Financial Stability and Development Council

Context (LM | TH | IT): The 28th Financial Stability and Development Council (FSDC) meeting chaired by finance minister was held recently.
The FSDC discussed various issues related to formulation of strategy for implementing the decisions of the FSDC and the Union Budget announcements.
The FSDC has decided to implement a standardised Know Your Customer (KYC) process.
The FSDC also deliberated on measures to counter the negative impacts of illegal lending apps that engage in charging exorbitant interest rates and employing predatory recovery practices.
They also discussed fundraising by social enterprises through social stock exchanges.

Standardised KYC Process

This uniform KYC approach aims to verify customers consistently across the entire financial sector.
At present, KYC verification processes vary across most banks and financial institutions.
The decision came shortly after the RBI took regulatory action against Paytm Payments Bank for non-compliance issues related to KYC.
Finance Minister in her Budget speech for FY 2023-24 had proposed that the KYC process will be simplified adopting a ‘risk-based’ instead of ‘one size fits all’ approach.

Over the years, fraudulent firms have mushroomed on the back of rapid growth in digital lending.
As per the information received from MeitY, during April 2021 – July 2022, Google had reviewed approximately 3,500 to 4,000 loan apps and suspended/removed over 2,500 loan apps from its Play Store.
RBI has shared a list of 442 unique digital lending apps used by the regulated entities with MeitY for the purpose of whitelisting and the same was shared with Google.

Whitelisting is a cybersecurity strategy that allows the execution of only preapproved apps, IP addresses, and emails. This implies that all the external software, harmful or not, will not be run.

In the Budget speech of 2019-20, Finance Minister had proposed creation of a social stock exchange (SSE) to facilitate raising money by social enterprises and voluntary organizations.
Following this, SEBI Board approved a framework for SSE.
Then the Finance Ministry declared zero coupon zero principal instruments (ZCZP) as securities.
- This decision aims to assist organizations, including corporates, in utilizing funds designated for social responsibility.
- It also helps non-profit organizations access funds more transparently.

Social enterprises eligible to participate in the SSE should be entities — NPOs and for-profit social enterprises, having social intent and impact as their primary goal.

It is issued by a Not-for-Profit Organisation (NPO).
Unlike traditional bonds or equities, zero coupon zero principal instrument don’t yield interest, nor do they return the principal amount upon maturity. Instead, they operate as pure donations.
However, they are considered as securities under Securities Contracts (Regulation) Act, 1956.
These instruments will be governed by the SEBI.
Unnati, a not-for-profit organisation issuing India’s first zero coupon zero principal instrument, on the social stock exchange. The funds raised by Unnati will be utilised to train and place underprivileged youth.

It is a non-statutory apex council under the Ministry of Finance.
It was constituted by the Executive Order in 2010.
The Raghuram Rajan committee (2008) on financial sector reforms first proposed the creation of FSDC.
FSDC sub-committee is headed by the Governor of RBI.
The Council can invite experts to its meeting if required.

Chairman: Finance Minister.
Its members include:
- The heads of all Financial Sector Regulators (RBI, SEBI, PFRDA & IRDA).
- The Finance Secretary.
- The Secretary of the Department of Economic Affairs (DEA).
- The Secretary of the Department of Financial Services (DFS).
- Chief Economic Adviser.
- Minister of State responsible for the Department of Economic Affairs (DEA).
- The Secretary of the Department of Electronics and Information Technology.
- The Chairperson of the Insolvency and Bankruptcy Board of India (IBBI).
- The Revenue Secretary.