RBI Circular

RBI’s Policy Measures: Financial Markets, Regulations, Payment Systems & Fintech

The Reserve Bank of India (RBI) made several announcements from time to time in the regulatory development landscape. Recently, in its press release- 2023-2024/1827 (Statement on Developmental and Regulatory Policies) dated 8^th February 2024, RBI focused on various aspects of the financial sector related to financial markets, regulations and payments systems with an intent to enhance transparency, efficiency, and security among the financial sector. These measures include:

1. Review the regulatory framework for electronic trading platforms to adapt to significant market developments to ensure fair access and prevent market abuse.
2. Allow resident entities to hedge gold price risk in the OTC (Over-the-counter) segment within the IFSC (International Financial Services Centre) related to recognised exchanges.
3. Mandate all existing regulated entities (REs) to furnish a key fact statement (KFS) to potential borrowers for all retail and MSME loans and ensure borrowers must have crucial information about the loan terms in a simple format.
4. Enhance the security of Aadhaar-enabled payment system (AePS) transactions and, streamline the the boarding process for AePS touch point operators and consider the other potential fraud risk management requirements.
5. Introduced a principle-based regulatory framework to authenticate digital payment transactions, with an intent to enhance the use of alternative authentication mechanisms beyond SMS OTP.
6. Expand the use cases of the CBDC (Central Bank Digital Currency) CBDC-R (Retail) pilot by introducing programmability to defined benefits and offline functionality for financial transactions in areas with limited internet connectivity.

Key highlights from the press release are as follows:

I. Financial Markets

Review of Regulatory Framework for Electronic Trading Platforms (ETPs):

RBI’s decision to review the regulatory framework for ETPs showcases its commitment to ensuring a fair and transparent trading ecosystem within the financial market landscape. Along with innovative technology and increased integration of onshore and offshore markets, it will be imperative to follow these regulations to ensure market integrity and prevent market abuse. Such review facilitates several potential opportunities for stakeholders to provide feedback and develop a frame which entirely balances innovation with a robust approach, which ultimately enhances the potential investor confidence and market stability.

Hedging of Gold Price Risk in the IFSC OTC Market:

Allowing resident entities to hedge gold price risk in the IFSC OTC market shows a significant approach to enhancing the risk management tools that are available to potential market participants. RBI’s flexibility, with easy access to derivative products, is more likely to empower businesses or entities to mitigate market exposure to volatile gold prices in the most effective manner. This approach has also strengthened the IFSC’s role as a hub for financial activities to attract more market participants and foster liquidity in the financial market.

II. Regulations

Mandate for Key Fact Statement (KFS) for Retail and MSME Loans:

RBI mandates the specific provision of key fact statements (KFS) for retail and MSME loans to empower borrowers with transparent and comprehensive information. RBI consolidate user-friendly key loan terms and costs, which enable borrowers to make more informed business decisions and build trust and accountability within the entire lending process. This initiative enhances consumer protections and is more likely to safeguard and promote responsible lending practices, which ultimately contribute to financial inclusion and economic stability.

III. Payment Systems and Fintech

Enhancements in AePS (Aadhaar Enabled Payment System):

RBI streamlined the entire onboarding process and implemented additional fraud risk management requirements for AePS transactions to increase security and reliability in digital payment systems. As the  AePS plays an important role in enhancing financial inclusion, such enhancements from RBI’s end are more likely to expand easy access to digital financial services and protect users from potential market risks. 

Principle-based Framework for Authentication of Digital Payment Transactions:

RBI introduced a principle-based regulatory framework to authenticate digital payment transactions, which showcases the forward approach to cyber security in the digital payment ecosystem. By implementing alternative authentication processes, including biometrics or tokenisation, beyond the traditional SMS-based OTPs, RBI intends to stay at the forefront of ever-evolving market threats and ensure robust security standards. This approach will promote trust among consumers and is more likely to enhance innovative approaches in payment technologies towards securing a more resilient digital economy.

Introduction of Programmability and Offline Functionality in CBDC Pilot:

RBI’s proposal to introduce programmability and offline functionality within the CBDC-R pilot ensures a significant evolution in central bank digital currencies. By enabling programmable features such as defined benefit payments and offline transactions, RBI’s intent is to enhance the utility and accessibility of CBDC in diverse use cases, adding remote areas with limited access to internet connectivity. Such innovations potentially revolutionise the delivery of financial services and offer great convenience and efficiency to users while enhancing financial inclusion and digital empowerment.

Conclusion

The Reserve Bank of India (RBI) significantly signifies a proactive approach to enhance transparency, innovation, and resilience within the financial landscape. Addressing the emerging challenges and integration of advanced innovative technology, RBI’s intent is to empower potential stakeholders, promote financial growth, and empower the foundation of the country’s financial system for the future. This RBI’s statement on development and regulatory policies showcases the efforts to promote inclusive growth and improve the financial system for the future.

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