, such as cooperative and local area banks. It has also reiterated the prescriptive cooling period of a minimum of 12 months, where the borrowers can take fresh loans after the said period. Later, on June 20, RBI published FAQs on the circular, where it provided clarification that this process of compromise settlements is not a major overhaul of the current resolution framework but rather it has been in practice for more than 15 years, with the earliest guidelines being released in the year 2007. CONCERNS OF THE STAKEHOLDERS One of the major concerns raised by the stakeholders, particularly bank unions has been that this circular will unduly advantage the defaulters by condoning their fraudulent or default act, thereby, eroding the public’s confidence in the banking system. Furthermore, it might set a dangerous precedent by allowing the defaulters to settle their large defaults by paying a minuscule amount of their original debt. Secondly, bank unions have further argued that these guidelines bring a sudden change into the process of clearing distressed assets from banks’ accounts, and will lead to the reversal of the guidelines that are provided under the Prudential Framework of 2019. Additionally, there is an apprehension that this reversal might entail major implications for the overall economy, such as systemic instability in the financial institutions, adverse market behavior, etc. Lastly, there is a concern that the circular would allow the defaulters to restructure their loan records to keep their reportable Non-Performing Assets (NPA) levels lower than they are, through the process of “evergreening.” This process allows for additional adjustments to be made to the existing debts of the borrowers, to make the repayment more feasible. However, instead of constituting a concrete solution to the recovery of distressed assets, evergreening is a temporary measure and different from compromise settlements. UNRAVELLING THE BANK UNIONS’ CONCERNS The concerns of the bank unions are seemingly contrary to the purpose envisioned by the RBI. These guidelines as provided by the circular impose the liability on the REs, primarily the banks to create and enforce a comprehensive framework that would be contingent on the approval of the management board of the bank. This requirement aligns with the ultimate goal of the circular, i.e., to increase the transparency and accountability between the lenders and the borrowers. The circular also clarifies the position on the minimum cooling period of 12 months. Accordingly, it will be the discretion of the banks to decide the upper limit of the cooling period. And only after that period has ended can the fresh loans be issued to the respective borrower. It is crucial to understand that rather than setting a dangerous precedent, this requirement puts a reasonable and justifiable restriction on the willful defaulter who seeks to get a fresh loan from a bank. The compromise settlements that are undertaken in consonance with these guidelines would be without prejudice to criminal proceedings and other penal matters. Hence, the argument that it unduly advantages the willful defaulters and the fraudsters, is not tenable. With respect to maintaining the integrity of the process, the permission of the board plays an imperative role, as it is provided in the circular, such borrowers might get debarred from issuing a fresh loan for 5 years. It is largely a misplaced concern of the bank unions to assume that the present circular would bring major changes to the process that is provided under the 2019 framework. It is pertinent to note that the Prudential framework deals with the illegibility of the defaulters for restructuring their debts whereas the current circular concerns compromise settlements. So, essentially, they are

[By Dhaval Bothra & Rajdeep Bhattacharjee] The authors are student of Symbiosis Law School, Pune.   Introduction The verbiage related to loss-sharing models has been a predicament for a substantial period now for the Reserve Bank of India (RBI). Post its Guidelines on Digital Lending (DL Guidelines) on 2 September 2022, a certain conundrum prevailed across the regulatory landscape concerning the validity of the same as it did not explicitly bar the arrangements of loss sharing but suggested that the Reserve Bank of India‘s (Securitization of Standard Assets) Directions 2021 (Securitization Directions),  paragraph 6(c), be adhered to for financial products involving contractual loss sharing modalities. However, under the recent Guidelines on Default Loss Guarantee in Digital Lending (DLG Guidelines), the air has been cleared by the regulator. Express permission has been granted to DLG arrangements subject to specific conditions, taking cognizance of all the stakeholders involved. The DLG Guidelines aim to boost confidence and growth in digital lending by allowing fintech companies to expand their customer base while lowering default risk. Prudent lending approaches, thorough credit evaluations, and modern data analytics should be prioritized for long-term lending practices. To limit risks, borrowers’ creditworthiness, income security, and repayment capacity must be carefully evaluated. This article compares the guidelines to past RBI norms, addresses industry issues, considers alternate options for addressing the stated concerns and suggests a way forward. Analysis and Interplay with Securitization Directions Under the guaranteeing ambit, two entities exist: Regulated Entities (REs) are permitted to retain the loans and associated credit risk of loans on their balance sheet, under Section 5(b) of the Banking Regulation Act 1949. The Lending Service Providers (LSPs) function either in liaising with the credit facilities provided by the REs or the acquisition of borrowers thereof, in a digital landscape. To provide access to the loan exposures for investors of different classes, a RE repackages the credit risk in a securitization structure into tradable securities with varying levels of risk. This enables a lender to share the risk of a loan with those third parties who might not have otherwise been able to access a loan exposure directly. These transactions that involve the redistribution of credit risk in assets by RE lenders are governed under paragraph 4 of the RBI‘s Securitization Directions. The DL Guidelines required REs participating in First Loss Default Guarantee (FLDG) arrangements to follow the RBI Securitization Directions, particularly its clause 6(c) about synthetic securitization. Therefore, the three possible interpretations were: An arrangement that is specifically related to the credit risk underpinning a pool of loans is called synthetic securitization. Herein, fintech companies could offer loan-specific guarantees. Only REs are covered by the Securitization Directions. So, if any regulatory flexibility on FLDG is allowed, it will only apply to RBI-recognized REs. Without obtaining a regulatory license, such as one to run an NBFC or small finance bank, the unregulated entities may not be able to offer FLDGs. Since synthetic securitisation is prohibited by the Securitisation Directions, any form of risk transfer in a pool of loans to a third party by a lender RE while keeping the pool on its balance sheet is prohibited. However, this res intergra position was addressed effectively by the Guidelines, hence clearing the air around this interpretative conundrum and it has been laid down that the DLG arrangements which are subjected to the provisions enlisted under Annex I to the circular, shall not be treated under the mandate of synthetic securitisation and/or the loan participation provisions. Thus, the RBI has provided clarity to LSPs regarding the extension of FLDGs. Industry Concerns FLDG To prevent borrower defaults, REs and LSPs must collaborate under the FLDG. FLDG acts as a risk-sharing mechanism in the domain of online lending. However, there can be concerns regarding how FLDG will be implemented under the DLG Guidelines. These include DLG provider eligibility requirements, DLG coverage constraints (capped at 5%), and the need for detailed disclosure guidelines to promote transparency. Additionally, further clarification is needed regarding the relationship between DLG arrangements and the RBI’s Master Direction on Securitization of Standard Assets 2021 to ensure compliance and avoid ambiguity. Excessive Data Collection and Misuse The DLG Guidelines and the DL Guidelines have failed to recognize the privacy concerns and exploitation risk when Digital Lending Aggregators (DLAs) and LSPs obtain superfluous data and permissions. These can include personal and financial information. From past scenarios, it is imperative to protect borrower data. This is crucial to prevent fraud and maintain trust in digital lending. DLAs and LSPs must prioritize strong data security measures like multi-factor authentication and upgraded encryption. The erosion of consumer trust hampers the growth of digital lending, so a comprehensive regulatory framework is needed. The framework should include explicit permission procedures, clear data retention and sharing policies, and strict penalties for noncompliance. To resolve this, a model akin to the European Banking Authority (EBA) Guidelines on the Security of Internet Payments can be adopted which comprehensively addresses the bottleneck and mitigates the concerns. ‘Buy Now Pay Later’ (BNPL)Applications These Guidelines will have a substantial impact on BNPL applications, particularly in terms of credit levels and operations. The effects of the DLG Guidelines on credit lines on BNPL platforms include the prohibition on loading non-bank Prepaid Payment Instruments (PPIs) through credit lines, changes to operational procedures, and the challenges faced by BNPL enterprises. The DLG Guidelines will impact the credit limitations of BNPL platforms. Specific conditions and new rules will be imposed on REs offering BNPL services, necessitating an evaluation of credit line practices and structures for regulatory compliance. BNPL companies must adjust their credit line policies accordingly. Additionally, DLG arrangements for BNPL platforms need to be reviewed to ensure adherence to the guidelines. This requires the development of clear and binding contracts between the RE and the DLG supplier, specifying the scope, categories, timeframe, and disclosure requirements of DLG coverage. Meeting these standards may involve investments in infrastructure, technology, and changes in business practices for BNPL companies. Mitigating Industry Concerns We propose the following alternative