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Indo-Nepal Remittance Facility scheme

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1. What is Indo-Nepal Remittance Facility Scheme under NEFT ecosystem? +

Ans: The Indo-Nepal Remittance Facility (INRF, Scheme) is a cross-border remittance scheme to transfer funds from India to Nepal (one-way only), enabled under the NEFT ecosystem. The scheme was launched by the Reserve Bank of India (RBI) in May 2008 to provide a safe and cost-efficient avenue to migrant Nepalese workers in India to remit money back to their families in Nepal.

In August 2021, the Scheme was enhanced to boost the trade payments between the two countries, and to facilitate payments relating to retirement, pension, etc., to our ex-servicemen who have settled / relocated in Nepal.

1. What is Sovereign Gold Bond (SGB)? Who is the issuer? +

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.

These FAQs attempt to put in place the common queries that users have on the subject in easy to understand language. However, for conducting a transaction, the Foreign Exchange Management Act, 1999 (FEMA) and the Regulations made or directions issued thereunder may be referred to. The relevant principal regulations are the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015 issued vide Notification No. FEMA 10(R)/2015-RB dated January 21, 2016. The directions issued are consolidated in Part I of the Master Direction No 14 on Deposits and Accounts. Amendments, if any, to the principal regulations are appended.

1. Who is a person resident in India?

Sec 2(v) of the Foreign Exchange Management Act, 1999 (FEMA) defines a person resident in India as:

(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include-

(A) a person who has gone out of India or who stays outside India, in either case-

for or on taking up employment outside India, or
for carrying on outside India a business or vocation outside India, or
for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

(B) a person who has come to or stays in India, in either case, otherwise than-

for or on taking up employment in India, or
for carrying on in India a business or vocation in India, or
for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

(ii) any person or body corporate registered or incorporated in India,

(iii) an office, branch or agency in India owned or controlled by a person resident outside India,

(iv) an office, branch or agency outside India owned or controlled by a person resident in India;

1. Query What is the definition of 'Basic Savings Bank Deposit Account' (BSBDA)?

Response

All the existing ‘No-frills’ accounts opened pursuant to guidelines issued vide circular RPCD.RF.BC.54/07.38.01/2005-06 dated December 13, 2005 and RPCD.CO.No.RRB.BC.58/ 03.05.33(F) / 2005-06 dated December 27, 2005 and converted into BSBDA in compliance with the guidelines issued in circular RPCD.CO.RRB.RCB.BC.No.24/07.38.01/2012-13 dated August 22, 2012 as well as fresh accounts opened under the said circular should be treated as BSBDA. Accounts enjoying additional facilities under the reasonable pricing structure for value added services, exclusively for BSBDA customers should not be treated as BSBDAs.

1. What are the pre-conditions for the FCNR (B) deposits mobilised by a bank for being eligible to be swapped with RBI under the swap window ? +

Only fresh FCNR (B) deposits mobilized in any of the permitted currencies after September 6, 2013 with a minimum three years maturity and having a lock in period of one year are permissible deposits under the swap window.

Banks are free to mobilise other types of permitted FCNR (B) deposits as specified in the RBI Master Circular on Interest Rates on FCNR (B) Deposits dated July 1, 2013 read with Circular DBOD.Dir.BC. 38/13.03.00/2013-14 dated August 14, 2013. However, such deposits will not qualify as eligible deposit for the purpose of swap with RBI. Banks are advised to maintain separate ledgers for FCNR (B) deposits mobilised under both the schemes along with proper audit trail of transactions.

Note: a) Since SNRR account has been allowed to be used for specified transactions in trade, foreign investments, External Commercial Borrowings, etc., in lieu of sending inward/outward remittances by a person resident outside India in a convertible foreign currency for each transaction with a resident or vice-versa, all precautions need to be taken by Authorized Dealer (AD) banks to ensure identification of the counterparty of such transactions. Some of such precautions are listed out in FAQs below. The onus of ensuring the use and identification of SNRR transactions as per guidelines falls on the AD banks.

b) The provisions of these FAQs will not apply to the SNRR accounts of FPIs, FVCIs and Depository Receipt / FCCB conversion accounts which are operated by a custodian and fall under para 7.1 (i) of Part II of the Master Directions on Deposits and Accounts.

1. What are the processes to be adopted for transactions undertaken through SNRR A/c? +

Payments initiated to the debit of SNRR Accounts: While handling INR payments to the debit of SNRR A/c favouring a person resident in India, AD Bank shall ensure that the transaction is communicated as SNRR transaction (including purpose code and country details, if applicable) to the recipient bank, either through electronic means or manually.
Payments received for credit to SNRR Accounts: AD Bank holding SNRR account shall ensure that any domestic inward remittance received for credit to SNRR account should be confirmed as SNRR transaction as at A above.
AD banks shall ensure compliance with various FEMA provisions as contained in the FEMA or the Rules or Regulations framed thereunder or directions issued thereunder in respect of all such transactions involving SNRR accounts.

Q 1: Whether a lending transaction would fall under the definition of digital lending only if all the processes in the life cycle of a loan, viz., customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service, are carried out digitally or some of the aforesaid processes can be carried out in physical mode also? +

Ans: The phrase ‘largely by use of seamless digital technologies’ has been used in the Digital Lending definition to accord operational flexibility to REs in ‘Digital Lending’. Therefore, even if some physical interface with customer is present, the lending will still fall under the definition of Digital Lending. However, while doing so, the REs should ensure that the intent behind the Guidelines is adhered to.

1. What are the RBI guidelines on education loans?

RBI issued circular RPCD.PLNFS.BC.NO.83/06.12.05/2000-01 dated April 28, 2001 on ‘Educational Loan Scheme’ advising all Scheduled Commercial Banks to adopt the Model Education Loan Scheme, formulated by Indian Banks’ Association (IBA). The Scheme has been revised by IBA from time to time and its latest revision is Model Education Loan Scheme (MELS), 2021.

For detailed information on guidelines to banks on education loan, please refer to MELS, 2021 and its related circulars. Copy of the aforesaid Scheme is available on the IBA website.

It is to be noted that the MELS, 2021 provides broad guidelines to the banks for operationalizing the educational loan scheme and implementing banks will have the discretion to make changes as deemed fit.

1. What is tokenisation? +

Ans. Tokenisation refers to replacement of actual card details with an alternate code called the “token”, which shall be unique for a combination of card, token requestor (i.e. the entity which accepts request from the customer for tokenisation of a card and passes it on to the card network to issue a corresponding token) and device (referred hereafter as “identified device”).

(i) If a borrower has aggregate sanctioned credit limit of Rs.25,000 crore on or before March 31, 2016, will it still qualify as a ‘Specified Borrower’? +

In all such cases, the borrower will deemed to be a ‘Specified borrower’ from April 1, 2016 and the disincentive mechanism will be applicable from April 1, 2017 if the borrower borrows from the banking system beyond the NPLL.

1. How will the daily changes in the inflation adjusted principal be accounted for, regarding MTM, Interest, Book Value

Ans: The valuation criteria as specified for HTM, AFS and HFT would apply.

Valuation (para nos. given are from our MC on investments)

3.1 Held to Maturity

i) Investments classified under HTM need not be marked to market and will be carried at acquisition cost, unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity. The banks should reflect the amortised amount in 'Schedule 13 - Interest Earned: Item II - Income on Investments', as a deduction. However, the deduction need not be disclosed separately. The book value of the security should continue to be reduced to the extent of the amount amortised during the relevant accounting period.

In the case of IIBs, face value will mean the inflation adjusted principal.

3.2 Available for Sale

The individual scrips in the Available for Sale category will be marked to market at quarterly or at more frequent intervals. Domestic Securities under this category shall be valued scrip-wise and depreciation / appreciation shall be aggregated for each classification referred to in item 2(i) above and foreign investments under this category shall be valued scrip-wise and depreciation / appreciation shall be aggregated for five classifications (viz. Government securities (including local authorities), Shares, Debentures & Bonds, Subsidiaries and / or joint ventures abroad and Other investments (to be specified)). Further, the investment in a particular classification, both in domestic and foreign securities, may be aggregated for the purpose of arriving at net depreciation / appreciation of investments under that category. Net depreciation, if any, shall be provided for Net appreciation, if any, should be ignored. Net depreciation required to be provided for in any one classification should not be reduced on account of net appreciation in any other classification. The banks may continue to report the foreign securities under three categories (Government securities (including local authorities), Subsidiaries and / or joint ventures abroad and other investments (to be specified)) in the balance sheet. The book value of the individual securities would not undergo any change after the marking of market.

3.3 Held for Trading

The individual scrips in the Held for Trading category will be marked to market at monthly or at more frequent intervals and provided for as in the case of those in the Available for Sale category. Consequently, the book value of the individual securities in this category would also not undergo any change after marking to market.

FIMMDA has informed that the price quoted in the market will be the real price and consideration for purchase and sale of the bond will be ((“Real Price x Index Ratio” which is clean price) + (Accrued Interest which is the Broken Period Interest). As per para 5.2 of the Master Circular on Classification, Valuation and Investment Portfolio by banks, broken period interest should not be capitalized but treated as an item of expenditure. In order to be consistent with present valuation norms, only clean price may be considered as acquisition cost.

As regards the mark to market value, in the case of IIBs it is the quoted clean price if available. If it is unquoted, FIMMDA’s valuation methodology for arriving at the clean price as above should be followed.

However, regarding broken period interest, banks would have to be guided by what is indicated in para 5.2 of MC on investments:

5.2 Broken Period Interest

Banks should not capitalise the Broken Period Interest paid to seller as part of cost, but treat it as an item of expenditure under Profit and Loss Account in respect of investments in Government and other approved securities. It is to be noted that the above accounting treatment does not take into account taxation implications and hence the banks should comply with the requirements of Income Tax Authorities in the manner prescribed by them.

In case it falls under unquoted SLR security, FIMMDA’s valuation methodology for arriving at the clean price should be followed.

The legal framework for administration of foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999. Under the Foreign Exchange Management Act, 1999 (FEMA), which came into force with effect from June 1, 2000, all transactions involving foreign exchange have been classified either as capital or current account transactions. All transactions undertaken by a resident that do not alter his / her assets or liabilities, including contingent liabilities, outside India are current account transactions.

In terms of Section 5 of the FEMA, persons resident in India ¹ are free to buy or sell foreign exchange for any current account transaction except for those transactions for which drawal of foreign exchange has been prohibited by Central Government, such as remittance out of lottery winnings; remittance of income from racing/riding, etc., or any other hobby; remittance for purchase of lottery tickets, banned / proscribed magazines, football pools, sweepstakes, etc.; remittance of dividend by any company to which the requirement of dividend balancing is applicable; payment of commission on exports under Rupee State Credit Route except commission up to 10% of invoice value of exports of tea and tobacco; payment of commission on exports made towards equity investment in Joint Ventures / Wholly Owned Subsidiaries abroad of Indian companies; remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme and payment related to “call back services” of telephones.

Foreign Exchange Management (Current Account Transactions) Rules, 2000 - Notification [GSR No. 381(E)] dated May 3, 2000 and the revised Schedule III to the Rules as given in the Notification G.S.R. 426(E) dated May 26, 2015 is available in the Official Gazette as well as, as an Annex to our Master Direction on ‘Other Remittance Facilities’ available on our website www.rbi.org.in.

Q 1. What is the Liberalised Remittance Scheme (LRS) of USD 2,50,000 ?

Ans. Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both. Further, resident individuals can avail of foreign exchange facility for the purposes mentioned in Para 1 of Schedule III of FEM (CAT) Amendment Rules 2015, dated May 26, 2015, within the limit of USD 2,50,000 only.

The Scheme was introduced on February 4, 2004, with a limit of USD 25,000. The LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions.

In case of remitter being a minor, the LRS declaration form must be countersigned by the minor’s natural guardian. The Scheme is not available to corporates, partnership firms, HUF, Trusts etc.

These FAQs attempt to put in place the common queries that users have on the subject in easy to understand language. However, for conducting a transaction, the Foreign Exchange Management Act, 1999 (FEMA) and the Regulations made or directions issued thereunder may be referred to. The relevant Principal Regulations are the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 issued vide Notification No. FEMA 22(R)/2016-RB dated March 31, 2016. The directions issued are consolidated in Master Direction on Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) or any other place of business in India by foreign entities.

Q.1. What action the AD is required to take in case of any adverse reporting in Annual Activity Certificate (AAC) of LO/BO or non-submission of AACs? +

Ans. In case the designated AD Category I bank notices any adverse findings by the auditor in respect of LO/BO or the LO/BO is defaulting in submission of AACs, then the same should be immediately reported to the Reserve Bank.

These FAQs attempt to put in place the common queries that users have on the subject in an easy to understand language. The directions relating to the subject of money changing activities including authorisation and functioning of FFMCs, non-bank ADs Category II, and franchisees of Authorised Persons as well as the conduct of foreign exchange transactions with their customers/constituents is laid down in Master Direction on Money Changing Activities as updated from time to time.

1. Who are Authorised Persons under Foreign Exchange Management Act, 1999 (“FEMA”)? What are the different categories of authorisation/licence granted under Section 10(1) of FEMA 1999? +

Reserve Bank, currently, issues authorisation under Section 10(1) of the Foreign Exchange Management Act, 1999, to

select banks (as Authorised Dealers Category-I) to carry out all permissible current and capital account transactions as per directions issued from time-to-time
select entities (as Authorised Dealers Category-II) to carry out specified non-trade related current account transactions, all the activities permitted to Full Fledged Money Changers and any other activity as decided by the Reserve Bank
select financial and other institutions (as Authorised Dealers Category-III) to carry out specific foreign exchange transactions incidental to their business / activities
select registered companies as Full Fledged Money Changers (FFMC) to undertake purchase of foreign exchange and sale of foreign exchange for specificied purposes viz. private and business travel abroad.

1. What is NDS-OM? +

NDS-OM is a screen based electronic anonymous order matching system for secondary market trading in Government securities owned by RBI. Presently the membership of the system is open to entities like Banks, Primary Dealers, Insurance Companies, Mutual Funds etc. i.e entities who maintain SGL accounts with RBI. These are Primary Members (PM) of NDS and are permitted by RBI to become members of NDS-OM. Gilt Account Holders which have gilt account with the PMs are permitted to have indirect access to the NDS-OM system i.e they can request their Primary Members to place orders on their behalf on the NDS-OM system.

Q 1. Who is an Authorized Dealer (AD)? +

Ans. An Authorised Dealer (AD) is any person specifically authorized by the Reserve Bank under Section 10(1) of FEMA, 1999, to deal in foreign exchange or foreign securities (the list of ADs is available on www.rbi.org.in) and normally includes banks.

1. What is National Electronic Funds Transfer (NEFT) system?

Ans: National Electronic Funds Transfer (NEFT) is a nation-wide centralised payment system owned and operated by the Reserve Bank of India (RBI). The set of procedures to be followed by various stakeholders participating in the system is available on the RBI website under the following link: https://website.rbi.org.in/documents/87730/39711381/NEFTPROCEDURALJANUARY2024DBA95372B2454F9F8B767824B0B6E86F.pdf.

Q.1. What is the definition of MSME ? +

In terms of Government of India Gazette Notification S.O. 2119 (E) dated June 26, 2020 the definition of micro, small and medium enterprises is as under:

(i) A micro enterprise is an enterprise where the investment in plant and machinery or equipment does not exceed ₹1 crore and turnover does not exceed ₹5 crore;

(ii) A small enterprise is an enterprise where the investment in plant and machinery or equipment does not exceed ₹10 crore and turnover does not exceed ₹50 crore; and

(iii) A medium enterprise is an enterprise where the investment in plant and machinery or equipment does not exceed ₹50 crore and turnover does not exceed ₹250 crore.

All enterprises are required to register online on Udyam Registration Portal and obtain ‘Udyam Registration Certificate’. (Refer circulars FIDD.MSME & NFS.BC.No.3/06.02.31/2020-21 dated July 2, 2020, FIDD.MSME & NFS. BC. No.4/06.02.31/2020-21 dated August 21, 2020 FIDD.MSME & NFS.BC.No.13/06.02.31/2021-22 dated July 07, 2021)

(Ref.No.DoS.CO.ARG/SEC.01/08.91.001/2021-22 April 27, 2021)

The Circular dated April 27, 2021 on ‘Guidelines for Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs), has been issued by RBI with the basic objectives of putting in place ownership-neutral regulations, ensuring independence of auditors, avoiding conflict of interest in auditor’s appointments and to improve the quality and standards of audit in RBI Regulated Entities. These guidelines will also help in streamlining the procedure for appointment of Statutory Auditors across all the Regulated Entities and ensure that appointments are made in a timely, transparent and effective manner.

In view of certain clarifications being sought in the matter, it has been decided to publish Frequently Asked Questions (FAQs) and the necessary clarifications, as given below:

1. As per Para 6.4, whether the time gap of one year between any non-audit works by the SCAs/SAs for the Entities or any audit/non-audit works for its Group Entities has to be ensured for all the Entities in the Group or the RBI Regulated Entities in the Group ? +

The Group Entities refer to the RBI Regulated Entities in the Group, which fulfill the definition of Group Entity, as provided in the Circular¹. However, if an audit firm engaged with audit/non-audit works for the Group Entities (which are not regulated by RBI) is being considered by any of the RBI Regulated Entities in the Group for appointment as SCAs/SAs, it would be the responsibility of the Board/ACB/LMC of the concerned RBI Regulated Entity to ensure that there is no conflict of interest and independence of auditors is ensured, and this should be suitably recorded in the minutes of the meetings of Board/ACB/LMC.

Q 1. Certain aspects of Master Direction on Regulatory Framework for Microfinance Loans may require additional time for drafting of new policies, getting board-level approvals, making changes in technology systems, training of staff, etc. Whether the timeline for complete rollout of these directions may be extended, while keeping the effective date as April 1, 2022? +

Ans. The effective date of these directions is April 1, 2022. However, in view of implementation related difficulties expressed by some regulated entities (REs), REs are advised to implement these directions completely at the earliest on best effort basis, but not later than October 1, 2022.