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Vijayaraghavan’s Notes on Banking -Promotion Interview – updated 16.09.16 1

Vijayaraghavan’s Notes on Banking Bank Officers’ Grade Promotion Interview-2016

By A R E A D I N G O F R E L E v A N C E T O I O B I A N S

R.Vijayaraghavan Senior Manager(Retd)

IOB

E Mail id- [email protected]

Table of Contents

Disclaimer: The information furnished is collected from various sources. Though to the best of our knowledge and belief, the contents are correct, the Author accepts no responsibility for authenticity or accuracy. The reading material has been provided on free service , to serve as a reference guide while preparing for exams and promotion test/interview. Readers are requested to refer the relevant Circulars, guidelines and Book of instructions for a detailed view and for Job Knowledge/Work applications.

September 2016

Interview-Question & Answers 1 General-Financial 2

2 Latest Developments in Financial Sector

9

3 Monetary Policy Statement 2016-17 108

4 General Banking 133

5 Basel, Capital & Risk Management 182

6 Foreign Exchange 193

7 Advances 206

IOB Financial Indicators 240


What is Sensex and Nifty? What is the difference between the two? Sensex & Nifty both are an "index". It is an indicator giving you a general idea about whether most of the stocks have gone up or most of the stocks have gone down. Sensex is an index of Bombay Stock Exchange (BSE) Nifty is an index of National Stock Exchange(NSE)

BSE –Sensex -Bombay Exchange Sensitivity Index is represented by how many stocks? 30

Nifty-NSE Index consist of how many stocks? 50

Why S&P name is added with Nifty index? S&P Dow Jones Indices is a global leader in index construction and management. They were in association with NSE , till recently for arriving at the Nifty Index. Hence the brand name S&P has all along been used with Nifty. Now the BSE, and S&P have entered into Licence agreement , for calculating Sensex .BSE Sensex, will hereafter will be renamed as S&P BSE Sensex.

What is the name of the Unique Identity Number given to Citizens of India? AADHAAR.

What is the objective of the “Project Financial Literacy Launched by RBI? The Objective of the project is to disseminate information regarding the central bank and general banking concepts to various target groups, including, school and college going children, women, rural and urban poor, defence personnel and senior citizens.

Under the Project Financial Literacy, RBI has introduced a Comic Book to explain the complexities of banking and finance and central banking in a simple and interesting way. Name the Two Modules/Characters created there in. one module in which Money Kumar will familiarise you with the role and functions of the Reserve Bank of India; and through the other module, Raju will introduce you to banking concepts.

What is inflation?

Inflation: The rate at which the general level of prices for goods and services is rising is called inflation. It Indicates, the overall general upward price movement of goods and services in an economy (often caused by a increase in the supply of money-When too much money chases too few goods ,prices of goods increases). That is called inflation. In that case there will be lot of money , but with fewer goods.

What is called Deflation? DEFLATION : Deflation is opposite of Inflation. Deflation measures the rate of

fall in prices. Denotes persistent fall in general price levels of goods and

services. It should not be confused with decline in prices in one economic sector

http://www.investorguide.com/definition/overall.html

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or fall in inflation rate (known as disinflation). While productivity driven deflation

in which costs and prices are pushed lower by technological advances is

beneficial to the economy that reflecting sharp slump in demand, excess

capacity and shrinking money

What is called Disinflation?

Disinflation is reduction in inflation rate or mitigating the Rate of Inflation.

Inflation , Stagflation, Deflation and disinflation are all related and reflecting the

price stability in an economy.)

What is called Stagflation?

Stagflation: Inflation coupled with stagnation is called Stagflation.

Who is the Regulator For Commodity Exchange Markets in India?

FMC(Forward Market Commission), set up in 1953.

How many Commodity Exchange Markets in India?

4. India has four national commodity exchanges namely, Multi Commodity

Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX),

National Multi-Commodity Exchange (NMCE) and Indian Commodity Exchange

(ICEX).

What is called Payment Gate Way?

A payment gateway is an e-commerce application. Through this a service provider authorizes payments for e-businesses, online credit and debit card payments . Payment gateways protect credit card details by encrypting sensitive information, such as credit card numbers and ensure that information is passed securely between the customer and the merchant and also between merchant and the payment processor.

A payment gateway facilitates the transfer of information between a payment portal (such as a website, mobile phone or IVR service) and the Front End Processor or acquiring bank. When a customer orders a product from a payment gateway-enabled merchant, the payment gateway performs a variety of tasks to process the transaction.

Name the BRICS countries?

Brazil, Russia, India, China and South Africa. Represents fastest growing countries and emerging markets.

Name the PIIGS Countries?

Portugal, Italy, Ireland, Greece and Spain. Group of Economically weaker countries. They use Common Euro currency.

What is the difference between Head Line Inflation and core Inflation?

Head line inflation is an indicator to total inflation. In core inflation, seasonal and volatile items like food and energy will be excluded.

http://en.wikipedia.org/wiki/Multi_Commodity_Exchange

http://en.wikipedia.org/wiki/Multi_Commodity_Exchange

http://en.wikipedia.org/wiki/National_Commodity_and_Derivatives_Exchange

http://en.wikipedia.org/w/index.php?title=National_Multi-Commodity_Exchange&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Indian_Commodity_Exchange&action=edit&redlink=1

http://en.wikipedia.org/wiki/E-commerce

http://en.wikipedia.org/wiki/Application_service_provider


http://en.wikipedia.org/wiki/Ebusiness

http://en.wikipedia.org/wiki/E-tailer

http://en.wikipedia.org/wiki/Gateway_%28computer_program%29

http://en.wikipedia.org/wiki/Credit_card

http://en.wikipedia.org/wiki/Payment_processor

http://en.wikipedia.org/wiki/IVR


What is called BIS?

Bank for International Settlement.

What is the term Counter Cyclical denotes?

An economic or financial policy is called “Counter cyclical”, if it works against the cyclical tendencies in the economy. That is, counter cyclical policies are the ones that cool down the economy when it is in upswing, and stimulate the economy when it is in a downturn.

What is called SFMS?

SFMS- Structured Financial Messaging System, is a secure messaging standard developed to serve as a platform for intra-bank and inter-bank applications. It is a standard similar to SWIFT messages.

What is called SWIFT?

SWIFT-Society for World wide Inter bank Financial Telecommunications, which is a international messaging system used for financial messaging globally.

What is called IMF?

International Monetary Fund.

What is called SAARC?

It is an association of countries from South Asia. South Asian association for Regional Cooperation.

a. What is called GIRO based payment System? b. Who is the chairman of the GIRO advisory group Constituted by RBI? c. What is the name of the Committee set by RBI to finalise the modalities of implementing the GIRO payment system in India? a. GIRO payment is a credit push transaction initiated by the payer and may involve the presence of three banks (collecting bank, payer bank and the payee bank). Alternatively it involves the customer, Bank and a Billing organisation. Through this arrangement the customer can make payment directly to a Billing Organisation for any outstanding bills like insurance premia, utility payments, taxes, university fees, examination fees, school fees, etc. Bill paying public/customers can access any payment channel through banks/non-bank entity. This model will enable the setting up of a centralised infrastructure bringing all the billers and banks to the bill platform through the aggregators. It will also allow interoperability in the bill payment process and enable the consumers to make payments at any of the collection points which is the essence of GIRO system. Note: The word "giro" is related to the German term Girokonto (Giro account), which is a common type of bank account in Germany. It is based on the Italian word "giro", in the sense of "circulation of money" b. Chairman of the GIRO advisory group Constituted by RBI: Prof. Umesh


Bellur. Following the report of Shri G.Padmanabhan Committee, this advisory group has been set up by RBI. The Group has submitted its report in April 2014. G Padmanabhan Committee- set by RBI to study the feasibility of feasibility of implementation of GIRO based payment systems and to finalise the modalities of implementing the GIRO payment system—both electronic and cheque based in India.

Single Window payment of all Bills-April 14

RBI is setting up an Indian Bill Payment System, a centralized payment Gateway to make all kinds of bill payments smooth. Users will be able to pay bills of all kinds by the click of the button or any where through third party vendors.

The payment process will be instituted through GIRO( Government Internal Revenue Order) based system, where all the billers such as utility payments, taxes, university fees, examination fees and insurance premiums etc come on a common platform that will enable payers to make payment directly to billers.

RBI has set up the committee called GIRO Advisory Group.( Chairman- Prof Umesh Bellur –April 14) GIRO Advisory Group has proposed setting up two organizations viz the “ Bharat Bill Payment Services” and the “ Bharat Bill Payment Operating Units”. The new system will allow all bills to be listed at one location , where one can go and pay. The new system will help customers and the billers to keep things electronically safe and reduce hassles.

What are the features of GOIIIB?

GOIIIB-Government Of India Inflation Indexed Bonds:

1. Inflation Indexed National Savings Securities- [IINSS-C] issued by Ministry of Finance, GOI.

2. Purpose of the bond is to protect savings of the investor from inflation. 3. Issued in the form of Bonds Ledger Account( BLA) will be held by RBI. 4. Minimum Investment Rs 5,000.Maximum Investment Rs 10 lacs.pa. for

individuals and for Institutional investors like HUF it is raised to Rs 25 Lacs.

5. Period-10 years. 6. Rate of Interest-Base rate/fixed rate of 1.50% ( annual)+Inflation rate(

CPI-Compounded Half yearly). 7. Pre-closure after 1 year for Senior Citizens and after 3 years for others. 8. Nomination can be more than one individual including NRI. 9. Security can be pledged as collateral for taking loan. 10. Individuals, HUFs, Charitable Institutions and Universities can subscribe.

Who are the financial Sector Regulators in India?

The financial sector regulators are Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority and


Pension Fund Regulatory and Development Authority.

Who is the Administrator of Indian Rupee Interest Rate Bench Mark?

Fixed Income Money Market and Derivatives Association of India (FIMMDA)*

Who is the Administrator of Foreign Exchange Bench Mark?

Foreign Exchange Dealers’ Association of India (FEDAI).*

*In order to overcome the possible conflicts of interest in the benchmark setting process arising out of the current governance structure of the FIMMDA and FEDAI, an independent body, either separately or jointly, may be formed by the FIMMDA and FEDAI for administration of the benchmarks.

What are the risks involved in Payment System ?

Payment systems are subjected to various financial risks, such as, credit risk, liquidity risk, systemic risk, operational risk, legal risk.

Under “ Make in India “ campaign Prime Minister Sri Narendra Modi has called for to take ROAD to growth and shun ABCD culture. What is the meaning of ROAD and ABCD culture?

Government is generally trapped in 'ABCD' culture from top to bottom.... A means Avoid, B-Bypass, C-Confuse, D-Delay. Our effort is to move from this culture to 'ROAD' where R stands for Responsibility, O-Ownership, A-Accountability, D-Discipline. We are committed to moving towards this roadmap," he said. Modi sought to make the traditional policy formulation model in government more open by saying that the public-private partnership model can be applied to the decision-making process itself.

What is the difference between” Caveat Emptor’ and “Caveat Venditor” ?

Principle of “ Cavet Emptor”-( Buyer Beware)-Under the principle of Caveat emptor, the buyer could not recover damages from the seller , for defects on the property that rendered the property unfit for ordinary purposes. The only exception as if the seller actively concealed latent defects or otherwise made material misrepresentations amounting to fraud.

Principle of “Caveat Venditor”-It is the opposite of common law rule of caveat emptor. This is based on the maxim, casting the responsibility for defects or deficiencies upon the seller of goods .

RBI has directed banks to refrain from providing products of inferior quality and to take responsibility for the products. Banks would have to move from the principle of caveat emptor ( let the buyer beware) . Caveat Venditor vests the burden of proving that the deficiency was absent on the seller of the product.

What are the Major HR Challenges that PSBs are facing?

Near vacuum in the Senior Management over the next few years, lack of expertise in critical areas like IT, Risk Management, Credit Appraisal, and Treasury Operations, absence of succession planning for middle and senior management positions, attracting ,retaining and nurturing fresh talent, adhoc responses to capacity building and poor performance management system are

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some of the major HR challenges that PSBs are facing.

Many of the present day ills in Indian Banks e.g. weak appraisal standards, not being able to pick up the early warning signals in problem accounts, which leads to fraudulent transactions or accounts becoming NPA, recurring customer grievances etc. can be ascribed to skill gaps in the manpower of the banks.

What is called Digital Wallet?

A system that securely stores users' payment information and passwords for numerous payment methods and websites. By using a digital wallet, users can complete purchases easily and quickly with near field communications technology. They can also create stronger passwords without worrying about whether they will be able to remember them later. Digital wallets can be used in conjunction with mobile payment systems that allow customers to pay for purchases with their smart phones. They can also be used to store loyalty card information and digital coupons. Also known as an e-wallet..

What is called Oligopoly? An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher prices for consumers. Dr. Jean Tirole wins Nobel Prize for Economics Dr. Jean Tirole, French economist won the 2014 Nobel Prize for Economics for his analysis of market power and regulation in natural monopolies and oligopoly.

What is called Talent Management?

Talent Management is a structured process for attracting, developing, retaining, deploying human resources with the right aptitude and skill sets and make them future ready. The old KSA model of capacity building (Knowledge, Skill and Attitude)is applicable here, with the addition of aptitude which is very valid in the context of talent management. It is thus a continuous process. Broadly from the organisation point of view, Talent Management involves coordinating the following dimensions namely ,.Recruiting the right set of people, developing them, retaining them, employee development and engagement through formal and informal learning processes , identifying high potential employees, developing leadership skills etc. Focus of Talent Management is that one needs SMART (this smart 1) persons; people - who are Skilled, Meticulous, Adaptive (willing to work in any environment), Responsible and Trust worthy (Reliable) in terms of customer service and they should be Team players. As Michael Jordan, the famous basket ball player was quoted as saying that 'talent wins games but teamwork and intelligence wins championships'. In PSBS, of late, problems are creeping in - weak appraisals, poor asset quality, frauds, increase in customer grievances, poor risk management, inadequate understanding and leveraging of IT resources, manpower shortages, etc.


The public sector banks in particular did not recruit personnel for a fairly long time. Owing to this, large scale retirements have already started to happen. There is a serious crunch of leadership in several areas like Risk Management, IT, credit appraisal, etc. There are hardly any leaders in pipeline. In many organisations, people have moved fast and are not mature enough to handle these tasks. PSBs needs SMART 2 persons - leaders - who can Strategize things, Meticulous planners, Articulate and advocate changes required, Result oriented, tough Team builders. These basically relate to the middle and the top management.

What is called Credit Information Co? Name the Credit Information Cos approved by RBI.

Credit Information Companies (Regulation) Act, 2005 came into force on 14th December, 2006.

The Act require every credit institution to become member of at least one credit information company before the expiry of three months from such commencement.

Such CIS have to be registered with RBI and DBOD, RBI will issue Certificate of registration to commence the business of credit information.

A CIC collects and maintains records of an individual’s payments pertaining to loans and credit cards. These records are submitted to the CIC by banks and other Credit Institutions, on a monthly basis. This information is then used to create Credit Information Reports (credit report) which are provided to Credit Institutions in order to help evaluate and approve loan applications or any other credit applications. The credit report is often used tool in evaluating loan applications. If required by the loan provider, a CICs will also provide a Credit Score, which is a 3 digit numeric summary of your credit report. The CIBIL TransUnion Score is used my many lenders during the loan application process.

CICs are also commonly referred to as “Credit Bureaus”.

List of CICs approved by RBI

1. Credit Information Bureau (India) Ltd.( CIBIL) 2. Experian Credit Information Company of India Private Ltd 3. Equifax Credit Information Services Pvt. Ltd 4. High Mark Credit Information Services Pvt. Ltd.

What is the fiscal deficit targets under FRBM Act?( Fiscal Responsibility and Budget Management Act 2003)

3.60% in 2016 and 3.00% in 2017.

GDP= Consumption+ Private Investment+ Govt Expenditure+ Net Exports

2015-16-7.6%


Vijayaraghavan’s Notes – Interview: Updates on Financial Sector Development

What are the reasons for Asset quality Problems in SCBs in India?

The signs of rising stress in the banking system became increasingly evident in the years beginning 2012. The stressed assets (GNPA+ Restd. Std. assets +Written Off Accounts) for the banking system as a whole, which stood at 9.8% as at the end of March 2012, moved up sharply to 14.5% as at the end of December 2015. During the same period, the stressed assets for the PSBs spiked from 11.0 % to 17.7%.

Similarly, the growth in net profits of SCBs was also on a declining trend since 2011-12 and turned negative in 2013-14. This decline in net profits of SCBs during this period was primarily the result of higher provisioning on banks’ delinquent loans during the period 2012-14. This in turn impacted their return on assets (RoA) and return on equity (RoE). The banks’ spread and net interest margin (NIM) also witnessed a decline during the period.

The asset quality problems can be due to one of the following four factors:

a) Environmental factors

The economic downturn that has engulfed the global economy since the onset of the Financial Crisis in 2008 can be counted as one of the major cause for the asset quality problems in India. Then, there are other external factors like fall in commodity prices, dumping by China etc. which has led to reduced competitiveness and consequently idle capacities and cash flow problems. The situation got aggravated due to the policy logjam that followed in the country. Several large scale projects in the country have remained stalled due to lack of environmental clearances, cancellation of coal block allocation, falling through of the fuel supply arrangements, local protests etc.

b) Corporate Imprudence

The imprudence of the corporates can be attributed as the second most important factor for poor asset quality in the system. Some of the major failings that the corporates exhibited are:

Overleverage - All debt, no equity; Veiled corporate structures impeded assessment by banks

Obsession for higher growth- Excess capacities, Unrelated diversification. The liquidity generated due to ultra-accommodative monetary policy stance by Central Banks in advanced economies also created misaligned incentives.

Chasing profits eg. ignoring risks inherent in unhedged forex exposures

c) Corporate Misdemeanors

Not all promoters/borrowers have had a clear conscience and some of them were out to dupe the system by using foul means. They are willful defaulters in banks’


books as they have been unwilling to honour their payment obligations even while having a capacity to do so. Some of the promoters have diverted borrowed funds for purposes other than for which the finance was availed. There are also occasions where some of the borrowers have siphoned off funds for personal gains and not created any productive asset. A section of the promoters have also disposed off movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the lender. The consequent defaults, in such cases are intentional, deliberate and calculated and hence willful. It is this set of promoters that need to be singled out and quickly brought to justice.

d) Banks’ failings

It is not corporates alone that caused pain in the system. In several instances, the bankers have also not exercised due caution while conducting due diligence on the projects that they have financed. Some of the common shortcomings that the banks exhibited include:

Governance deficit Poor credit appraisal particularly in infra financing such as highways where

contracts were ‘gold plated’; Power which suffered from Faulty FSAs, absence of Pass through arrangements, lack of provision for termination payments etc.;

Weak risk management; Chasing quick growth; Pretend and Extend

The mistakes committed by the banks and the corporates, whether incidental or intentional, have resulted in a massive pile up of non-performing assets in the banking system. While the banks needed to guard against growing credit concentration risks especially in sectors which had witnessed excessively high growth, the corporates should have had the foresight of analyzing the emerging market dynamics

Consolidation among PSBs- Discuss Issues Involved: Current Imperatives

1. The need for consolidation is specially felt now, due to the fact that although India is seventh largest economy in the world in terms of nominal GDP, there is no Indian bank in the list of 70 large banks in terms of asset size. We can easily see that large banks reap certain advantages in terms of efficiency, risk diversification and capacity to finance large projects. The efficiency gains resulting from lower cost of services and higher quality of services is too attractive to ignore.

2. It is also felt that a larger bank may be less risky than a smaller bank as the larger bank will have a more diversified portfolio resulting in less volatility in its earnings. Consequently, a large bank may command higher credit rating than a


smaller bank.

3. Large banks do benefit from economies of scale in terms of risk diversification, although this benefit disappears when banks become excessively large beyond a certain threshold size. This threshold size has been subject of much debate in the discipline of finance. In India, it is felt that there is ample room for consolidation in the banking sector, especially among PSBs without creating issues of moral hazard or too big to fail concerns. It does appear that the banking system in India is too fragmented at present.

4.. There are 48 domestic banks (excluding RRBs and LABs) out of which there are 27 PSBs having a market share of around 70% in terms of asset size. A comparison of performance of larger PSBs with smaller PSBs does indicate that larger PSBs perform better. For example, among all PSBs, larger PSBs like SBI and Bank of Baroda are trading at higher Price to Book Value ratio in comparison to other smaller PSBs. SBI has been able to maintain relatively strong capital ratios and appears to be in a better position to withstand shocks to asset-quality. This indicates that under Indian conditions, there is lot of scope for banks to grow in size to become efficient and diversify their risks.

5. The other important aspect which needs to be considered is credit demand of a growing economy. As Indian companies increase their business and become global in nature, their demand for large scale credit will become higher. Banks also have to grow in size to meet the higher demand of credit. The banking system will be required to enhance its capacity to lend to larger companies and to larger projects. With increase in credit penetration and as credit to GDP ratio increases from present levels of 50 percent, PSBs with a market share of over 70 per cent need to contribute significantly in the process. Without strong PSBs which are efficient, competitive and well-capitalised, meeting higher demands of bank credit would be quite challenging in future.

6. Recent proposals on Large Exposure norms which limit banks’ exposure to a group by 25% of their common equity will further limit their capacity to fund large credit demands. It is therefore imperative that some consolidation among PSBs do happen to support the growth potential of the economy.

Caveats:

1. It is not that a large size is always beneficial for the banking system and overall economy. The benefit of size is observed up to a threshold level of size. A size beyond this threshold size may have negative consequences for the economy. Existence of excessively large banks may also create significant moral hazard costs for the entire system.

2. A failure of a very large bank may have systemic implications and therefore, there is a perception that large banks may be bailed out during stress periods. This expectation of government support create the perception of too big to fail, and this may improve their creditworthiness resulting in significant funding advantages. This implicit government subsidy enjoyed by these banks incentivises them to grow even bigger and makes them use higher leverage and engage in risky market-based


activities. 3. PSBs as a group have not been performing well during the last few years.

There has been a large increase in Non-Performing Assets (NPAs). As a part of managing large NPAs, some suggestions have been made that perhaps a consolidation of PSBs can render them more capable of managing such challenges relatively better. It has to be ensured that mergers among two banks should not be seen as a fix to short term problems as being faced by certain PSBs.

4. Merger may be useful only if it has strategic vision driven by synergy and creating value for both the banks. Merger of a weak bank with a strong bank may make combined entity weak if the merger process is not handled properly.

5. The problems of capital shortages and higher NPAs may get transmitted to stronger bank due to unduly haste or a mechanical merger process.

6. Consolidation should not be seen from the sole perspective of creating larger sized banks.

While it is agreed that under present banking structure in India, creating a few large size banks is desirable, it has to be a well calibrated and cautious process.

Consolidation of Indian Banking System in the Past:

There have been two types of bank consolidation in India. One and most obvious has been voluntary merger of banks driven by the need for synergy, growth and operational efficiency in operations. Recent merger of ING Vysya Bank with Kotak Mahindra Bank is an example of this kind of consolidation. ING Vysya Bank had a stronger presence in South India while Kotak had an extended franchise in the West and North India. The merger created a large financial institution with a pan-India presence. This kind of voluntary merger driven by synergy and clear economic logic has been rather common in the private banks segment. Other examples of this kind of merger may be acquisition of Bank of Madura in 2001 and Sangli Bank in 2007 by ICICI Bank, acquisition of Centurion Bank of Punjab by HDFC Bank in 2008, etc. The Reserve Bank has been given powers under Section 44A of Banking Regulation Act 1949 to approve such voluntary mergers. The Reserve Bank has been quite supportive of voluntary mergers of banks which have the prospect of creating value for those banks. However, such examples are not many in public sector banks sphere. Recent merger of State Bank of Saurashtra and State Bank of Indore into State Bank of India may be seen as basically merger among group companies. The only example of merger of two PSBs is merger of New Bank of India with Punjab National Bank in 1993. However, this was not a voluntary merger.

The other type of merger of banks has been from the perspective of resolution of a weak bank. Section 45 of Banking Regulation Act 1949 empowers the Reserve Bank to make a scheme of amalgamation of a bank with another bank if it is in the depositors’ interest or in the interest of overall banking system. The operation of the weak bank may be kept under moratorium for a certain period of time to ensure smooth implementation of the scheme. Many private sector banks have been merged with other private sector banks or the PSBs under this mechanism. The merger of Global Trust Bank with Oriental Bank of Commerce in 2004 was


an example of this kind of merger. Earlier way back in 1960s, post Palai Central Bank’s failure, there were several such mergers guided by the Reserve Bank.

Since the onset of reforms, there have been about 32 mergers / amalgamations in the banking sector. Prior to 1999, most of the mergers were driven by resolution of weak banks under Section 45 of Banking Regulation Act 1949. However, after 1999, there has been increasing trend of voluntary mergers under Section 44A of Banking Regulation Act 1949. As noted above, most of these Section 44A mergers were among private sector banks. PSBs have bypassed this trend despite the fact that there might have been ample opportunities of creating value through strategic mergers and acquisitions among two PSBs.

Conclusions:

There is tremendous scope for consolidation among PSBs. Consolidation will bring efficiency and synergy of operations and will ensure that Indian banking sector is capable of meeting credit demand of our growing economy. However, the consolidation needs to be a well-calibrated process based on sound economic logic.

Empowering MSMEs- Issues and Challenges: Three fundamental issues pertaining to the MSME sector 1.Enabling better understanding of the sector by the banking community; 2.Ensuring timely financial support to distressed Micro and Small enterprises; 3.Empowering MSMEs, an objective that is closely linked to the first two. MSME Sector has emerged as a vibrant and dynamic sector of the Indian economy, contributing 37.5 per cent of India’s GDP, with its vast network of 48 million enterprises providing employment to 111.4 million persons.2 It may not be out of place to mention here that in the face of adverse economic conditions prevalent in the country today, the MSME sector stands as a beacon of hope. Realizing the potential that the sector holds, both Government of India and Reserve Bank of India have been laying substantial emphasis on means to energize the sector. Among the GOI initiatives that have a bearing on the sector are provision for Udyog Aadhaar, Start-up India, Make in India and steps for improving “Ease of Doing Business” in the country. Likewise, Reserve Bank of India has also been very conscious of the needs of the MSMEs and has hence, initiated a plethora of steps to support them through their lifecycle. Strengthening the Banking System for lending to MSMEs:

1. With a view to strengthen the reach and scope of credit delivery mechanism for small entrepreneurs and businesses, RBI has recently issued in-principle approvals for setting up of 10 Small Finance Banks (SFBs). The SFBs are mandated to extend 75 per cent of their Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by RBI. Further, these banks are also mandated to ensure that at least 50 per cent of their loan portfolio should constitute of loans and advances of up to Rs.25 lakh.

2. The recent revision to the priority sector lending guidelines has also sought to facilitate flow of credit to the sector. While on the one hand, the target for banks’ lending to micro enterprises has been progressively

https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=996#F2


increased to 7 percent by March 2016 and 7.5 percent by March 2017, medium enterprises have been brought within the ambit of priority sector, whereby all loans to medium enterprises in the manufacturing sector and those up to Rs. 10 crore in the service sector now qualify for priority sector classification.

3. An extremely important, but relatively much less appreciated aspect of credit delivery system is the availability of trained human capital within the banks. Bankers ought to have a sound understanding of the businesses that they finance. To overcome this human resource deficit in the banking sector, the Reserve Bank of India have embarked upon a fairly ambitious national level skill building programme for the bankers titled National Mission for Capacity Building of Bankers for Financing MSME Sector (NAMCABS) in July 2015. A major facet of the NAMCABS initiative is ‘Training the trainer’, which is intended to serve as a force- multiplier.

4. Timely availability of credit from the formal financial sector is a very critical issue which the small entrepreneur faces. RBI issued guidelines on maintaining electronic records of the loan applications from MSME borrowers and some of the banks have implemented a Credit Proposal and Tracking System.

5. The Committee on Medium Term Path on Financial Inclusion (Chairman: Shri Deepak Mohanty) has recommended exploring a system of professional credit advisors for MSMEs, which could help bridge the information gap between bank and the borrower that is a major constraint in the flow of credit to the MSME sector today. There is a proposal to accord accreditation to few credit counsellors who would act as facilitators for the micro and small entrepreneurs for accessing the formal financial system with greater ease and flexibility

6. Another financial infrastructure, which could have a multiplier effect on lending to small businesses, is a Movable Asset Registry. Today CERSAI provides a facility for registering charge on immovable property. However, most of the small business entrepreneurs do not possess immovable property to offer as collateral and instead they own machinery, stocks, receivables or livestock, which can be leveraged to obtain finance from banking channels if a ‘Movable Asset’ Registry is available. RBI is working towards this.

7. Predicting the lifecycle of MSMEs, particularly the Micro units, is a difficult proposition.

8. RBI has recently issued licenses to three entities for operating the Trade Receivable Discounting System (TReDS), which when operational, would address a major issue faced by the sector, i.e. timely realization of receivables. This is a path-breaking initiative with very few parallels in other countries. However, the implementation would need wholehearted support from all the major stakeholders, i.e. the large corporates, the PSUs and eventually, the Government enterprises.

9. RBI has also recently issued guidelines to streamline the credit flow to the MSME sector. The banks have been advised to review their existing lending policies to the MSE sector and fine-tune these policies by incorporating provisions for sanctioning of Standby Credit Facility in case of term loans, Additional Working Capital Limits, Mid Term Review of Regular Working Capital Limits, setting timelines for making credit


decisions, etc. Banks should be sensitive to the requirements of the small entrepreneurs and offer a helping hand in times of crisis.

10. It is seen that the life cycle issues of micro entrepreneurs like weavers, artisans, etc. in far flung areas, in agglomerations and unrecognized clusters are much more acute. More often than not they are compelled to borrow towards their working capital needs from local money lenders and informal sources. It is observed that there is a huge scope for deepening of banking services in such areas

11. Preparing an individual for an entrepreneurial venture is as important to the resource provider as it is to the entrepreneur himself. Rural Self Employment Training Institutes (R-SETI) which trains the rural youth to take up micro entrepreneurial ventures.

12. RBI recently announced Framework for Revival and Rehabilitation of MSMEs. GOI, in consultation with RBI and other stakeholders, has provided an institutionalized framework for rehabilitation of enterprises which are potentially viable, but under temporary duress. From a bank’s perspective, the most critical period in the lifecycle of small enterprises is the little time window between the unit operating smoothly and turning sick. The Framework provides for a structured mechanism, which could be triggered either by the banker or by the entrepreneur when first signs of stress appear.

13. The banks and borrowers share a symbiotic relationship and hence, both the lenders as well as the borrowers have to understand their basic responsibilities, co-operate with each other and adhere to a general code of conduct and discipline

Global Economic Turmoil: Impact on Indian Economy and the Way Forward: Global scenario: More than eight years have passed since the onset of the Global Financial Crisis (GFC) in 2007. Yet the world economy is not out of the woods yet. Central banks of Europe, UK and Japan continue to remain in an accommodative mode, a clear indication that growth and inflation have not recovered to a sustainable level. The US economy has been doing well enough in growth terms for the Federal Reserve to begin, in December 2015, the process of 15keptical15g policy rates that had been hugging the zero lower bound since late 2008. The fragility of their economic outlook was, however, clearly revealed in the reversal of the impact of lift-off in less than a month as China started showing signs of weakening. Inflation outlook in all these countries continue to be soft which has been dampening hopes of a sustained recovery. In the US in particular, the softness in wages despite the unemployment rate edging below five per cent does not auger well for the inflation outlook. This together with fragility of the global economic conditions and the strengthening of the US dollar are the reasons the market seems to be 15keptical of pace of rate hikes by the Federal Reserve in the near future. 2. Fears of further weakening of the Chinese economy, its falling equity market and the depreciation of its currency loom large over global economic prospects. 3. China’s efforts at rebalancing its economy are facing serious challenges, at least in the near term. Prolonged slowdown in developed economies is increasingly making it improbable that even a big economy like China will be able


to create the level of demand lost by the advanced economies for much longer. 4. These factors have led to an outflow of capital from China, particularly in the last one year. China’s forex reserves have come down. 5.The slowdown in China has also led to a sharp correction in commodity prices, which, in turn, had major consequences .Economic performance of commodity exporting economies (Australia, Canada, Brazil, Russia, etc.) has taken a beating and this has added to the weakening global growth outlook. 6.Money has started to move out of risky assets (equity, commodity, etc.) to safe haven assets (e.g., Government bonds in US, UK, Euro-core and Japan) and safe haven currencies (e.g., US dollar, Euro and Japanese Yen). Impact on India:

1. Global economic growth has slowed down but has not really reversed the direction. The International Monetary Fund (IMF), in its January 2016 World Economic outlook, has projected global growth at 3.4 per cent in 2016, marginally going up to 3.6 per cent in 2017.

2. India is the best performing large economy (GDP close to US$ two trillion) with a 7.6 per cent estimated growth rate for FY16. Both IMF and the World Bank in their January 2016 outlook project India to grow at the highest rate among major economies in 2016 and 2017.

3. India has been variously hailed as “beacon of stability”, “haven of stability” and “bright spot” amidst a slowing global economy”.

4. Inflation has been under control and the balance of payment position looks healthy. Current Account Deficit (CAD) has narrowed to 1.4 per cent of GDP (Q2, FY16) from the high of 4.8 per cent in FY13. Capital flows have remained strong during the last few years.

5. India’s foreign exchange reserves stand at a robust level of about US$ 350 billion. The ratio of short-term debt to foreign exchange reserves remains around 25.0 per cent.

6. On the flip side, like most other EM currencies, Rupee did come under pressure, and so was the stock market. Over a longer time horizon, say the last five quarters, Rupee has, however, shown more resilience as compared to its peers reflecting the improving macro-economic fundamentals of the country.

7. the falling exports for a prolonged period is an issue that needs serious attention. What is worrying is the fact that our market shares have fallen from 1.7 in 2011 per cent to 1.6 per cent in 2015. The falling crude prices may have helped the country to bring down the current account deficit but once oil prices start recovering, the challenge before the country would be to increase exports if the CAD has to be contained on a sustainable basis.

8. Retail inflation in India as measured by CPI rose for the sixth straight month in January 2016. The CPI for January at 5.69 per cent was the highest figure recorded since August of 2014. Similarly, food inflation at 6.85 per cent in January was also the highest in 17 months. Despite these numbers, we are on track as far as meeting the inflation targets is concerned in near term4. There are, however, risks to meeting our projections. Besides structural factors like persistent high level of food prices due to rising income level not being matched by increase in productivity, production and distribution of food items, in particular protein/pulses food, the implementation of the seventh Central Pay

https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=995#F4


Commission award, monsoon and the path of commodity prices including crude prices have to be factored in the near term inflation outlook.

9. There have been discussions in recent times about the stress in banking and corporate balance sheets. In respect of health of Indian banks, the Reserve Bank has taken various steps to address the issue of stressed assets of the banks. After a comprehensive asset quality review, banks have initiated the process of cleaning up balance sheets by March 2017. While this may lead to a short-term impact on profitability of some of the PSU banks, it would enable a healthy flow of credit to the system in the long run. Further, efforts at improving the capital buffers of banks will be helpful as they prepare to lend more now, after cleaning up their balance sheets. Also, the steps being taken to improve governance in banks, such as the setting up of a Banks’ Board Bureau (BBB), would complement these efforts to develop and strengthen the banking sector. In respect of corporate sector stress, as evident from profitability and lower interest coverage ratio, the efforts at deleveraging, including by way of exit from non-core business, enhanced productivity and additional equity infusion and better governance practices supported by policies aimed at containing the global headwinds have to be fast-tracked.

10. The current situation is a great opportunity for India to position itself as a leader who would shape the world economic order in years to come. There would be challenges, nevertheless. The real challenge would be to sustain the improved fundamentals over a longer period and contain the spill over effect from other parts of the world. While other countries may take measures best suited to them, our focus should continue to remain on improving domestic macroeconomic fundamentals, including addressing the infrastructure bottlenecks, ensuring price stability, narrowing current account deficit, continuing fiscal reforms, increasing the competitiveness of our products and services for the global market and improved governance.

ISSUES IN INDIAN BANKING TO DAY: Asset Quality Review and its aftermath:

1. The recent decline in bank share prices has investors on the edge. Of course, part of the reason is that markets are in turmoil. Some of the greater decline of bank share prices can therefore be explained by the fact that they are seen as a leveraged play on the economy. With markets generally in decline, the decline in bank share prices has been more accentuated.

2. Part of the reason is that some bank results, mainly public sector banks, have not been, pretty. Clearly, an important factor has been the Asset Quality Review (AQR) conducted by the Reserve Bank and its aftermath.

3. Over time, a number of large projects in the economy have run into difficulty. Reasons include poor project evaluation, extensive project delays, poor monitoring and cost overruns, and the effects of global overcapacity on prices and imports. Loans to these projects have become stressed.

4. There are two polar approaches to loan stress. One is to apply band aids to keep the loan current, and hope that time and growth will set the project back on track. Sometimes this works. But most of the time, the low growth that precipitated the stress persists. The fresh lending intended to keep the original loan current grows. Facing large and potentially unpayable debt,


the promoter loses interest, does little to fix existing problems, and the project goes into further losses.

5. n alternative approach is to try to put the stressed project back on track rather than simply applying band aids. This may require deep surgery. Existing loans may have to be written down somewhat because of the changed circumstances since they were sanctioned. If loans are written down, the promoter brings in more equity, and other stakeholders like the tariff authorities or the local government chip in, the project may have a strong chance of revival, and the promoter will be incentivized to try his utmost to put it back on track.

6. But to do deep surgery such as restructuring or writing down loans, the bank has to recognize it has a problem – classify the asset as a Non Performing Asset (NPA). Think therefore of the NPA classification as an anesthetic that allows the bank to perform extensive necessary surgery to set the project back on its feet. If the bank wants to pretend that everything is all right with the loan, it can only apply band aids – for any more drastic action would require NPA classification.

7. Loan classification is merely good accounting – it reflects what the true value of the loan might be. It is accompanied by provisioning, which ensures the bank sets aside a buffer to absorb likely losses. If the losses do not materialize, the bank can write back provisioning to profits. If the losses do materialize, the bank does not have to suddenly declare a big loss, it can set the losses against the prudential provisions it has made. Thus the bank balance sheet then represents a true and fair picture of the bank’s health, as a bank balance sheet is meant to. Of course, we can postpone the day of reckoning with regulatory forbearance. But unless conditions in the industry improve suddenly and dramatically, the bank balance sheets present a distorted picture of health, and the eventual hole becomes bigger.

8. In 2008-9, after the global financial crisis, the Reserve Bank agreed to forbear on certain kinds of stressed loan restructuring, hoping that this was a temporary need pending stronger growth. Unfortunately, for a variety of reasons, the stress has not been temporary, and growth in these sectors has proved elusive. Therefore, early in the process, the Reserve Bank set about giving banks the tools to deal with stressed loans, including information about the degree of the borrower’s collective indebtedness from the system and more effective ways to reduce the project’s financial stress such as the Joint Lender’s Forum, the Strategic Debt Restructuring mechanism, Asset Quality Review:

Of course, every new tool can be used to deal with a problem, but also

perversely, to avoid it. So after giving banks the tools, the RBI ended

forbearance in April 2015, and then started the Asset Quality Review to

ensure that banks were taking proactive steps to clean up their balance

sheets. RBI identified loans that were of concern, as well as loans that had

potential weaknesses. For the loans that are of concern, the banks are

attempting to regularize the loans that can be put back on track, and are

classifying those that cannot for deeper surgery – and taking provisions in

accordance with the degree of extant stress in the loan. They will also


make provisions for loans that have weaknesses. RBI intent is to have

clean and fully provisioned bank balance sheets by March 2017.

Why not do everything in one go rather than over a period of six quarters?

Precisely because a number of these loans can be regularized, or

stabilized when weak but regular, through the right collective actions.

Sometimes, an NPA classification, even while permitting deeper surgery,

prompts risk aversion on the part of bank boards and they stop lending

even when the project is viable. We need to overcome this view – we have

issued circulars stating that a loan to a project whose other loans are NPA

does not automatically become an NPA – but it will take time. Pending the

change in attitude, which I think will come as banks turn to unlocking the

value in NPAs, we are working with them to sequence the most obvious

actions up front. However, the end game is clear to everyone and

bounded.

Having pointed out the contours of the task to be accomplished, RBI

teams are working with the banks to ensure that they are all broadly on the

same page in terms of recognition and provisioning, even though each one

has flexibility on individual cases. This means that December 2015 quarter

results can be compared across banks to get a rough sense of the task

each bank has to accomplish. Some banks have expressed an intent to

moves faster, so as to put the problem behind them, and we have not held

them back. We have not put out any of our final estimates because we

believe it is a moving target, with more bank action, promoter response,

and growth diminishing the eventual cost. It is important to recall that

underlying many of these stressed loans is an economically viable

productive asset.

The Finance Minister has indicated he will support the public sector banks

with capital infusions as needed. According to RBI estimate , that the

Government support that has been indicated will suffice. Private sector

banks will not want for regulatory capital as a result of this exercise.

Finally, the RBI is also working on identifying currently non-recognizable

capital that is already on bank balance sheets, such as undervalued

assets. The RBI could allow some of these to count as capital as per Basel

norms, provided a bank meets minimum common equity standards.

RBI projections are that any breach of minimum core capital requirements by a small minority of public sector banks, in the absence of any recapitalization, will be small. They will need government equity or preference share infusion since they are typically banks that will find it difficult to raise equity in the markets. A few others will need a top up of their capital to ensure they have a reasonable


buffer over and above minimum capital.

What the Government has already explicitly committed is, in RBI’s view, enough to take care of all reasonable scenarios, and the Government has committed to stand behind its banks to whatever extent needed. The RBI will provide whatever liquidity is needed by any bank that needs it, though we do not foresee liquidity stress.

In sum, while the profitability of some banks may be impaired in the short run, the system, once cleaned, will be able to support economic growth in a sustainable and profitable way. The economic assets of our public sector banks, such as the trust they are held in by the population, their knowledgeable employees, their location and reach, and the low-cost funding they have access to, can then be fully realized.

The need for Clean up:

Why now? Why did RBI have to pick this period of global market turmoil for banks to start cleaning up? Why not let growth take care of the problem? The process started in April 2015. We knew at that time that the global economy would continue to be weak but not that markets would be in turmoil today. Nevertheless, this simply reinforces the fact that it is time to act..

While growth will help the system, it would likely be significantly impaired if we did not nudge the process of clean up.

The most plausible explanation is that the stressed balance sheet of public sector banks is occupying management attention and holding them back, and the only way for them to supply the economy’s need for credit, which is essential for higher economic growth, is to clean up. The silver lining message in the slower credit growth is that banks have not been lending indiscriminately in an attempt to reduce the size of stressed assets in an expanded overall balance sheet, and this bodes well for future slippages. In sum, to the question of what comes first, clean up or growth, the answer is unambiguously “Clean up!” Indeed, this is the lesson from every other country that has faced financial stress.

People are outraged by the size of the losses that will have to eventually be absorbed and want the perpetrators to be brought to justice. Let me emphasize that all NPAs are not because of malfeasance. Indeed, most are not. Loans can go bad even if the promoter has the best intent and banks do the fullest due diligence before sanctioning. Nevertheless, where there is evidence of malfeasance by the promoter, it is extremely important that the full force of the law is brought against him, even while banks make every effort to put the project, and the workers who depend on it, back on track. This is why RBI have strengthened the fraud detection and monitoring mechanism, and look forward to bank support to make it effective.

The Government is taking direct action to clear bottlenecks and revive stalled stressed projects, and intends to support them with equity infusion through the National Investment and Infrastructure Fund. Private well-funded players are


looking to buy assets, and in recent weeks we have seen some promoters sell assets to raise money to pay banks or infuse in projects. All this activity bodes well for the success of the clean up.

Improving Bank Management and Governance

. The Government, through the Indradhanush initiative, has sent a clear signal that it wants to make sure that public sector banks, once healthy, stay healthy. Strengthening Board and management appointments, decentralizing more decisions to the professional board, finding ways to incentivize management, all these will help improve loan evaluation, monitoring and repayment. Banks must review their procedures to ensure they can make good credit decisions. The new bankruptcy code, when enacted, will finally give creditors a way of collecting repayment through the judicial process in reasonable time. So the hope and belief is that the next time will be different for public sector banks – they will emerge from this clean up stronger and more capable.

Liquidity

Another issue, unrelated to the AQR, that is, system wide liquidity. The RBI has been infusing plenty of liquidity in the system to offset any seasonal build up in Government balances. Indeed, money market rates have dipped dramatically on some days because of the liquidity infusion. Nevertheless, market participants have complained about shortage.

RBI allows banks to count 3 percentage points more of their SLR holdings towards LCR requirements.

The clean-up will get done, and Indian banks will be restored to health. While we should not underplay the dimensions of the task, we should be confident that it is manageable.

Marginal Cost of Funds based Lending Rate (MCLR)

(i) All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 shall be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark for such purposes.

(ii) The MCLR shall comprise of:

a. Marginal cost of funds; b. Negative carry on account of CRR; c. Operating costs; d. Tenor premium.

(iii) Marginal Cost of funds

The marginal cost of funds shall comprise of Marginal cost of borrowings and


return on networth..

(iv) Negative Carry on CRR

Negative carry on the mandatory CRR which arises due to return on CRR balances being nil, will be calculated as under:

Required CRR x (marginal cost) / (1- CRR)

The marginal cost of funds arrived at (iii) above shall be used for arriving at negative carry on CRR.

(v) Operating Costs

All operating costs associated with providing the loan product including cost of raising funds shall be included under this head. It shall be ensured that the costs of providing those services which are separately recovered by way of service charges do not form part of this component.

(vi) Tenor premium

These costs arise from loan commitments with longer tenor. The change in tenor premium should not be borrower specific or loan class specific. In other words, the tenor premium will be uniform for all types of loans for a given residual tenor.

Since MCLR will be a tenor linked benchmark, banks shall arrive at the MCLR of various maturities by incorporating the corresponding tenor premium/ discount to the sum of Marginal cost of funds, Negative carry on account of CRR and Operating costs.

Accordingly, banks shall publish the internal benchmark for the following maturities:

a. overnight MCLR, b. one-month MCLR, c. three-month MCLR, d. six month MCLR, e. One year MCLR.

In addition to the above, banks shall have the option of publishing MCLR of any other longer maturity.

(ix) Review of MCLR

(a) Banks shall review and publish their Marginal Cost of Funds based Lending Rate (MCLR) of different maturities every month on a pre-announced date with the approval of the Board or any other committee to which powers have been delegated.

(b) Banks which do not have adequate systems to carry out the review of MCLR


on a monthly basis, shall review their rates once a quarter on a pre-announced date for the first one year i.e. upto March 31, 2017.

Spread

(a) Banks shall have a Board approved policy delineating the components of spread charged to a customer. The policy shall include principles:

(i) To determine the quantum of each component of spread.

(ii) To determine the range of spread for a given category of borrower / type of loan.

(iii) To delegate powers in respect of loan pricing.

(b) Spread under Base rate system

In addition to the conditions laid down in section 8(a) of these Directions, banks shall adhere to the following conditions:

(i) The credit risk premium charged to an existing borrower shall not be increased except on account of deterioration in the credit risk profile of the customer or change in tenor premium

Banks shall adopt the following broad components of spread:

(i) Business strategy

The component shall be arrived at taking into consideration the business strategy, market competition, embedded options in the loan product, market liquidity of the loan etc.

(ii) Credit risk premium

The credit risk premium charged to the customer representing the default risk arising from loan sanctioned shall be arrived at based on an appropriate credit risk rating/scoring model and after taking into consideration customer relationship, expected losses, collaterals, etc.

(d) The spread charged to an existing borrower shall not be increased except on account of deterioration in the credit risk profile of the customer. Any such decision regarding change in spread on account of change in credit risk profile shall be supported by a full-fledged risk profile review of the customer.

Reset of interest rates under MCLR system

(a) Banks shall, at their option specify interest reset dates on their floating rate loans. Banks shall have the option to offer loans with reset dates linked either to the date of first disbursement of the loan/credit limits or to the date of review of


MCLR.

(b) The Marginal Cost of Funds based Lending Rate (MCLR) prevailing on the date of first disbursement, whether partial or full, shall be applicable till the next reset date, irrespective of the changes in the benchmark during the interim. Future reset dates shall be determined accordingly.

(c) The periodicity of reset shall be one year or lower. The exact periodicity of reset shall form part of the terms of the loan contract.

Transition to MCLR from Base Rate/ BPLR

(a) Banks shall continue to review and publish Base Rate as hitherto.

(b) Existing loans and credit limits linked to the Base Rate/ BPLR shall continue till repayment or renewal, as the case may be.

Provided that existing borrowers shall have the option to move to the Marginal Cost of Funds based Lending Rate (MCLR) linked loan at mutually acceptable terms.

Provided that the switch-over shall not be treated as a foreclosure of existing facility.

Implementation of Indian Accounting Standards

The Reserve Bank on February 11, 2016 advised the scheduled commercial banks (excluding regional rural banks) to follow the Indian Accounting Standards (Ind AS) as notified under the Companies (Indian Accounting Standards) Rules, 2015, subject to any guideline or direction issued by the Reserve Bank in this regard, in the following manner:

Banks shall comply with the Indian Accounting Standards (Ind AS) for financial statements for accounting periods beginning from April 1, 2018 onwards, with comparatives for the periods ending March 31, 2018 or thereafter. Ind AS shall be applicable to both standalone financial statements and consolidated financial statements.

Banks shall apply Ind AS only as per the above timelines and shall not be permitted to adopt Ind AS earlier.

Banks are further advised to set up a Steering Committee headed by an official of the rank of an Executive Director (or equivalent) comprising members from cross-functional areas of the bank to immediately initiate the implementation process. The Audit Committee of the Board shall oversee the progress of the Ind AS implementation process and report to the Board at quarterly intervals. Banks would start submission of proforma Ind AS financial statements to the Reserve Bank from the half-year ended September 30, 2016.

Banks shall disclose in the Annual Report, the strategy for Ind AS implementation, including the progress made in this regard. These disclosures shall be made from the financial year 2016-17 until implementation


Sale of India Gold Coin (IGC)

The Reserve Bank, on January 21, 2016, allowed the designated commercial banks, to sell the India Gold Coins(IGCs) minted by Metals and Minerals Trading Corporation of India (MMTC). The terms and conditions shall be as per the contract between the designated bank and MMTC. The current restriction on selling of imported gold coin by the banks will continue.

MMTC has been authorised by the Central Government to manufacture India Gold Coins (IGC) with Ashok Chakra and supply these coins to the domestic market. MMTC has clarified to the Reserve Bank that the gold used for the IGC will be only that mobilised domestically under the existing Gold Deposit Scheme and Gold Monetisation Scheme.

Changes in Monetary Policy Framework

The year 2015 witnessed some changes in the conduct of monetary policy and the changes were :

• On February 20, 2015, the Government of India and the Reserve Bank signed an agreement on the Monetary Policy Framework.

• The agreement makes price stability the primary objective of monetary policy; defines price stability numerically - below 6 per cent CPI inflation for 2015-16 (to be achieved by January 2016) and 4 +/- 2 per cent for all subsequent years; sets out what will constitute a failure in achieving the target; and specifies that the Reserve Bank in the event of failure will report to the government on: (a) reasons for deviation of inflation from the target over three consecutive quarters, (b) remedial measures, and (c) an estimated time frame over which inflation will be brought back to the target.

• Greater transparency on monetary policy necessitated release of Monetary Policy Reports (MPRs) - released on April 2015 and then on September 2015.

• To create conditions for more effective transmission of monetary policy, the export credit refinance (ECR) facility was replaced with the provision of system level liquidity with effect from February 7, 2015.

• A new liquidity management framework was put in place to ensure market-based liquidity operations through auctions, while striving to ensure consistency of liquidity conditions with the stance of monetary policy.

Changes in Monetary Policy in 2015

On the basis of an assessment of the current and evolving macroeconomic situation, the Reserve Bank reviewed its Monetary Policy 8 times. The Reserve Bank in the year 2015, acted outside the monetary policy twice-once on January 15, 2015 and then on March 4, 2015:


Gold Monetisation Scheme

The Gold Monetisation Scheme, 2015 will replace the existing Gold Deposit Scheme, 1999. However, the deposits outstanding under the Gold Deposit Scheme will be allowed to run till maturity unless the depositors prematurely withdraw them.

Eligibility

Resident Indians (Individuals, HUF, Trusts including Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations and Companies) can make deposits under the scheme.

Minimum Size

The minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold of 995 fineness. There is no maximum limit for deposit under the scheme.

The gold will be accepted at the Collection and Purity Testing Centres (CPTC) certified by Bureau of Indian Standards (BIS) and notified by the Central Government under the Scheme. The deposit certificates will be issued by banks in equivalence of 995 fineness of gold. The principal and interest of the deposit under the scheme will be denominated in gold.

Types of Deposits

The designated banks will accept gold deposits under the Short Term (1-3 years) Bank Deposit (STBD) as well as Medium (5-7 years) and Long (12-15 years) Term Government Deposit Schemes. While the former will be accepted by banks on their own account, the latter will be on behalf of Government of India. There will be provision for premature withdrawal subject to a minimum lock-in period and penalty to be determined by individual banks.

Interest on Deposits

Interest on deposits under the scheme will start accruing from the date of conversion of gold deposited into tradable gold bars after refinement or 30 days after the receipt of gold at the CPTC or the bank’s designated branch, as the case may be and whichever is earlier. During the period from the date of receipt of gold by the CPTC or the designated branch, as the case may be, to the date on which interest starts accruing in the deposit, the gold accepted by the CPTC or the designated branch of the bank shall be treated as an item in safe custody held by the designated bank.

Reserve Requirements

The short term bank deposits will attract applicable cash reserve ratio (CRR) and statutory liquidity ratio (SLR). However, the stock of gold held by the banks will


count towards the general SLR requirement.

KYC to apply

The opening of gold deposit accounts will be subject to the same rules with regard to customer identification as are applicable to any other deposit account.

Utilisation of Gold mobilised under GMS

The designated banks may sell or lend the gold accepted under STBD to MMTC for minting India Gold Coins (IGC) and to jewellers, or sell it to other designated banks participating in GMS. The gold deposited under MLTGD will be auctioned by MMTC or any other agency authorised by the Central Government and the sale proceeds credited to the Central Government’s account with the Reserve Bank. The entities participating in the auction may include the Reserve Bank, MMTC, banks and any other entities notified by the Central Government. Banks may utilise the gold purchased in the auction for purposes indicated above.

Risk Management

Designated banks should put in place a suitable risk management mechanism, including appropriate limits, to manage the risk arising from gold price movements in respect of their net exposure to gold. For this purpose, they have been allowed to access the international exchanges, London Bullion Market Association or make use of over-the-counter contracts to hedge exposures to bullion prices subject to the guidelines issued by the Reserve Bank

Central KYC Registry set up

The Government of India has authorised the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) to act as, and to perform the functions of the Central KYC Records Registry (CKYCR). All Regulated Entities (REs) shall capture KYC information for sharing with the CKYCR in the manner prescribed for ‘individuals’ and ‘Legal Entities’. The Reserve Bank of India on July 8, 2016 modified its Know Your Customer (KYC) Directions, 2016 as under:

i. The ‘live run’ of the CKYCR has started from July 15, 2016 in phased manner.

ii. In the first phase, Scheduled Commercial Banks (SCBs) have been asked to upload the KYC data with CERSAI, in respect of new individual accounts opened on or after July 15, 2016.

Differentiated Banks:

.The Payments Banks and the Small Finance Banks are called Differentiated Banks.

Recommended by Committee: Shri Nachiket Mor,( , on Comprehensive Financial Services for Small Businesses and Low-Income Households)

RBI recently granted ‘in principle’ licenses to 11 entities to form Payments


Banks.

The objective of setting up of Payments Banks will be to further financial inclusion; the strategies will be by providing (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users. The scope of the activities permitted for the Payment Banks included a. Acceptance of demand deposits.

Payments Bank will initially be restricted to holding a maximum balance of ₹ 1 lakh per individual customer, b. Issuance of ATM / debit cards c. Payments and remittance services through various channels and some ancillary activities.

The deposits collected by them can be only in current or savings account; they cannot accept fixed deposits. The payments banks are prohibited from lending activity. They can deploy the deposits largely in government securities only; a small portion, upto 25% of their deposits, can be held in deposits with other banks.

The public deposits in the Payments Banks will be covered by the deposit insurance of the DICGC. As the deposit ceiling is ₹ 1 lakh and the deposit insurance ceiling is also ₹ 1 lakh, it means that the depositors of the Payments Banks will be fully insured.

The payments bank will be required to have at least 25 per cent of physical access points including BCs in rural centres.

Banking Sector Reforms: Journey so far and the Road Ahead:

PSBs came into existence with nationalization in the year 1969/1980. How was the banking scenario in the next couple of decades?

Highly regulated credit flow (selective credit control, credit authorization scheme, no consumption credit & so on)

Militant unionized atmosphere- resistance to technology Stiff branch authorization norms, loan melas, opaque income recognition &

asset classification (IRAC) norms ….Just to name a few.

• Post-reform years (after 1991) saw several far-reaching reforms in banking industry also. A few of these include:

Deregulation of credit processes and interest rate structures Introduction of prudential IRAC norms Licensing of banks in the private sector/part divestment in PSBs Migration to CBS VRS(year 2001) Gradual reduction in pre-emptions

• Resultantly by the year 2008, banks’ balance sheets were much stronger/growth was strong/ NPAs had come down from the peak of around 12%


to slightly over 2%

• Then two developments took place:

Global Financial Crisis Introduction of PPP model in Infrastructure building

• Banks were enthusiastic, rather major partners, in this newly opened field supported by accommodative fiscal and easy monetary policies. However, the process got plagued by:

Weak governance, lax underwriting, high corporate leverage, several policy logjams

Resultant consequences are well known

PSBs in 2016:

Agenda for PSBs- the immediate and overriding priority is to complete the clean-up of the banks’ balance sheets which is underway

• Resultant provisioning needs coupled with meeting Basel III norms/migration to IFRS & to capture due market share in growth funding would entail recapitalisation of most of these banks. Seeking this capital externally at this stage may be difficult as also value eroding for the majority owner.

• Simultaneously process has to continue to bestow greater “Governance Autonomy” to these banks. My sense is that the Government ownership of these banks has resulted in crucial stability and resilience in trying times. Immediate roadmap should, therefore, be towards complete “managerial autonomy”. If Government remains the largest shareholder, not necessarily majority shareholder, it still serves the intended purpose. At the same time, it releases these banks from multi-institutional oversights and overlapping controls.

• HR autonomy would naturally flow from the above. Banks would be able to move towards competitive compensation, flexible hiring and move away from the “collective bargaining”-just to quote a few from many possible outcomes.

• There could be a reasonable apprehension that such measures can adversely impact the objectives of inclusive growth being attempted through several national missions and schemes. I would argue that advent of several new institutions (as recently licensed by RBI), new processes, digital advancements & competition would ensure that these objectives are well supported.

• Similarly, some of the reforms are driven by a global reform structure. These pertain to capital, liquidity and disclosure standards under the Basel III package. Some such other measures are TLAC, SIBs, Misconduct rules, etc. Few other measures are currently under discussion, such as, imposing risk weight on sovereign exposure and new standardised approach for credit and operational risk.


Road Ahead:

Apart from the whole gamut of credit risk, which is already discussed extensively several times and at several places, the following are the other areas needing prior attention of the Boards.

Operational Risks

Fraud cases – Recurrent failure of internal control machinery noticed, Delayed Recognition and laxity in follow up leads to cold trails, Need to bring fraudsters as also errant valuers, accountants , lawyers to book to stop them from duping the system in future

Fraud Registry and a Quick Response Team set up at RBI to facilitate information –sharing and for closely tracking high-value fraud cases

KYC/AML Compliance failures – Stricter enforcement action a global norm now, Strong Centralized processing and surveillance needed as branches do not have the capability to handle such areas effectively.

Customer service

Charter of customer Rights- RBI’s Observance period now over, Implementation monitoring a priority

Mis-selling- Risk of silent customer simply moving away as account number portability is now a real possibility

Technology: Cyber/Digital

Digitization/ Fintech driving new possibilities in the field of finance Technology, a double edged sword - instances of cyber-attacks, identity

thefts, ATM frauds etc. Bangladesh Bank case and other near-misses

Hence, Bank Boards would do well to focus on the following Governance issues:

Strategy and Risk Management are two most important and least focussed items

Boards should set the “ Risk Appetite” and ensure adherence- Importance of 3 lines of defence- Business verticals themselves/ Risk Management Department and Compliance / Internal Audit

Hiring/Grooming/Retention of frontline staff... e-learning for capacity building

Instil Organisational Culture (what you do when no one is watching) Put an enabling mechanism to ensure that voice of middle/lower level

functionaries reaches the Top quickly (G-30 Report) Bad news should travel faster.


Scheme for Sustainable Structuring of Stressed Assets introduced (S4A)

Resolution of large borrowal accounts which are facing severe financial difficulties may, require co-ordinated deep financial restructuring

which often involves a substantial write-down of debt and/or making large provisions. Often such high write-downs act as a disincentive to lenders to effect a sustainable change in the liability structure of borrowers facing stress.

Banks have also represented for a regulatory framework which would facilitate lenders taking up the exercise of reworking of the liability structure of companies to which they have significant exposures, in the context of asset quality stress currently faced by them.

Accordingly, the Reserve Bank, after due consultation with lenders, has formulated the ‘Scheme for Sustainable Structuring of Stressed Assets’ (S4A) as an optional framework for the resolution of large stressed accounts, which satisfy following conditions:-

• The project has commenced commercial operations;

• The aggregate exposure (including accrued interest) of all institutional lenders in the account is more than ₹ 500 crore (including Rupee loans, Foreign Currency loans/External Commercial Borrowings);

• The debt meets the test of sustainability.

The S4A envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around.

In order to make sure that the entire exercise is carried out in a transparent and prudent manner, S4A envisages that the resolution plan will be prepared by credible professional agencies, while an Overseeing Committee, set up by the Indian Banks Association, in consultation with the Reserve Bank, comprising of eminent experts will independently review the processes involved in preparation of the resolution plan, under the S4A, for reasonableness and adherence to the provisions of these guidelines, and opine on it. It is envisaged that the resolution plan should have the following features:

• There should be no fresh moratorium granted on interest or principal repayment for servicing.

• There should not be any extension of the repayment schedule or reduction in the interest rate for servicing, as compared to repayment schedule and interest rate prior to this resolution.

• Asset should be converted into equity/redeemable cumulative optionally convertible preference shares. However, in cases where the resolution plan does not involve change in promoter, banks may, at their discretion, also convert a portion of asset into optionally convertible debentures.


June 16-Payment and Settlement Systems in India: Vision-2018

The Vision-2018 aims at building best of class payment and settlement systems for a ‘less-cash’ India.

The broad contours of Vision-2018 revolve around 5 Cs – coverage, convenience, confidence, convergence and cost. To achieve these, Vision-2018 will focus on four strategic initiatives, such as, responsive regulation, robust infrastructure, effective supervision and customer centricity.

The regulatory framework, based on consultative approach, aims at achieving enhanced coverage of the payment systems coupled with convenience for end-users. A key objective would be ensuring a robust payments infrastructure in the country to increase accessibility, availability, interoperability and security. The oversight and supervisory framework would focus on strengthening the resilience of both large value and retail payment systems in the country. Customer centric initiatives envisaged include streamlining of customer grievance redressal mechanism and building customer awareness and education.

With increasing use of technology-based innovative payment products, the strategic initiatives under Vision-2018 are expected to reduce paper-based instruments significantly and lead to accelerated growth in mobile banking and other modes of electronic payments.

NPCI:

National Payments Corporation of India (NPCI) is an umbrella organization for all retail payments system in India. It was set up with the guidance and support of the Reserve Bank of India (RBI) and Indian Banks’ Association (IBA). The RBI, after setting up the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) in 2005, released a vision document incorporating a proposal to set up an umbrella institution for all the RETAIL PAYMENT SYSTEMS in the country. The core objective was to consolidate and integrate the multiple systems with varying service levels into nation-wide uniform and standard business process for all retail payment systems. The other objective was to facilitate an affordable payment mechanism to benefit the common man across the country and help financial inclusion.

It was incorporated as a Section 25 company under Companies Act 1956 (now Section 8 of Companies Act 2013) and is aimed to operate for the benefit of all the member banks and their customers. The authorized capital was pegged at Rs 300 crore and paid up capital was Rs 100 crore. NPCI has ten promoter banks namely, State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank and HSBC.

From a single service of switching of inter-bank ATM transactions, the range of services has grown to Cheque Clearing, Immediate Payments Service


(24x7x365), Automated Clearing House, Electronic Benefit Transfer and a domestic card payment network named RuPay to provide an alternative to international card schemes

IMPS( Immediate Payment Services) Currently majority of interbank mobile fund transfer transactions are channelized through NEFT mechanism. Under NEFT, the transactions are processed and settled in batches, hence are not real time. Also, the transactions can be done only during the working hours of the RTGS system.

IMPS offers an instant, 24X7, interbank electronic fund transfer service through mobile phones. IMPS is an emphatic tool to transfer money instantly within banks across India through mobile, internet and atm which is not only safe but also economical both in financial and non financial perspectives.

This facility is provided by NPCI through its existing NFS switch.

Objectives:

To enable bank customers to use mobile instruments as a channel for accessing their banks accounts and remit funds

Making payment simpler just with the mobile number of the beneficiary

To sub-serve the goal of Reserve Bank of India (RBI) in electronification of retail payments

To facilitate mobile payment systems already introduced in India with the Reserve Bank of India Mobile Payment Guidelines 2008 to be inter-operable across banks and mobile operators in a safe and secured manner

To build the foundation for a full range of mobile based Banking services.

Number of participants in IMPS; 4(Remitter (Sender),Beneficiary (Receiver),Banks, National Financial Switch – NPCI

By IMPS, Funds Transfer can be effected

I. Using Mobile number & MMID (P2P) II. Using Account number & IFS Code (P2A)

III. Using Aadhaar number (ABRS)

I. IMPS Person-to-Person (P2P) funds transfer requires the Remitter customer to make funds transfer using Beneficiary Mobile Number and MMID. Both Remitter as well as Beneficiary needs to register their mobile number with their respective bank account and get MMID, in order to send or receive funds using IMPS. There may be cases where Remitter is enabled on Mobile Banking, but Beneficiary mobile number is not registered with any bank account. In such cases, Remitter shall not be able to send money to the Beneficiary using Mobile Number & MMID

II. The IMPS funds transfer has been made possible using Beneficiary


account number and IFS code as well, in addition to Beneficiary mobile number and MMID

III. Using Aadhaar number (ABRS) In ABRS, a remitter can initiate IMPS transaction using the beneficiary's AADHAAR number, which acts as a financial address & which will be linked to the beneficiaries account number. ABRS facilitates in simplifying the IMPS payment initiation process as in this service the customer will have to input only AADHAAR number of the beneficiary for initiating an IMPS transaction. Another important utility of this service will be in disbursal of subsidy payment i.e. Electronic Benefit Transfer (EBT)/ Direct Benefit transfer (DBT) by the Government. ABRS will act as a catalyst in expanding financial Inclusion reach.. Query Service on Aadhaar Mapper (QSAM). To facilitate the effective implementation of ABRS, a new feature is being added to the existing NUUP (USSD based platform on *99#) service. Under this new service, known as "Query Service on Aadhaar Mapper" the customer will be able to know

Whether his/her AADHAAR number is seeded/linked to any bank account number or not?

If yes, then with which bank and when was it last updated.

Appropriate existing two-factor authentication method would be used for all the channels. The limit as prescribed by the bank for these channels would apply while transferring money using either of these channels.

Maximum Limit for Funds Transfer through IMPS-Rs 2 lacs per customer per day. Monthly cap is Rs. 62,00,000 per customer.

(As on date 91 Banks are participating in IMPS funds transfer.in P2P)

MMID - Mobile Money Identifier (7 digit code). Each MMID is linked to a unique Mobile Number. Different MMIDs can be linked to same Mobile Number

IFS Code - 11 digit alphanumeric number, available in the users Cheque book.

Unified Payments Interface (UPI)

Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood. It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience.

UPI acts as the gateway for the cashless society in India.. Using UPI, people can send money using virtual IDs. Banks are integrating UPI to existing apps and users have loads of advantages like making payments without creating beneficiaries in bank accounts; receivers initiating the transactions; and single-click & two-factor authentication.


If a user wants to pay someone, he need not add him or her as a beneficiary and there is no need for an IFSC code, account number, etc. The UPI app does away with all this. All one needs is the receiver’s unique ID. Open the UPI app, select the amount to be paid, add the unique ID of the beneficiary and select “send.” The app will ask for a mobile PIN to authenticate the payment and the transaction is initiated.

Here are the use cases of UPI:

Send money to relatives, Collecting money from friends,Buying on e-commerce sites Buying railway tickets on IRCTC’s application, Bill payments and insurance premium collections

For making payment to the shop keeper or Taxi driver this can be used. The shopkeeper or the taxi driver can collect money through UPI. All one has to do is give one’s virtual address instead of bank account number or mobile number,” NPCI conducted a pilot launch with 21 member banks

How is it unique?

Immediate money transfer through mobile device round the clock 24*7 and 365 days.

Single mobile application for accessing different bank accounts Single Click 2 Factor Authentication – Aligned with the Regulatory

guidelines, yet provides for a very strong feature of seamless single click payment.

Virtual address of the customer for Pull & Push provides for incremental security with the customer not required to enter the details such as Card no, Account number; IFSC etc.

Bill Sharing with friends. Best answer to Cash on Delivery hassle, running to an ATM or rendering

exact amount. Merchant Payment with Single Application or In-App Payments. Scheduling PUSH and PULL Payments for various purposes. Utility Bill Payments, Over the Counter Payments, Barcode (Scan and

Pay) based payments. Donations, Collections, Disbursements Scalable. Raising Complaint from Mobile App directly.

1. Participants in UPI o Payer PSP( Payment Service Provider) o Payee PSP o Remitter Bank o Beneficiary Bank o NPCI o Bank Account holders o Merchants


2. UPI - Benefits to the Ecosystem participants

Benefits for banks:

o Single click Two Factor authentication o Universal Application for transaction o Leveraging existing infrastructure o Safer, Secured and Innovative o Payment basis Single/ Unique Identifier o Enable seamless merchant transactions

Benefits for end Customers:

o Round the clock availability o Single Application for accessing different bank accounts o Use of Virtual ID is more secure, no credential sharing o Single click authentication o Raise Complaint from Mobile App directly

Benefits for Merchants:

o Seamless fund collection from customers - single identifiers o No risk of storing customer’s virtual address like in Cards o Tap customers not having credit/debit cards o Suitable for e-Com & m-Com transaction o Resolves the COD collection problem o Single click 2FA facility to the customer - seamless Pull o In-App Payments (IAP)

UPI can be accessed on all platforms viz. Android / iOS & Windows – right now enabled only for Android in the first phase.

At present, the upper limit per UPI transaction is Rs. 1 Lakh.

How is UPI different from IMPS?

UPI is providing additional benefits to IMPS in the following ways:

Provides for a P2P Pull functionality Simplifies Merchant Payments Single APP for money transfer Single click two factor authentication.


Budget 2016-17 Higjlights: Growth of Economy accelerated to 7.6% in 2015-16. India hailed as a ‘bright spot’ amidst a slowing global economy by IMF. Robust growth achieved despite very unfavourable global conditions and two consecutive years shortfall in monsoon by 13% Foreign exchange reserves touched highest ever level of about 350 billion US dollars. CHALLENGES IN 2016-17 Risks of further global slowdown and turbulence. Additional fiscal burden due to 7th Central Pay Commission recommendations and OROP. ROADMAP& PRIORITIES 'Transform India' to have a significant impact on economy and lives of people. Government to focus on–

ensuring macro-economic stability and prudent fiscal management.

boosting on domestic demand

continuing with the pace of economic reforms and policy initiatives to change the lives of our people for the better. Focus on enhancing expenditure in priority areas of -farm and rural sector, social sector, infrastructure sector employment generation And recapitalisation of the banks. Focus on Vulnerable sections through:

Pradhan Mantri Fasal Bima Yojana

New health insurance scheme to protect against hospitalisation expenditure

facility of cooking gas connection for BPL families Continue with the ongoing reform programme and ensure passage of the Goods and Service Tax bill and Insolvency and Bankruptcy law Undertake important reforms by:

giving a statutory backing to AADHAR platform to ensure benefits reach the deserving.

freeing the transport sector from constraints and restrictions

incentivising gas discovery and exploration by providing calibrated marketing freedom

enactment of a comprehensive law to deal with resolution of financial firms.

provide legal framework for dispute resolution and re-negotiations in PPP projects and public utility contracts


undertake important banking sector reforms and public listing of general insurance companies undertake significant changes in FDI policy. FINANCIAL SECTOR REFORMS A comprehensive Code on Resolution of Financial Firms to be introduced. Statutory basis for a Monetary Policy framework and a Monetary Policy Committee through the Finance Bill 2016. A Financial Data Management Centre to be set up. RBI to facilitate retail participation in Government securities. New derivative products will be developed by SEBI in the Commodity Derivatives market. Amendments in the SARFAESI Act 2002 to enable the sponsor of an ARC to hold up to 100% stake in the ARC and permit non institutional investors to invest in Securitization Receipts. Comprehensive Central Legislation to be bought to deal with the menace of illicit deposit taking schemes. Increasing members and benches of the Securities Appellate Tribunal. Allocation of 25,000 crore towards recapitalisation of Public Sector Banks. Target of amount sanctioned under Pradhan Mantri Mudra Yojana increased to 1,80,000 crore. General Insurance Companies owned by the Government to be listed in the stock exchanges. GOVERNANCE AND EASE OF DOING BUSINESS A Task Force has been constituted for rationalisation of human resources in various Ministries. Comprehensive review and rationalisation of Autonomous Bodies. Bill for Targeted Delivery of Financial and Other Subsidies, Benefits and Services by using the Aadhar framework to be introduced. Introduce DBT on pilot basis for fertilizer.

Automation facilities will be provided in 3 lakh fair price shops by March 2017.

http://indiabudget.nic.in/ub2016-17/bh/bh1.pdf#page=2





Amendments in Companies Act to improve enabling environment for start-ups. Price Stabilisation Fund with a corpus of`900 crore to help maintain stable prices of Pulses. Ek Bharat Shreshtha Bharat” programme will be launched to link States and Districts in an annual programme that connects people through exchanges in areas of language, trade, culture, travel and tourism. FISCAL DISCIPLINE Fiscal deficit in RE 2015 -16 and BE 2016-17 retained at 3.9% and 3.5%. Total expenditure projected at `19.78 lakh crore Plan expenditure pegged at `5.50 lakh crore under Plan, increase of 15.3% Special emphasis to sectors such as agriculture, irrigation, social Sector including health, women and child development, welfare of Scheduled Castes and Scheduled Tribes, minorities, infrastructure. Mobilisation of additional finances to the extent of `31,300 crore by NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority by raising Bonds. Plan / Non -Plan classification to be done away with from 2017-18. Every new scheme sanctioned will have a sunset date and outcome review. . Committee to review the implementation of the FRBM Act.( Fiscal Responsibility and Budget Management Act) RELIEF TO SMALL TAX PAYERS Raise the ceiling of tax rebate under section 87A from `2000 to 5000 to lessen tax burden on individuals with income Upto `5 laks. Increase the limit of deduction of rent paid under section 80GG from 24000 per annum to `60000, to provide relief to those who live in rented houses. MAKE IN INDIA Changes in customs and excise duty rates on certain inputs to reduce costs and improve competitiveness of domestic industry in Sectors like Information technology hardware, capital goods, defence production, textiles, mineral fuels & mineral oils, chemicals & petrochemicals, paper, paperboard & newsprint, Maintenance repair and overhauling[MRO] of aircrafts and ship repair. PROMOTING AFFORDABLE HOUSING 100% deduction for profits to an undertaking in housing project for flats up to 30 sq. metres in four metro cities and 60 sq. metres in ther cities, approved during June 2016 to






March 2019 and completed in three years. MAT to apply. Deduction for additional interest of `50,000 per annum for loans up to `35 lakh sanctioned in 2016-17 for first time home buyers, where house cost does not exceed `50 lakh. Distribution made out of income of SPV to the REITs and INVITs having specified shareholding will not be subjected to Dividend Distribution Tax, in respect of dividend distributed after the specified date. Exemption from service tax on construction of affordable houses up to 60 square metres under any scheme of the Central or StateGovernment including PPP Schemes. Extend excise duty exemption, presently available to Concrete Mix manufactured at site for use in construction work to Ready Mix Concrete

Agreement between GOI and RBI on Monetary Policy Framework- 20.02.15-Salient Features. The central government has signed a memorandum with the Reserve Bank setting out clear inflation objectives for the latter. Target for Inflation: RBI will aim to bring inflation below 6% by January 2016. The target for the financial year 2016-17 and the subsequent years will be 4% with a band of + or- 2% The Governor and in his absence Dy Governor In charge of Monetary Policy will determine the Policy rate as well as other monetary measures to achieve the targets. Once in six Months RBI will publish the document explaining the source of inflation , forecasts for inflation. RBI shall be seen to have failed to meet the targets if inflation is

i. more than 6% for 3 consecutive quarters in the financial year 2015-16 and in all subsequent years

ii. less than 2% for 3 consecutive quarters in 2016-17 and all subsequent years. Failure to maintain the target: If RBI fails to meet the set target, it shall send a report to the GOI

i. The reasons for failure to achieve the target ii. The remedial actions to be taken by RBI. iii. An estimate of time period with in which the target would be achieved.

Revisiting Existing Priority Sector Lending Guidelines-March 2015

The Reserve Bank released the Report of the Internal Working Group to Revisit the Existing Priority Sector Lending Guidelines (Chair: Lily Vadera, Chief General Manager, Department of Banking Regulation) on March 2, 2015.

The key recommendations of the Report include:

i) Overall Priority sector target: The target for lending to the redefined priority sector is retained uniformly at 40 per cent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure (CEOBE), whichever is higher, for all




scheduled commercial banks. However, foreign banks, which will all now come under the norms, have been given time to comply with the target.

ii) Agriculture: Target of 18 per cent of ANBC retained. A subtarget of 8 per cent of ANBC has been recommended for small and marginal farmers to be achieved in a phased manner. More flexibility has been recommended for banks to lend the remaining 10 per cent of the overall agriculture loan target to other farmers, agricultural infrastructure and ancillary activities as defined by the Group. To give a fillip to agri-infrastructure and agri-processing, no caps on loan limits have been stipulated.

iii) MSME: In addition to micro and small enterprises, medium enterprises are included within the ambit of priority sector lending. To ensure that the micro enterprises are not crowded out, a subtarget of 7.5 per cent for micro enterprises has been recommended, which is to be achieved in a phased manner.

iv) Other Sectors: In addition, loans to sanitation, health care and drinking water facilities and renewable energy will come under the priority sector ambit, as will incremental loans made to exports, with certain ceilings.

v) Priority Sector Lending Certificates: The Working Group recommends introduction of priority sector lending certificates (PSLCs) which will enable banks to meet their PSL requirements even while leveraging their comparative advantage in lending

What are the recent measures by GOI and RBI to attract investments, to maintain growth and to improve the ease of doing business in India? Following are some of the measures: Initiatives: Government has undertaken a number of initiatives such as, Swachh Bharat Abhiyan, Make in India campaign, Clean Ganga Campaign and Pradhan Mantri Jan Dhan Yojana. FDI in key sectors: The government relaxed FDI norms in key sectors such as railways and defence. Also, a bill was introduced in the Parliament to increase the FDI cap in the insurance sector from 26.0 to 49.0 per cent. The RBI relaxed FDI norms by allowing higher flexibility in pricing of instruments with a view to attract more overseas investment. New regulatory reporting requirement for stressed assets: The RBI introduced a new system of reporting stressed assets in case of non-payment of interest and principal for 30 days and 60 days onwards. The initiative was supported by formation of a central repository of information for large borrowers of more than INR5 crore.


Revision in interest rates: The RBI signalled softening of the monetary policy stance by cutting policy repo rates from 7.75 percent in January 2015 to 6.50% in April 2016. Subsequently, during Feb 15, the RBI also reduced the SLR by 50 bps from 22.0 per cent to 21.5 per cent. And 21.25% from April 2016. Reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 95 per cent of the requirement to 90 per cent with effect from the fortnight beginning April 16, 2016 Gold imports: In February 2015, the RBI lifted the ban on imports of gold coins by medallions by trading houses and banks on consignment basis. Also, in November 2014, the 80:20 scheme which linked gold imports to exports was withdrawn. Sub-limits for FII: In July 2014, the RBI raised FIIs’ sub-limit in government bonds by USD5 billion. The move is expected to stabilise the yields. The pace of economic recovery during FY15 is expected to be better than the pace during FY14. However, it could depend on a variety of factors such as the performance of agriculture and industry, inflation rate, and policy support. The Economic Survey of India 2015 outlines a few priority areas for the GOI such as reviving investments, strengthening macro-economic stability, creating non-agriculture related jobs and developing infrastructure and agriculture. Moreover, the formation of a new government at the centre after 10 years seems to have increased expectations, especially those of investors’, which can be gauged from the 40 per cent rise in the Sensex to the 29,571.0 mark in January 2015 from the 21,140.5 mark in January 2014, making it one of the best performing stock exchanges in the world. The government is expected to translate into action the policies announced by it and also to make conscious efforts towards ensuring a growing and stable economy.

Second Green revolution-focus on Pulses< Agrarian growth.

White Revolution-Ensuring cattle welfare

Saffron energy revolution-solar power

Blue Revolution-Fishermen’s welfare, cleaning seas and rivers , conserving water.

Tricolur revolution- Four fold way to Growth-Second Green revolution, white revolution, saffron Energy revolution, and blue revolution.

PM lays stress on Skills, Scale and Speed.


. NOTES FOR INTERVIEW – NEW-2016 April 2016 Guidelines on Investment Advisory Services- RBI advised that banks desirous of offering Investment Advisory Services (IAS) may do so either through a separate subsidiary set up for the purpose or one of the existing subsidiaries after ensuring that there is an arm’s length relationship between the bank and the subsidiary.

The sponsor bank should obtain specific prior approval of Department of Banking Regulation

• All bank sponsored subsidiaries offering IAS will be registered with SEBI • IAS provided by the bank sponsored subsidiaries should only be for the products

and services in which banks are permitted to deal in as per Banking Regulation Act, 1949.

Computation and Dissemination of RBI Reference Rate based on Committee on Financial Benchmarks (Chairman: Shri P. Vijaya Bhaskar)

The Reserve Bank had constituted a Committee on Financial Benchmarks (Chairman: Shri P. Vijaya Bhaskar) to study the various issues relating to financial benchmarks in India and the committee had also reviewed the process of computation and dissemination of Rupee Reference Rate published by the Reserve Bank. The Committee had recommended that the USD/INR Reference Rate of the Reserve Bank should be derived based on the actual market transactions so as to ensure that the Reference Rate appropriately represents the prevailing spot rate.

The Reserve Bank compiles and publishes on a daily basis the Reference Rate for Spot USD/INR. Under the existing methodology, the rate is arrived at through a polling process involving rates obtained from select banks.

As announced in the First Bi-monthly policy statement for the year 2016-17, the Reserve Bank revised the existing methodology for computation of the RBI Reference Rate by making the following changes:

• The rate for spot US Dollar against the Indian Rupee will be computed on the basis of the Volume Weighted Average of the actual market transactions that have taken place during a randomly selected 15 minute window between 11.30 a.m. and 12.30 p.m. every week- day.

https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=36654


RBI amends Basel III Capital Regulations:

Reserve Bank on March 1, 2016 made some amendments to the treatment of certain balance sheet items for the purposes of determining banks’ regulatory capital. The salient features of the amendments were:

Treatment of Revaluation Reserves

Revaluation reserves arising from change in the carrying amount of a bank’s property consequent upon its revaluation would be considered as common equity tier 1 capital (CET1) at a discount of 55 per cent instead of Tier 2 capital as earlier, subject to conditions.

Master Directions of RBI:

The Reserve Bank has started issuing Master Directions on all regulatory matters beginning January 2016 to streamline compliance in pursuance of the decision announced in the Fourth Bi-monthly Monetary Policy Statement, 2015-16 on September 29, 2015. The Master Directions consolidate instructions on rules and regulations framed by the Reserve Bank under various Acts including banking issues and foreign exchange transactions. The process of issuing Master Directions involves issuing one Master Direction for each subject matter covering all instructions on that subject. Any change in the rules, regulation or policy is communicated during the year by way of circulars/press releases. The Master Directions will be updated suitably and simultaneously whenever there is a change in the rules/regulations or there is a change in the policy. Explanations of rules and regulations will be issued by way of Frequently Asked Questions (FAQs) after issue of the Master Directions

Sovereign Gold Bond 2015-16

Sl.No.

Item Details

1. Product name Sovereign Gold Bond

2. Issuance To be issued by Reserve Bank India on behalf of the Government of India.

3. Eligibility The Bonds will be restricted for sale to resident Indian entities including individuals, HUFs, trusts, Universities, charitable institutions.

4. Denomination The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram.

5. Tenor The tenor of the Bond will be for a period of 8 years with exit option from 5th year to be exercised on the interest payment dates.

6. Minimum size Minimum permissible investment will be 1 units (i.e. 1 grams of gold).

7. Maximum limit The maximum amount subscribed by an entity will not be more than 500 grams per person per fiscal year (April-March). A self-


declaration to this effect will be obtained.

8. Joint holder In case of joint holding, the investment limit of 500 grams will be applied to the first applicant only.

9. Frequency The Bonds will be issued in tranches. Each tranche will be kept open for a period to be notified. The issuance date will also be specified in the notification.

10. Issue price Price of Bond will be fixed in Indian Rupees on the basis of the previous week’s (Monday–Friday) simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Ltd. (IBJA).

11. Payment option Payment for the Bonds will be through electronic funds transfer/cash payment/ cheque/ demand draft.

12. Issuance form Government of India Stock under GS Act, 2006. The investors will be issued a Stock/Holding Certificate. The Bonds are eligible for conversion into de-mat form.

13. Redemption price

The redemption price will be in Indian Rupees based on previous week’s (Monday-Friday) simple average of closing price of gold of 999 purity published by IBJA.

14. Sales channel Bonds will be sold through banks and designated Post Offices, as may be notified, either directly or through agents.

15. Interest rate The investors will be compensated at a fixed rate of 2.75 per cent per annum payable semi-annually on the initial value of investment.

16. Collateral Bonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time.

17. KYC Documentation

Know-your-customer (KYC) norms will be the same as that for purchase of physical gold. KYC documents such as Voter ID, Aadhaar card/PAN or TAN /Passport will be required.

18. Tax treatment The interest on Gold Bonds shall be taxable as per the provision of Income Tax Act, 1961 (43 of 1961) and the capital gains tax shall also remain same as in the case of physical gold.

19. Tradability Bonds will be tradable on exchanges/NDS-OM from a date to be notified by RBI.

20. SLR eligibility The Bonds will be eligible for Statutory Liquidity Ratio.

21. Commission Commission for distribution shall be paid at the rate of 1% of the subscription amount.


Gold Monetisation Scheme, 2015

GMS, which modifies the existing ‘Gold Deposit Scheme’ (GDS) and ‘Gold Metal Loan Scheme (GML), is intended to mobilise gold held by households and institutions of the country and facilitate its use for productive purposes, and in the long run, to reduce country’s reliance on the import of gold. All Scheduled Commercial Banks excluding RRBs will be eligible to implement the Scheme.

There are two type of Deposits.

Short Term Bank Deposit (STBD) - The deposit of gold made under the GMS with a designated bank for a short term period of 1-3 years. It is left to the individual banks to decide the rate of Interest. It will reflect in the liability side of the Bank’s balance sheet. The deposit will attract CRR and SLR requirements as per applicable instructions of RBI from the date of credit of the amount to the deposit account. However, the stock of gold held by banks in their books will be an eligible asset for meeting the The designated banks may, at their discretion, allow whole or part premature withdrawal of the deposit subject to such minimum lock-in period and penalties, if any, as may be determined by them.

he interest rates on these deposits. The interest shall be credited in the deposit accounts on the respective due dates and will be withdrawable periodically or at maturity as per the terms of the deposit.

y will, at the option of the depositor be either in Indian Rupee equivalent of the deposited gold and accrued interest based on the price of gold prevailing at the time of redemption, or in gold. The option in this regard shall be made in writing by the depositor at the time of making the deposit and shall be irrevocable:

the discretion of the designated bank.

Medium and Long Term Government Deposit (MLTGD) - The deposit of gold made under the GMS with a designated bank in the account of the Central Government for a medium term period of 5-7 years or a long term period of 12-15 years or for such period as may be decided from time to time by the Central Government. he deposit under this category will be accepted by the designated banks on behalf of the Central Government. The receipts issued by the CPTC and the deposit certificate issued by the designated banks shall state this clearly.

eflected in the balance sheet of the designated banks. It will be the liability of Central Government and the designated banks will hold this gold deposit on behalf of Central Government until it is transferred to such person as may be determined by the Central Government.

-7 years or a long term period of 12-15 years or for such period as may be decided from time to time by the Central


Government. The designated banks may allow whole or part premature withdrawal of the deposit subject to such minimum lock-in period and penalties, if any, as determined by the Central Government.

equivalent of the value of the gold and accumulated interest as per the price of gold prevailing at the time of redemption.

Government and the sale proceeds will be credited to Government’s account held with RBI.

Reserve Bank of India will maintain the Gold Deposit Accounts denominated in gold in the name of the designated banks that will in turn hold sub-accounts of individual depositors.

General:

ll be denominated in gold.

- Resident Indians (Individuals, HUFs, Trusts including Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations and Companies) can make deposits under the scheme. Joint deposits of two or more eligible depositors are also allowed under the scheme and the deposit in such case shall be credited to the joint deposit account opened in the name of such depositors. The existing rules regarding joint operation of bank deposit accounts including nominations will be applicable to these gold deposits.

Testing Centres) However, at their discretion, banks may accept the deposit of gold at the designated branches, especially from the larger depositors.

of gold deposited into tradable gold bars after refinement or 30 days after the receipt of gold at the CPTC or the bank’s designated branch, as the case may be, whichever is earlier.

designated branch, as the case may be, to the date on which interest starts accruing in the deposit, the gold accepted by the CPTC or the designated branch of the bank shall be treated as an item in safe custody held by the designated bank.

designated banks shall translate the gold liabilities and assets in Indian Rupees by crossing the London AM fixing for Gold / USD rate with the Rupee-US Dollar reference rate announced by RBI on that day. The prevalent custom duty for import of gold will be added to the above value to arrive at the final value of gold. This approach will also be followed for valuation of gold at any subsequent valuation dates and for the conversion of gold into Indian Rupees under the Scheme.


The minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold of 995 fineness. There is no maximum limit for deposit under the scheme. All transactions under the scheme with the designated bank shall be in gold of 995 fineness.

Utilization of gold mobilized under GMS

Gold accepted under STBD

Without prejudice to the generality of the uses of the gold mobilised under the STBD, the designated banks may

i. sell the gold to MMTC for minting India Gold Coins (IGC), to jewellers and to other designated banks participating in GMS; or

ii. lend the gold under the GML scheme to MMTC for minting India Gold Coins (IGC) and to jewellers.

Gold accepted under MLTGD

i. Gold deposited under MLTGD will be auctioned by MMTC or any other agency authorized by the Central Government and the sale proceeds credited to the Central Government’s account with RBI.

ii. The entities participating in the auction may include RBI, MMTC, banks and any other entities notified by the Central Government in this regard.

iii. Gold purchased by designated bank under the auction may be utilized by them for any specified purposes.

GMS - linked Gold Metal Loan (GML) Scheme

i. The gold mobilized under STBD may be provided to the jewellers as GML. The designated banks can also purchase the gold auctioned under MLTGD and extend GML to the jewellers.

ii. The jewellers will receive the physical delivery of gold either from the refiners or from the designated bank, depending on the place where the refined gold is stored.

iii. The existing Gold (Metal) Loan (GML) Scheme operated by nominated banks in terms of paragraph 2.3.12 of the RBI Master Circular on Loans and Advances dated July 1, 2015 will continue in parallel with GMS-linked GML scheme. All prudential guidelines for the existing GML Scheme as prescribed in the Master Circular as amended from time to time will also be applicable to the new Scheme.

iv. The designated banks other than the nominated banks shall be eligible to import gold only for redemption of the gold deposits mobilised under the STBD.

Interest to be charged: The designated banks are free to determine the interest rate to be charged on GMS-linked GML.

Tenor:The tenor of GMS-linked GML will be the same as under the extant GML scheme.


The Indian Banks’ Association (IBA) has agreed to design appropriate standard documentations in connection with the GMS including application form for tendering raw gold to the assaying centers, description of the physical appearance and other characteristics of the gold, the recording of the results of XRF by the assaying centre, customer’s consent for melting the gold for fire-assaying, customer’s consent for making the final deposit, the Final Receipt to be issued to the depositor and any other documents that may be considered by the banks. The entire set of documents should be made available to the depositor upfront and should include all the terms and conditions of the scheme including the schedule of charges. The documentation should be posted on IBA’s website and should also be available in physical form at the CPTCs.

Report of the Working Group on the Implementation of Indian accounting standards (Ind AS) by Banks in India((Chair: Shri Sudarshan Sen)

The Union Budget for 2014-15 emphasised the urgent need for convergence of the current Indian accounting standards with International Financial Reporting Standards (IFRS). The Ministry of Corporate Affairs (MCA), Government of India notified the rules for IFRS converged Indian accounting standards (Ind AS) along with its implementation road map for corporates in a phased manner from 2016-17 onwards. The roadmap for convergence of insurance companies, banking companies and non-banking financial companies (NBFCs) is expected to be announced by MCA in due course. The Reserve Bank recommended to the MCA a roadmap for implementation of Ind AS by banks from 2018-19 onwards and NBFCs in a phased manner (2018-19 and 2019-20).

Considering these developments, a Working Group was constituted to look into the issues in implementation of Ind AS by banks. The Working Group has structured its recommendations into the following key areas with focus on financial instruments.

i. Classification and Measurement of Financial Assets ii. Classification and Measurement of Financial Liabilities iii. Hedge Accounting and Derivatives iv. Fair Value Measurement v. Impairment of Financial Assets vi. Presentation of Financial Statements and Disclosure vii. DE recognition, Consolidation and Other Residuary Issues.

Amendment to Prevention of Money Laundering (Maintenance of Records) Rules, 2005 – additional documents for the limited purpose of ‘proof of address’

‘Simplified measures’ to verify the proof of identity of ‘low risk customers’ if they do not have Officially Valid Documents (OVDs) for proof of identity.

The Government has since amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 providing additional relaxations for the purpose of proof of address in addition to the relaxations in proof of identity under ‘simplified measures’ as contained in paragraph 2(d) of PML Rules. Thus, for the limited purpose of proof of address the following additional documents are deemed to be OVDs under ‘simplified

https://rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3093

https://rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3093


measures’.

a. Utility bill which is not more than two months old of any service provider (electricity, telephone, postpaid mobile phone, piped gas, water bill);

b. Property or Municipal Tax receipt; c. Bank account or Post Office savings bank account statement; d. Pension or family pension payment orders (PPOs) issued to retired employees by

Government Departments or Public Sector Undertakings, if they contain the address;

e. Letter of allotment of accommodation from employer issued by State or Central Government departments, statutory or regulatory bodies, public sector undertakings, scheduled commercial banks, financial institutions and listed companies. Similarly, leave and license agreements with such employers allotting official accommodation; and

f. Documents issued by Government departments of foreign jurisdictions and letter issued by Foreign Embassy or Mission in India.

The additional documents mentioned above shall be deemed to be OVDs under ‘simplified measure’ for the ‘low risk’ customers for the limited purpose of proof of address where customers are unable to produce any OVD for the same.

Legal Audit of title documents in respect of large value loan accounts

In terms of RBI banks are to put in place a system wherein the concurrent auditors were required to look into and report, inter alia, on the genuineness of the title documents especially for large value loans.

2. Apart from that , the banks should also subject the title deeds and other documents in respect of all credit exposures of ` 5 crore and above to periodic legal audit and re-verification of title deeds with relevant authorities as part of regular audit exercise till the loan stands fully repaid.

3. The banks may furnish a review note to its Board/ Audit Committee of the Board at quarterly intervals on an ongoing basis.

Modalities for implementation of Atal Pension Yojana (APY)

Government of India, Ministry of Finance has announced the launch of Atal Pension Yojana (APY) on May 9, 2015. The scheme, is an universal social security measure specially for the poor and the under-privileged , which will provide a defined pension, depending on the contribution, and its period to its subscribers. The enrolment under the scheme to be introduced from June 1, 2015 has to start immediately. The APY will be focussed on all citizens in the unorganised sector, who join the National Pension System (NPS) administered by the Pension Fund Regulatory and Development Authority (PFRDA). Under the APY, the subscribers would receive the fixed minimum pension of Rs. 1000-Rs 5000 per month at the age of 60 years, depending on their contributions, which itself would be based on the age of joining the APY. The minimum age of joining APY is 18 years and maximum age is 40 years. Therefore, minimum period of


contribution by any subscriber under APY would be 20 years or more. The benefit of fixed minimum pension would be guaranteed by the Government.

The Central Government would also co-contribute 50% of the total contribution or Rs. 1000 per annum, whichever is lower, to each eligible subscriber account, for a period of 5 years, i.e., from Financial Year 2015-16 to 2019-20, who join the NPS before 31st December, 2015 and who are not members of any statutory social security scheme and who are not income tax payers. However, the scheme will continue after this date but Government Co-contribution will not be available. The Government co-contribution is payable to eligible PRANs by PFRDA after receiving the confirmation from Central Record Keeping Agency at such periodicity as may be decided by PFRDA. However, the funding support to the scheme would be released only after approval of the Parliament through Supplementary Demand for Grants for making necessary budgetary provision.

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and Pradhan Mantri Suraksha Bima Yojana (PMSBY)

Government of India, Ministry of Finance intends to roll out Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) Scheme and Pradhan Mantri Suraksha Bima Yojana (PMSBY) from June 1st, 2015. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) Scheme offers life insurance worth Rs 2 lakhs at Rs 330 per annum while Pradhan Mantri Suraksha Bima Yojana (PMSBY) offers accident insurance worth Rs 2 lakhs at Rs 12 per annum. The schemes will be implemented by member banks in accordance with the preliminary rules and terms finalised by the Government

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)

All savings bank account holders in the age 18 to 50 years in participating banks will be entitled to join. In case of multiple saving bank accounts held by an individual in one or different banks, the person would be eligible to join the scheme through one savings bank account only. Aadhar would be the primary KYC for the bank account. Enrolment period : Initially on launch for the cover period 1 st June 2015 to 31 stMay 2016, subscribers will be required to enroll and give their auto debit consent by 31 st May 2015. Benefits :Rs.2 lakhs is payable on member’s death due to any reason Premium:Rs.330/-per annum per member. The savings bank account holders of the participating banks aged between 18 years(completed)and 50 years(age nearer birthday)


Pradhan Mantri Suraksha Bima Yojana (PMSBY)

All savings bank account holders in the age 18 to 70 years . Aadhar would be the primary KYC. The cover shall be for the one year period stretching from 1stJune to 31stMay. Benefits: Death-Rs 2 lakhs. Loss of both eyes or loss of both hands or feet, loss of one eye and loss of hand and foot-Rs 2 lakhs Loss of one eye or one hand or foot-Rs 1 lakh. Premium-Rs 12 per annum per member.

What is called EWS & FRA?

Early Warning Signals (EWS) and Red Flagged Accounts (RFA)

The concept of a Red Flagged Account (RFA) is being introduced in the current framework as an important step in fraud risk control. A RFA is one where a suspicion of fraudulent activity is thrown up by the presence of one or more Early Warning Signals (EWS). These signals in a loan account should immediately put the bank on alert regarding a weakness or wrong doing which may ultimately turn out to be fraudulent. A bank cannot afford to ignore such EWS but must instead use them as a trigger to launch a detailed investigation into a RFA.

Illustrative list of EWS

1. Default in payment to the banks/ sundry debtors and other statutory bodies, etc., bouncing of the high value cheques

2. Raid by Income tax /sales tax/ central excise duty officials 3. Frequent change in the scope of the project to be undertaken by the borrower 4. Under insured or over insured inventory 5. Invoices devoid of TAN and other details 6. Dispute on title of the collateral securities 7. Costing of the project which is in wide variance with standard cost of installation of

the project 8. Funds coming from other banks to liquidate the outstanding loan amount 9. Foreign bills remaining outstanding for a long time and tendency for bills to remain

overdue 10. Onerous clause in issue of BG/LC/standby letters of credit 11. In merchanting trade, import leg not revealed to the bank 12. Request received from the borrower to postpone the inspection of the godown for

flimsy reasons 13. Delay observed in payment of outstanding dues 14. Financing the unit far away from the branch 15. Claims not acknowledged as debt high 16. Frequent invocation of BGs and devolvement of LCs


17. Funding of the interest by sanctioning additional facilities 18. Same collateral charged to a number of lenders 19. Concealment of certain vital documents like master agreement, insurance

coverage 20. Floating front / associate companies by investing borrowed money 21. Reduction in the stake of promoter / director 22. Resignation of the key personnel and frequent changes in the management 23. Substantial increase in unbilled revenue year after year. 24. Large number of transactions with inter-connected companies and large

outstanding from such companies. 25. Significant movements in inventory, disproportionately higher than the growth in

turnover. 26. Significant movements in receivables, disproportionately higher than the growth in

turnover and/or increase in ageing of the receivables. 27. Disproportionate increase in other current assets. 28. Significant increase in working capital borrowing as percentage of turnover. 29. Critical issues highlighted in the stock audit report. 30. Increase in Fixed Assets, without corresponding increase in turnover (when project

is implemented). 31. Increase in borrowings, despite huge cash and cash equivalents in the borrower’s

balance sheet. 32. Liabilities appearing in ROC search report, not reported by the borrower in its

annual report. 33. Substantial related party transactions. 34. Material discrepancies in the annual report. 35. Significant inconsistencies within the annual report (between various sections). 36. Poor disclosure of materially adverse information and no qualification by the

statutory auditors. 37. Frequent change in accounting period and/or accounting policies. 38. Frequent request for general purpose loans. 39. Movement of an account from one bank to another. 40. Frequent ad hoc sanctions. 41. Not routing of sales proceeds through bank 42. LCs issued for local trade / related party transactions 43. High value RTGS payment to unrelated parties. 44. Heavy cash withdrawal in loan accounts. 45. Non submission of original bills.

The threshold for EWS and RFA is an exposure of Rs.500 million or more at the level of a bank irrespective of the lending arrangement (whether solo banking, multiple banking or consortium). All accounts beyond Rs.500 million classified as RFA or ‘Frauds’ must also be reported on the CRILC data platform together with the dates on which the accounts were classified as such.

The modalities for monitoring of loan frauds below Rs.500 million threshold is left to the discretion of banks. However, banks may continue to report all identified accounts to CFMC, RBI as per the existing cut-offs.

The tracking of EWS in loan accounts should not be seen as an additional task but must be integrated with the credit monitoring process in the bank so that it becomes a


continuous activity and also acts as a trigger for any possible credit impairment in the loan accounts, given the interplay between credit risks and fraud risks. In respect of large accounts it is necessary that banks undertake a detailed study of the Annual Report as a whole and not merely of the financial statements, noting particularly the Board Report and the Managements’ Discussion and Analysis Statement as also the details of related party transactions in the notes to accounts. The officer responsible for the operations in the account, by whatever designation called, should be sensitised to observe and report any manifestation of the EWS promptly to the Fraud Monitoring Group (FMG) or any other group constituted by the bank for the purpose immediately. To ensure that the exercise remains meaningful, such officers may be held responsible for non-reporting or delays in reporting.

The FMG should report the details of loan accounts of Rs.500 million and above in which EWS are observed, together with the decision to classify them as RFAs or otherwise to the CMD/CEO every month.

A report on the RFA accounts may be put up to the Special Committee of the Board for monitoring and follow-up of Frauds (SCBF) providing, inter alia, a synopsis of the remedial action taken together with their current status.

What are the Penal measures for fraudulent borrowers?

In general, the penal provisions as applicable to wilful defaulters would apply to the fraudulent borrower including the promoter director(s) and other whole time directors of the company insofar as raising of funds from the banking system or from the capital markets by companies with which they are associated is concerned, etc. In particular, borrowers who have defaulted and have also committed a fraud in the account would be debarred from availing bank finance from Scheduled Commercial Banks, Development Financial Institutions, Government owned NBFCs, Investment Institutions, etc., for a period of five years from the date of full payment of the defrauded amount. After this period, it is for individual institutions to take a call on whether to lend to such a borrower. The penal provisions would apply to non-whole time directors (like nominee directors and independent directors) only in rarest of cases based on conclusive proof of their complicity.

8.2 No restructuring or grant of additional facilities may be made in the case of RFA or fraud accounts.

8.3 No compromise settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued.

Bifurcation of Top Posts in Public Sector Banks The Government approved the proposal to separate the posts of Chairman and Managing Directors in Public Sector Banks (PSBs). While the Chairman would be non-executive, Managing Director and Chief Executive Officer (MD & CEO) would be the executive head. The splitting of the posts of Chairman and Managing Director is in accordance with the international best practices. While the Chairman would give an overall policy directions to the Bank, MD & CEO would be responsible for day-to-day


management of the Bank. What is called Red Flagged Account (RFA)? It comes under Fraud risk Management as an important step in Fraud risk control. An RFA is one where suspicion of fraudulent activity is thrown up by the presence of one or more Early Warning Signals (EWS). These signals in a loan account should immediately put the bank on alert regarding weakness or wrong doing which may ultimately turn out to be fraudulent. A bank cannot afford to ignore such EWS but must instead use them as a trigger to launch a detailed investigation into the RFA. The EWS so compiled by a bank would form the basis for classifying an account as an RFA. The threshold for EWS and RFA is an exposure of ₹500 million or more at the level of a bank irrespective of the lending arrangement (whether solo banking, multiple banking or consortium). RBI guidelines on Dealing with Loan Frauds:

The Reserve Bank has formulated a ‘Framework for fraud risk management in banks’

objective of this framework i) to direct the focus of banks on the aspects relating to prevention, early detection, prompt reporting to the Reserve Bank and the investigative agencies (for instituting criminal proceedings against the fraudulent borrowers) and (ii) timely initiation of the staff accountability proceedings (for determining negligence or connivance, if any) while ensuring that the normal conduct of business of the banks and their risk taking ability is not adversely impacted and no new and onerous responsibilities are placed on the banks.

Early Warning Signals and Red Flagged Accounts

The concept of a Red Flagged Account (RFA) was introduced as an important step in fraud risk control. An RFA is one where suspicion of fraudulent activity is thrown up by the presence of one or more Early Warning Signals (EWS). These signals in a loan account should immediately put the bank on alert regarding weakness or wrong doing which may ultimately turn out to be fraudulent. A bank cannot afford to ignore such EWS but must instead use them as a trigger to launch a detailed investigation into the RFA. The EWS so compiled by a bank would form the basis for classifying an account as an RFA. The threshold for EWS and RFA is an exposure of ₹500 million or more at the level of a bank irrespective of the lending arrangement (whether solo banking, multiple banking or consortium).

Early Detection and Reporting

The most effective way of preventing frauds in loan accounts is for banks to have a robust appraisal and an effective credit monitoring mechanism during the entire life-cycle of the loan account, namely,

(i) Pre-sanction stage: Banks may keep the record of pre-sanction checks as part of the sanction documentation;

(ii) Disbursement stage: Checks by Risk Management Group (RMG) during the disbursement stage may focus on the adherence to the terms and conditions of sanction, rationale for allowing dilution of these terms and conditions, level at which such dilutions were allowed;


(iii) Annual review: While the continuous monitoring of an account through the tracking of EWS is important, banks also need to be vigilant from the fraud perspective at the time of annual review of accounts.

Besides, the RMG should have capability to track market developments relating to the major clients of the bank and provide inputs to the credit officers. This would involve collecting information from the grapevine, following up stock market movements, subscribing to a press clipping service, monitoring databases on a continuous basis and not confining the exercise only to the borrowing entity but to the group as a whole.

Besides, the Framework for fraud risk management in banks also include broad guidelines relating to the (i) Reporting to the Central Repository of Information on Large Credits (CRILC); (ii) Staff Empowerment; (iii) Role of auditors; (iv) Incentive for prompt reporting; (v) Bank as a sole lender; (vi) Lending under consortium or multiple banking arrangements; (vii) Staff accountability; (viii) Filing complaints with law enforcement agencies; (ix) Penal measures for fraudulent borrowers and (x) Central Fraud Registry.


Central Fraud Registry

Presently there is no single database which the lenders can access to get all the important details of previous frauds reported by banks. The creation of such database at RBI will make available more information to banks at the time of start of a banking relationship, extension of credit facilities or at any time during the operation of an account. The Reserve Bank is in the process of designing a Central Fraud Registry, a centralised searchable database, which can be accessed by banks. The CBI and the Central Economic Intelligence Bureau (CEIB) have also expressed interest in sharing their own databases with the banks. More information in this regard would follow once the structure is finalised.

Current Structure for filing Police/CBI complaints

Category of bank

Amount involved in the fraud

Agency to whom complaint should be lodged

Remarks

Private Sector/ Foreign Banks

Rs.1 lakh and above

State Police

Rs.10000 and above if committed by staff

State Police

Rs.1 crore and above

SFIO In addition to State Police

Public Sector Banks

Below Rs.3 crore

State Police

Rs.3 crore and above and up to Rs.25 crore

CBI Anti Corruption Branch of CBI (where staff involvement is prima facie evident)

Economic Offences Wing of CBI (Where staff involvement is prima facie not evident)

More than Rs.25 crore

CBI Banking Security and Fraud Cell (BSFC) of CBI (irrespective of the involvement of a public servant)


Mandatory Leave for Employees in Sensitive Positions

The Reserve Bank, on April 23, 2015, advised all scheduled commercial banks, that employees posted in sensitive positions or areas of operations (namely, treasury, currency chests, risk modelling, model validation, etc.) are covered under a ‘Mandatory Leave’ policy. As per the policy, these employees are required to compulsorily avail of leave for a few days (say 10 working days) in a single spell every year, during their posting in such areas. The bank should also identify such highly sensitive positions where the bank will, without any prior intimation, advise the employee to be away from his desk for a specified number of working days each year. While the employee is on ‘mandatory leave’ or asked to be away from his desk as above, it should be ensured that he does not have access to any physical or virtual resources related to his work responsibilities, with the possible exception of corporate email. An exhaustive list of sensitive positions or areas of operations to be covered under ‘mandatory leave’ and under ‘away from desk’ requirement, may be decided as per the bank’s own policy duly approved by the Board of Directors or committee of the Board, and the incumbents of these positions should be kept aware of these requirements. Implementation of such policy would be covered under the Pillar II review of banks’ risk management system by the Reserve Bank of India.

Differential Interest Rates on Deposits

The Reserve Bank, on April 16, 2015, permitted all scheduled commercial banks (excluding RRBs) to offer differential interest rates based on whether the term deposits are with or without-premature-withdrawal-facility, subject to certain guidelines:

(i) All term deposits of individuals (held singly or jointly) of ₹ 15 lakh and below should, necessarily, have premature withdrawal facility.

(ii) For all term deposits other than (i) above, the customers can be given the option to choose between term deposits either with or without premature withdrawal facility.

(iii) Banks should disclose in advance the schedule of interest rates payable on deposits.

(iv) The banks should have a Board approved policy with regard to interest rates on deposits including deposits with differential rates of interest and ensure that the interest rates offered are reasonable, consistent, transparent and available for supervisory review/scrutiny as and when required.

Provisioning pertaining to Fraud Accounts

The Reserve Bank, on April 1, 2015, prescribed a uniform provisioning norm in respect of all cases of fraud, as under:

• The entire amount due to the bank (irrespective of the quantum of security held against such assets), or for which the bank is liable (including deposit accounts), is to be provided for over a period not exceeding four quarters commencing with the quarter in which the fraud has been detected;

• However, where there has been delay, beyond the prescribed period, in reporting the


fraud to the Reserve Bank, the entire provisioning is required to be made at once. In addition, the Reserve Bank may also initiate appropriate supervisory action where there has been a delay by the bank in reporting a fraud, or provisioning there against

Procedure for Opening of Currency Chests simplified

The Reserve Bank, on April 23, 2015, reviewed extant instructions for “Construction of Currency Chests Strong Rooms / Vaults” and advised all Scheduled Commercial Banks as under:

A. Locations that are at/ close to the International Border/ Insurgency affected areas

• In case the place of the proposed location of a currency chest is within 80 kms from the international border and it is not a State Capital or a cantonment area, banks may approach Regional Offices (ROs) of the Reserve Bank for obtaining security clearance. Under no circumstance, construction can be commenced before receipt of the required clearance.

• The banks may also note to obtain all necessary approvals from other agencies before beginning construction.

• Strict adherence to the Technical Specifications of construction in terms of the circular dated November 14, 2008, must be ensured by banks.

• Final Approval from the respective Regional Offices of the Reserve Bank may be sought after construction is completed. No deviation will be permitted or considered and any construction falling short of specifications will not be approved.

B. All other locations

• Banks may construct new Currency Chests at any place after informing the Regional Office concerned of the Reserve Bank, under whose jurisdiction it is to be established.

• The banks may also note to obtain all necessary approvals from other agencies before beginning construction.

• Strict adherence to the Technical Specifications of construction in terms of circular dated November 14, 2008, must be ensured by banks.

• Final Approval from the respective Regional Office of the Reserve Bank may be sought after construction is completed. No deviation will be permitted or considered and any construction falling short of specifications will not be approved.

Approvals for opening of CCs by public sector banks and private sector banks will continue to be given by regional offices of the Reserve Bank. All other banks (RRBs, Cooperative banks and foreign banks) may continue to seek approvals for opening of Currency Chests from DCM, Central Office, Mumbai.


Calendar of Reviews

The Reserve Bank advised all public sector banks to suitably determine, with the approval of their boards, the agenda items and the periodicity thereof, keeping in view that there is adequate focus on matters of strategic and financial importance, including the seven broad themes as prescribed by the Committee to Review Governance of Boards of Banks in India (Chairman - Dr. P. J. Nayak), popularly known as Nayak Committee. The Nayak Committee had earlier recommended that discussions in the boards of banks need to be upgraded and greater focus should be on strategic issues.

The Reserve Bank had, in the first bi-monthly monetary policy statement 2015-16, proposed to do away with the ‘Calendar of Reviews’ and instead, replace it with the seven critical themes prescribed by the Nayak Committee. These are: business strategy, financial reports and their integrity, risk, compliance, customer protection, financial inclusion and human resources. The Reserve Bank has decided to leave it to the banks’ boards to determine other list of items to be deliberated and periodicity thereof.

Declaration of Exports of Goods/Software

The Reserve Bank has dispensed with the requirement of declaring the export of goods/software in the Statutory Declaration Form (SDF) in case of exports taking place through the Electronic Data Interchange (EDI) ports, as the mandatory statutory requirements contained in the SDF have been subsumed in the shipping bill format.

Banks Board Bureau:

Vinod Rai, former comptroller and auditor general of India, was on Sunday named the first chairman of the Banks Board Bureau, a body that will select top executives of state-run banks and help lenders raise capital and develop business strategies.

The other members of the board include Anil K. Khandelwal, a former chairman of Bank of Baroda; H.N. Sinor, a former joint managing director of ICICI Bank Ltd; and Roopa Kudva, a former managing director of rating company Crisil Ltd, a finance ministry statement said on Sunday.

The tenure of Rai and other members of the board will be of two years. Besides these members, there will two representatives from the government: secretary, department of financial services of the finance ministry; and secretary, department of public enterprises. The deputy governor of the Reserve Bank of India will represent the central bank on the board.

All the members and chairman will be part-time. The Banks Board Bureau will start functioning from 1 April 2016.

Finance minister Arun Jaitley last year announced the plan to set up a seven-member Banks Board Bureau as part of the government’s Indradhanush programme to revamp the functioning of the state-run banks. The board is an attempt to separate the


functioning of the banks from the government by creating another entity in between to act as a link between the two.

It will also help in creating a holding company for the government’s stakes in 27 state-run banks—thereby facilitating consolidation in the banking sector. The Banks Board Bureau may also help in identifying the right fits when it comes to mergers.

The announcement of the Banks Board Bureau comes at a time when state-run banks are struggling with high levels of bad debt and huge losses on account of higher provisioning.

Gross non-performing assets (NPAs) of India’s 39 listed banks rose to Rs.4.37 trillion in December quarter—a rise of almost 50% from the Rs.2.92 trillion in the year earlier after RBI asked lenders to declare certain accounts as NPAs and mandated higher provisions for stressed accounts.

The clean-up of bank balance sheets has impacted profitability of all state-run banks and made them dependent on the government, their major stakeholder, for capitalization. The weak balance sheets have also reduced fundraising options for banks as low valuations do not make it feasible for them to go to the market.

Global ratings agency Fitch Group Inc., in a report earlier this month, pointed out that the credit profile of Indian banks will come under pressure unless they are adequately capitalized.

Guidelines for implementation of Countercyclical Capital Buffer (CCCB)- Shri B Mahapatra working group

1. The aim of the Countercyclical Capital Buffer (CCCB) regime is twofold. Firstly, it requires banks to build up a buffer of capital in good times which may be used to maintain flow of credit to the real sector in difficult times. Secondly, it achieves the broader macro-prudential goal of restricting the banking sector from indiscriminate lending in the periods of excess credit growth that have often been associated with the building up of system-wide risk.

2. The CCCB may be maintained in the form of Common Equity Tier 1 (CET 1) capital or other fully loss absorbing capital only, and the amount of the CCCB may vary from 0 to 2.5% of total risk weighted assets (RWA) of the banks.

3. The Credit-to-GDP gap shall be the main indicator in the CCCB framework in India(Credit-to-GDP gap is the difference between credit-to-GDP ratio and the long term trend value of credit-to-GDP ratio at any point in time.) apart from GNPA growth.( Gross Non Performing Assets)

4. while the framework for CCCB takes immediate effect, the activation of CCCB will take place when circumstances warrant. Currently, circumstances do not warrant activation.


Branch Licensing :

As per extant instructions of RBI on Branch Licensing , Banks need not obtain prior permission of RBI for setting up off-site ATMs. Now RBI vide notification dt 02.02.15, has given permission to banks to set up CDMs and BNAMs, at centres / places identified by them without having the need to take permission from Reserve Bank in each case, subject to following conditions.

CDMs/BNAMs may be installed at any place identified by banks with adequate security arrangements.

CDMs/BNAMs should not return any note which is suspect / counterfeit to the customer.

An audit trail of transactions should be available to enable reporting detection of counterfeit notes.

CDM- Cash Depositing Machines.

BNAM- Bunch Note Acceptor Machines.

KVP 2014

1. Issued in the denominations of Rs1,000/-, Rs 5,000/-, Rs 10,000/- and Rs 50,000/-.

2. Maturity period 8 years and 4 Months. 3. On maturity initial investment will become double.( eg Rs 1000-Mat value Rs

2000). 4. Apart from Post offices Banks can also issue KVP 2014 akin to PPF accounts. 5. Nomination facility is available. 6. Can be issued in single name or in Joint names with E or S or Both or S clause. 7. Pledging of KVP and Loan against KVP is possible. 8. Premature Encashment possible after two and half years. 9. If claimed after maturity date, Simple Interest from the date of Maturity at Post

Office SB rate.

“Framework for Revitalising Distressed Assets in the Economy”

The Reserve Bank issued guidelines regarding the “Framework for Revitalising Distressed Assets in the Economy”. The guidelines pertained to -(i)refinancing of project loans (ii)sale of financial assets to securitisation companies (SCs)/reconstruction companies (RCs)(iii)purchase/sale of non-performing assets (NPAs) to other banks(iv)use of counter-cyclical/floating provisions(v)bank loans for financing promoters’ contribution.

Licensing of New Banks in the Private Sector’ The Reserve Bank granted “in-principle” approval to two applicants, namely, IDFC Limited and Bandhan Financial Services Private Limited, to set up banks under the ‘Guidelines on Licensing of New Banks in the Private Sector’.


Non Banking entities authorised by RBI to operate White Label ATMs in India Seven entities.

BTI Payments Private Limited, Bangalore, (ii) Srei Infrastructure Finance Limited, Kolkata, (iii) Riddi Siddhi Bullions Limited, Mumbai, iv)Tata Communications Payment Solutions Limited, Mumbai;v) Prizm Payment Services Pvt. Ltd., Mumbai;vi) Muthoot Finance Limited, Kochi and vii)Vakrangee Limited, Mumbai

Sukanya Samriddhi Account eligible scheme under Section 80C

The Scheme which was announced in the budget 2014-15 by the Finance Minister has been notified by GOI. The scheme is for the welfare of the girl child aimed at meeting the expenditure on the education and marriage. Eligible for Income Tax benefits under Sec 80 C as per GOI notification dt 21.01.15 Main features:

1. It is new Savings Scheme for girl Child. 2. The account can be opened by a Natural or Legal guardian of the girl child. On

attaining age of ten years, the account holder that is the girl child may herself operate the account, however, deposit in the account may be made by the guardian or any other person or authority.

3. A depositor may open and operate only one account in the name of a girl child under these rules.( exception - the natural or legal guardian of the girl child shall be allowed to open third account in the event of birth of twin girls as second birth or if the first birth itself results into three girl children, on production of a certificate to this effect from the competent medical authorities where the birth of such twin or triple girl children takes place.)

4. Birth certificate of the girl child along with residence and id proof of the guardian is to be submitted for opening the account.

5. The age of the girl child at the time of opening the account should not be more than 10 years. For this year, one year relaxation will be applicable ( not exceeding 11 years as on 01.12.2014)

6. Minimum deposit per financial year is Rs 1,000/-(in multiples of Rs 100/-) Maximum deposit is Rs 1,50,000/- per year.

7. Deposits in an account may be made till completion of fourteen years, from the date of opening of the account..

8. An irregular account where minimum amount as specified has not been deposited may be regularized on payment of a penalty of fifty rupees per year along with the said minimum specified subscription for the year (s) of default any time, till the account completes fourteen years.

9. Maturity date is 21 years from the date of opening or at the time of marriage ( after completion of 18 years) which ever is earlier.

10. 50% withdrawal can be made for higher studies, after her age of 18 years. 11. Account shall be closed premature in case of unfortunate death of girl child. 12. Interest rate is 9.1% pa or as notified.(9.2% wef 01.4015)( compounded yearly).

In case of account holder opting for monthly interest, the same shall be calculated on the balance in the account on completed thousands, in the balance which shall be paid to the account holder and the remaining amount in fraction of thousand will continue to earn interest at the prevailing rate.

13. On opening an account, the depositor shall be given a pass book bearing the date

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of birth of the girl child, date of opening of account, account number, name and address of the account holder and the amount deposited. The pass book shall be presented to the post office or bank, as the case may be, at the time of depositing money in the account and receiving payment of interest and also at the time of final closure of the account on maturity.

14. Account can be opened in authorised bank branches or in Post offices.

RBI revised guidelines dt 28.01.15 on Service Area & No Due Certificate 1. Service Area Approach continues to be applicable for Government Sponsored

Schemes, the borrower is free to approach any bank branch in his service area for

obtaining credit under Government Sponsored Schemes.

2. Banks were earlier advised to dispense with the requirement of ‘No Due

Certificate’ for small loans up to Rs.50,000 to small and marginal farmers, share-

croppers and the like and, instead, obtain self-declaration from the borrower. Now

banks are advised to dispense with obtaining ‘No Due Certificate’ from the

individual borrowers (including SHGs & JLGs) in rural and semi-urban areas for all

types of loans including loans under Government Sponsored Schemes,

irrespective of the amount involved unless the Government Sponsored Scheme

itself provides for obtention of ‘No Dues Certificate’

3. Banks are encouraged to use an alternative framework of due diligence as part of

credit appraisal exercise other than the ‘No Due Certificate’ which could, among

others, consist of one or more of the following:

a. Credit history check through credit information companies b. Self declaration or an affidavit from the borrower c. CERSAI registration d. Peer monitoring e. Information sharing among lenders f. Information search (writing to other lenders with an auto deadline)

4. Banks are also advised to submit credit information/data to all Credit Information

Companies (CICs).

NITI Aayog (National Institution for Transforming India) The Government has replaced Planning Commission, with a new institution named NITI Aayog (National Institution for Transforming India), as part of a plan to restructure the institution, and like its predecessor, the Prime Minister will be the institution's chairperson. NITI Aayog will have a governing council comprising all Chief Ministers and Lt. Governors. The institution will serve as ‘Think Tank’ of the Government-a directional and policy dynamo. NITI Aayog will provide Governments at the central and state levels with relevant strategic and technical advice across the spectrum of key elements of policy, this includes matters of national and international import on the economic front, dissemination of best practices from within the country as well as from other nations, the infusion of new policy ideas and specific issue-based support.


Chairman-Prime Minister Vice Chairman- Sri Arvind Panagariya

RBI panel outlines steps to help PSBs manage talent better

A Committee constituted by RBI has recommended a slew of measures to ease the human resources pressure on the banking industry. Improvement of various institutions such as the National Institute of Bank Management, mentoring of Managing Directors and Chief Executives, and having rigorous induction programmes are essential to meet the growing needs of the industry. The panel has suggested that a national and online Banking Aptitude Test at the entry level as a necessary but not sufficient condition for selecting a bank employee. It has also stressed that placement of employees be based on well-laid out parameters rather than being ad-hoc or discretionary. The ambit of the report is essentially Human Resource (HR) intervention that would be required for improving the efficacy and efficiency of personnel employed at various levels by banks, and NBFCs regulated by the apex bank. The Committee has recommended to banks to create specialists, as their role is increasingly becoming crucial; thus there is a need for suitable HR intervention. Adoption of formal standards and structured training programmes will club India with advanced countries like UK, Hong Kong and Singapore which adhere to certain threshold knowledge parameters for serving in the banking industry. The Committee has also stressed the need for banks and NBFCs to plan talent and leadership requirements strategically over the long term, say over 5 years and above.

Jeevan Pramaan:

It is a digital Life Certificate, for pensioners, based on Aadhaaar Biometric Authentication.

The Reserve Bank, advised all agency banks disbursing government pension, to take necessary action to implement and benefit from the “Jeevan Pramaan”, a digital life certificate based on Aadhaar Biometric Authentication. The initiative is aimed at simplifying the process of submission of life certificate and facilitating accuracy and timeliness in disbursal of pensions. In order to facilitate implementation of Jeevan Pramaan, a web portal (jeevanpramaan.gov.in) was launched on November 10, 2014. Once fully implemented, this would enable the agency bank branches to obtain information about the digital life certificate of their pensioner customers by logging on to the website of Jeevan Pramaan and searching for the certificate or by downloading through their core banking systems (CBS). Pensioners would also be able to forward to their bank branches the relative link to their digital life certificate by email/sms.

Display of information by Banks

Based on the recommendations of Working Group on Pricing of Credit, banks are advised to adhere to the following additional instructions, wef 01.04.15.

(a) Website:

i. Banks should display on their website the interest rate range of contracted loans for the past quarter for different categories of advances granted to individual borrowers along with mean interest rates for such loans.

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ii. The total fees and charges applicable on various types of loans to individual borrower should be disclosed at the time of processing of loan as well as displayed on the website of banks for transparency and comparability and to facilitate informed decision making by customers.

iii. Banks should publish Annual Percentage Rate (APR) or such similar other arrangement of representing the total cost of credit on a loan to an individual borrower on their websites so as to allow customers to compare the costs associated with borrowing across products and/ or lenders.

(b) Key Statement/ Fact Sheet:

Banks should provide a clear, concise, one page key fact statement/fact sheet, as per prescribed format to all individual borrowers at every stage of the loan processing as well as in case of any change in any terms and conditions. The same may also be included as a summary box to be displayed in the credit agreement.

Non-Cooperative Borrowers

A non-cooperative borrower is one who does not engage constructively with his lender by defaulting in timely repayment of dues while having ability to pay, thwarting lenders’ efforts for recovery of their dues by not providing necessary information sought, denying access to assets financed / collateral securities, obstructing sale of securities, etc. In effect, a non-cooperative borrower is a defaulter who deliberately stone walls legitimate efforts of the lenders to recover their dues.

The cut off limit for classifying borrowers as non-cooperative would be those borrowers having aggregate fund-based and non-fund based facilities of Rs.50 million from the concerned bank/FI.

The decision to classify the borrower as non-cooperative borrower should be entrusted to a Committee headed by an Executive Director and consisting of two other senior officers of the rank of General Managers/ Deputy General Managers as decided by the Board of the concerned bank/FI.

If the Committee concludes that the borrower is non-cooperative, it shall issue a Show Cause Notice to the concerned borrower and call for his submission and after considering his submission issue an order recording the borrower to be non-cooperative and the reasons for the same. An opportunity should be given to the borrower for a personal hearing if the Committee feels such an opportunity is necessary. The order of the Committee should be reviewed by another Committee headed by the Chairman / CEO and MD and consisting, in addition, of two independent directors of the Bank/FI and the order shall become final only after it is confirmed by the said Review Committee.

On classifying a borrower as non cooperative, banks should report to Central Repository of Information on Large Credits (CRILC) ,on quarterly basis.

Wilful Defaulters- Guarantors-RBI guidelines

The Reserve Bank has advised that when a default is made in making repayment by the principal debtor, the banker will be able to proceed against the guarantor/surety even without exhausting the remedies against the principal debtor as in terms of Section 128 of


the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. As such, where a banker has made a claim on the guarantor on account of the default made by the principal debtor, the liability of the guarantor is immediate. In case the said guarantor refuses to comply with the demand made by the creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a wilful defaulter. The Reserve Bank has clarified that this would apply only prospectively and not to cases where guarantees were taken prior to this circular. Banks/FIs may ensure that this position is made known to all prospective guarantors at the time of accepting guarantees.

The Reserve Bank has also advised the banks/FIs to take due care to follow the provisions in identifying and reporting instances of wilful default in respect of guarantors also. While reporting such names to the Reserve Bank, banks/FIs may include “Guar” in brackets i.e. (Guar) against the name of the guarantor and report the same in the Director column.

Wilful Defaulter: A wilful defaulter is one who has not met repayment obligations even when he has the capacity to do so or has not utilised the money from the lender for the specific purposes for which finance was availed of but has diverted the funds for other

purposes. Banks must report cases of wilful defaults to to all the four Credit Information

Companies,I where the loan outstanding is`25 lakh and above. Four Credit Information

Cos (i) Experian Credit Information Company of India Private Limited, (ii) Equifax Credit

Information Services Private Limited, (iii) CRIF High Mark Credit Information Services

Private Limited and (iv) Credit Information Bureau (India) Limited (CIBIL) Revised Liquidity management Framework by RBI. The revised framework for

liquidity management is being put in place with effect from September 5, 2014

What are the instruments available under Liquidity management of RBI?

Overnight Fixed Rate Repos (at repo rate); Variable Rate 14 Day Term Repo Auctions; Overnight Variable Rate Repo Auction; Overnight Fixed Rate Reverse Repo; Overnight Variable Rate Reverse Repo Auctions; Overnight Marginal Standing Facility; and Export Credit Refinance, are available under Liquidity management of RBI.

Apart from Liquidity Management Framework, how RBI manages liquidity requirements and movements?

In addition to the revised framework, the Reserve Bank may announce special variable rate short term repo/reverse repo auctions at short notice to take care of fast-changing liquidity conditions at any time during the day. Further, apart from addressing day-to-day liquidity requirements arising out of frictional factors, the Reserve Bank will also manage liquidity movements of a more durable nature through open market operations (including those conducted on the NDS-OM platform) and forex operations.

Under the existing arrangements, day-to-day liquidity requirements are met through variable rate 14-day/7-day repo auctions equivalent to 0.75 per cent of net demand and time liabilities (NDTL) of the banking system, supplemented by daily overnight fixed rate (at the repo rate) repos equivalent to 0.25 per cent of bank-wise NDTL and export credit refinance (at the repo rate) of 32 per cent of bank-wise outstanding eligible export credit bills (about 0.4 per cent of NDTL). In addition, the Reserve Bank conducts special repos


of varying maturities in order to manage transient liquidity pressures emanating from unanticipated frictional factors.

Mortgage Guarantee Cos

What is called Mortgage Cos and what is called Mortgage guarantee? What are te RBI guidelines on Mortgage guarantee Cos?

Mortgage guarantee company' means a company which primarily transacts the business of providing mortgage guarantee;

Mortgage guarantee' means a guarantee provided by a mortgage guarantee company for the repayment of an outstanding housing loan and interest accrued thereon up to the guaranteed amount to a creditor institution, on the occurrence of a trigger event.

MGCs should have a net owned fund of one hundred crore rupees or such other higher amount.

Minimum CRAR-10% ( Tier 1 Capital-6%)

No single guarantee shall exceed 10% of the company's Tier I and Tier II capital.

The mortgage guarantee company shall primarily transact the business of providing mortgage guarantee. A mortgage guarantee company shall be deemed to comply with the above when at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business (which includes the income derived from reinvesting the income generated from mortgage guarantee business).

Draft guidelines for licensing of “Small Banks” in private sector In the backdrop of the Union Budget 2014-15 as also for furthering of financial inclusion o augment supply of credit to micro and small enterprises, agriculture and banking services in unbanked and under-banked regions in the country, RBI has decided to allow small banks” in the private sector. Accordingly, draft guidelines for licensing of small banks in the private sector have been formulated. The guidelines provide that the proposed small bank shall be registered as a public limited company under the Companies Act 2013 and licensed under Sec.22 of the Banking Regulation Act 1934. The small bank would be governed by the provisions of various acts and directives / instructions issued by RBI and other regulators from time to time, including the regulations of SEBI regarding public issues and other guidelines applicable to listed banking companies. Resident individuals / professionals with 10 years of experience in banking and finance, Companies and Societies would be eligible as promoters. Existing Non-Banking finance Companies (NBFCs), Micro Finance Institutions (MFIs) and LABs can also opt for conversion into small banks. The area of operations of the small bank will normally be restricted to contiguous districts in a homogenous cluster of States / Union Territories so has the bank has the “local feel” and culture with flexibility to expand its area of operations beyond contiguous districts in one or more States with reasonable geographical proximity. The small banks are not permitted to set up subsidiaries to undertake non-banking financial services activities. The minimum paid up


voting equity capital for small banks shall be `100 crore. They are required to maintain a minimum CRAR of 15% n a continuous basis computed under Basel I standard subject to any higher percentage as may be prescribed by RBI from time to time.

D-SIBs-Domestic Systemically Important Banks :

RBI shall identify D-SIBs and issue regulatory policies on them.

The assessment methodology adopted by the Reserve Bank is primarily based on the Basel Committee on Banking Supervision (BCBS) methodology for identifying the Global Systemically Important Banks (G-SIBs) with suitable modifications to capture domestic importance of a bank. The indicators which would be used for assessment are: size, interconnectedness, substitutability and complexity. Based on the sample of banks chosen for computation of their systemic importance, a relative composite systemic importance score of the banks will be computed. The Reserve Bank will determine a cut-off score beyond which banks will be considered as D-SIBs. Based on their systemic importance scores in ascending order, banks will be plotted into four different buckets and will be required to have additional Common Equity Tier-I capital requirement ranging from 0.20 per cent to 0.80 per cent of risk weighted assets, depending upon the bucket they are plotted into. Based on the data as on March 31, 2013, it is expected that about 4 to 6 banks may be designated as D-SIBs under various buckets. D-SIBs will also be subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system.

The computation of systemic importance scores will be carried out at yearly intervals. The names of the banks classified as D-SIBs will be disclosed in the month of August every year starting from 2015.

What is called Differentiated Banking Model ? Unlike a single universal bank Licence which are blanket licences from the RBI allowing banks to offer a range of services, a DBL will allow banks to offer specialized services in select verticals like project financing, mortgage banking, industrial financing, etc. Though differentiated banks like co-operative banks, agricultural banks, foreign banks, financial institutions and NBFCs have been a part of the Indian Financial System for long, only a single class of banking licence were issued for both domestic and foreign banks and all of them enjoyed full and equal access to the payment and the settlement system and the deposit insurance cover. But with the introduction of differentiated bank licences, newer dimensions of banking would emerge. These differentiated banks would specialize only in one area of banking thereby leading higher risk and higher asset-liability mismatches. The RBI-constituted Nachiket Mor Committee for financial inclusion first mooted the idea of having differentiated banks in the country. The panel's suggestions include specialised payment banks, retail banks, wholesale banks, infrastructure banks etc. But various banks and research institutions have questioned the need for DBL are of the view that it is a bit too early to introduce this differentiated banks' model in the domestic context. Though universal banking model remains a dominant and the most preferred model across the globe, there are countries like the US, Australia, Singapore, Hong Kong (China) and Indonesia that have been offering DBL. The


banking environment in India is not mature enough to accept this type of banking and hence would be a bit early to introduce such a model in the domestic context The differential banking activity licences issued to RRBs and Local Area Banks (LABs) could achieve only limited success which have prompted authorities to call for large size banks to go for rapid financial inclusion in a time bound manner .In the differentiated banking environment it would be very difficult for a differentiated bank to survive by selling only one or two products. Studies have also shown that only the foreign lenders, who undertake niche business activities even though they have a universal banking licence, could be possibly interested in DBL. These differentiated licencing model could be tried for fee-based business areas like credit card, remittances, payment and settlement business and other businesses of the like.

Entry of Banks into Insurance Business

Banks may undertake insurance business by setting up a subsidiary/joint venture, as well as undertake insurance broking/ insurance agency/either departmentally or through a subsidiary subject to the conditions

Banks should satisfy the following eligible criteria as on 31st March of the previous year

a) The CRAR of the bank should not be less than 10 per cent;

b) The level of net non-performing assets should be not more than 3 percent.

c) The bank should have made a net profit for the last three continuous years;

d) The track record of the performance of the subsidiaries, if any, of the concerned bank should be satisfactory.

In addition to that

For Banks setting up a subsidiary/JV for undertaking insurance business with risk participation-The net worth of the bank should not be less than Rs.1000 crore.

For Banks undertaking insurance broking/corporate agency through a subsidiary/JV-The net worth of the bank should not be less than Rs.500 crore after investing in the equity of such company.

Pradhan Mantri Jan-Dhan Yojana (PMJDY) Scheme by Ministry of Finance-GOI

Scheme Details

Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to ensure access to financial services, namely, Banking/ Savings & Deposit Accounts, Remittance, Credit, Insurance, Pension in an affordable manner.

Account can be opened in any bank branch or Business Correspondent (Bank Mitr) outlet. PMJDY accounts are being opened with Zero balance. However, if the account-holder wishes to get cheque book, he/she will have to fulfill minimum balance criteria.


Documents required to open an account under Pradhan Mantri Jan-Dhan Yojana

1. If Aadhaar Card/Aadhaar Number is available then no other documents is required. If address has changed, then a self certification of current address is sufficient.

2. If Aadhaar Card is not available, then any one of the following Officially Valid Documents (OVD) is required: Voter ID Card, Driving License, PAN Card, Passport & NREGA Card. If these documents also contain your address, it can serve both as “Proof of Identity and Address”.

3. If a person does not have any of the “officially valid documents” mentioned above, but it is categorized as ‘low risk' by the banks, then he/she can open a bank account by submitting any one of the following documents:

a. Identity Card with applicant's photograph issued by Central/State Government Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks and Public Financial Institutions;

b. Letter issued by a gazette officer, with a duly attested photograph of the person.

Special Benefits under PMJDY Scheme

a. Interest on deposit. b. Accidental insurance cover of Rs.1.00 lac c. No minimum balance required. d. Life insurance cover of Rs.30,000/- e. Easy Transfer of money across India f. Beneficiaries of Government Schemes will get Direct Benefit Transfer in these

accounts. g. After satisfactory operation of the account for 6 months, an overdraft facility will be

permitted h. Access to Pension, insurance products. i. For Accidental Insurance Cover, RuPay Debit Card must be used at least once in

45 days. j. Overdraft facility upto Rs.5000/- is available in only one account per household,

preferably lady of the household.

Interest on Overdraft will be charged at Base Rate + 2 % or 12 %, whichever is lower. At present it will be 12 %.

What is RuPay Debit Card ?

Rupay Debit Card is an indigenous domestic debit card introduced by National Payment Corporation of India (NPCI). This card is accepted at all ATMs (for cash withdrawal) and at most of the PoS machines (for making cashless payment for purchases) in the country. It provides accidental insurance cover up to Rs 1 lac with out any charges to the customer. To get the benefit of accidental insurance cover, the debit card must be used at least once in 45 days. For getting the life insurance cover in PMJDY, accounts opened between 15.08.2014 to 26.01.2015 for the first time will get the benefit. Existing account holders can get issued a RuPay Card in his existing account to get benefit of accident insurance. Credit facility can be extended in the existing account if it is being operated satisfactorily.


Existing account holders need not open new accounts under PMJDY. Overdraft facility up to Rs.5000/-will be available to one account holder of PMJDY per household after6 months of satisfactory conduct of the account. To avoid duplication Aadhaar number will also be required. If Aadhaar number is not available then Bank will do additional due diligence and also seek declaration from the beneficiary. Overdraft facility upto Rs.5000/-is available in only one account per household, preferably lady of the household. Accidental Insurance Cover is Rs.1.00 lac and no premium is charged to the beneficiary

NPCI will pay the premium . At present the premium is Rs.0.47 per Card.

Accidental Insurance cover of Rs.1.00 lac and Life Insurance Cover of Rs.30000/- will be available to all account holders.( husband, wife and members of the family having separate account) However, overdraft facility upto Rs.5000/-will be available to only one person in the family (preferably lady of the house)

Interest on Overdraft will be charged at Base Rate + 2 % or 12 %, whichever is lower. At present it will be 12 %

Who is Business Correspondent Agent / Bank Mitra and what is their role in PMJDY? Business Correspondent Agents (Bank Mitras) are retail agents engaged by banks for providing banking services at locations where opening of a brick and mortar branch / ATM is not viable. Scope of activities of Business Correspondents / Bank Mitra are as under:

a) Creating Awareness about savings and other products and

education and advice on managing money and debt counseling.

b) Identification of potential customers.

c) Collection and preliminary processing of various forms for deposits

including verification of primary information /data.

d) Filling of applications / account opening forms

e) Collection and payment of small value deposits and withdrawals.

f) Receipt and delivery of small value remittances / other payment

instructions.

g) Furnishing of mini account statements and other account

information.

Any other service on behalf of the Bank, duly authorized by the appropriate authority .

How Bank Mitr helps customers to use Banking Services ?

Bank Mitr represent the bank concerned and enable a bank to expand its outreach and offer limited range of banking services at low cost, particularly where setting up a brick and mortar branch is not viable. Bank Mitrs, as agent of the Bank, thus are an integral part of the business strategy for achieving greater financial inclusion

Who can be Bank Mitr ?

Banks have been permitted to engage individuals / entities as Business Correspondent (Bank Mitrs) like (i) Retired Bank Employees (ii) Retired Teachers (iii) Retired Govt.


Employees (iv) Ex-Servicemen (v) Individual owners of kirana / medical/ fair price shops, individual Public Call Office (PCO) operators, Agents of Small Savings Scheme of Government of India / Insurance Companies , ‘for profit’ companies registered under the Indian Companies Act. Since 24.06.2014, RBI has permitted Non Deposit

taking NBFCs as BCs in addition to above. What is USSD based transaction and how to use it ?

USSD is abbreviated form of “Unstructured Supplementary Service Data” . USSD based Mobile Banking offers basic Banking facilities like Money Transfer, Bill Payments, Balance Enquiries, Merchant Payments etc. on a simple GSM based Mobile Phone, without the need to download application on a Phone as required at present in the immediate Payment Service (IMPS) based Mobile Banking . Transactions can be performed on basic phone handsets. The user needs to approach his bank and get his mobile number registered. The bank will issue an MPIN (Mobile PIN) to the user. The user thereafter needs to dial *99# and the menu for using USSD opens. Thereafter customer has to follow selections on the menu to complete the transaction. Charges as applicable by the Telecom Operator (not more than Rs.1.50 per transaction as mandated by TRAI) may be applicable.

Usage of ATMs : Number of Free Transactions

The number of mandatory free ATM transactions (inclusive of both financial and non-financial transactions) for savings bank account customers at other banks’ ATMs is reduced from the present five to three transactions per month for transactions carried out at the ATMs located in six metro centres, viz. Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad., wef 01.11.14.

Important points:

1. Even if the base/home branch where the customer account is attached, is in Non Metro , if the transactions are carried out in ATMs in 6 Metros , exceeding the prescribed limit, the Charges are applicable.

2. For Transactions carried out on other banks’ ATM , for SB customers , free transactions , for both financial and non financial reduced from 5 to 3, per month. For BSBDA/Small account holders, this limit is maximum of 4, subject to conditions.

3. In other Centres, for transactions carried out in Other Banks’ ATM, the free transactions( both financial and non financial) remain the same viz-5.

4. If there is combination of transactions in a month carried out both in 6 Metros and in other locations, total number of free transactions (inclusive of both financial and non-financial) at other bank ATMs would continue to remain at FIVE.( 3 in Metro +2 in Non Metro.)

5. Free transactions limit for use at own bank ATMs- 5 free transactions (inclusive of financial and non financial transactions) per month should be permitted to the savings bank account customers for use of own bank ATMs at all locations.

6. The ceiling / cap on customer charges of Rs.20/- per transaction (plus service tax, if any) will be applicable.

7. For BSBDA/Small SB account holders, the maximum limit of withdrawal ,including ATM, remain at 4.( for Small accounts, additionally the total of debits by way of cash withdrawals and transfers will not exceed ten thousand rupees in a month)


8. The above are only Minimum. Banks are free to offer more number of free transactions in any location both for transactions on other bank ATMs as well as own ATMs as per Board approved policy.

9. As per RBI Instructions, for SB accounts, the number of Free transactions allowed in six metros is 3 and in other centres 5 per month, for transactions carried out in other Banks’ ATMs. For use of own Bank ATMs, at all locations the number of free transactions is minimum 5 per month, for SB account holders. Therefore in total, in locations other than Metros, SB account holders can have a minimum of 10 free ATM transactions per month( 5 at own bank + 5 at other Banks) and in Metros total of 8 ( 5 at Own Bank + 3 at other Banks)

Credit Valuation Adjustments (CVA) Credit Valuation Adjustment (CVA) is the difference between the risk-free portfolio value and the true portfolio value that takes into account the possibility of a counterparty's default. In other words, CVA is the market value of counterparty credit risk. Basel-III norms state that banks have to set aside capital for Counter-party Credit Risk (CCR) and also maintain an additional charge towards which seeks to safeguard against the mark-to-market risks associated with derivative transaction. Therefore, a bank extending forex loan to its client and providing to hedge the loan through a derivative contract will have to set aside capital for the transactions as well as the CVA.

TReDS to help MSME finance To make it easier and faster for Micro Small and Medium Enterprises (MSMEs) to get their dues, RBI has issued draft guidelines for setting up a Trade Receivables Discounting System (TReDS). A TReDS will be like an exchange where an MSME that has some receivables pending from a large corporate will be able to trade the bill. It will make the MSME's credit cycle shorter and will help it get a better price on the bill due to competition. MSME sellers, corporate buyers and financers (both banks and non bank) will be direct participants in TReDS.

BRICS Bank It is new Development Bank with a proposed $100 billion Contingency Reserve Arrangement proposed by the BRICS nations. The New Development Bank, with an initial corpus of $50 billion, could be an alternative to the IMF to fund not just India's but also other developing countries' infrastructure needs. The Contingency Reserve Arrangement would give an added insurance to BRICS countries, which can help them bail each other out in times of crises. A stronger BRICS can also have more influence in other multilateral forums such as the WTO and the Climate Change convention.

PSBs need to raise `2.2 lakh crore to meet Basel III norms (Oct 14) As per rating agency Moody's report, major PSBs in India will need to raise `1.5-2.2 lakh crore in the next four-five years to meet Basel III norms. The PSBs that it rates could need external capital, assuming a moderate recovery in GDP growth and a gradual decline in non-performing loans from the current levels. Moody's noted that a significant


part of the required capital around `80,000-90,000 crore could be in the form of Additional Tier I capital. Basel III raises the minimum required capital levels for both Total Tier I to 7% and Common Equity Tier I capital to 5.5%. Besides, banks will also need to meet a Capital Conservation Buffer in order to pay dividends. That will put pressure on PSBs, as low capital levels remain a key credit weakness.

Limited Liability Partnership: A limited liability partnership (LLP) is a partnership, formed under Limited Liability Partnership Act 2008. It is legal entity , separate from that of its partners. It should have minimum Two partners. Any change in the partners will not affect the existence, rights and liabilities of LLP. In LLP some or all partners (depending on the jurisdiction) have limited liabilities. It therefore exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from the traditional unlimited partnership, where in which each partner has joint and several liability. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation.

A limited partnership is similar to a general partnership except that it has two classes of partners. The general partner(s) have full management and control of the partnership business but also accept full personal responsibility for partnership liabilities. Limited partners have no personal liability beyond their investment in the partnership interest. Limited partners cannot participate in the general management and daily operations of the partnership business without being considered general partners in the eyes of the law. The general partner can be either an individual or a corporation.

Foreign Limited Liability Partnership means, LLP formed, incorporated or registered out side India, Which establishes a place of business in India.

Features of LLP:

1.LLP combines the advantages of ease of running a Partnership and separate legal entity status and limited liability aspect of a Company.

2. LLP is a separate legal entity separate from its partners, can own assets in its name, sue and be sued.

3. Unlike corporate shareholders, the partners have the right to manage the business directly

4. One partner is not responsible or liable for another partner’s misconduct or negligence.

5. Minimum of 2 partners and no maximum limit.

6. Should be ‘for profit’ business.

7. Perpetual succession.

http://en.wikipedia.org/wiki/Partnership

http://en.wikipedia.org/wiki/Corporation

http://en.wikipedia.org/wiki/Joint_and_several_liability

http://en.wikipedia.org/wiki/Limited_liability

http://en.wikipedia.org/wiki/Limited_liability


8. The rights and duties of partners in LLP, will be governed by the agreement between partners and the partners have the flexibility to devise the agreement as per their choice. The duties and obligations of Designated Partners shall be as provided in the law.

9. Liability of the partners is limited to the extent of his contribution in the LLP. No exposure of personal assets of the partner, except in cases of fraud.

10. LLP shall maintain annual accounts. However, audit of the accounts is required only if the contribution exceeds Rs. 25 lakhs or annual turnover exceeds Rs.40 lakhs.

Basel III-Banks must increase Liquidity Ratio to 100% by 2019

Banks to maintain 60% liquidity coverage ratio from Jan 2015 and raise the level to 100% over the next 4 years.(60% by 2015, 70% from Jan 2016,80% from Jan 2017,90 % from Jan 18 and 100% from Jan 19)

“Liquidity Coverage Ratio” is a concept aimed at ensuring availability of short term liquidity with Banks and Financial Institutions. Banks are required to hold an amount of highly liquid assets, such as cash or treasury bills, equal to or greater than their net cash over a 30 day period.

BCSBI Rating of Banks on BCSBI code implementation

BCSBI has developed a rating model in consultations with CRISIL, on implementation of codes related to Bank’s Commitment to customers and Micro & Small Enterprises.

The overall score of PSBs in the level of compliance with the implementation of codes was at 69.6%.

The overall scoring was based on five parameters-Information dissemination, Transparency, Customer Centricity, Grievance redressal and customer feed back.

Shri Anand Sinha ‘Working Group on Pricing of Credit’

Background

Despite the policy efforts to usher in transparency and fairness to the credit pricing framework, there have been certain concerns from the customer service perspective. These mainly relate to the downward stickiness of the interest rates, discriminatory treatment of old borrowers vis-à-vis new borrowers, and arbitrary changes in spreads, etc. In response, the Reserve Bank of India had constituted a Working Group under the Chairmanship of Shri Anand Sinha, the then Deputy Governor, Reserve Bank of India comprising members from banks, Indian Banks’ Association (IBA), academia and the Reserve Bank of India to examine the issues related to discrimination in pricing of credit and recommend measures for transparent and appropriate pricing of credit under a floating rate regime.

Recommendations

Major recommendations made by the Working Group are:

It would be desirable that banks, particularly those whose weighted average maturity of deposits is on the lower side, move towards computing the Base Rate


on the basis of marginal cost of funds. This may result in more transparency in pricing, reduced customer complaints, better transmission of changes in the policy rate and improved asset liability management at banks. If banks use weighted average cost of funds because of their deposits profile or any other methodology that may result in differentiation between old and new customers, the boards of banks should ensure that this differentiation does not lead to any discrimination amongst borrowers.

Apart from factors like specific operating cost, credit risk premium and tenor premium, broad factors, such as, competition, business strategy and customer relationship are also used to determine the spread. Banks should have a Board approved policy delineating these components. The Board of a bank should ensure that any price differentiation is consistent with bank’s credit pricing policy factoring Risk Adjusted Return on Capital (RAROC). Banks should be able to demonstrate to the Reserve Bank of India the rationale of the pricing policy.

Banks’ internal policy must spell out the rationale for, and range of, the spread in the case of a given borrower, as also, the delegation of powers in respect of loan pricing.

The spread charged to an existing customer cannot be increased except on account of deterioration in the credit risk profile of the customer. The customer should be informed of this at the time of contract. Further, this information should be adequately displayed by banks through notices/website.

The floating rate loan covenant may have interest rate reset periodicity and the resets may be done on those dates only, irrespective of changes made to the Base Rate within the reset period.

There may be a sunset clause for Benchmark Prime Lending Rate (BPLR) contracts so that all the contracts thereafter are linked to the Base Rate. Banks may ensure that these customers who shift from BPLR linked loans to Base Rate loans are not charged any additional interest rate or any processing fee for such switch-over.

The IBA may develop a new benchmark for floating interest rate products, namely, the Indian Banks Base Rate (IBBR), which may be collated and published by IBA on a periodic basis. Banks may consider offering floating rate products linked to the Base Rate, IBBR or any other floating rate benchmark ensuring that at the time of sanction, the lending rates should be equal to or above the Base Rate of bank. To begin with, IBBR may be used for home loans. By design, the IBBR should meet the standards for benchmarks set by the Committee on Financial Benchmarks (Chairman: Shri P Vijaya Bhaskar, Executive Director, RBI).

The Working Group has also made several recommendations to bring in greater transparency enabling comparability across banks and informed decision making by customers.

The benefit of interest reduction on the principal on account of pre-payments should be given on the day the money is received by the bank without waiting for the next EMI cycle date to effect the credit.

Both, banks and the Reserve Bank may impart financial education through consumer education drives.

For retail loans, the customers should have a choice of “with exit” and “sans exit” options at the time of entering the contract. The exit option can be priced differentially but reasonably. The exit option should be easily exercisable by the customer with minimum notice period and without impediments. This would address issues of borrowers being locked into contracts, serve as a consumer


protection measure and also help enhance competition. Further, IBA should evolve a set of guidelines for easier and quicker transfer of loans, particularly mortgage/housing loans. There could also be penalties for banks which do not cooperate with borrowers in this regard.

The industry association, IBA, should: o Develop case studies and examples of best practices for customer service; o Conduct studies to identify areas of best market conduct practices for

improvement; o Conduct training for industry representatives.

The grievances redressal systems in banks should be made robust and responsive to customers’ needs. The Reserve Bank may penalise banks which do not put in place adequate measures, as evidenced by repeated complaints.

Differential Rate of Interest for Micro and Small Enterprises (MSEs)

In part ‘B’ of the First Bi-monthly Monetary Policy Statement, 2014-15 announced on April 1, 2014 , certain measures have been proposed to be adopted by banks in order to give a fillip to the flow of credit to micro and small enterprises (MSEs) borrowers.

While pricing their loans to MSE borrowers, banks should take into account the incentives available to them in the form of the credit guarantee cover of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and the zero risk weight for capital adequacy purpose for the portion of the loan guaranteed by the CGTMSE and provide differential interest rate for such MSE borrowers, than the other borrowers.However, banks should note that such differential rate of interest is not below the Base Rate of the bank.

Banks are advised to undertake a review of their loan policy governing extension of credit facilities to the MSE sector, with a view to using Board approved credit scoring models in their evaluation of the loan proposals of MSE borrowers.

PRAN-Permanent Retirement Account Number: PRAN- Permanent Retirement Account Number issued to subscribers under NPS( New Pension Scheme).

CRA( Central Record Keeping Agency)will issue unique Permanent Retirement Account Number (PRAN) to each subscriber, maintain database of all PRANs and record the transactions related to each subscriber’s PRAN.

The CRA shall be responsible for receiving funds and instructions from subscribers through the nodal offices, transmitting such instructions and funds to the appointed Pension Fund Managers, trustee Bank, Annuity Service Provider effecting switching instructions received from subscribers.

The CRA will provide periodic consolidated Statement Of Transaction (SOT) to each subscriber and discharge such other duties and functions as may be determined by the guidelines, directions and regulations issued by the PFRDA from time to time.

CRA is set up by ,NSDL e-Governance Infrastructure Limited and The Pension Fund Regulatory and Development Authority (PFRDA).

http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30911#PB

http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30911#PB


RBI CLASSIFICATION OF CENTRES -POPULATION 2001 CENSUS

CENTRES-TIER WISE POPULATION GROUP WISE-Classification of Centres

TIER 1 Centre 100,000& above Rural centre Up to 9,999

TIER 2 Centre 50,000-99,999 Semi Urban 10,000-99,999

TIER 3 Centre 20,000-49,999 Urban 1,00,000-9,99,999

TIER 4 Centre 10,000-19,999 Metro 10,00,000 & above

TIER 5 Centre 5,000- 9,999

TIER 6 Centre Less than 5,000

Tier 1 and 2 Capital:

Under Basel, for supervisory purposes capital is split into two categories: Tier I and Tier II. These categories represent different instruments’ quality as capital. Tier I capital consists mainly of share capital and disclosed reserves and it is a bank’s highest quality capital because it is fully available to cover losses. Tier II capital on the other hand consists of certain reserves and certain types of subordinated debt. The loss absorption capacity of Tier II capital is lower than that of Tier I capital.

Under Basel, Banks to maintain Tier I CRAR of at least 6%( to be achieved before 31.03.2010)

Tier 1 Capital- Paid up capital , statutory reserve, free reserve and eligible IPD( Innovative Perpetual Debt ) Instruments .

Tier 2 capital: Revaluation Reserve (@ a discount of 55%),General Provision and loss reserve ( maximum 1.25% of Total Risk weighted assets), Hybrid Capital Instruments, Subordinated Debt, IPDI in excess of 15%.

IPDI limit for reckoning as Tier 1 Capital-15% of total Tier 1 Capital as of previous year.

Innovative Instruments/PNCPS( Perpetual Non Cumulative Preference Shares)-shall not exceed 40% of Total tier 1 capital, at any point of time.

Subordinated Debt Instruments , eligible for inclusion for Lower Tier II Capital will be limited to 50% of Tier I capital.

Limits for Tier 2 Capital: Tier II Capital should not exceed 100% of Tier I Capital.

Statutory Audit Of Branches: Norms

Hither to, Statutory branch audit of PSBs may be carried out for all branches with advances of ` 20 crore & above and 1/5th of the remaining branches covering a representative cross section of rural/semi-urban/urban and metropolitan branches, predominantly including branches which are not subjected to concurrent


From the year 2013-14 onwards, Individual PSBs may decide on the threshold level of advances for the purpose of selecting branches for statutory audit. Progressively, the threshold level of advances may be increased so that the number of branches to be taken up for statutory audit is phased down over a period of time.

GIRO Advisory Group ( Prof Umesh Bellur)

The Reserve Bank of India had announced the constitution of a GIRO(Government Internal Revenue Order) Advisory Group (GAG) under the chairmanship of Prof. Umesh Bellur, Indian Institute of Technology, Bombay to implement a national GIRO-based Indian Bill Payment System. The GAG submitted its report on March 20, 2014 to the Reserve Bank of India.

The GAG has observed that bill payments landscape in the country are mostly biller-specific and thus do not provide an environment to customers to make bill payments through an inter operable system in a seamless and efficient manner at many of the agent / customer service points that exist today. These gaps in delivery of services in large parts of the country thus present an opportunity, as well as potential, for the creation of a centralised bills payment system in the country.

Based on the deliberations, the GAG examined multiple options that are available to establish and run such a system in the country and recommended a tiered structure where the Bharat Bill Payment Services (BBPS) will be the authorised standard setting body (also handling settlement functions) while the Bharat Bill Payment Operating Units (BBPOUs) will be the authorised operational units, working in adherence to the standards set by the BBPS.

The BBPS will function as a ‘not-for-profit’ organisation which has necessary experience in the payment systems space, while the BBPOUs may be operated on commercial lines by existing entities in the bill payments space as well as new entities interested in this segment. The BBPS will also handle the settlement responsibilities arising out of the transactions in the system.

All the entities in this tiered structure will operate under the uniform and single brand of the BBPS. This will also ensure a uniform dispute resolution and customer grievance redressal mechanism, thereby building trust and confidence in such a centralised bill payment system.

Report of Shri Aditya Puri, Committee on furnishing of Credit Information to CICs

The Second Quarter Review of Monetary Policy 2012- 13, (October 2012) of the Reserve Bank of India had stated that credit institutions should furnish timely and accurate credit information on their borrowers and make extensive use of available credit information as a part of their credit appraisal process.

The Commmittee was set up to finalise an updated data format, standardisation of data collection format as well- as harmonisation/ convergence among CICs to minimise duplication.

The Reserve Bank, during March 2014, released the Report of the Committee to recommend Data Format for Furnishing of Credit Information to Credit Information


Companies (CICs.

The committee has made wide ranging recommendations on issues relating to credit information, such as, increasing its coverage, format of reports and best practices to be followed by credit institutions, credit information companies (CICs) and the Reserve Bank.

Making credit information more useful, the committee has stated that low usage of credit information by member institutions and other specified users needs to be addressed by requiring CICs to populate their databases with requisite credit information so that enquiries by specified users yield desired information. It has recommended that this can be done by increasing the coverage of credit information in terms of membership (all credit institutions should be members of all CICs) and products (also covering defaults in CPs and such other products) and by creating awareness about Credit Information Reports (CIRs).

The Committee has further suggested that providing customers with a free copy of their CIRs would help create awareness about the need to have credit discipline, enable customers to correct their behaviour and improve their score well before they plan to avail fresh credit of any kind, help detect identity theft at an early stage, help CICs correct and validate their database and increase their business in the long run. Use of common data formats, including additional information in the formats, such as, dispute codes, consumer comments on dispute, details of collateral, etc., and to institutionalise a continuing mechanism for making changes to data formats could help improve data quality, the committee has pointed out.

The committee has recommended a common Data Quality Index that could assist credit institutions in determining the gaps in their data and also move towards improving their performance over a period of time.

Report of the Technical Committee on Enabling Public Key Infrastructure (PKI) in Payment System Applications.

Reserve Bank of India had, in September 2013, constituted a group to prepare an approach paper for enabling PKI for Payment System Applications in India in order to mitigate the risks involved in payment systems Viz financial risks, such as, credit risk, liquidity risk, systemic risk, operational risk, legal risk.

The Reserve Bank of India has released, the final report of the Technical Committee on enabling PKI in payment system applications.

Highlights of the Report

1.Non-PKI enabled payment systems, such as, clearing (Magnetic Ink Character Recognition (MICR/Non MICR), electronic credit system, credit card and debit cards contributed 75 per cent in volume terms but only 6.3 per cent in value terms in the year 2012-13.

2. The Group has suggested that in order to ensure a safe, secure payment system in the country and to ensure legal compliance, digital technology, such as, PKI may be used.

http://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=765

http://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=765


3. The Group has also included a detailed study of cloud-Hosted Digital Signature Certificate (DSC), Trusted Execution Environment, Hardened ―Soft‖ Signatures, Mobile PKI, Portable Security Transaction Protocol and Hybrid PKI Solution by Institute for Development and Research in Banking Technology (IDRBT) as alternative strategies keeping in view the Indian context

4. The report also highlights, among other things, security features in existing payment system applications and feasibility in implementing PKI in all payments system applications.

5. All banks’ internet banking applications should mandatorily create authentication environment for password-based two-factor authentication as well as PKI-based system for authentication and transaction verification in online banking transaction. In online banking transactions, banks should provide the option to its customers for enabling PKI for its online banking transactions as optional feature for all customers.

6. The Group has also recommended that banks may carry out in phases PKI implementation for authentication and transaction verification.

Concept Paper on Trade Receivables and Credit Exchange for Financing MSMEs

The Reserve Bank, during March 2014, has sought feedback on the Concept Paper on “Trade Receivables and Credit Exchange for Financing Micro, Small and Medium Enterprises (MSMEs)”.

Given the potential of MSMEs in unlocking growth, employment and inclusion in the economy and society, there is a pressing need to address concerns related to financing of this segment.

Despite efforts on multiple fronts as well as enabling legal and regulatory provisions, the MSME segment continues to be belaboured with the problem of delayed payments and dependency on their corporate buyer/s.

The matter has been addressed in the reports of the Committee on Financial Sector Reforms (2008) as well as the Working Group on Securitisation of Trade Receivables (2009). The reports had recommended having an institutional infrastructure for creating necessary liquidity for trade receivables through a mechanism of efficient and cost effective factoring/ reverse factoring process. The statement made by the Governor on September 04, 2013 regarding facilitation of Electronic Bill Factoring Exchanges in the country, has drawn the attention of many stakeholders in the country in offering their expertise and experience in this area to facilitate building of suitable infrastructure for MSME financing.

This concept paper has been prepared taking into account the interest expressed by few entities and in consultation with a few stakeholders. The model outlined in the paper envisages both, primary market segment (in which invoices first undergo a reverse factoring process to enable the first level of financing to the MSMEs) as well as a secondary market segment (where the financiers of the primary segment get an opportunity to trade these invoices).

It is also imperative to understand and address the issues and challenges outlined


through wider consultation process. To this end, the Reserve Bank has sought views on the concept paper on Trade Receivables and Credit Exchange in the country. Specific and actionable feedback would be highly valued.

Framework for Revitalising Distressed Assets

The Reserve Bank, during February 2014, has issued certain guidelines regarding the “Framework for Revitalising Distressed Assets in the Economy”. They are:

I. Refinancing of Project Loans

The Reserve Bank has advised that if the banks/lenders refinance any existing infrastructure and other project loans by way of take-out financing, even without a pre-determined agreement with other banks/Financial institutions, and fix a longer repayment period, the project loan refinancing would not be considered as restructuring subject to certain conditions.

II. Sale of Financial Assets to SCs/RCs

With a view to incentivising banks to recover appropriate value in respect of their non performing assets (NPAs) promptly, banks can now reverse the excess provision on sale of NPA if the sale is for a value higher than the net book value (NBV) (i.e., book value less provisions held) to its profit and loss (P&L) account in the year the amounts are received. Further, as an incentive for early sale of NPAs, banks can spread over any shortfall, if the sale value is lower than the NBV, over a period of two years. The Reserve Bank has also advised that the banks using auction process for sale of NPAs to Securitisation Companies (SCs)/Reconstruction Companies (RCs), should be more transparent, including disclosure of the Reserve Price, specifying clauses for non-acceptance of bids, etc.

III. Purchase/Sale of NPAs to Other Banks

The Reserve Bank has advised that banks will be permitted to sell their Non-Performing Financial Assets (NPAs) to other banks/FIs/Non-Banking Finance Companies (NBFCs) (excluding SCs/RCs) without any initial holding period. However, the nonperforming financial asset should be held by the purchasing bank in its books at least for a period of 12 months before it is sold to other banks/financial institutions/NBFCs (excluding SCs/RCs).

IV. Use of Counter-cyclical/Floating Provisions

Banks can now use counter-cyclical/floating provisions for meeting any shortfall on sale of NPA, i.e., when the sale is at a price below the NBV (i.e., book value less provision held), which presently requires debit to the profit and loss account.

V. Bank Loans for Financing Promoters’ Contribution

Banks can now extend finance to ‘specialised’ entities subject to select guidelines applicable to advances against shares/debentures/bonds and other regulatory and statutory exposure limits. The lenders should, however, assess the risks associated with such financing and ensure that these entities are adequately capitalised, and debt equity


ratio for such entity is not more than 3:1.

The guidelines regarding “Framework for Revitalising Distressed Assets in the Economy” also include regulatory issues like, credit risk management; reinforcement of regulatory instructions by the Reserve Bank issued from time to time; registration of transactions relating to securitisation and reconstruction of financial assets and those relating to mortgage by deposit of title deeds to secure any loan or advances granted by banks and financial institutions, as defined under the SARFAESI Act, in the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI); and Board Oversight.

Shri P J Nayak Expert Committee to Review Governance of Boards of Banks in India.

The Reserve Bank of India has constituted an Expert Committee , during Jan 14, to Review Governance of Boards of Banks in India.

The terms of reference of the Committee would be:

to review the regulatory compliance requirements of banks’ boards in India, to judge what can be rationalised and where requirements need to be enhanced; to examine the working of banks’ boards including whether adequate time is

devoted to issues of strategy, growth, governance and risk management; to review central bank regulatory guidelines on bank ownership, ownership concentration and representation in the board;

to analyse the representation on banks’ boards to see whether the boards have the appropriate mix of capabilities and the necessary independence to govern the institution, and to investigate possible conflicts of interest in board representation, including among owner representatives and regulators. In this regard to also assess and review the ‘fit and proper’ criteria for all categories of directors of banks, including tenor of directorship; and

to examine board compensation guidelines, and any other issue relevant to the functioning of banks’ boards and the governance they exercise.

Highlights of the Report and major Recommendations:

GIST: The panel has recommended radical reforms for Indian Banks. It has suggested that the Government transfer all its stake and powers in Public Sector Banks (PSBs)to a separate entity viz “ Bank Investment Co(BIC).It has also recommended that the Govt cut its stake in PSBs to less than 50% so that there is a level playing field for these banks in matters of vigilance, employee compensation, and applicability of the Right to Information. For private Banks a special category of investors called Authorized Bank Investors( ABIs)has been recommended. This segment would have diversified investors and be discretionally managed by fit and proper fund managers. ABIs could hold up to 20% stake in a bank with out prior approval, and 15% with voting rights. Promoters should be allowed to hold 25% vis-a vis 15% under the new bank Licence norms.

For PSBs, a three phased approach has ben proposed for board level appointments.


Highlights of the Report

1. The financial position of public sector banks is fragile, partly masked by regulatory forbearance. Capital is significantly eroded with the proportion of stressed assets rising rapidly. The Report projects, the capital requirements till March 2018 in order that provisions are prudent, there is adequate balance sheet growth to support the needs of the economy, and capital is in line with the more demanding requirements of Basel 3.

2. It is unclear that the boards of most of these banks have the required sense of purpose, in terms of their focus on business strategy and risk management, in being able to provide oversight to steer the banks through their present difficult position. The boards are disempowered, and the selection process for directors is increasingly compromised. Board governance is consequently weak.

3. The onus of remedying this situation through radical reform lies primarily with the Central Government. In the absence of such reform, or if reform is piecemeal and non-substantive, it is unlikely that there will be material improvement in the governance of these banks. This could impede the Government's objective of fiscal consolidation. The fiscal cost of inadequate reform will therefore be steep.

4. The high leverage that banks operate under makes banking a riskier commercial activity than most non-financial businesses. Unless banks are extremely well run and with a strong focus on financial returns, they tend to falter. The Central Government is a good example of a bank shareholder which has suffered deeply negative returns over decades. It is therefore in the Government's own interest to provide clarity in the objectives set for bank boards, and to thereby improve governance and management.

5. The Report proposes that the Government distances itself from several bank governance functions which it presently discharges. For this purpose it recommends that the Bank Nationalisation Acts of 1970 and 1980, together with the SBI Act and the SBI (Subsidiary Banks) Act, be repealed, all banks be incorporated under the Companies Act, and a Bank Investment Company (BIC) be constituted to which the Government transfers its holdings in banks. The Government's powers in relation to the governance of banks should also be transferred to BIC.

6. The process of board appointments, including appointments of whole-time directors, needs to be professionalised and a three-phase process is envisaged. In the first phase, until BIC becomes operational, a Bank Boards Bureau (BBB) comprising former senior bankers should advise on all board appointments, including those of Chairmen and Executive Directors. In the second phase this function would be undertaken by BIC, which would also actively strive to professionalise bank boards. In the third phase BIC would move several of its powers to the bank boards. The duration of this three-phase transition is expected to be between two and three years.

7. Governance difficulties in public sector banks arise from several externally imposed constraints. These include dual regulation, by the Finance Ministry in addition to RBI; board constitution, wherein it is difficult to categorise any director as independent; significant and widening compensation differences with private sector banks, leading to the erosion of specialist skills; external vigilance enforcement though the CVC and CBI;


and limited applicability of the RTI Act. A more level playing field with private sector banks is desirable.

8. If the Government stake in these banks were to reduce to less than 50 per cent, together with certain other executive measures taken, all these external constraints would disappear. This would be a beneficial trade-off for the Government because it would continue to be the dominant shareholder and, without its control in banks diminishing, it would create the conditions for its banks to compete more successfully. It is a fundamental irony that presently the Government disadvantages the very banks it has invested in.

9. The Report proposes the need for wide-ranging human resource policy changes. These would encompass getting younger people into top management, for which a demographic opportunity has now arisen, and which would thereby lead to longer tenures; and succession planning. There is also a need to envision afresh the process of countering corruption through a redesign of the existing process of vigilance enforcement. The Report argues that present modalities are damaging and erode the ability of the banks to compete strategically, besides being only weakly effective in combating corruption.

10. Governance issues in private sector banks originate from an altogether different set of concerns. There are issues which arise from ownership constraints stipulated by RBI, which could misalign the interests of shareholders with those of the management. In several other jurisdictions, these constraints are less rigid. Rigidity keeps out certain kinds of investors and thereby reduces the pool of capital that banks could otherwise attract. When individual shareholdings are small, investors also tend to be more disengaged. Allowing larger block shareholders generally enhances governance.

11. In order to permit certain kinds of investors to take larger stakes, it is proposed that a category of Authorised Bank Investors (ABIs) be created, comprising all diversified funds which are discretionally managed by fund managers and which are deemed fit and proper. It is proposed that an ABI be permitted a 20 per cent equity stake without regulatory approval, or 15 per cent if it also has a seat on the bank board. All other financial investors should be permitted upto 10 per cent.

12. The shareholding permitted to promoters of banks is also tightly structured at present. Under the 2013 RBI guidelines, while such investors could begin with large stakes in banks, after some years they would need to reduce their stake and eventually can own no more than 15 per cent. The Report proposes increasing the continual stake ceiling to 25 per cent. It also proposes that for distressed banks, private equity funds - including sovereign wealth funds - be permitted to take a controlling stake of upto 40 per cent.

13. The Report also proposes that the principle of proportionate voting rights should constitute part of the regulatory bedrock that fosters good governance.

14. It is also necessary for boards to be vigilant about the quality of the loan asset portfolios as these sensitively affect the integrity of financial reporting. In private sector banks senior management is incentivised on the basis of bank profitability, and the compensation paid out - through stock options - is in substantial measure contingent on the stock price of the bank. There is a potential incentive to evergreen assets in order


that provisions do not make a dent in profitability.

15. With RBI also having moved away from detailed to risk-based supervision, the annual financial inspections investigate the asset quality reporting accuracy of banks less rigorously. It appears desirable therefore that RBI conducts random and detailed checks on asset quality in these banks.

16. Wherever significant ever greening in a bank is detected by RBI, it is recommended that penalties be levied through cancellations of unvested stock options and claw-back of monetary bonuses on officers concerned and on all whole-time directors, and that the Chairman of the audit committee be asked to step down from the board.

17. Boards should also define for third-party products what constitutes proper selling practices. Products need to be matched with customer demographics, customer income and wealth, and customer risk-appetite.

18. Profit-based commissions for non-executive directors should be permitted in, but not before, Phase 3 of the transition process described in Observation 6 above.

19. Old private sector banks typically began as community banks, although some have attempted to outgrow their historical origins and imitate the new private sector banks, bringing in diversified boards and broadbasing senior management. However, many other banks have management styles where the community hold remains intact, either tacit or explicit. The designation of a 'promoter director' then develops, who controls shareholder voting, the board and the employees. The CEO thereby becomes disempowered. RBI should attempt to diversify boards in banks where independence is not visible, by mandating prior RBI approval for directors in such banks. RBI should also mandate a separation between board oversight and executive autonomy.

20. The Report also proposes details of legislation needed in order to implement its Recommendations.

Working Group on Taxation for Financial Instruments- Convener- Smt. Balbir Kaur-To study various issues relating to taxation of financial instruments in India and suggest rationalisation. The terms of reference of the Working Group are:

• To review the current tax structure as applicable to various financial instruments issued in the Indian financial system;

• To identify possible ‘tax arbitrage’ among financial instruments under the extant tax structure; and

• To suggest rationalisation of tax treatment across financial instruments to promote financial savings and for minimising distortions, taking into account the recommendations of earlier Committees in this regard and the draft Direct Taxes Code.

Shri G.Gopalakrishna Committee on Capacity Building in Banks and Non-Banks-

The Committee (Chairman: Shri G. Gopalakrishna), was constituted by the Reserve Bank during Feb 14, with the objective of implementing non-legislative recommendations of the


Financial Sector Legislative Reforms Commission (FSLRC) relating to capacity building in banks and non-banks, streamlining training intervention and suggesting changes thereto in view of ever increasing challenges in banking and non-banking sectors. The objectives also included evolving an appropriate certification mechanism in the realm of training, where feasible, examining possible incentives for undertaking such certification and covering all stages of hierarchy-from the lowest rung to the Board level executives.

The Committee made exhaustive recommendations after examination of feedback received from the banking industry, inputs from member-experts, academicians and various training/consulting institutions. The key recommendations of the Report pertain to:

i. approach to capacity building in banks and non-banks; ii. enhancing Human Resources Management practices; iii. creation of position of “Chief Learning Officer” in banks and concept of return on

learning; iv. strategies for addressing issues of replacement / replenishment of talent in banks; v. process and steps for skill development; vi. training strategy and need for expert trainers to help build capacities; vii. coaching and mentoring including mentoring programme for Top Management of

banks; viii. entry point qualifications at recruitment stage, development of competency

standards and certification/accreditation in various areas of training; ix. conducting a common Banking Aptitude Test (BAT) at entry levels; x. qualifications for generalists and specialists; xi. e-learning as an important constituent for building capacity and imparting training; xii. training/learning Infrastructure oriented to banking; xiii. proposal for setting up a Centre of Excellence for Leadership Development in

banking sector; xiv. fostering research on skill development in banking sector and evolving a

monitoring framework for capacity development in banking sector; and creation of skills registry for the banking sector.

Shri Harun R Khan Committee on use of unclaimed amount lying in various small savings schemes in post offices and banks

The Committee to examine issues related to unclaimed amounts lying in various small savings schemes and on appropriate use of unclaimed amount lying in various small savings schemes in post offices and banks.

Dr. Urjit Patel Committee: On Monetary policy frame work

Dr.Urjit Patel Expert Committee to Revise and Strengthen the Monetary Policy Framework submitted its report to the Governor on January 21, 2014. The Expert Committee was appointed on September 12, 2013 by Dr. Raghuram G Rajan. The main objective of the Committee was to recommend what needs to be done to revise and strengthen the current monetary policy framework with a view to, making it transparent and predictable.


Highlights of Recommendations

(1) Inflation should be the nominal anchor for the monetary policy framework. This nominal anchor should be set by the Reserve Bank as its predominant objective of monetary policy in its policy statements.

(2) The Reserve Bank should adopt the new CPI (combined) as the measure of the nominal anchor for policy communication. The nominal anchor should be defined in terms of headline CPI inflation, which closely reflects the cost of living and influences inflation expectations relative to other available metrics.

(3) The nominal anchor or the target for inflation should be set at 4 per cent with a band of +/- 2 per cent around it (a) in view of the vulnerability of the Indian economy to supply/external shocks and the relatively large weight of food in the CPI; and (b) the need to avoid a deflation bias in the conduct of monetary policy.

(4) In view of the elevated level of current CPI inflation and hardened inflation expectations, supply constraints and weak output performance, the transition path to the target zone should be graduated to bringing down inflation from the current level of 10 per cent to 8 per cent over a period not exceeding the next 12 months and to 6 per cent over a period not exceeding the next 24 month period before formally adopting the recommended target of 4 per cent inflation with a band of +/- 2 per cent. The Committee is also of the view that this transition path should be clearly communicated to the public.

(5) Since food and fuel account for more than 57 per cent of the CPI on which the direct influence of monetary policy is limited, the commitment to the nominal anchor would need to be demonstrated by timely monetary policy response to risks from second round effects and inflation expectations in response to shocks to food and fuel.

(6) Monetary policy decision-making should be vested in a monetary policy committee (MPC).

(7)) To support the operating framework, the Committee recommends that some new instruments be added to the toolkit of monetary policy.

Important recommendations: Inflation should be the nominal anchor for the monetary policy framework. This nominal anchor should be set by the Reserve Bank as its predominant objective of monetary policy in its policy statements. The RBI should adopt the new CPI (combined) as the measure of the nominal anchor for policy communication. The nominal anchor or the target for inflation should be set at 4 per cent with a band of +/- 2 per cent around it. Inflation target should be graduated to bringing down inflation from the current level of 10 per cent to 8 per cent over a period not exceeding the next 12 months and to 6 per cent over a period not exceeding the next 24 month period before formally adopting the recommended target of 4 per cent inflation with a band of +/- 2 per cent. The Central Government needs to ensure that its fiscal deficit as a ratio to GDP is brought down to 3.0 per cent by 2016-17.


Monetary Policy Committee: Composition & Tasks

The Governor of the RBI will be the Chairman of the MPC, the Deputy Governor in charge of monetary policy will be the Vice Chairman and the Executive Director in charge of monetary policy will be a member. Two other members will be external, to be decided by the Chairman and Vice Chairman on the basis of demonstrated expertise and experience in monetary economics, macroeconomics, central banking, financial markets, public finance and related areas.

The RBI will also place a bi-annual inflation report in the public domain.

New Instruments

1. To support the operating framework, the Committee recommends that some new instruments be added to the toolkit of monetary policy.

2. Secondly, term repos of longer tenor may also be conducted since term repo market segments .

3. Thirdly, dependence on market stabilisation scheme (MSS) and cash management bills (CMBs) may be phased out, consistent with Government debt and cash management being taken over by the Government’s Debt Management Office (DMO) .

4. Fourthly, all sector specific refinance should be phased out ..

Addressing Impediments to Transmission of Monetary Policy

Statutory Liquidity Ratio

Consistent with the time path of fiscal consolidation , SLR should be reduced to a level in consonance with the requirements of liquidity coverage ratio (LCR) prescribed under the Basel III framework.

Government should eschew suasion and directives to banks on interest rates that run counter to monetary policy actions .

Small Savings Schemes

More frequent intra-year resets of interest rates on small saving instruments, with built-in automaticity linked to benchmark G-sec yields, need to be brought in.

Taxation

All fixed income financial products should be treated on par with bank deposits for the purposes of taxation and TDS.

Subventions

With a sharp rise in the ratio of agricultural credit to agricultural GDP, the need for


subventions on interest rate for lending to certain sectors would need to be re-visited.

Dr. Nachiket Mor Committee on Committee on Comprehensive Financial Services for Small Business and Low Income Households

The Committee’s important Suggestions/Observations

1. Committee laid down vision statement for financial inclusion and its deepening. 2. It has suggested providing a universal bank account to all Indians above the age

of eighteen years and has recommended a Vertically Differentiated Banking System with Payments Banks for Deposits & Payments and Wholesale Banks for credit outreach with relaxed entry point norms of ` 50 crore.

3. On priority sector, the Committee has recommended Adjusted Priority Sector Lending Target of 50 per cent against the current requirement of 40 per cent with sectoral and regional weightages based on the level of difficulty in lending.

4. The Committee has also recommended risks and liquidity transfers through markets. In view of the fact that banks may choose to focus their priority sector strategies on different customer segments and asset classes, the Committee has recommended that the regulator provide specific guidance on differential provisioning norms at the level of each asset class. A bank‘s overall Non Performing Assets Coverage Ratio would therefore be a function of its overall portfolio asset mix.

5. On definition of Non-Banking Finance Companies (NBFCs), the Committee has recommended only two categories - one for core investment companies and another category for all other NBFCs. The Committee has advocated regulatory convergence between banks and NBFCs based on the principle of neutrality with regard to classification of non-performing assets and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 eligibility.

6. The Committee has suggested that a State Finance Regulatory Commission (SFRC) be created into which all the existing State Government-level regulators could be merged and functions like the regulation of Non-Government Organisations-Micro Finance Institutions and local Money Services Business could be added on.

Committee on Financial Benchmarks- Chairman: Shri P. Vijaya Bhaskar

Committee on Financial Benchmarks to study various issues relating to financial benchmarks in India .

In the aftermath of the revelations regarding manipulations of several key global benchmark rates, viz. LIBOR, EURIBOR, TIBOR, etc., several international standard setting bodies, national regulators, and self-regulatory market bodies have reviewed the benchmark setting processes and came out with wide ranging reform measures and governing principles for enhancing the robustness and reliability of the financial benchmarks. The IOSCO has released its final report on Principles for Financial Benchmarks in July 2013. The FSB, working under the mandate of G-20, has endorsed

http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=29606

http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=29606


the IOSCO’s Principles. The Benchmark Administrators are required to disclose their compliance with the IOSCO Principles by July 2014.

The Report of the Committee provides a brief overview of the measures recommended by various international bodies/committees and the reforms already undertaken/underway in key benchmarks in various jurisdictions. Building on the cross-country experiences, the Report provides an in-depth analysis of the existing benchmark setting methodology and governance framework of the major Indian Rupee interest rate benchmarks and foreign exchange benchmarks. While the existing system was found generally satisfactory, the Report recommends several measures/principles to be followed to strengthen the benchmark quality, setting methodology and governance framework of the Benchmark Administrators, Calculation Agents and Submitters. In line with the international move towards greater regulatory oversight of the benchmark setting process, the Report reviews the existing regulatory powers of RBI over the financial benchmarks and recommends suitable amendments of the RBI Act, as a long term measure, to explicitly empower RBI to determine policy with regard to benchmarks used in Money, G-sec, Credit and Foreign Exchange markets in India and to issue binding directions to all the agencies involved in the benchmark setting. Pending the amendments, the Report recommends appropriate regulatory and supervisory framework to be put in place by RBI for the above financial benchmarks under its existing statutory powers.

The Reserve Bank had announced the constitution of the Committee on Financial Benchmarks (Chairman: Shri P. Vijaya Bhaskar, Executive Director) on June , 2013 with a mandate to study various issues relating to financial benchmarks in India. The Committee has released its report after taking into account the feedback received from market participants and other stakeholders.

Highlights of Recommendations

• FIMMDA and FEDAI may be designated as administrators for all the Rupee interest rate and foreign exchange benchmarks respectively, with primary responsibility for the entire benchmark setting process. FIMMDA and FEDAI may form an independent body for monitoring the benchmarks.

• The benchmark calculation may be based on observable transactions, wherever available, as first layer of inputs subject to appropriate threshold criteria. The executable bids and offers, wherever available, subject to appropriate threshold and polled submissions may be used as second and third layer of inputs respectively in terms of hierarchy of inputs;

• The Benchmark Administrator may publicly disclose individual submissions after a suitable lag;

• The Administrators may periodically review each benchmark and undertake necessary changes;

• New benchmarks may be registered with the concerned Administrator before being introduced in the market;


• Credible contingency provision may be put in place and there should be written policies and procedure to handle possible cessation of a benchmark;

• Overnight MIBID-MIBOR setting may be shifted from existing polling method to volume weighted average of trades executed between 9 AM to 10 AM on NDS-CALL operated by CCIL;

• FIMMDA may coordinate the transition of legacy contracts referenced to NSE MIBID-MIBOR through multilateral and bilateral amendment agreement, as appropriate;

• Construction of the G-sec yield curve may use volume weighted average rate of the trades executed over longer time window in place of last traded yields;

• Transaction data may be used for calculation of INBMK, T-Bill, CP, and CD Curves as the first layer of data inputs;

• The threshold trades/bids and offers specified for setting of G-sec yield curve, spread for FRBs, prices of SDL and corporate bonds may be subjected to periodic resetting at a well-defined time intervals, for keeping them at reasonably higher level taking into account the overall liquidity and developments in the respective market segments. In the absence of required trading volume in SDL, the spread discovered in the last two SDL auctions, subject to appropriate qualifying criteria, may be used in place of existing fixed 25bps spread;

• The Reserve Bank may continue with the existing system of fixation of Reference Rates, keeping in view the recent international moves where the official sector is assuming greater role in fixation of financial benchmarks and also the fact that several central banks in developed as well as emerging economies publish such reference rates;

• Reserve Bank reference rates may be based on volume weighted average of actual transactions executed during a sufficiently longer time window in place of existing polling method;

• The benchmark/benchmark tenors that are not used in the interbank/PD transactions may be phased-out subject to FIMMDA ascertaining the extent of outstanding client transactions referenced to those benchmarks/benchmark tenors (MIFOR- 1-month, 2-month and 1-year; MITOR, INBMK–all tenors except 1-year) and facilitate suitable transition arrangements, if required;

• FEDAI may stop publishing spot fixings, if it is not used for any meaningful purpose by corporates and other clients.

• Banks may strive to develop the USD/INR basis swaps and USD/INR forwards (beyond 1 year) so as to obviate the need to use MIFOR;

• MIOIS and MIOCS may be uniformly used for valuation of outstanding OIS and MIFOR swap trades respectively.

Technical Committee on Mobile Banking-Chairman-B. Sambamurthy

The Reserve Bank of India released, for public comments, the “Report of the Technical


Committee on Mobile Banking” ( February , 2014.)

The Reserve Bank of India had, in October 2013, constituted a Technical Committee on Mobile Banking under the chairmanship of Shri B. Sambamurthy, to examine the options/ alternatives including the feasibility of using encrypted SMS based funds transfer using an application that can run on any type of handset for expansion of mobile banking in the country.

Mobile banking transaction is considered economical and has capability of last mile delivery.

The Committee has identified the challenges faced by the banks in providing mobile banking to customers in general (customer enrolment and technical issues) and further highlighted the challenges faced in providing SMS/Unstructured Supplementary Service Data (USSD)/application based mobile banking and recommended solutions for the same. The major challenges identified are registration, M-PIN generation, concerns related to security, bank staff training and customer education.

The report emphasises the need for a standardised and simplified procedure for registration/authentication of customers for mobile banking services, a cohesive awareness programme to be put in place, adoption of common application platform (with necessary level of security through encryption) across all banks. The issuance of necessary guidelines by the Telecom Regulatory Authority (TRAI) of India which has prescribed the optimum service parameters as also ceiling on transactional cost for extension of the USSD services by telecom operators to the banks and their agents has been highlighted and the Committee recommends that the implementation of the TRAI regulations must be expedited by all the stakeholders.

B. Mahapatra Working Group:Disclosure Requirements on Restructured Advances

The Working Group (WG) constituted by the Reserve Bank to Review the existing Prudential Guidelines on Restructuring of Advances (Chairman: Shri B. Mahapatra) had recommended that once the higher provisions and risk weights (if applicable) on restructured advances (classified as standard either abinitio or on upgradation from NPA category) revert back to the normal level on account of satisfactory performance during the prescribed period, such advances should no longer be required to be disclosed by banks as restructured accounts in the “notes on accounts” in their annual balance sheets. However, the provision for diminution in the fair value of restructured accounts on such restructured accounts should continue to be maintained by banks as per the existing instructions. The WG also recommended that banks may be required to disclose:

• Details of accounts restructured on a cumulative basis excluding the standard restructured accounts which cease to attract higher provision and risk weight (if applicable);

• Provisions made on restructured accounts under various categories; and

• Details of movement of restructured accounts.

This recommendation has been accepted by the Reserve Bank in view of the fact that in terms of present guidelines, banks are required to disclose annually all accounts


restructured in their books on a cumulative basis even though many of them would have subsequently shown satisfactory performance over a sufficiently long period. As such the present position of disclosures do not take into account the fact that in many of these accounts the inherent weaknesses have disappeared and the accounts are in fact standard in all respects, but continue to be disclosed as restructured advances.

Accordingly, banks are now required to disclose in their published annual balance sheets, under ';notes on accounts';, information relating to number and amount of advances restructured, and the amount of diminution in the fair value of the restructured advances.

The above disclosure requirements would be effective from the financial year 2012-13.

According RBI Governor , RBI development Measures tor developing Financial System , rests on five pillars. What are they?

Reserve Bank’s development measures to improve the financial system, over the next few quarters, rests on five pillars. These are:

1. Clarifying and strengthening the monetary policy framework.

2. Strengthening banking structure through new entry, branch expansion, encouraging new varieties of banks, and moving foreign banks into better regulated organizational forms.

3. Broadening and deepening financial markets and increasing their liquidity and resilience so that they can help allocate and absorb the risks entailed in financing India’s growth.

4. Expanding access to finance for small and medium enterprises, the unorganized sector, the poor, and remote and underserved areas of the country through technology, new business practices, and new organizational structures; that is, we need financial inclusion.

5. Improving the system’s ability to deal with corporate distress and financial institution distress by strengthening real and financial restructuring as well as debt recovery.

Financial sector Reforms:

What are the key elements to deal with distressed borrowers?

The key elements to deal with distressed borrowers will include:

(i) Early formation of a lender committee with timelines for reaching agreement on a plan for resolution.

(ii) Stronger incentives for lenders to agree collectively and quickly to a plan – this will involve better regulatory treatment of stressed assets if a resolution plan is formulated and agreed to, accelerated provisioning if no agreement can be reached.

(iii) A mandated independent evaluation of large value restructurings, with a focus on plan viability and a fair sharing of losses (and future possible upside) between promoters


and creditors.

(iv) More expensive future borrowing for wilful defaulters or uncooperative defaulters who do not work with lenders to achieve an efficient and equitable resolution of distressed assets.

(v) More liberal regulatory treatment of asset sales and more encouragement for new entities to purchase or refinance assets.

The lesson of every period of financial stress across economies has been that early recognition and resolution of problems gives the economy its best chance of robust recovery. Through the measures that will be outlined next week, the RBI intends to help promoters and banks deal effectively with the financial stress that has built up.

What is the 2% Interest Subvention and additional 3% Int subvention scheme ? 2 % Interest Subvention scheme: Interest subvention of 2 % p.a. will be made available to Public Sector Banks (PSBs) for short-term crop loans up to Rs.3,00,000/- per farmer provided the lending institutions make available short term credit at the ground level at 7% per annum to farmers. This amount of interest subvention will be calculated on the crop loan amount from the date of its disbursement/drawal up to the date of actual repayment of the crop loan by the farmer or up to the due date of the loan fixed by the banks whichever is earlier, subject to a maximum period of one year. 3% additional Interest Subvention Scheme: Additional interest subvention @3% will be available to the prompt paying farmers from the date of disbursement of the crop loan up to the actual date of repayment by farmers or up to the due date fixed by bank for repayment of crop loan, whichever is earlier, subject to a maximum period of one year from the date of disbursement. This also implies that the prompt paying farmers would get short term crop loans @4% per annum during the year 2013-14. This benefit would not accrue to those farmers who repay after one year of availing such loans.

Scaling up of the BC Model

With a view to scaling up the Business Correspondent (BC) Model by dealing with the critical issue of cash management of BCs, the Reserve Bank decided that -

The Boards of the banks must review the operations of BCs at least once every six months with a view to ensuring that requirement of prefunding of Corporate BCs and BC Agents should progressively taper down with the passage of time. Ideally in all normal cases the prefunding should progressively come down to reach around 15 percent of the limits fixed for each BC/CSP (customer selling point) in case of deposits and 30 percent in case of bank guarantees, etc. in say two years from the time a BC starts operations.

The Board should review the position of payment of remuneration of BCs . The issue of allowing BCs to handle deposit and payment transactions of various credits, remittance, overdraft and other products of banks must also be examined by the Board from time to time .

As the cash handled by BCs is bank’s cash, the responsibility for insuring this cash


should rest with the banks.

Treatment of RIDF and Other Funds The Reserve Bank has decided to include the outstanding deposits placed by scheduled commercial banks under Rural Infrastructure Development Fund (RIDF) and certain other funds established with NABARD, on account of their shortfall in lending to priority sector as part of indirect agriculture under priority sector classification.

Accordingly, the outstanding deposits as on March 31 of the current year under RIDF, Warehouse Infrastructure Fund, Short Term Co-operative Rural Credit Refinance Fund and Short Term Regional Rural Bank (RRB) Fund with NABARD would be treated as part of indirect agriculture and would count towards overall priority sector target achievement. The outstanding deposits under the above funds with NABARD as on preceding March 31 will form part of adjusted net bank credit..

Refinancing of Project Loans

Important conditions are

1. The aggregate exposure of all institutional lenders to such project should be minimum `1,000 crore;

2. In case of partial take-out, a significant amount of the loan (a minimum 25 percent of the outstanding loan by value) should be taken over by a new set of lenders from the existing financing banks/financial institutions.9 Reduced from existing 50%)

RBI clarifies that prepaid foreign currency cards are a form of foreign currency, similar to foreign currency notes or travellers cheques.

Maximum Loan to Value Ratio for loan against shares is 50%

KYC –FAQ

KYC guidelines ( updated 02.09.16) The important points for easy recapitulation

1. Bank accounts can be opened with out introduction. 2. Documents required for opening bank account-One Photo, Id proof and address

proof. Customers who are minors have to submit fresh photograph on becoming major.

3. GOI notified 6 documents as Officially Valid Documents ( OVD) Viz Passport, Driving Licence, Voters’ Identity Card, PAN Card, Aadhaar Card issued by UIDAI and NREGA Job Card.

4. Should submit 1 OVD for id proof. If Id proof carries the current address, it is enough to submit one proof.

5. If OVD could not be provided , Either Small account can be opened or based on


Bank discretion Normal account can be opened by submitting a copy of any one of the following documents as Proof of Identity (PoI): (i) Identity card with person’s photograph issued by Central/State Government Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, and Public Financial Institutions; or

(ii) letter issued by a gazetted officer, with a duly attested photograph of the person.

For Proof of Address (PoA), you may submit the following documents:

i. Utility bill, which is not more than two months old, of any service provider (electricity, telephone, post-paid mobile phone, piped gas, water bill);

ii. Property or Municipal Tax receipt; iii. Bank account or Post Office savings bank account statement; iv. Pension or family Pension Payment Orders (PPOs) issued to retired employees by

Government Departments or Public Sector Undertakings, if they contain the address;

v. Letter of allotment of accommodation from employer issued by State or Central Government departments, statutory or regulatory bodies, public sector undertakings, scheduled commercial banks, financial institutions and listed companies. Similarly, leave and license agreements with such employers allotting official accommodation; and

vi. Documents issued by Government departments of foreign jurisdictions or letter issued by Foreign Embassy or Mission in India.

6. Small accounts, with a initial validity period of 1 year can be opened with photo and with out id /address proof.( Max Bal 50,000/- total credits in a year not to exceed Rs1 lac, total withdrawal per month not to exceed Rs 10,000)

7. Bank account in a different location can be opened if the permanent address proof produced carries an address in a different location, based on the self declaration of the customer( to be used for communication purpose )

8. PAN number needs to be quoted for transactions, such as, account opening, transactions above Rs.50,000 ( cash/non cash)

9. KYC exercise needs to be done for all those who want to make domestic remittances of Rs. 50,000 and above and all foreign remittances.

10. Demand Draft/Payment Order/Travelers Cheques for Rs.50,000/- and above can be issued only by way of debiting the customer's account or against cheques.

a. Different periodicities have been prescribed for updation of KYC records depending on the risk perception of the bank. KYC is required to be done at least every two years for high risk customers, at least every eight years for medium risk customers and ten years for low risk customers. This exercise would involve all formalities normally taken at the time of opening the account. If there is no change in status with respect to the identity (change in name, etc.) and/or address, such customers who are categorized as ‘low risk’ by the banks may now submit a self-certification to that effect at the time of periodic updation. (This address may be verified by the bank through ‘positive confirmation’ such as acknowledgment of receipt of (i) letter, cheque books, ATM cards; (ii) telephonic conversation; (iii) visits; etc. In the event of change in this address due to relocation or any other reason, customers may intimate the new address for correspondence to the bank


within two weeks of such a change.) 11. In case of change of address of such ‘low risk’ customers, they could merely

forward a certified copy of the document (proof of address) by mail/post, etc. Physical presence of such low risk customer is not required at the time of periodic updation.

12. At the time of periodic updation, if KYC documents are not provided, bank has the option to close the account, after imposing partial freezing of the account under due notice( 3 months notice+3 Months reminder. Partial freezing- Only credits, no debits. After 6 months of Partial freezing-Inoperative no debit and no credits )

Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards

The liquidity coverage ratio (LCR) stipulated by the Basel Committee becomes a standard with effect from January 1, 2015.

Guidelines relating to Basel III LCR and Liquidity Risk Monitoring tools are issued by RBI in June 2014.

The BCBS has since published ‘Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools’ in January 2013.

Further, the ‘Liquidity Coverage Ratio Disclosure Standards’ have been published by the BCBS in January 2014.

Accordingly, the final guidelines on the LCR, Liquidity Risk Monitoring Tools and LCR Disclosure Standards are issued by RBI. Applicable to whole Bank only , on a stand alone basis.

The LCR will be introduced in a phased manner starting with a minimum requirement of 60% from January 1, 2015 and reaching minimum 100% on January 1, 2019.

THE LCR requirement would be binding on the banks from 01.01.2015.

The requirement of 100% provisioning to be achieved by Jan 1,2019 as follows.

Jan 1, 2015 Jan 1,2016 Jan 1,2017 Jan 1,2018 Jan 1,2019

Minimum LCR 60% 70% 80% 90% 100%

HQLA-High quality Liquid assets.

LCR-Liquidity Coverage ratio-Banks to maintain unencumbered HQLA, that can be converted in to Liquidity with in 30 calendar days.

Definition of LCR-stock of HQLAs/total Net Cash outflow over next 30 calendar days.

Direct Benefit Transfer Scheme

With a view to facilitating seamless rollout of Aadhaar based direct benefit transfer (DBT) of government benefits, including LPG subsidy, all state level bankers' committee (SLBC)


convenor banks and lead banks have been advised to:

Take steps to complete account opening and seeding Aadhaar number in all the DBT districts.

Closely monitor the progress in seeding of Aadhaar number in bank accounts of beneficiaries.

Put in place a system to provide acknowledgement to the beneficiary of seeding request and also send confirmation of seeding of Aadhaar number.

Form DBT Implementation Co-ordination Committee along with the state government department concerned, at district level and review the seeding of Aadhaar number in bank accounts.

Ensure that district and village wise names and other details of business correspondents (BCs) engaged/other arrangements made by the bank is displayed on the SLBC website.

Set up a complaint grievance redressal mechanism in each bank and nominate a complaint redressal officer in each district, to redress the grievances relating to seeding of Aadhaar number in bank accounts.

Migrating to CTS 2010 Standards

On a review of the progress made by banks towards migration to CTS-2010, it has been noticed that while banks have begun to issue fresh cheques in the CTS-2010 format there is still a large volume of non-CTS-2010 format cheques being presented in image-based clearing. It has, therefore, been decided to put in place the following arrangements for clearing of residual non- CTS-2010 standard cheques:

(a) Separate clearing session will be introduced in the three CTS centres (Mumbai, Chennai and New Delhi) for clearing of such residual non-CTS 2010 instruments (including PDC and EMI cheques) with effect from January 1, 2014. This separate clearing session will initially operate thrice a week (Monday, Wednesday and Friday) up to April 30, 2014. Thereafter, the frequency of such separate sessions will be reduced to twice a week up to October 31, 2014 (Monday and Friday) and further to once a week (every Monday) from November 1, 2014 onwards. If the identified day for clearing non-CTS-2010 instruments falls on a holiday under the Negotiable Instruments Act, 1881, the presentation session on such occasions will be conducted on the previous working day. Operational instructions in this regard will be issued separately by the CTS centres.

(b) Upon the commencement of special session for non- CTS-2010 standard instruments, drawee banks will return the non-CTS-2010 instruments, if any, presented in the regular CTS clearing, under the reason code '37- present in proper zone'. Such returned instruments will have to be re-presented by the collecting bank in the immediate next special clearing session for non-CTS-2010 instruments.

(c) Banks may educate and notify their customers of the likely delay in realisation of non-CTS-2010 standard instruments in view of the proposed arrangement for clearing of such instruments at less frequent intervals. Banks may also suitably modify their cheque collection policies (CCPs) to reflect this change. Banks should also put in place appropriate arrangement for handling customer complaints, if any, arising out of this new arrangement.


(d) Banks can continue to present such non-CTS-2010 instruments in ‘express cheque clearing system’ (ECCS) centres and MICR cheque processing centres (CPCs) till such time the CPCs are in operation.

(e) During the transition period (i.e., up to December 31, 2013), the existing clearing arrangements will continue and all cheque issuing banks should make efforts to withdraw the non-CTS-2010 standard cheques in circulation.

Basic Savings Bank Deposit Account

Banks have been advised to offer a 'Basic Savings Bank Deposit Account' which should offer the following minimum common facilities to all their customers:

The 'Basic Savings Bank Deposit Account' should be considered as a normal banking service available to all.

This account should not have the requirement of any minimum balance. The services available in the account will include deposit and withdrawal of cash at

bank branch as well as ATMs; receipt/ credit of money through electronic payment channels or by means of deposit/collection of cheques drawn by central/state government agencies and departments.

While there will be no limit on the number of deposits that can be made in a month, account holders will be allowed a maximum of four withdrawals in a month, including ATM withdrawals.

Facility of ATM card or ATM-cum-debit card should be provided. The above facilities should be provided without any charges. Further, no charge

should be levied for non-operation/activation of in-operative 'Basic Savings Bank Deposit Account'.

Banks would be free to evolve other requirements including, pricing structure for additional value-added services beyond the stipulated basic minimum services on reasonable and transparent basis and applied in a non-discriminatory manner.

The 'Basic Savings Bank Deposit Account' would be subject to the Reserve Bank’s instructions on know your customer (KYC)/anti-money laundering (AML) for opening of bank accounts issued from time to time. If such an account is opened on the basis of simplified KYC norms, the account would additionally be treated as a 'small account' and would be subject to the conditions stipulated for such accounts in the Reserve Bank’s Master Circular on KYC Norms/AML Standards/Combating of Financing of Terrorism (CFT)/ Obligation of Banks under PMLA, 2002 dated July 02, 2012.

Holders of 'Basic Savings Bank Deposit Account' will not be eligible for opening any other savings bank deposit account in that bank. If a customer has any other existing savings bank deposit account in that bank, he/she will be required to close it within 30 days from the date of opening a 'Basic Savings Bank Deposit Account'.

The existing basic banking 'no-frills' accounts should be converted to 'Basic Savings Bank Deposit Account'.

Lending against Gold

As per extant instructions, banks are currently permitted to grant advances against gold ornaments and other jewellery and against specially minted gold coins sold by banks. Banks cannot, however, grant advances for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold exchange traded funds


and units of gold mutual funds. While there may not be any objection to grant of advances against specially minted gold coins sold by banks, there is a risk that some of these coins would be weighing much more, thereby circumventing the Reserve Bank’s guidelines of July 1978 regarding restrictions on grant of advance against gold bullion.

Accordingly, it is advised that while granting advance against the security of specially minted gold coins sold by them, banks should ensure that the weight of the coin(s) does not exceed 50 grams per customer and the amount of loan to any customer against gold ornaments, gold jewellery and gold coins (weighing up to 50 grams) should be within the Board approved limit.

Commercial Real Estate - Residential Housing

As loans to residential housing projects under the commercial real estate (CRE) sector exhibit lesser risk and volatility than the CRE sector taken as a whole, it has been decided to carve out a separate sub-sector called ‘commercial real estate – residential housing’ (CRE-RH) from the CRE sector. CRE-RH would consist of loans to builders/developers for residential housing projects (except for captive consumption) under CRE segment. Such projects should ordinarily not include non-residential commercial real estate. Integrated housing projects comprising some commercial space (e.g. shopping complex, school, etc.) can also be classified under CRE-RH, provided the commercial area in the residential housing project does not exceed 10 per cent of the total floor space index (FSI) of the project. In case the FSI of the commercial area in the predominantly residential housing complex exceeds the ceiling of 10 per cent, the project loans should be classified as CRE and not CRE-RH.

The CRE-RH segment will attract a lower risk weight of 75 per cent and lower standard asset provisioning of 0.75 per cent as against 100 per cent and 1.00 per cent, respectively for the CRE segment.

It has been decided to rationalise the prudential norms on risk-weight, provisioning and loan to value (LTV) ratio for individual housing loans, CRE and CRE-RH exposures, as under:

Category of Loan. Individual Housing Loans

LTV Ratio % Risk weight % Standard asset Provisioning %

Up to Rs 20 lakh 90 50 0.40

Above Rs 20 lakh up to Rs 75 lakh

80 50 0.40

Above Rs 75 lakh 75 75 0.40

CRE-RH NA 75 0.75

CRE NA 100 1.00

Note: (1) The LTV ratio should not exceed the prescribed ceiling in all fresh cases of sanction. In case the LTV ratio is currently above the ceiling prescribed for any reasons, efforts should be made to bring it within limits. (2) Banks’ exposures to third dwelling unit onwards to an individual will also be treated as CRE exposures.

Licensing of New Banks in the Private Sector:


The Reserve Bank of India (RBI) has decided today to grant “in-principle” approval to two applicants viz., IDFC Limited and Bandhan Financial Services Private Limited, to set up banks under the Guidelines on Licensing of New Banks in the Private Sector issued on February 22, 2013. These two applicants were also recommended as suitable for grant of “in-principle” approval by the High Level Advisory Committee (HLAC) set up by the RBI. The HLAC had also recommended that in the case of Department of Posts which has applied for licence, it would be desirable for the RBI to consider the application separately in consultation with the Government of India. The RBI has accepted the recommendation of the HLAC.

The “in-principle” approval granted will be valid for a period of 18 months during which the applicants have to comply with the requirements under the Guidelines and fulfil the other conditions as may be stipulated by the RBI. On being satisfied that the applicants have complied with the requisite conditions laid down by the RBI as part of “in-principle” approval, they would be considered for grant of a licence for commencement of banking business under Section 22(1) of the Banking Regulation Act, 1949. Until a regular licence is issued, the applicants would be barred from doing banking business.

The Depositor Education and Awareness Fund Scheme, 2014 - Section 26A of Banking Regulation Act, 1949

Pursuant to the amendment of the Banking Regulation Act, 1949, section 26A has been inserted in that Act, empowering Reserve Bank to establish The Depositor Education and Awareness Fund (the Fund).

Under the provisions of this section the amount to the credit of any account in India with any bank which has not been operated upon for a period of ten years or any deposit or any amount remaining unclaimed for more than ten years shall be credited to the Fund, within a period of three months from the expiry of the said period of ten years.

The Fund shall be utilized for promotion of depositors’ interest and for such other purposes which may be necessary for the promotion of depositors’ interests as specified by RBI from time to time. The depositor would, however, be entitled to claim from the bank her deposit or any other unclaimed amount or operate her account after the expiry of ten years, even after such amount has been transferred to the Fund. The bank would be liable to pay the amount to the depositor/claimant and claim refund of such amount from the Fund.

The Government of India had notified the ‘Depositor Education and Awareness Fund Scheme, 2014’ in the Official Gazette. The Scheme would be effective wef 24.05.14.

As per the scheme the banks will have to calculate the cumulative balances in all inoperative accounts and balances remaining unclaimed for 10 years along with interest as on 23.05.14 and transfer such amounts to the DEA fund on 30.06.14.

Subsequently banks will have to transfer the amounts becoming due in each calendar month( proceeds of the inoperative accounts and balances unclaimed for 10 years or more) with interest accrued on the last working day of the subsequent month.

http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8780&Mode=0#S1

http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8780&Mode=0#S1


Clarification on Inoperative Accounts

Earlier on August 22, 2008, the Reserve Bank had issued a circular on unclaimed deposits/inoperative accounts in banks in terms of which a savings as well as current account should be treated as inoperative/dormant if there are no transactions in the account for over a period of two years. Further, the Reserve Bank had advised that for the purpose of classifying an account as inoperative, both the types of transactions i.e. debit as well as credit transactions induced at the instance of customers as well as third party should be considered, which included crediting of Dividends.

Non-maintenance of Minimum Balance in Savings Account

The Reserve Bank, on November 20, 2014, advised the scheduled commercial banks (excluding regional rural banks) to adhere to the following additional guidelines with effect from April 1, 2015, while levying charges for non-maintenance of minimum balance in savings bank account-

• In the event of a default in maintenance of minimum balance/ average minimum balance as agreed to between the bank and customer, the bank should notify the customer clearly by SMS/ email/ letter that in the event of the minimum balance not being restored in the account within a month from the date of notice, penal charges will be applicable.

• In case the minimum balance is not restored within a reasonable period, which shall not be less than one month from the date of notice of shortfall, penal charges may be recovered under intimation to the account holder.

• The policy on penal charges to be so levied may be decided with the approval of Board of the bank.

• The penal charges should be directly proportionate to the extent of shortfall observed. In other words, the charges should be a fixed percentage levied on the amount of difference between the actual balance maintained and the minimum balance as agreed upon at the time of opening of account. A suitable slab structure for recovery of charges may be finalised.

• The penal charges should be reasonable and not out of line with the average cost of providing the services.

• The balance in the savings account does not turn into negative balance solely on account of levy of charges for non-maintenance of minimum balance.

Branch Banking:

1. RBI prescribes no penal charges for non maintenance of minimum balance in

ordinary SB accounts. Banks should limit services available on such accounts to

those available to Basic SB Deposit accounts and restore the services when the

balances reaches to the minimum required level.

2. Banks should not levy penal charges for non maintenance of minimum balance in

any inoperative account.

3. Banks should limit the liability of customers in electronic banking transactions in


cases where banks are not able to prove customer negligence.

4. From 1.5.14, the frequency of clearing Non-CTS cheques reduced to Two sessions

a week( Monday and Friday)

5. Internet Banking applications of all banks should mandatorily create authentication

environment fro password based two factor authentication as well as PKI based

system for authentication and transaction verification in online banking transactions.

6. RBI has directed Bank boards to review the operations of Business

Correspondents(BCs) at least once in every 6 Months. RBI also directs that the

prefunding of Corporate BCs and BC agents should progressively come down to

around 15% of the limits fixed for each BC in case of deposits and 30% in case of

Bank Guarantees in around 2 years from when a BC starts operating.

7. .No penalty for pre paying floating rate term loans( home loans).

8. RBI has allowed exporters to get long term advances for up to 10 years to service

export contractors, instead of earlier 1 year. Exporters with a satisfactory track

record of 3 years and the payments adjusted against future exports will be eligible for

such advances. Interest rates cannot exceed LIBOR+200bps

9. RBI switches 30 banks from the age old practice of CAMELS( Capital Adequacy,

Asset quality, management, earnings, Liquidity and Systems& Control) inspection

frame work to Risk based supervision , indicating a beginning of micro management

of banks.

10. In terms of PML rules, banks are required to report information related to cash and

suspicious transactions and all transactions involving receipts by non profit

organisations of value more than Rs 10 lakh or its equivalent in FC to FIU.

11. In consortium Lending, if an account was Non performing for any bank, all the

consortium members should classify it as NPA.

12. Banks to disclose sector wise advances in the notes to accounts in their financial

statements from 14-15, as per the recommendations of Nachiket MOR committee.

13. RBI allows Banks to appoint NBFC-NDs( Non deposit taking NBFCs) to act as

Banks’ Business Correspondents.( as per Nachiket Mor Committee

recommendations)

14. Now it is also not compulsory for banks to attach outlet and subagent of a BC to a

specific branch.( Earlier banks had to assign BC outlets to a branch with in30km of

semi urban & rural areas and 5 km for metro regions.)

15. Limit on JL waived.RBI has waived away the Rs 1 lakh limit on the amount of non

agricultural loan against the pledge of gold ornaments and Jewellery. Banks to

maintain LTV ratio of 75%throgh out the tenure of loan ( LTV is the amount of loan

given as a percentage of the appraised value of the pledged security). The tenor of

the loan where both interest and principal are due for payment cannot exceed 12

months from the date of sanction.

16. Customers to be alerted before clearing high-value cheques In order to have a

control on cheque-related fraud cases, Reserve Bank of India (RBI) has asked banks

to alert account holders by a phone call and contact the base branch before clearing

high value payments via non-home cheques. RBI also asked banks to send an SMS


alert to payer / drawer when cheques are received for clearing;

17. Examine cheques under UV lamp for clearance beyond `2 lakh; and undertake multi-

level checking before clearing cheques above `5 lakh. Further, banks have to ensure

the use of 100% CTS-2010 compliant cheques. Under the Cheque Truncation

System (CTS) environment, electronic image of the cheque is transmitted to the

drawee branch through the clearing house, along with relevant information such as

data on the MICR band, date of presentation and the presenting bank.

18. RBI has asked banks to inform their customers, well in advance, about the fall in

minimum balance. Penal charges will be levied only to the extent of shortfall in such

balances. The guidelines pertaining to these charges will come into effect from April

1, 2015. While levying the charges, banks shall adhere to the additional guidelines,

making the penal charges directly proportionate to the extent of shortfall observed.

Charges will be a fixed percentage levied on the amount of difference betweenthe

actual balance maintained and the minimum balance as agreed upon at the time of

opening of account.A suitable slab structure for recovery of charges may be finalised.

In the event of a default in maintaining the minimum balance as agreed to between

the bank and customer, the bank should notify the customer clearly by SMS / e-mail /

letter that if the minimum balance is not being restored in the account within a month

from the date of notice, penal charges will be applicable.

19. Banks may extend loans up to Rs10L against infra bonds RBI has allowed banks to

extend loans up to Rs10 lakh to individuals against long-term infra bonds issued by

them.

Computation of Net-worth:

Definition of for Computation of Net worth under the Payment and Settlement Systems Act, 2007 (PSS Act) under the Payment and Settlement Systems Act, 2007 (PSS Act)- ‘Net-worth’ will consist of ‘paid up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets’ adjusted for ‘accumulated loss balance, book value of intangible assets and Deferred Revenue Expenditure, if any’. This definition would apply for the purpose of all approvals under the PSS Act.

Cheque Related Frauds - Preventive Measures

RBI indicative measures are

Ensuring the use of 100 percent Cheque Truncation System (CTS) - 2010 compliant cheques;

• Strengthening the infrastructure at the cheque handling service branches and bestowing special attention on the quality of equipment and personnel posted for CTS based clearing, so that it is not merely a mechanical process;

• Ensuring that the beneficiary is KYC compliant so that the bank has recourse to him/her


as long as he/she remains a customer of the bank;

• Examination under ultra violet lamp for all cheques beyond a threshold of say, ` 2 lakh;

• Checking at multiple levels, of cheques above a threshold of say, ` 5 lakh;

• Close monitoring of credits and debits in newly opened transaction accounts based on risk categorisation;

• Sending SMS alert to payer/drawer when cheques are received in clearing;

In addition to the above, banks may consider the following preventive measures for dealing with suspicious or large value cheques (in relation to an account’s normal level of operations):

• Alerting the customer by a phone call and getting the confirmation from the payer/drawer.

• Contacting base branch in case of non-home cheques.

Guidelines on ARCS

RBI has asked Asset Reconstruction Companies (ARCs) and Securitisation Companies (SCs) to increase the mandatory upfront investment in Security Receipts (SRs) to 15% from the earlier 5%. This shall continue on an ongoing basis till all the SRs issued under each scheme, are redeemed. RBI has also changed the definition of the planning period - ARCs will now get period not exceeding 6 months (instead of 12 months as earlier) to draw up a plan to realise Non-Performing Assets (NPAs) of the selling bank


Vijayaraghavan’s Notes: Third Bi-monthly Monetary Policy Statement, 2016-17- dt 09.08.16

It has been decided to:

keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5 per cent;

keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL); and

continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality.

Consequently, the reverse repo rate under the LAF will remain unchanged at 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.0 per cent Second Bi-monthly Monetary Policy Statement, 2016-17- Dt 07.06.16

Monetary and Liquidity Measures

On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:


keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL); and

continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality.

Consequently, the reverse repo rate under the LAF will remain unchanged at 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.0 per cent.

Gross Value Added (GVA) growth for 2015-16 marginally scaled down the annual growth rate to 7.2 per cent,

GVA growth projection for 2016-17 has been retained at 7.6 per cent with risks evenly balanced


First Bi-monthly Monetary Policy Statement, 2016-17( 05.04.16)

Highlights:

It has been decided to

• Reduce the policy repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 6.75 per cent to 6.5 per cent;

• Reduce the minimum daily maintenance of the cash reserve ratio (CRR) from 95 per cent of the requirement to 90 per cent with effect from the fortnight beginning April 16, 2016, while keeping the CRR unchanged at 4.0 per cent of Net Demand and Time Liabilities (NDTL);

• Continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality; and

• Narrow the policy rate corridor from +/-100 basis points (bps) to +/- 50 bps by reducing the MSF rate by 75 basis points and increasing the reverse repo rate by 25 basis points, with a view to ensuring finer alignment of the Weighted Average Call Rate (WACR) with the repo rate;

Consequently, the reverse repo rate under the LAF stands adjusted to 6.0 per cent, and the marginal standing facility (MSF) rate to 7.0 per cent. The Bank Rate which is aligned to the MSF rate also stands adjusted to 7.0 per cent.

Part A: Monetary Policy

Assessment

Since the sixth bi-monthly statement of February 2016, global economic activity has been quiescent. Perceptions of downside risks to recovery in some advanced economies (AEs) at the beginning of 2016 have eased, while major emerging market economies (EMEs) continue to contend with weak growth and still elevated inflation amidst tighter financial conditions. World trade remains subdued due to falling import demand from EMEs and stress in mining and extractive industries. In the US, consumer spending was underpinned by a strengthening labour market, but flagging exports proved to be a drag on growth in Q4 and cloud the near-term outlook. In the Euro area, tailwinds in the form of aggressive monetary policy accommodation and still low energy prices have supported activity in an environment beset with uncertainties from the migrant crisis, intensifying stress in the banking sector, and


possible Brexit. While Japan escaped recession in Q4 of 2015, a combination of weak consumer spending, business investment and exports has slowed the economy in Q1 of 2016. In China, sluggish industrial production, contracting exports, capital outflows and substantial excess capacity in factories and the property market remain formidable headwinds, notwithstanding significant monetary and fiscal policy stimulus. EME commodity exporters have benefited recently from the firming up of commodity prices and risk-on investor sentiment has appreciated their currencies. Across EMEs, however, weak domestic fundamentals, lacklustre external demand and country-specific constraints continue to restrain growth..

Effective April 2, 2016 the statutory liquidity ratio (SLR) of scheduled commercial banks was reduced by 25 basis points from 21.5 per cent to 21.25 per cent of their NDTL. Also, from February 2016, banks were allowed to reckon additional government securities held by them up to 3 per cent of their NDTL within the mandatory SLR requirement as level 1 high quality liquid assets (HQLA) for the purpose of computing their liquidity coverage ratio (LCR), thereby taking the total carve-out from SLR available to banks equivalent to 10 per cent of their NDTL. These measures will create space for banks to increase their lending to productive sectors on competitive terms so as to support investment and growth.

While exports declined in February in US dollar terms for the fifteenth successive month, the rate of contraction narrowed to a single digit for the first time in this period and volume growth turned positive. The decline in non-POL exports was even smaller, with gems and jewellery, drugs and pharmaceuticals, electronics and chemicals driving the upturn. The prolonged contraction in imports also slowed significantly, and non-POL non-gold import growth turned positive for the first time after seven months. This reflected a sizable upsurge in imports of machinery, supported by a pick-up in imports of pearls and precious stones and electronic goods. With gold imports falling in February and March, the continuing softness in crude prices working favourably in terms of conserving the POL import bill and some gains in terms of trade, the trade deficit narrowed to its lowest monthly level since September 2013. In turn, this has likely lowered the current account deficit (CAD) in Q4 below 1.3 per cent of GDP recorded in Q3, despite a moderation in net receipts from services exports and remittances. Net inflows in the form of foreign direct investment (FDI) were robust in Q4 (up to January), more than sufficient to fund the external financing requirement. Foreign portfolio investors (FPIs), who were net sellers in the domestic capital market up to February, became net buyers in March in both equity and debt segments.

. In its bi-monthly monetary policy statement of February 2, 2016, the Reserve Bank indicated that it awaits further data on inflation as well as on structural reforms in the Union Budget that boost growth while controlling spending. Given recent data, forecasts in Chart 1 indicate that inflation will trend towards the 5 per cent target in March 2017 under reasonable assumptions. The changes to the RBI Act to create a Monetary Policy Committee will further strengthen monetary policy credibility. In the Union Budget for 2016-17, the Government has adhered to the path of fiscal consolidation and this will support the disinflation process going forward. The Government has also set out a comprehensive strategy for reinvigorating demand in the rural economy, enhancing the economy’s social and physical infrastructure, and improving the environment for doing business and deepening institutional reform.


The implementation of these measures should improve supply conditions and allow efficiency and productivity gains to accrue. Given weak private investment in the face of low capacity utilisation, a reduction in the policy rate by 25 bps will help strengthen activity and aid the Government’s initiatives.

Perhaps more important at this juncture is to ensure that current and past policy rate cuts transmit to lending rates. The reduction in small savings rates announced in March 2016, the substantial refinements in the liquidity management framework announced in this policy review and the introduction of the marginal cost of funds based lending rate (MCLR) should improve transmission and magnify the effects of the current policy rate cut. The stance of monetary policy will remain accommodative. The Reserve Bank will continue to watch macroeconomic and financial developments in the months ahead with a view to responding with further policy action as space opens up.

Part B: Developmental and Regulatory Policies

I. Liquidity Framework for Monetary Policy Operations

The Reserve Bank’s liquidity framework was changed significantly in September 2014 in order to implement key recommendations of the Expert Committee to Revise and Strengthen the Monetary Policy Framework (Chairman: Dr. Urjit R Patel

Liquidity management is driven by two objectives: first, the need to supply or withdraw short term liquidity from the market so as to accommodate seasonal and frictional liquidity needs such as the build-up of Government balances and demand for cash; and second, the need to supply durable liquidity in the economy so as to facilitate growth, while ensuring that the monetary policy stance is supported.

.


i. smooth the supply of durable liquidity over the year using asset purchases and sales as needed;

ii. progressively lower the average ex ante liquidity deficit in the system to a position closer to neutrality;

iii. narrow the policy rate corridor from +/-100 bps to +/- 50 bps, with a view to ensuring finer alignment of the WACR with the repo rate;

iv. ease liquidity management for banks without abandoning liquidity discipline by reducing the minimum daily maintenance of CRR from 95 per cent of the requirement to 90 per cent with effect from the fortnight beginning April 16, 2016;

v. allow substitution of securities in market repo transactions in order to facilitate development of the term money market; and

vi. consult with the Government on how to moderate the build-up of cash balances with the Reserve Bank.

Detailed guidelines are being issued separately. The Reserve Bank will monitor the consequences of these changes as it modernises the country’s liquidity framework.


II. Banking Structure

Large Exposures: Taking into account the views and suggestions received from stakeholders on the discussion paper on ‘Large Exposures Framework and Enhancing Credit Supply through Market Mechanism’, a fresh discussion paper will be issued by April 30, 2016 on large borrowers meeting a part of their funding requirements from markets. A draft circular on the Large Exposures Framework will be issued for public comments in June 2016 (to be implemented by January 1, 2019).

Revision of regulatory framework: The Basel Committee on Banking Supervision (BCBS) has issued final standards on the standardised approach for measuring counterparty credit risk (SA-CCR), a revised framework for the capital treatment of bank exposures to central counterparties (CCPs) and final rules on revised Pillar 3 disclosure requirements. These standards will be implemented by January 1, 2017 by BCBS member jurisdictions. The Reserve Bank proposes to issue draft guidelines on these standards by May 31, 2016. The Reserve Bank will also undertake revision of the guidelines on the securitisation framework in the light of the BCBS revisions to the securitisation framework which is to be implemented by January 2018. It is proposed to issue draft guidelines on the revised securitisation framework by June 2016.

Rationalisation of Branch Authorisation Policy: Currently, banks provide services through a variety of business outlets – branches; extension counters; satellite offices; mobile branches; ultra small branches and the like. The current policy approach is to facilitate adequate outreach of banking outlets in unbanked areas while at the same time providing autonomy to banks to decide their business strategy. Given that regulations are written in terms of branches, with a view to facilitating financial inclusion and providing flexibility on the choice of delivery channel, it is proposed to redefine branches and permissible methods of outreach keeping in mind the various attributes of the banks and the types of services that are sought to be provided.

Differentiated Licensing of Banks: In addition to recently licensed differentiated banks such as payments banks and small finance banks, the Reserve Bank will explore the possibilities of licensing other differentiated banks such as custodian banks and banks concentrating on whole-sale and long-term financing. A paper in this regard will be put out for comments by September 2016.

Supervisory Enforcement Framework: Changes in the domestic and international financial sector environment necessitate formalisation of an improved supervisory framework for taking enforcement action against scheduled commercial banks for non-compliance of instructions and guidelines issued by the Reserve Bank. The framework, which is intended to meet the principles of natural justice and global standards of transparency, predictability, standardisation, consistency, severity and timeliness of action, will be formalised by June 2016.

Cyber Risks - Supervisory Assessment of Preparedness of Banks: The Reserve Bank has commenced detailed examination of IT used by banks on a pilot basis during the current year. IT examination reports are being issued separately so as to


strengthen the information security preparedness of banks as well as to assess the effectiveness of IT adoption by banks. Moving forward, it is planned to cover major banks in 2016-17 and all banks from 2017-18. The Reserve Bank has constituted an Expert Panel (Chairperson: Smt. Meena Hemachandra) on IT Examination and Cyber Security to provide broad guidance on its approach.

III. Financial Markets

Introduction of Money Market Futures: The Working Group on Enhancing Liquidity in the Government Securities and Interest Rate Derivatives (Chairman: Shri R. Gandhi) had recommended introduction of interest rate futures based on the overnight call money borrowing rate. It is important to develop such market segments which could signal expectations of market participants, while allowing hedging of asset-liability mismatches. It has been decided to allow futures on an appropriate money market rate. The contract specifications will be decided in consultation with market participants and the Securities and

Forex Benchmark-RBI Reference Rate: The Reserve Bank calculates and notifies the reference rate of the rupee (INR) against the US dollar and also publishes INR rates against the euro, the pound sterling and the yen every day around 1:30 P.M. These rates are based on quotes polled from a select list of contributing banks. As recommended by the Committee on Financial Benchmarks (Chairman: Shri P. Vijaya Bhaskar), it has been decided to move over to a process of determining the reference rate based on actual market transactions on volume weighted basis with effect from May 2, 2016.

Initiatives for Start-ups: In the Sixth Bi-Monthly Monetary Policy Statement for 2015-16 and the press release dated February 2, 2016 the Reserve Bank had highlighted the steps being taken with respect to the Government’s initiatives to promote ease of doing business for start-ups. Guidelines/clarifications have already been issued in areas such as online submission of Form A2 for outward remittances up to certain thresholds, issue of shares without cash payments and acceptance of payments by the Indian start-ups on behalf of their overseas subsidiaries. In addition, guidelines in respect of deferred payment through escrow/ indemnity arrangement for transfer of shares, enabling investment by foreign venture capital investors (FVCIs) in start-ups and overseas investment operations for start-ups will be issued soon in consultation with the Government. Furthermore, the simplification of process for dealing with delayed reporting of FDI transactions and provisions for an enabling external commercial borrowing regime for start-ups are being examined by the Government and the Reserve Bank.

IV. Non-banking Financial Sector, Financial Inclusion and Payment and Settlement

Simplification of Process of Registration of New Non-banking Financial Companies (NBFCs): In order to make the process of registration of new NBFCs smoother and hassle free, it has been decided to simplify and rationalise the process of registering new NBFCs. The new application forms will be simpler and the number of documents required to be submitted will be reduced to a minimum.


Peer to Peer Lending (P2P): P2P lending has shown accelerated growth over the last one year. While encouraging innovations, the Reserve Bank cannot be oblivious to the risks posed by such institutions to the system. A Concept Note on P2P lending will be put up on the Reserve Bank’s website for public comments by April 30, 2016 and based on the feedback, the contours of regulating P2P lending will be decided in consultation with the SEBI.

Strengthening Business Correspondent (BC) Infrastructure: The BC model offers significant scope for further strengthening. Accordingly, the following initiatives are proposed:

i. In order to ensure the competence of BCs and to promote quality delivery of financial services, a graded certification/training programme for BCs is proposed to be introduced. This would enable BCs with a good track record and advanced training to be entrusted with more complex tasks such as handling/delivery of financial products that go beyond deposit and remittance. The Reserve Bank will issue the necessary framework for establishing a certification programme for BCs by end-June 2016. Based on the framework, the Indian Banks’ Association (IBA) will be requested to put in place a system of training and certification of BCs in coordination with external training institutes.

ii. In order to have a tracking system of BCs, it is proposed to create a registry covering all BCs, both existing and new. The registration will be online and will capture basic details including location of fixed point BCs, nature of operations and the like. This database will be updated on a quarterly basis. The necessary enabling framework would be issued by the Reserve Bank by end-June 2016 and the IBA will be requested to put in place a registry of BC agents in consultation with all stakeholders.

Micro, Small and Medium Enterprises (MSMEs): The Reserve Bank will lay down a framework by September 2016 for accreditation of credit counsellors who can act as facilitators for entrepreneurs to access the formal financial system with greater ease and flexibility. Credit counsellors will also assist MSMEs in preparing project reports in a professional manner which would, in turn, help banks make more informed credit decisions.

Payment and Settlement Systems in India – Vision 2018: The Reserve Bank will publish Vision 2018 for the payment and settlement systems in the country by end-April 2016. Vision 2018 will continue to focus on migrating to a “less-cash” and more digital society. The endeavour would be to make regulations more responsive to technological developments and innovations in the payments space. This would be complemented by enhanced supervision of payment system operators, improvement in customer grievance redressal mechanisms and for the strengthening of the payments infrastructure.

Sixth Bi-monthly Monetary Policy Statement, 2015-16-dt 02.02.16




keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL);

continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and

continue with daily variable rate repos and reverse repos to smooth liquidity.

Consequently, the reverse repo rate under the LAF will remain unchanged at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.75 per cent.

Important committees- 2015-16

1. Dr. Urjit R. Patel Committee-on strengthening Monetary Policy frame work.

2. Dr Bimal Jalan High Level Advisory Committee -on Licensing New banks

3. Shri B. Mahapatra working Group - constituted to operationalise the countercyclical capital buffer framework in India.

4. Dr. Nachiket Mor Committee -on Comprehensive Financial Services for Small Businesses and Low Income Households.

5. Shri R. Gandhi Working Group -on Enhancing Liquidity in the Government Securities and Interest Rate Derivatives Markets.

6. Shri P. Vijaya Bhaskar Committee- on Financial Benchmarks .

7. Shri B. Sambamurthy Technical Committee - set up to examine the challenges being faced by banks in taking mobile banking forward for achieving financial inclusion.

8. Dr. Arvind Mayaram and Shri Anand Sinha working Group on a Resolution Regime for Financial Institutions. Submitted its report in January 2014. The Group has recommended the setting up of a single Financial Resolution Authority (FRA).

Five Pillar appraoach outlined in the Sixth Bi-Monthly Monetary Policy Statement 2014-15 –Dt 03.02.15

Developmental and regulatory measures are put in place by the Reserve Bank periodically within the organising framework of the five-pillar approach announced in October 2013 .

I Pillar-On strengthening Monetary Policy Frame work.

II Pillar- Strengthening Banking Structure


III Pillar- on the broadening and deepening of financial markets

IV Pillar- measures to foster Financial Inclusion

V pillar- corporate distress and financial institution distress, Restructuring and debt recovery.

I Pillar-Strengthening Monetary Policy Frame work

Expert Committee to Revise and Strengthen the Monetary Policy Framework (Chairman: Dr. Urjit R. Patel)

Recommendation that have been implemented

1. Adoption of the new CPI (combined) as the key measure of inflation 2. Explicit recognition of the glide path for disinflation 3. Transition to a bi-monthly monetary policy cycle 4. Progressive reduction in access to overnight liquidity under the LAF at the

fixed repo rate and corresponding increase in access to liquidity through term repos, and introduction of longer tenor term repos.

II Pillar-Strengthening Banking Structure

Dr Bimal Jalan High Level Advisory Committee on Licensing New banks:

On strengthening banking structure, which is the second pillar, the High Level Advisory Committee (Chairman: Dr. Bimal Jalan) has recently submitted its recommendations to the Reserve Bank on the licensing of new banks. The Reserve Bank will announce in-principle approval for new licences. Immediately afterwards, the Reserve Bank will start working on the framework for on-tap licensing as well as differentiated bank licences, building on the Discussion Paper on “Banking Structure in India – The Way Forward” placed on the Reserve Bank’s website in August 2013 and using the learning from the recent licensing process. The intent is to expand the variety and efficiency of players in the banking system while maintaining financial stability. The Reserve Bank will also be open to banking mergers, provided competition and stability are not compromised.

Progress has been made on a number of regulatory and supervisory measures. Based on the comments/feedback received on the draft framework for dealing with domestic systemically important banks (D-SIBs), the final framework is proposed to be issued by end-May 2014.

. As the liquidity coverage ratio (LCR) stipulated by the Basel Committee becomes a standard with effect from January 1, 2015 it is proposed to issue guidelines relating to Basel III LCR and Liquidity Risk Monitoring tools by end-May 2014. Updated guidelines on stress testing, drawing from Basel Committee on Banking Supervision (BCBS) principles and subsequent global developments, were issued in December


2013. Capital and provisioning requirements on banks' advances to corporates with unhedged foreign currency exposures were specified in January 2014.

The draft report of the Internal Working Group (Chairman: Shri B. Mahapatra), which was constituted to operationalise the countercyclical capital buffer framework in India, was placed on the Reserve Bank's website for comments in December 2013.

On the basis of the recommendations of the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (Chairman: Dr. Nachiket Mor) to encourage banks to actively manage their exposures to various sectors, including priority sectors, it is proposed to prescribe certain additional disclosure requirements in the financial statements by end-June 2014.

Following industry-wide concerns about asset quality and the consequential impact on the performance/profitability of banks, the Reserve Bank has extended the transitional period for full implementation of Basel III Capital Regulations in India up to March 31, 2019, instead of as on March 31, 2018. This will also align full implementation of Basel III in India closer to the internationally agreed date of January 1, 2019.

The Reserve Bank has moved over to risk-based supervision (RBS) for scheduled commercial banks (SCBs), starting with banks that were more prepared. Based on the experience gained from the completion of Phase I and the feedback received on the RBS framework from banks, the framework is being fine-tuned. Banks are also being advised to assess their risk management architecture, practices, related processes and management information systems (MIS) to facilitate their switch over to RBS in Phase II.


Inflation Indexed National Saving Securities (IINSSs) for retail investors were issued in December 2013. To expand investor demand, certain design changes are required. Some such as an increase in the limit for individual investors and trusts have been implemented. Others such as tradability (and consequently, the benefit of indexation for capital gains tax) and issuance of securities with regular coupon flows are being contemplated.

Cash settled single bond 10 year Interest Rate Futures (IRFs) were introduced by stock exchanges in January 2014.

The Reserve Bank will shortly issue guidelines that would allow banks to offer partial credit enhancements to corporate bonds.

As recommended by the Working Group on Enhancing Liquidity in the Government Securities and Interest Rate Derivatives Markets (Chairman: Shri R. Gandhi), the Reserve Bank proposes to introduce a market making scheme for primary dealers (PDs) by allocating specific securities to PDs and ensuring continuous availability of prices, with a suitable framework for assessing the performance of PDs. It will also examine the possibility of limited re-repo/re-hypothecation of "repoed" government securities, subject to appropriate risk control measures.


The Committee on Financial Benchmarks (Chairman: Shri P. Vijaya Bhaskar) submitted its report in February 2014. The Committee has recommended several measures/principles to be adopted in respect of major Indian rupee interest rate and foreign exchange benchmarks to strengthen their quality, the methodology by which they are set and the governance framework. Banks and PDs are being advised to strengthen their governance frameworks on benchmark submissions, subject to the supervisory review of the Reserve Bank. Other recommendations will be implemented in consultation with the Fixed Income, Money Market and Derivatives Association (FIMMDA) and Foreign Exchange Dealers Association of India (FEDAI).

The Reserve Bank will continue to work to ease entry while reducing risk to foreign investors from the volatility of flows. The modalities for allowing FIIs to hedge their currency risk by using exchange traded currency futures in the domestic exchanges are being finalised in consultation with the Securities and Exchange Board of India (SEBI). In order to enhance hedging facilities for foreign investors in debt instruments, it is proposed to allow them to hedge the coupon receipts falling due during the next 12 months. Rebooking of cancelled contracts in case of contracted exposures has been fully restored. It is further proposed to allow all resident individuals, firms and companies with actual foreign exchange exposures to book foreign exchange derivative contracts up to US$ 250,000 on declaration, subject to certain conditions.

Revised regulations under Foreign Exchange Management Act (FEMA) for a simplified foreign portfolio investor (FPI) regime have been notified in March 2014. The Reserve Bank also proposes to simplify the know-your-customer (KYC) procedures for opening bank accounts by FPIs. The Reserve Bank has also been rationalising and expanding limits for FPI investments in debt markets.

A comprehensive IT-based system namely, Export Data Processing and Monitoring System (EDPMS) for effective monitoring, easier tracking and reconciliation of export transactions was launched in February 2014.

IV Pillar- Measures to foster Financial Inclusion:

The recommendations of the Mor Committee on accelerating the flow of credit to those at the bottom of the pyramid and enlargement of catchment area of the Business Correspondents (BCs), including through possible inclusion of new entities as BCs, are under examination. To overcome the challenge of cash management of BCs which is impeding the scaling up of the BC model, the Reserve Bank will collate best practices and issue a fresh set of guidelines to commercial banks.

The Reserve Bank has released a concept paper on Trade Receivables and Credit Exchange for micro, small and medium enterprises (MSMEs) in March 2014 on its website for public feedback. The model outlined in the paper envisages a credit exchange with both primary and secondary market segments that will help address problems faced by the MSME segment on delayed payments and dependency on their corporate buyers. After receiving feedback, the Reserve Bank will work towards implementation.


With a view to ensuring fair and transparent credit pricing and to give a fillip to the flow of credit to micro and small enterprises (MSEs) borrowers, it would be desirable for SCBs to provide differential interest rates for MSEs and other borrowers whose loans are covered under the credit guarantee scheme. SCBs are encouraged to undertake a review of their loan policy governing extension of credit facilities to the MSE sector and should consider using Board approved credit scoring models in their evaluation of the loan proposals of MSE borrowers.

Measures have been taken to expand banking services to the financially excluded sections of society with the appropriate application of technology. The GIRO Advisory Group (GAG) has recommended a tiered structure approach for a centralised bill payment system that will enable inter-operability viz., (a) Bharat Bill Payment System (BBPS) and (b) Bharat Bill Payment Operating Units (BBPOUs). The recommendations of the GAG report are under examination.

A Technical Committee (Chairman: Shri B. Sambamurthy) set up to examine the challenges being faced by banks in taking mobile banking forward for achieving financial inclusion submitted its report in January 2014. This was placed in the public domain for feedback. The recommendations of the Committee will be examined closely, and plans for the way forward will be discussed with stakeholders.

Consumer protection is an integral aspect of financial inclusion. The Reserve Bank proposes to frame comprehensive consumer protection regulations based on domestic experience and global best practices. In the interest of their consumers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty. Banks should also not take undue advantage of customer difficulty or inattention.

Instead of levying penal charges for non-maintenance of minimum balance in ordinary savings bank accounts, banks should limit services available on such accounts to those available to Basic Savings Bank Deposit Accounts and restore the services when the balances improve to the minimum required level. Banks should not levy penal charges for non-maintenance of minimum balances in any inoperative account. Banks should also limit the liability of customers in electronic banking transactions in cases where banks are not able to prove customer negligence.

V Pillar, on Improving the system’s ability to deal with corporate distress and financial institution distress by strengthening real and financial restructuring as well as debt recovery.

Reserve Bank issued a framework for revitalising distressed assets in the economy in January 2014. The framework lays down guidelines for early recognition of financial distress, steps for prompt resolution and fair recovery for lenders. It envisages centralised reporting and dissemination of information on large credits, early formation of lenders' forums and incentives for lenders and borrowers to agree on resolution and disincentives for both in the event of failure to act in a timely way. Improvements in the current restructuring process such as an independent evaluation of large value restructuring with a focus on viability and fair sharing of


gains and losses between promoters and creditors have been mandated. Finally, a more liberal regulatory treatment of distressed asset sales, particularly to asset reconstruction companies, has been provided. The framework will be fully effective from 1.4.14..

Following the announcement in the Second Quarter Review of October 30, 2013, a Working Group (Chairmen: Dr. Arvind Mayaram and Shri Anand Sinha) on a Resolution Regime for Financial Institutions was constituted, which submitted its report in January 2014. The Group has, inter alia, recommended the setting up of a single Financial Resolution Authority (FRA), an early supervisory intervention mechanism in the form of prompt corrective action (PCA) framework for all financial institutions and a separate comprehensive legal framework providing necessary powers and tools for orderly resolution of all financial institutions irrespective of ownership. The Group's report will be disseminated for comments.

Going forward, this five-pillar approach will continue to guide the design and calibration of developmental measures. With competition in the banking sector set to increase, financial markets will play a complementary role, allowing banks to trade their long term assets and match the maturity profile of assets and liabilities. Simultaneously, the Reserve Bank will strive to increase the reach of financial services to everyone, however remote or small, by using technology, new products, and new entities to link people up to the formal financial system. Priority sector lending will become an effective vehicle to promote greater financial access. Concomitantly, the Reserve Bank will take steps for early recognition and resolution of distress with a focus on putting real assets back to work in their best use.

Previous Policy Statements- Important aspects:

Dr. Urjit Patel Committee has indicated that objective of Monetary Policy to target

inflation so as to achieve below 8 per cent CPI inflation by January 2015 and below

6 per cent CPI inflation by January 2016.

The enhanced framework for resolution of distressed assets will be operational by

April 1. The recommendations of the Dr. Nachiket Mor Committee on financial

inclusion are being examined carefully as are the recommendations of the Dr. Urjit

Patel Committee on the monetary policy framework.

Important Committees:

1. Dr. Urjit Patel Committee: On Monetary policy frame work.Expected to submit

report by Dec 13.

2. Dr. Nachiket Mor Committee: On strategy to expand financial inclusion.

3. Shri B. Mahapatra working Group: To operationalise the countercyclical

capital buffer framework in India.( as part of Basel III Capital Frame work).

4. Dr. Bimal Jalan High Level Advisory Committee (HLAC): The HLAC will

devise its own procedures for screening the applications received, for


licensing of new banks in the private sector and submit its recommendations

to the Reserve Bank for consideration.

5. Shri G. Padmanabhan: Technical committee on Services/Facilities to

Exporters. Some of the recommendations accepted are1. an increase in the

limit of e-commerce transactions and 2.extending the time period for

submission of documents under project exports, 3.simplification of reporting

requirement of forward contracts booked over-the-counter (OTC) and

4.extending the limit for exporters to cancel and rebook the forward contracts.

6. Shri G Padmanabhan Committee- set by RBI to study the feasibility of

feasibility of implementation of GIRO based payment systems and to finalise

the modalities of implementing the GIRO payment system-–both electronic

and cheque based in India. The committee has highlighted the need for

developing an electronic bill payment system based on a GIRO model for

payment of dues of essential services, insurance premia, utility payments,

taxes, university fees, examination fees, school fees, etc. This model will

enable the setting up of a centralised infrastructure bringing all the billers and

banks to the bill platform through the aggregators. It will also allow

interoperability in the bill payment process and enable the consumers to make

payments at any of the collection points which is the essence of GIRO

system.The major recommendations of the committee are

a) setting up of the Indian Bill Payment System (IBPS) which would be the

centralized.

b) infrastructure connecting the billers through the aggregators and the

customers through the customer service points, for management of

all bill payments; b) Extending the IBPS value chain of banks/non-

banks/billers/aggregators, etc.; c) Bill data codification and

presentment; d) process of settlement; e) Roles and responsibilities of

stakeholders; and f) Customer support and redressal mechanism.

7. GIRO advisory group Constituted by RBI: Prof. Umesh Bellur. Following the

report of Shri G.Padmanabhan Committee, this advisory group has been set

up by RBI. The Group is expected to submit its report by end-December 2013.

8. Shri B. Sambamurthy- Chairman: Shri B. Sambamurthy -Technical Committee

on Expansion of Access to Mobile Banking set by RBI to examine various

options/alternatives, including the feasibility of encrypted SMS-based funds

transfer using an application which can run on any type of handset, for

expansion of mobile banking in the country. The Committee is expected to

submit its report by end-December 2013.

(Chairman: Shri B. Mahapatra- The Reserve Bank’s Working Group to review prudential guidelines on restructuring of advances by banks and financial institutions . Based on the recommendations relevant guidelines to banks have been issued.


Important Committees/WGs

Shri Mahapatra Committee- to review the existing Prudential guidelines on restructuring of Advances by Banks and Financial Institutions. Draft guidelines issued during Jan 13.

It is expected that the final guidelines on restructuring of advances by banks/financial institutions will be issued by end-May 2013.

Shri K R Kamath Sub Committee on MSE

To suggest a structured mechanism to be put in place by banks to monitor the entire gamut of credit related issues pertaining to the sector. The Committee has since submitted its report and based on its recommendations, it has been decided that banks need to:

1.Strengthen their existing systems of monitoring credit growth to the sector and put in place a system-driven comprehensive performance management information system (MIS) at every supervisory level (branch, region, zone, head office) which should be critically evaluated on a regular basis;

2.Put in place a system of e-tracking of MSE loan applications and monitor the loan application disposal process in banks, giving branch-wise, region-wise, zone-wise and State-wise positions. A format for the purpose will be provided to banks as recommended by the Sub-Committee. The position in this regard may be displayed by banks on their websites; and

3.Monitor timely rehabilitation of sick MSE units. A format for the purpose will be provided to banks as recommended.. The progress in rehabilitation of sick MSE units should be available on the website of banks.

Implementation of Shri Damodaran Committee Report

As mentioned in the Monetary Policy Statement of April 2012, a sub-group of the IBA was constituted to examine implementation of some of the recommendations of Sri Damodaran Committee. These include benchmarking of service charges for basic banking services, charges for non-home branch transactions, zero liability for Automated Teller Machine (ATM)/Point-of-Sale (PoS)/Internet Banking Transactions, and placing the onus on banks to prove customer negligence and discrimination in interest rates offered to old and new borrowers under the floating interest rate regime. The IBA has been advised to draw up a strategic roadmap for implementation of these recommendations, increase customer awareness and ensure that the recommendations of the Committee result in optimisation of desired outcomes.


Recommendations of Shri Damodaran Committee – Uniformity in Charges

With the introduction of Core Banking Solution (CBS), it is expected that customers of banks would be treated uniformly at any sales or service delivery point. It is observed, however, that some banks are discriminating against their own customers on the basis of one branch being designated as the ‘home branch’ where charges are not levied for products/services and other branches being referred to as ‘non-home’ branches where charges are levied for the same products/services. This practice is contrary to the spirit of the Reserve Bank’s guidelines on reasonableness of bank charges. With a view to ensuring that bank customers are treated fairly and reasonably without any discrimination and in a transparent manner at all branches of banks/service delivery locations, banks are advised to:

• follow a uniform, fair and transparent pricing policy and not discriminate between their customers at home branch and non-home branches.

Smt Suma Varma WG on Banking Ombudsman Scheme 2006-Jan 2013

To review, update, and revise the Banking Ombudsman Scheme, 2006, in the light of the recommendations and suggestions of the Committee on Customer Service in Banks and the Rajya Sabha Committee on Subordinate Legislation. The Working Group submitted its report in January 2013, which is under examination.

Shri G.Padmanabhan Committee- Technical on Services/Facilities to Exporters –April 2013 Technical Committee on exports to study various issues such as availability of credit,

transaction costs, insurance, factoring and other procedural aspects in order to cut delays and streamline procedures.

Smt Rashmi Fauzdar WG on Export Reporting and Follow up To identify gaps in the current export reporting and follow-up procedure, including large number of unmatched export transactions between customs and bank reporting, and to recommend suitable re-engineering of the system. The recommendations of the Working Group are under implementation. With the envisaged architecture expected to be put in place by end-September 2013, Authorised Dealers (ADs) would be required to regularly update the status of documents evidencing exports and receipt of export proceeds for the transactions pertaining to them in the Reserve Bank’s data base, ensuring effective follow-up of large value transactions/ transactions of serious nature and improvement in the monitoring of export transactions. Shri R Gandhi WG on Government Securities (g-secs) and Interest Rate Derivatives Markets-August 2012. Some of the recommendations such as reducing the time gap between dissemination of the results of primary auctions on the newswires and the auction system; truncating the time window for bidding in the primary auction; changing the


settlement cycle of primary auctions in Treasury Bills (T-Bills) from T+2 to T+1; conduct of primary auctions in g-secs as a mix of both uniform-price and multiple-price formats; re-issuances of existing securities in state development loans; standardising interest rate swap (IRS) contracts to facilitate centralised clearing and settlement of these contracts; and migration of secondary market reporting of over-the-counter (OTC) trades in g-secs (outright and repo) from Public Debt Office-Negotiated Dealing System (PDO-NDS) to Negotiated Dealing System-Order Matching (NDS-OM) and Clearcorp Repo Order Matching System (CROMS), respectively, have already been implemented. Further, the Government of India has announced the introduction of inflation-indexed bonds for retail investors in the Union Budget 2013-14. The dispensation regarding held to maturity (HTM) has also been reviewed. Other recommendations including consolidation of the Government of India’s public debt; introduction of cash settled 10-year interest rate futures (IRF); introduction of single bond futures; and simplification of operational procedures for seamless movement of securities from SGL form to demat form and vice versa are being examined. Shri K K Vohra Committee on Fixed Interest Rate Products-January 2013 Committee to assess the feasibility of introduction of long-term fixed interest rate loan products by banks. Banks may consider implementing these recommendations so that retail customers are not adversely impacted by undue interest rate risk arising out of changes in economic cycles and policy rates. Dr. Prakash Bakshi Expert Committee on Rural Coop credit Structure-Jan 2013 To undertake an in-depth analysis of the Short-Term Cooperative Credit Structure (STCCS). The Committee submitted its report in January 2013 and made 25 recommendations towards strengthening of the rural cooperative credit architecture. An Implementation Committee (Chairman: Shri V. Ramakrishna Rao) comprising members from the National Bank for Agriculture and Rural Development (NABARD) and the Reserve Bank has been formed to ensure effective and expeditious implementation of the recommendations of the Expert Committee, wherever applicable.

Shri Aditya Puri Committee on Dissemination of Credit Information

As per existing guidelines, credit institutions should furnish timely and accurate credit information on their borrowers and make extensive use of available credit information as a part of their credit appraisal processes.

A Committee , consisting of representatives from Credit Information Companies and Credit Institutions has been constituted to examine the available formats for furnishing of credit information by Credit Institutions to the Credit Information Companies in respect of different sectors.


The Committee would also suggest best practices for the guidance of Credit Institutions in respect of usage of credit information as a part of their credit appraisal process. The Committee will submit its report by end-September 2013.

Shri K.U.B. Rao working Group on Import of Gold

The Working Group on Gold had recommended aligning gold import regulations with the rest of imports with a view to reducing gold imports by creating a level playing field between gold imports and other imports. Currently, banks authorised by the Reserve Bank are permitted to import gold on: (i) consignment basis; (ii) unfixed price basis; and (iii) loan basis. Gold is also imported directly by export oriented units (EOUs) / units in Special Economic Zones (SEZs) in the gems and jewellery sector and nominated agencies / banks using letters of credit (LCs). The bulk of the gold imported by nominated banks is, however, on consignment basis whereby the nominated banks do not have to fund these stocks. With a view to reducing the demand for gold for domestic use, it is proposed to:

• restrict the import of gold on consignment basis by banks only to meet the genuine needs of exporters of gold Jewellery.

The Working Group has made a number of recommendations pertaining to the non-banking financial companies (NBFCs)involved in lending against the collateral of gold. These include loan to value ratio, branch expansion, and review of Fair Practices Code provisions with regard to auction and transparency in loan terms. Detailed guidelines will be issued by RBI in due course.

Shri G. Padmanabhan Committee Alternate Payments: Committee for Implementation of GIRO Based Payment System

The committee for Implementation of GIRO based Payment System, was constituted in January 2013. The Committee has submitted its report on April 29, 2013. The report is under examination.(GIRO-GIRO Transfer , is a payment transfer from one bank account to another bank account and instigated by the payer, not the payee. In the United Kingdom and in other countries the term Giro may refer to a specific system once operated by the post office. Giro was a common method of money transfer in early banking.)

Shri Vijay Chugh Technical Committee on Uniform Routing Code and Account Number Structure

A Technical Committee, was constituted to examine the feasibility of a uniform routing code and uniform account number across banks. The Committee has since submitted its report and its recommendations are being examined by the Reserve Bank.

Shri Pulak Kumar Sinha Working Group to Study Feasibility of Aadhaar as Additional Factor of Authentication for Card Present Transactions

Following one of the recommendations of the Working Group on securing card present transactions (Chairperson: Ms. Gowri Mukherjee), this Working Group has

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been constituted in March 2013 to study the feasibility of Aadhaar as an additional factor for authentication of card present transactions and other related issues. The Working Group is expected to submit its report by end-June 2013.

Q & A On Monetary Policy Statements

The Committee to Review Governance of Boards of Banks in India (Chairman: Dr. P.J.Nayak) recommended that discussions in the boards of banks need to be upgraded and greater focus should be on strategic issues and suggested Seven Critical themes. What are they?

The Reserve Bank has been prescribing a comprehensive ‘Calendar of Reviews’ to be deliberated by the boards of banks, with significant additions to the calendar over the years. Time spent on reviews reduces the leeway for the board to discuss issues of strategic importance for banks such as product market strategy and risk management. The Committee to Review Governance of Boards of Banks in India (Chairman: Dr. P.J.Nayak) recommended that discussions in the boards of banks need to be upgraded and greater focus should be on strategic issues. It is, therefore, proposed to do away with the mandatory calendar of reviews and instead, replace it with the seven critical themes prescribed by the Nayak Committee namely, business strategy, financial reports and their integrity, risk, compliance, customer protection, financial inclusion and human resources, and leave it to the banks’ boards to determine other list of items to be deliberated and periodicity thereof.

Who will be the Bench Mark Administer in India?

The Financial Benchmarks India Pvt. Ltd., jointly floated by the Fixed Income Money Market and Derivatives Association of India (FIMMDA), the Foreign Exchange Dealers' Association of India (FEDAI) and the Indian Banks’ Association (IBA), has been established as an independent benchmark administrator. This administrator will start operations by end-May 2015. Once it starts publishing various indices of market interest rates, the Reserve Bank will explore the possibility of encouraging banks to use the indices as an external benchmark for pricing bank products.

What will be the basis for Monetary Policy stance from the year 2015-16 onwards?

The Monetary Policy Framework Agreement signed by the Government of India and the Reserve Bank in February 2015 will shape the stance of monetary policy in 2015-16 and succeeding years. The Reserve Bank will stay focussed on ensuring that the economy disinflates gradually and durably, with CPI inflation targeted at 6 per cent by January 2016 and at 4 per cent by the end of 2017-18. Although the target for end-2017-18 and thereafter is defined in terms of a tolerance band of +/- 2 per cent around the mid-point, it will be the Reserve Bank’s endeavour to keep inflation at or close to this mid-point.

Reserve Bank’s developmental and regulatory policies will continue to be guided by the five-pillar approach to improve the efficacy of monetary and liquidity


management, expand financial inclusion and carry forward banking sector reforms by adapting the best international practices to country-specific requirements

What are the five Pillars set by RBI based on which its Development and regulatory measures are formed? What is called five pillar approach of RBI?

Five pillar framework set by RBI (in its II quarter review of monetary policy 2013-14) for guiding its development and regulatory measures are being implemented.

I Pillar-On strengthening Monetary Policy Frame work.

II Pillar- Strengthening Banking Structure


IV Pillar- measures to foster Financial Inclusion

V pillar- corporate distress and financial institution distress, Restructuring and debt recovery.

This five-pillar approach will continue to guide the design and calibration of developmental measures of RBI. With competition in the banking sector set to increase, financial markets will play a complementary role, allowing banks to trade their long term assets and match the maturity profile of assets and liabilities. Simultaneously, the Reserve Bank will strive to increase the reach of financial services to everyone, however remote or small, by using technology, new products, and new entities to link people up to the formal financial system. Priority sector lending will become an effective vehicle to promote greater financial access. Concomitantly, the Reserve Bank will take steps for early recognition and resolution of distress with a focus on putting real assets back to work in their best use.

What are the three broad objectives of RBI’s Monetary Policy?

Three basic objectives of Monetary policy-Controlling inflation, encouraging growth and financial stability.

In How many times in a year RBI releases its Monetary Policy Statement? Based on the recommendations of the Dr. Urjit Patel Committee on the monetary policy framework, monetary policy reviews will ordinarily be undertaken in a two-monthly cycle, consistent with the availability of key macroeconomic and financial data. Accordingly, the next policy review is scheduled on Tuesday, April 1, 2014.So here in after 6 Bi-Monthly statements of Monetary Policy statement.

Name the Committee on Monetary policy frame work? What are the important recommendations? Dr. Urjit Patel Committee-On Monetary policy frame work. Important recommendations: Inflation should be the nominal anchor for the monetary policy framework. This nominal anchor should be set by the Reserve Bank as its predominant objective


of monetary policy in its policy statements. The RBI should adopt the new CPI (combined) as the measure of the nominal anchor for policy communication. The nominal anchor or the target for inflation should be set at 4 per cent with a band of +/- 2 per cent around it. Inflation target should be graduated to bringing down inflation from the current level of 10 per cent to 8 per cent over a period not exceeding the next 12 months and to 6 per cent over a period not exceeding the next 24 month period before formally adopting the recommended target of 4 per cent inflation with a band of +/- 2 per cent. The Central Government needs to ensure that its fiscal deficit as a ratio to GDP is brought down to 3.0 per cent by 2016-17.

How RBI maintains price stability?

It maintains price stability by controlling money available with public. It controls money supply, by either providing more money or taking away excess money from the banks. It also increase or decrease the price of money, ie interest rates to control money available with public for spending

What are the guidelines regarding Direct Benefit Transfer? Direct Benefit Transfer

With a view to facilitating Direct Benefit Transfer (DBT) for the delivery of social welfare benefits by direct credit to the bank accounts of beneficiaries, it is proposed to advise banks to:

1. Open accounts for all eligible individuals in camp mode with the support of local government authorities;

2. Seed the existing accounts or the new accounts opened with Aadhaar numbers; and

Put in place an effective mechanism to monitor and review the progress in the implementation of DBT.

What are the Guidelines regarding FIP(Financial Inclusion Plan) and EBT(Electronic Benefit Transfer)?

Financial Inclusion Plan 2013-16

The implementation of the Financial Inclusion Plan (FIP) 2010-13, introduced for the first time in April 2010, has led to the establishment of banking outlets in more than 2 lakh villages.

In order to take financial inclusion to the next stage of providing universal coverage and facilitating Electronic Benefit Transfer (EBT), banks have been advised to draw up the next FIP for the period 2013-16. The FIPs submitted by banks would be discussed in detail with the Reserve Bank. Banks are, therefore, advised to:

Draw up the plan for 2013-16 by disaggregate the FIPs of the earlier period from branch level.


What are the RBI initiatives on Financial Literacy Material ?

In order to link the financially excluded segment with the banking system, a model for conduct of literacy camps by banks has been designed, detailing the operational modalities to culminate in effective financial access to the excluded. Further, to ensure consistency in the financial literacy material reaching the target audience in a simple and lucid manner, the Reserve Bank has prepared comprehensive financial literacy material consisting of a Financial Literacy Guide, a Financial Diary and a set of 16 Financial Literacy Posters. Banks are, therefore, advised to:

• use the model of financial literacy camps as a tool to achieve the targets set under their FIPs;

• use the financial literacy material as a standard curriculum in the literacy camps; and

• be innovative in devising suitable communication channels so that the messages reach the target audience effectively.

What are the RBI guidelines regarding Lead bank Scheme?

Lead Bank Scheme - Metropolitan Areas

At present, the Lead Bank Scheme (LBS) is applicable to all districts in the country, excluding districts in metropolitan areas. However, the challenge of financial exclusion is widespread in metropolitan areas also, especially amongst the disadvantaged and low-income groups. With the objective of providing an institutional mechanism for coordination between government authorities and banks, facilitating doorstep banking to the excluded segment of urban poor, and to implement DBT, it has been decided to:

• bring all districts in metropolitan areas under the fold of the LBS.

What are the guidelines regarding Annual Branch Expansion Plan?

At present, domestic scheduled commercial banks (SCBs) are required to allocate at least 25 per cent of the total number of branches proposed to be opened during a year in unbanked rural (Tier 5 and Tier 6) centres while preparing their Annual Branch Expansion Plan (ABEP). Branch expansion in rural areas is essential to address the existing asymmetries in achieving financial inclusion. To facilitate speedier branch expansion in unbanked rural centres for ensuring seamless roll out of the DBT Scheme of the Government of India, banks are advised to:

• front-load the opening of branches in unbanked rural centres over a 3 year cycle co-terminus with the FIP. Credit will be given for branches opened in unbanked rural centres in excess of 25 per cent in a year which will be carried forward to the subsequent year of the FIP.


What are the RBI guidelines regarding Implementation of Dynamic Provisioning Regime for Banks in India?

The Reserve Bank had placed a discussion paper on Introduction of Dynamic Loan Loss Provisioning Framework for Banks in India on its website in March 2012, soliciting views/comments. The comments/views received by the Reserve Bank from stakeholders are under examination .It is proposed to:

• issue the final guidelines on dynamic provisioning framework and its implementation in a phased manner.

What are the guidelines on Commercial Real Estate ?

Residential Housing: Prudential Norms

In September 2009, the Reserve Bank had issued guidelines on classification of certain exposures as Commercial Real Estate (CRE) exposures. CRE exposures are sensitive in view of their inherent price volatilities. Therefore, these exposures generally attract higher risk weights and higher provisioning requirements. However, it has been generally observed that the residential housing complex sector under the CRE poses lower risk than the other components of CRE sector. Accordingly, it is proposed to:

• carve out a sub-sector of ‘CRE-Residential Housing’ within the CRE sector with appropriate prudential regulatory norms on risk weights and provisioning. .

What are the points regarding Banking Structure in India? The guidelines on Licensing of New Banks in the Private Sector issued in February 2013 indicated that the Reserve Bank would prepare a policy discussion paper on the banking structure in India within two months, keeping in view the recommendations of the Committee on Banking Sector Reforms, 1998 (Chairman: Shri M. Narasimham), the Committee on Financial Sector Reforms, 2008 (Chairman: Shri Raghuram Rajan), and other viewpoints. The discussion paper would cover issues such as consolidation of large-sized banks with a view to having a few global banks, desirability and practicality of having small, localised banks as preferred vehicles for financial inclusion, the need for having investment banks through differentiated licensing regime for domestic and foreign banks instead of granting of universal banking licence, policy regarding presence of foreign banks in India, conversion of urban cooperative banks into commercial banks, and periodicity of licensing new banks, whether in blocks or on tap.

What are all the services covered under “Wealth Management”? and what are the RBI guidelines on wealth Management?

Wealth management services (WMS) generally include referral services, investment advisory services (IAS) and portfolio management services (PMS). In India, banks with well-developed branch network have access to a large customer base. Banks offering wealth management services are exposed to reputational risks on account of mis-selling of products, conflict of interest, lack of knowledge and clarity about products and frauds.


What are the RBI guidelines on Marketing and Distribution of Third Party Financial Products ?

As per existing guidelines, banks are allowed to market insurance and mutual fund products as agents of other entities on non-risk participation basis. It has been observed that in some cases, banks did not have clear segregation of duties of marketing personnel from other branch functions, and bank employees were directly receiving incentives from third parties such as insurance, mutual fund and other entities for selling their products. Such practices may lead to mis-selling and distortion of the staff incentive structure. It is, therefore, proposed to advise banks to:

• ensure segregation of the marketing function from the approval/transactional process at bank branches;

• ensure that its employees do not receive cash/non-cash incentives directly from insurance companies, mutual funds and other third party product providers; and

• have a board approved policy to avoid mis-selling and conflict of interest in marketing and distribution of own or third party financial products. .

What are RBI guidelines on Pricing of Retail Loans?

The Reserve Bank has observed wide variations in the rate of interest charged to retail borrowers by banks even when the loan was sanctioned on the same day. In terms of extant instructions, all categories of loans (with certain specified exemptions) are to be linked to the Base Rate from July 2010. It is expected that the final rate of interest charged to the borrower will include product and customer specific charges and will be reasonable and transparent. However, the very wide variation in rates of interest charged by banks on retail loans to different borrowers on the same day cannot possibly be attributed to customers’ risk profiles. Such a practice may be reflective of opaqueness in the system.

Credit management in a bank is essentially an internal management function and banks are expected to prepare a well-defined loan policy approved by their boards, laying down, inter alia, the factors taken into consideration for deciding interest rates. However, keeping in view the findings in this regard, banks are advised to have management oversight on such practices and also frame policies that ensure pricing of loans, especially retail loans, is transparent, realistic, and related to the risk perception of the borrowers.

What is called Depositor Education and Awareness Fund(DEAF)?

Pursuant to the enactment of The Banking Laws (Amendment) Act, 2012, Section 26A has been inserted in the Banking Regulation Act, 1949 which, empowers the Reserve Bank to establish a Depositor Education and Awareness Fund (DEAF).

DEAF will be credited with the amount to the credit of any account in India with a banking company which has not been operated upon for a period of ten years or any deposit or any amount remaining unclaimed for more than ten years within a


period of three months from the expiry of ten years.

DEAF shall be utilised for promotion of depositors’ interest and for such other purposes considered necessary for the promotion of depositors’ interests as specified by the Reserve Bank from time to time. However, the provisions of Section 26A do not prevent a depositor from claiming his/her deposit or operating his/her account or deposit after the expiry of the period of ten years and the banking company should pay the deposit amount and claim refund of such amount from DEAF. .

What are the RBI guidelines on Distribution of Banknotes and Coins as Alternative Avenues?

With a view to effectively meeting the growing demand for banknotes and coins in the country, there is a need for identification of alternative avenues for their distribution by banks. For this purpose, banks may explore the possibility of offering these services through Business Correspondents (BC) and consider engaging the services of Cash in Transit (CIT) entities for the purpose of distribution of banknotes and coins, thereby addressing the last mile connectivity issues.

What are the RBI guidelines on Improving Currency Distribution in Districts – Identification of Lead Banks for that?

With a view to ensuring that banks have a more pronounced stake in the distribution of banknotes and coins and also to facilitate their uninterrupted supply in places other than metropolitan and urban centres, it is proposed to formulate a scheme on the lines of the Lead Bank Scheme and to allot specific areas (districts/States) to individual banks. The identified Lead Bank will be responsible for ensuring that the genuine needs of people for clean notes and coins are appropriately met through proper coordination with the Currency Chests and Small Coin Depots situated in that area.

What are the RBI guidelines on Detection and Reporting of Counterfeit Banknotes?

As a step towards strengthening the mechanism for detection of counterfeit notes, the Reserve Bank has advised banks in May 2012 to re-align their cash management to ensure that cash receipts in denomination of `100 and above are not put into re-circulation without being machine-processed for authenticity. Banks were also advised in November 2012 that wherever counterfeit notes are detected but not impounded and reported, it will be construed as wilful involvement of the bank concerned in circulating counterfeit notes and may attract penal measures.

In view of the recommendation of the DPSC(Department-related Parliament Standing Committee) for addressing the menace of counterfeit notes, it has now been decided that in order to encourage banks to report counterfeit notes detected by them, a scheme of incentives for banks will be introduced. Simultaneously, the existing penalty for non-detection and non-reporting of counterfeit notes by banks is being revisited.


Vijayaraghavan’s Notes –Promotion Interview - Q & A- General Banking

1 What is the main difference between RBI Act 1934 and Banking Regulation Act 1949? RBI Act governs the Reserve Bank Functions and through that Governs the financial Sector , where as Banking Regulation Act directly governs the financial Sector.

2 What are all the main Acts governing Banking operations in India?

Companies Act, 1956:Governs banks as companies Banking Companies (Acquisition and Transfer of Undertakings) Act,

1970/1980: Relates to nationalisation of banks Bankers'' Books Evidence Act Banking Secrecy Act Negotiable Instruments Act, 1881

3 What are the specific functions governed by the following Acts?

Public Debt Act, 1944/Government Securities Act: Governs government debt market

Securities Contract (Regulation) Act, 1956: Regulates government securities market

Indian Coinage Act, 1906:Governs currency and coins Foreign Exchange Regulation Act, 1973/ Foreign Exchange Management

Act, 1999 : Governs trade and foreign exchange market Payment and Settlement Systems Act 2007: Regulation and supervision of

the payment systems.

4 What is the role function of RBI as a Banker to Government? RBI Performs merchant banking function for the central and the state governments; also acts as their banker.

5 What is the Role function of RBI as Banker to Banks?

RBI Maintains banking accounts of all scheduled banks.

6 What is the objective and Role function of RBI as Monetary Authority?

RBI Formulates, implements and monitors the monetary policy, with the objective of maintaining price stability and ensuring adequate flow of credit to productive sectors.

7 What is the objective and role function of RBI as regulator and supervisor of financial system ? RBI prescribes broad parameters of banking operations within which the country's banking and financial system functions, with the Objective of maintaining public confidence in the system, protecting depositors'' interest and


providing cost-effective banking services to the public. As a Regulator and Supervisor of the payment systems , RBI

Authorises setting up of payment systems Lays down standards for operation of the payment system Issues direction, calls for returns/information from payment system

operators.

8 What is the role function of RBI in supervising and managing Foreign Exchange of the country?

RBI manages the Foreign Exchange Management Act, 1999, with the objective to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

9 What is the role function of RBI as Issuer of currency?

RBI Issues and exchanges or destroys currency and coins not fit for circulation, with the objective to give the public adequate quantity of supplies of currency notes and coins and in good quality.

10 How does Reserve Bank of India discharge its statutory obligation of being 'Banker to Government'? Reserve Bank of India maintains the Principal Accounts of Central as well as State Governments at its Central Accounts Section, Nagpur. It has put in place a well-structured arrangement for revenue collection as well as payments on behalf of Government across the country. A network comprising the Public Accounts Departments of RBI and branches of Agency Banks appointed under Section 45 of the RBI Act carry out the Govt. transactions. At present all the public sector banks and three private sector banks viz. ICICI Bank Ltd., HDFC Bank Ltd. and Axis Bank Ltd. act as RBI's agents. Only authorised branches of Agency banks can conduct Govt. business.

11 What are the Key Policy Rates?(as on April 2016) Bank Rate-7.00% Repo Rate-6.50% Reverse Repo Rate-6.00% MSF rate-7.00%

12 What are the present reserve ratios?( as on April 2016) CRR-4% SLR-21%

13 What is the rate of interest RBI is paying on the CRR maintained by the banks? Nil.

14 With What rate the lending rates of the Banks are linked with? Base rate.


15 What is CAD? CAD- Current Account Deficit. It refers to the excess import payments over earnings from export and remittances from overseas Indians. For 2015-16-USD 7.5 billion(1.40% of GDP) Fex reserves as on As on 08.04.16-US $ 359.91 billion As on 22.06.16-US$ 288.62 billion GDP Growth-2015-16-7.6%

16 What are the reasons/Factors affecting the GDP Growth? RBI Perspective: The global financial crisis affected virtually every economy in the world, and India was no exception. But we recovered from the crisis much sooner than even other emerging economies. In the crisis year of 2008/09, growth dropped to 6.7 per cent, but it recovered smartly thereafter. In fact, in the two years after the crisis, 2008/09 and 2009/10, growth averaged 9.0 per cent which compares favourably with the average growth of 9.5 per cent in the three years before the crisis. However, last year, 2011/12, growth moderated to 6.2 per cent, and the first advance estimates suggest that growth this year may drop further to 5.0 per cent, the lowest in a decade The reasons for the down turn growth over the last two years would be

1. Due to slowing of demand across the board. 2. Private investment decelerated sharply, in part reflecting the global

downturn, but largely owing to domestic factors. 3. Business profitability was dented by tightening infrastructure constraints

and increasing input prices stemming from high food and fuel inflation. 4. Business confidence was hit by a rising fiscal deficit, vacillating

commitment to reforms and governance concerns, all of which dampened investor perceptions on returns to investment.

17 What is called Inflation?

Inflation: The rate at which the general level of prices for goods and services is rising is called inflation. It Indicates, the overall general upward price movement of goods and services in an economy (often caused by a increase in the supply of money-When too much money chases too few goods ,prices of goods increases). That is called inflation. In that case there will be lot of money , but with fewer goods.

Most of the Developing and Developed Economics uses CPI as a measure of

inflation. In India , all along WPI data has been extensively used by RBI and

Govt as key inflation measure.

In January 2011, a new measure of inflation, CPI index was introduced by

Ministry of Statistics , with 2010 as base year. Every month Govt will release ,

annual inflation data report based on CPI , starting from 21.02.12, a move that is

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expected to make monetary policy more effective in addressing demand driven

price measures..

Unlike most Central Banks, which mainly use the CPI to monitor inflation and set

monitory policy, the RBI focuses on WPI to keep tabs on prices.

The CPI data captures price movements at the retail level and has wider basket of

goods, while the WPI data measures movements at the whole sale level.

Since WPI largely reflects price pressures experienced by producers, reliance on

it renders monetary policy less effective at the retail level. CPI will also reflect

price movements in Service sector, which makes up about 55% of Indian

economy but is not included in WPI. CPI will also cover retail prices in five major

groups, food, fuel, clothing, housing and education across rural and urban India,

providing a comprehensive reference point for policy makers. Hence CPI will

serve as a broad based index and should help in making the policy more

effective.

It will take some time , for the new CPI index to replace WPI index as the country’s main Inflation measure. As the CPI data series needs to stabilize.

18 Inflation How it is measured in India?

The following are the details of measure of inflation ,currently in use in India.

1. WPI -release by Ministry of Commerce and Industry. Base year2004-05=100( earlier base year was1993-94). It capture all transaction in the domestic market at first point of bulk sale. Widely used by RBI and Govt. Data being released weekly, monthly and yearly. Following the recommendations of Prof. Abhijit Sen working group, the base year was changed from 1993-94 to 2004-05.

2. All India General CPI- Ministry of Statistics (CSO)-Base year-2010=100-releases every month for All India, rural, urban and combined from January 2011. It is expected that this CPI may replace WPI in future.

3. CPI for Industrial Workers-(CPI-IW)-Ministry of Labour-Base year 2001=100. These Index Numbers are utilised for fixation and revision of wages, determination of variable dearness allowance, measuring inflationary trends and policy formulation. These index numbers are released on last working day of every succeeding month.( Monthly and annual reports released by Ministry of Labour.)

4. CPI for Rural Labourers and Agricultural Labours{CPI(RL/AL)}-Ministry of Labour-Base Year 1986-87=100. These Index numbers are used for revision and fixation of Minimum Wages in respect of Employments in Agriculture under Minimum wages Act 1948. ( Monthly and annual reports released by Ministry of Labour)

5. Retail Price Index of 31 essential Commodities in Urban areas-Ministry of Labour-Base year 2001=100. Retail price Indices in respect of 31 selected commodities in urban Areas are also compiled every month and supplied to the Ministry of Consumer Affairs, Food and Public Distribution , with the


objective to monitor the movement in prices of these selected commodities and to take timely remedial action. Monthly reports.

6. Wage rate Index Numbers- Compiled by Ministry of Labour- Base-1963-65=100. These indices are compiled for Twenty one selected industries in three sectors viz-Manufacturing, Plantations and Mining Compiled every Month.

In addition, Gross Domestic Product (GDP) deflator and Private Final Consumption Expenditure (PFCE) deflator from the National Accounts Statistics (NAS) provide implicit economy-wide inflation estimate. The WPI is considered as the headline inflation measure because of its availability at high frequency. WPI is more broader in coverage than CPI. WPI is close to Producer’s price while CPI represents more of retail price.

While the WPI does not cover prices of services, CPIs are meant to reflect the cost of living conditions for a homogeneous group of consumers based on retail prices.

19 What is the new measure for inflation?

Most of the Developing and Developed Economics uses CPI as a measure of inflation. In

India , all along WPI data has been extensively used by RBI and Govt as key inflation

measure.

As per Dr. Urjit Patel Committee recommendations, The Reserve Bank wef April 14 will adopt the new CPI (combined) as the measure of the nominal anchor for policy communication. The nominal anchor should be defined in terms of headline CPI inflation, which closely reflects the cost of living and influences inflation expectations relative to other available metrics.

Dr. Urjit Patel Committee has indicated that objective of Monetary Policy to

target inflation so as to achieve below 8 per cent CPI inflation by January 2015

and below 6 per cent CPI inflation by January 2016.

(3) The nominal anchor or the target for inflation should be set at 4 per cent with a band of +/- 2 per cent around it (a) in view of the vulnerability of the Indian economy to supply/external shocks and the relatively large weight of food in the CPI; and (b) the need to avoid a deflation bias in the conduct of monetary policy.

In January 2011, a new measure of inflation, CPI index was introduced by

Ministry of Statistics , with 2010 as base year. Every month Govt will release ,

annual inflation data report based on CPI , starting from 21.02.12, a move that is

expected to make monetary policy more effective in addressing demand driven

price measures.

Unlike most Central Banks, which mainly use the CPI to monitor inflation and set


monitory policy, the RBI focuses on WPI to keep tabs on prices.

The CPI data captures price movements at the retail level and has wider basket of

goods, while the WPI data measures movements at the whole sale level.

Since WPI largely reflects price pressures experienced by producers, reliance on

it renders monetary policy less effective at the retail level. CPI will also reflect

price movements in Service sector, which makes up about 55% of Indian

economy but is not included in WPI. CPI will also cover retail prices in five major

groups, food, fuel, clothing, housing and education across rural and urban India,

providing a comprehensive reference point for policy makers. Hence CPI will

serve as a broad based index and should help in making the policy more

effective.

20 What are the factors that driving inflation ?

RBI Perspective: Both supply side and demand side factors have contributed to the buildup of inflationary pressures.

1. A major driver from the supply side has been food inflation, which has both structural and cyclical components. The structural component arises from rising incomes, especially in rural areas, which is leading to a shift in dietary habits from cereals to protein foods. Inflation of protein food prices remained in double digits for much of the last three years barring a few months . The cyclical component of food inflation arises from the monsoon related spike in prices of food items such as vegetables. The timely onset of the monsoon and its spatial and temporal distribution continue to influence the inflation outlook in India.

2. The second major factor driving the current episode of inflation has been global commodity prices, especially the price of crude oil. India imports 80 per cent of its oil demand. The global price of oil is therefore an important variable in determining the inflation outlook. The depreciation of the rupee, starting October 2011, has compounded the inflationary impact of oil prices. The cost of subsidies raised the fiscal deficit which fuelled inflation. So, any softening of inflation that we gained through subsidization was offset by a larger fiscal deficit.

3. The third major factor fuelling inflation has been wage pressures. Nominal rural wages increased at double digit rates over the last five years. Indeed, they increased so rapidly that, despite high retail inflation, real wage growth surged close to double digits in the last three years.

21 What is the main difference between WPI and CPI , while measuring inflation? Whole Sale Price Index (WPI ) does not take into account the prices of food, where as Consumer price Index(CPI)takes into account the prices of food also. It has often been reiterated that when measuring inflation in India, taking the consumer price index (CPI) makes more sense than the wholesale price index (WPI). This is because the latter does not take into account the prices of food. And higher food prices have been the main reason why consumer price

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inflation has not really come down even when the WPI has. Thus, does it make sense for the Reserve Bank of India (RBI) to lower interest rates when CPI is still firm? Lowering interest rates would mean that household savings would take a hit. Further, higher food prices eat into the incomes, as a result of which the propensity to spend on non-food items is low. Further, higher fuel prices also have an impact because it adds on to the transportation costs which ultimately reflect in food prices. One of the things that the government needs to do is reduce supply bottlenecks and provide adequate storage facilities. This is so that there is no wastage of food grains. This means that adequate supply will ensure that prices stay lower. The mechanism of minimum support prices also needs to be looked into especially when it is not aligned to the market but ends up impacting the market prices instead. Overall, the government cannot base its policies entirely on WPI but needs to attach more importance to the consumer price inflation numbers.

22 What is “ New Normal for Inflation? Though Inflation is hovering around 8% and above during last 3 years,, the Reserve Bank has consistently maintained in all its policy reviews that its objective is to “… condition and contain perception of inflation in the range of 4.0-4.5 per cent. This is in line with the medium-term objective of 3.0 per cent inflation consistent with India’s broader integration into the global economy.” In recent months, some analysts have questioned the Reserve Bank’s resolve to bring inflation down to this level given the trend of stubborn and persistent inflation. Their main contention is that average WPI inflation over the last three years for which data are available (February 2010 - January 2013), at 8.8 per cent, is significantly higher than the average inflation of 6.0 per cent in the three years before the Lehman collapse (September 2005 - August 2008) suggesting that India’s inflation rate has undergone an upward phase shift owing to a host of domestic and global developments. Monetary policy calibration, it is argued, can get flawed unless the Reserve Bank acknowledges this new normal. So in view of some analysts and economists that the New Normal for Inflation has to be more than 7%. The Reserve Bank does not agree with this ‘new normal’ argument. Indeed RBI has succeeded by reining in inflation over the last three years as it brought inflation from double digit levels to below 7 per cent. The debate about a new normal for inflation is not unique to India; it is playing out in several countries. Even as these debates about a new normal for inflation are becoming more commonplace around the world, the context similarity between India and advanced economies should not be stretched. The concern in advanced economies is about how to continue with the stance of monetary easing even after the policy interest rates have hit the zero lower bound so as to minimize loss of employment and output. The concern in emerging economies in general, and India in particular, on the contrary, is an aspiration for higher growth aimed at poverty reduction, even if it entails higher, albeit not much higher, inflation. RBI Perspective:

“Admittedly, the average inflation rate in India over the last three years has trended up. Nevertheless, the context presents neither a necessary nor a

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sufficient condition for the Reserve Bank to revise its inflation goal. Not a necessary condition because, as indicated earlier, much of our inflation is driven by supply constraints which can be corrected by appropriate policies and their effective implementation. Accepting a new normal for inflation not only has no theoretical or empirical support, but entails the moral hazard of policy inaction in dealing with supply constraints. Not a sufficient condition because there is no empirical evidence to establish that the benefits of higher growth outweigh the costs of welfare loss associated with higher inflation.

Key to our collective national aspiration for sustained high economic growth is low and steady inflation. It is only under such an environment of price stability that investors and consumers can make informed choices and contribute to growth. The responsibility of the Reserve Bank in this regard is to anchor inflation expectations and ensure price stability. Neither theory nor empirical evidence presents a credible case for acquiescing in a new normal for inflation in India.”

23 What is called Deflation and Disinflation?

Deflation is opposite of Inflation. Deflation measures the rate of fall in prices.

Disinflation is reduction in inflation rate or mitigating the Rate of Inflation. Inflation , Stagflation, Deflation and disinflation are all related and reflecting the price stability in an economy.

24 What is called Recession? RECESSION : Refers to business condition with mild tapering off of economic activity not qualifying to be called phase of depression. The text book definition of recession is two consecutive quarters of declining out put. Recession can also be used to describe any period in which growth falls below an economy's trend growth rate.

25 What is called Tight Money Policy? TIGHT MONEY POLICY : Refers to the monetary policy of restraining or reducing the money supply and of raising interest rates. This policy may have the effect of slowing the GDP growth, reducing the rate of inflation or raising the nation's foreign exchange rates.

26 What are the major financial markets in India? Capital Market, Government Securities Market, Foreign Exchange Market and Money Market.

27 What are the prominent index/rates referred in the following financial markets? Capital Market-BSE Sensex and Nifty(S&P CNX Nifty) Government Securities Market-91 day, 182 day 364 day T Bill rates Money Market- Call Money Rates.

28 What is called MICR? MICR-Magnetic Ink Character recognition-this technology is used to for speeding up and bringing in efficiency in processing of cheques.


29 What is called MICR code? MICR code number – is a numeric code consisting of nine digits-first three representing the centre, next three bank and last three branch code. This code uniquely identifies a bank branch participating in the ECS Credit scheme

30 What is called IFSC? Indian Financial System Code. IFSC is an alpha numeric code which uniquely identify bank branch in India. IFSC is code used for various payment system within the country. IFSC is used in NEFT/RTGS Transactions. IFS Code is 11 digit code for a bank branch. First 4 characters represents bank code. The 5th character is a '0' (Zero ) and it's reserved as control character. Remaining last 6 characters used to identify the bank branch.

31 What is called Repo Rate? Repo Rate Repo Rate is the interest rate for secured overnight or short term financing involving the sale and repurchase of securities. It is basically the rate at which RBI lends to commercials banks for meeting the short term deficits. RBI varies Repo rate from time to time to achieve its monetary policy objectives.

32 What is the difference between Repo and Reverse Repo? Repo and Reverse Repo are short term reference rates of RBI. Repo means a purchase and sale agreement. It is contract to buy securities and sell them at an agreed future date & price It is an avenue for short term investment of surplus funds. A reverse Repo is an instrument of borrowing funds for a shorter period and it involves selling a security simultaneously agreeing to repurchase it at a stated future date for a slightly higher price. The price differential represents interest element . the rate of which is slightly lower than the call money rate and constitutes the cost of borrowing against the security. The instrument has provided liquidity and depth to the underlying securities markets like bond markets. RBI is using the instrument effectively as part of open market operations to influence bank reserves/overnight or short term interest rates and there by liquidity and monetary conditions in the economy

33 What is called Bank rate? An instrument of general credit control and represents the standard rate at which the RBI is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase under the provisions of the Act. The Bank Rate influences the cost of financial accommodation extended by RBI.

34 What is called MSF rate? (MSF) is being introduced with effect from May 9, 2011.all SCBs are eligible. Under the facility, the eligible entities can avail overnight, up to 2% per cent of their respective Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight. The rate of interest on amount availed under this facility will be 100 basis points above the LAF repo rate, or as decided by the Reserve Bank from time to time.


35 What is called LAF Corridor?

LAF is one of the tool for management of liquidity by RBI. Under LAF RBI does

Repo and Reverse Repo auctions to inject and absorb liquidity in/from the

system.

LAF corridor is the spread between Repo and Reverse Repo rate.

It is expected that a narrower LAF corridor will restrict short-term interest rate

volatility and improve monetary transmission.

Presently it is 1%

36 What are the key features of the new operating procedure of the Monetary Policy? Key features of the new operating procedure of the monetary policy -institution

of an independently varying single policy rate, institution of MSF, setting up the

revised interest rate corridor with a fixed width of 200 basis points(difference

between MSF rate and reverse Repo Rate).

37 What is called revalidation? Duly authenticated extension of the validity period for negotiation/payment of cheque/draft or a negotiable instrument.

38 What is IMPS?

Interbank Mobile Payment Service (IMPS) is an instant interbank electronic fund transfer service through mobile phones. IMPS would facilitate Bank Customer(s) to send money instantaneously to any other person registered for IMPS service in any of participating banks, using Mobile Banking services. All IMPS registered customers can also act as beneficiaries to receive money from any participating bank .A common infrastructure has been set-up amongst participant banks, in association with the National Payment Corporation of India (NPCI), to enable real time funds transfers across banks.

To enhance the efficiency of the mobile banking system, RBI had approved a unique initiative, the Inter Bank Mobile Payment System (IMPS) which provides a centralized interoperable infrastructure and enables money transfers between customer accounts in different banks through mobile phones in real time. This service rides on the existing National Financial Switch (NFS) Interbank ATM transaction switching infrastructure and message format – and hence easy for banks to adopt.

39 What is MMID ?

MMID stands for Mobile Money Identifier. MMID is a 7 digit unique code issued to the account holder by his/her bank for availing IMPS service as a beneficiary.


A customer will have different MMID's for different accounts and all these can be linked to a single mobile number.

40 What is called OLTAS?

OLTAS-On Line Tax Accounting System was introduced by RBI wef June 2004.

It is a system introduced in April, 2004 for collection, accounting and reporting of the receipts and payments of Direct Taxes on-line through a network of bank branches. The tax payers’ data flow from banks directly to Tax Information Network (TIN) maintained by National Securities Depository Ltd.

The salient features are the introduction of a single copy challan with tear-off taxpayer's counterfoil, branding of acknowledgement stamp with unique serial number known as Challan Identification Number (CIN) on the single copy challan and on taxpayer's counterfoil. Tax payers are now able to view the tax paid by them by logging on to http://tin-nsdl.com. Under the new procedure, banks were advised to issue acknowledgement in respect of challans tendered with clearing cheques/drafts (i.e. other than cash and transfer cheques/drafts) only after the realization of such cheques/drafts. The receiving banker to return the tear-off portion of taxpayers' counterfoil on realization of such cheques/drafts after branding with the rubber stamp acknowledging the payment with Challan Identification Number (CIN) comprising of the following:

i. BSR Code number of the bank branch (7 digits) ii. Date of presentation of the challan (DD/MM/YY)

Serial number of the challan in that branch on that day (5 digits).

41 What is CIN?

It is Challan Identification Number. It is a unique number containing the following information:

(i) 7 digits BSR Code of the bank branch where tax is deposited

(ii) Date of presentation of the challan (DD/MM/YY)

(iii) Serial number of Challan in that branch on that day (5 digits)

The CIN has to be quoted in the Income Tax Return as a proof of payment. CIN is also to be quoted in any further enquiry.

42 What is the new procedure for payment of Direct Taxes at banks?

The authorised bank branches accept Direct Taxes by cash or cheque/demand draft drawn on the same branch or on other banks/branches with Single Challan. The bank immediately returns the tear off portion of the challan duly stamped with a unique Challan Identification Number (CIN) when the payment is made in cash. In the case of challans presented with cheque/demand draft drawn on other banks/branches, tear-off portion of the challan will be released to the tax-payer only after the realisation of the cheque/demand draft but tax shall be deemed to have been paid on the date of tender.

http://tin-nsdl.com/


43 What is called EASIEST?

EASIEST-Electronic Accounting System in Excise and Service Tax: e payment of Indirect Taxes.(Excise and Service Tax).It is mandatory to remit excise duty and service tax of Rs10 lac and above electronically, on line.

44 Permissible Period of Remittance of E-payment of Government Transactions

The remittance period of all Government transactions including EASIEST and OLTAS received through e-payments by Public Sector Banks would be T+1 working day .

The period of delay in a transaction of Rs.1 lakh and above shall attract delayed period Interest at Bank Rate + 2%.

45 What is called SWIFT? SWIFT- Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) and their headquarters is located in La Hulpe, Belgium. SWIFT Codes are used for transferring money and messages between banks. SWIFT Code is a unique identification code for a particular bank and it is a standard format of Bank Identifier Codes (BIC)The SWIFT code consists of 8 or 11 characters. When 8-digits code is given, it refers to the primary office.

First 4 characters - bank code (only letters) Next 2 characters - ISO 3166-1 alpha-2 country code (only letters) Next 2 characters - location code (letters and digits) (passive participant

will have "1" in the second character) Last 3 characters - branch code, optional ('XXX' for primary office) (letters

and digits)

46 What is called BOS?

BANKING OMBUDSMAN SCHEME : The Banking Ombudsman Scheme was introduced in 1995 under the provision of Banking Regulation Act 1949 covering scheduled commercial banks and scheduled primary cooperative banks and Regional Rural Banks having business in India. The scheme is intended to establish a system of Banking Ombudsman for expeditious and inexpensive resolution of customer complaints. Any person whose grievance against a bank is not resolved to his satisfaction with in a period of two months after the bank received the complaint can approach the Banking Ombudsman if the complaint of the deficiency of service is pertaining to any of the matters specified in the scheme. Presently 15 Banking Ombudsman Offices administer the scheme in the country. Apart from enabling resolution of complaints relating to provision of banking services by mediating between the bank and the aggrieved party or by passing an award in accordance with the scheme, Banking Ombudsman endeavours to resolve disputes by way of arbitration between one bank and its constituents, as well as between one bank and another bank as may be agreed upon by the contesting parties in accordance with the provisions of the B.O scheme and Arbitration and Conciliation Act.


47 What is called BCBS?

BCBS- BASEL COMMITTEE ON BANKING SUPERVISION-The Basel Committee is a committee of bank supervisors drawn from 13 member countries (Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, The Netherlands, Spain, Sweden, Switzerland, United Kingdom and United State of America). It was founded in 1974 to ensure international cooperation among a number of supervisory authorities. It usually meets at the Bank for International settlements in Basel, Switzerland, its permanent Secretariat. The Committee framed two Capital Accords, Basel I (1988) and Basel II (1999).

48 What is the difference between CAMELS and OSMOS and Inroads?

CAMELS- It is a rating system under which, RBI Monitors and Supervise Banks

It is also a onsite examination process. CAMEL S stands for

Capital Adequacy, Asset quality , Management, Earnings, Liquidity and Systems and Controls.

In the on-site examination process, the banks are rated on CAMELS model, which combined financial management and systems and control elements. Under this approach core assessments based on the Capital Adequacy, Asset quality, Management, Earnings , Liquidity and Systems and controls are used to assign a rating for the bank. A composite rating is arrived at after rating each of the individual components under CAMELS. For the foreign banks operating in India the rating factors were CALCS (i.e. Capital adequacy, Asset quality, Liquidity, Compliance and Systems and controls) OSMOS- It is off-site Monitoring-Off-site Monitoring and Surveillance System (OSMOS) has become fully operational wef 1997. One of the important functions of Central Banks all over the world is to regulate the financial system, ensure financial stability and thus help economic growth of the country. Irrespective of the regulatory set-up, on-site examinations coupled with off-site surveillance and monitoring have become the major tools of bank supervision. The system in India is a combination of on-site inspection and off-site surveillance with bias towards the former. BFS, in its first meeting held in December 1994, directed that an off-site supervision system be set up within the Reserve Bank to collect financial information from banks on a quarterly basis so as to assess the financial health of the banks in between on-site inspections. The objectives of setting up an off-site supervision process are broadly five-fold:

To provide on-going information about the health of banks in-between on-site inspections;

To build a memory on the supervised institutions;

To capture systemic trends in banking and to support policy initiatives;

For better focus of supervisory effort and to optimize resource allocation;


and

Identification of banks showing financial deterioration and to act as an Early Warning System (EWS) and as a trigger for on-site inspections.

Though the off-site prudential supervisory returns for commercial banks were introduced in November 1995, for all practical purposes the system became fully operational only from March 1997.

INROADS:

RBI proposes to replace CAMELS with INROADS , a more Dynamic Rating and risk based mechanism from the next round of AFI(Annual Financial Inspection)

INROADS-Indian Risk Oriented and Dynamic Rating System.

49 What is DSB return?

DSB Returns: In 1995, when off-site prudential supervisory returns were first

introduced, these returns were christened ‘DSB’ returns since at the time of introduction of these returns the department was known as ‘Department of Supervision’. Over a period, the number of DSB returns, which were 7 in 1997, went up to 21 by 2000.Some Important DSB returns are.. (i) Return on Assets, Liabilities and Exposures, (ii) Return on Capital Adequacy, (iii) Return on Operating Results, (iv) Return on Asset Quality and (v) Return on Large Credits. vi)The Return on Connected Lending and vii)Report on Ownership and Control

50 What is called BSR?

BSR-Basic statistical Return. It provides granular data on different dimensions of deposits and credit of the banking sector. The information is collected from bank branches through Basic Statistical Returns 1 & 2 (BSR 1& 2), annually.

Under BSR 1, account level data for loan accounts with credit limit more than `200 thousand and occupation-wise consolidated data for loan accounts with credit limit up to `200 thousand (small borrowal accounts) are collected branch-wise. The parameters for account level information are occupation/activity and organizational sector of the borrower, type of account, interest rate, credit limit and amount outstanding.

Under BSR 2, branch-wise data on type of deposits, maturity pattern of term deposits as well as number of employees are collected.

Such information is aggregated at population group, bank group and state wise.

51 What is called CCIL?

CLEARING CORPORATION OF INDIA LTD (CCIL) : This was set up in November 2002 to serve as an industry-wise organisation for clearing and settlement of trades in foreign exchange government securities and other debt instruments. The CCIL manages various risks and reallocates risks among the


participants. CCIL reduces the liquidity requirements of the market and thereby liquidity risk of the system. Major commercial banks, financial institutions and primary dealers own it.

52 What is called Green banking?

Green Banking : Green banking is like a normal bank, which considers all the social and environmental/ecological factors with an aim to protect the environment and conserve natural resources. It is also called as an ethical bank or a sustainable bank. They are controlled by the same authorities but with an additional agenda toward taking care of the Earth's environment/habitats/resources. Benefits of Green Banking: Basically Ethical (Green) banking avoids as much paper work as possible and rely on online/electronic transactions for processing so that you get green credit cards and green mortgages. Less paperwork means less cutting of trees. Creating awareness to business people about environmental and social responsibility enabling them to do a environmental friendly business practice. When you are awarded with a loan, the interest of that loan is comparatively less with normal banks because ethical banks give more importance to environmental friendly factors - ecological gains. Natural resources conservation is also one of the underlying principles in a green bank while assessing capital/operating loans to extracting/industrial business sector.

53 What is called ECS?

Electronic Clearing Facility: An inter bank arrangement where by a customer can give instructions to his bank where he holds a current or savings account to pay the monthly installments of payments due on loans/credit cards held with another bank. Electronic Clearing Service (ECS) Credit ECS Credit is used for affording credit to a large number of beneficiaries by raising a single debit to an account, such as dividend, interest or salary payment. ECS Credit can be utilised for payments like interest / dividend etc. in the accounts maintained with other banks by another bank. Electronic Clearing Service (ECS) Debit ECS Debit is used for raising debits to a number of accounts of consumers/ account holders for crediting a particular institution. It is a scheme under which an account holder with a bank can authorise an ECS user to recover an amount at a prescribed frequency by raising a debit in his account. The ECS user has to collect an authorisation, which is called ECS mandate for raising such debits. These mandates have to be endorsed by the bank branch maintaining the account. ECS Debit is normally used for collections, which include payment of utility bills (electricity, telephone), collection of taxes etc.


54 What is called EFT?

Any transfer of funds initiated by electronic means, such as an electronic terminal, telephone, computer, ATM or magnetic tape.

55 Name the High level committee constituted by GOI to examine the issues relating to increase in demand for coins and supply/distribution bottlenecks so as to ensure regular and smooth availability of coins to the public at large.

Dr K C Chakrabarty. ( May 12)

56 Name the RBI panel Which recommended maximum repayment period of 30 years for Housing Loans

K K Vohra panel.

57 What is called S I P?

SIP-stand in Process Limit- The Bank may at its discretion, allow a small limit to individual card holders referred as Stand-In Process (SIP) limit with a view to ensuring high availability of services even when the balance in the account is not available for verification. This should not be construed as an agreement; either express or implied that the Bank is bound to grant any overdraft facility whatsoever. When the cardholder overdraws from an account, interest shall be charged on such overdrafts as prescribed by the Bank. If a cardholder, by using the Card, draws an amount in excess of the balance available or overdraft limit permitted by the Bank, he / she shall pay to the Bank the entire amount overdrawn with interest and penalties as prescribed by the Bank.

58 What is called Cash Pay out scheme?

Cash Pay out Scheme:Payment of amounts transferred from a bank account

In terms of RBI notification dt 24.12.2099, on Mobile banking, banks are permitted to provide services which facilitate transfer of funds from the accounts of their customers for delivery in cash to the recipients not having bank accounts at an ATM or through an agent appointed as Business Correspondent. This is called Cash Pay out Scheme.

RBI , vide notification dt 05.10.2011, raised the ceiling on the value of such transfers from Rs. 5,000 to Rs. 10,000 per transaction subject to the cap of Rs. 25,000 per month. RBI has also permitted banks to facilitate such fund transfers through any other authorized payment channels as well. The remitting bank shall obtain full details of the name and address of the beneficiary.

59 What is called Cash Pay in Scheme?

Cash Pay in Scheme:Payment of amounts to be credited to bank accounts

Individuals who do not have a bank account (walk-in customers) can also deposit cash at the NEFT-enabled branches with instructions to transfer funds using


NEFT. However, such cash remittances will be restricted to a maximum of Rs.50,000/- per transaction.

Besides, banks are also permitted to allow such customers to transfer funds to a Bank account of a beneficiary through BCs, ATMs, etc. up to a maximum amount of Rs.5,000 per transaction with a monthly cap of Rs. 25,000. This is called Cash Pay in Scheme. Such a walk-in customer needs to provide minimum details like his name and complete address to the remitting bank.

60 What is the limit up to which Banks can accept cash for sending remittance?

DD/TT Below Rs 50,000/-(RBI guidelines- Banks should ensure that any remittance of funds by way of demand drafts / mail / telegraphic transfer or any other mode and issue of travelers’ cheques for value of ` 50,000 and above is effected by debit to the customer's account or against cheques and not against cash payment.. For NEFT remittance, Banks can accept cash up to Rs50,000/- per transaction.

61 Who is a Non Resident Indian as per FEMA guidelines?

An NRI– is a citizen of India or a foreign citizen of Indian origin , who has gone abroad/is residing abroad a. for the purpose of employment/business/vocation/any other motive b. that shows his intention to stay outside India for an indefinite period c. for Education.

62 Who is a Person of Indian Origin?

A PIO– a. is a person, being a citizen of any country other than Pakistan and Bangladesh who at any time held an Indian Passport or b. was a citizen of India or either of his parents or any of his grandparents were a citizen of India or

c. is a person who is a spouse of Indian citizen or any of the persons mentioned in b.

63 Who is a Non resident as per IT Act?

Under the Income tax Act, an individual is resident in India in a year if he:

is in India for at least 182 days or;

is in India for 365 days or more in the 4 years preceding that year and is in India for 60 days or more in that year.

In other cases, the individual will be a non-resident under the Income-tax Act


64 What is 15 H?

Form 15H :- Declaration under sub-section (1C) of section 197A of the Income-tax

Act, 1961, to be made by an individual who is of the age of sixty-five years or

more (Sixty Years from 1st July, 2012) claiming certain receipts without deduction

of tax.

65 What is 15 G?

Form 15G:- Declaration under sub-sections (1) and (1A) of section 197A of the

Income-tax Act, 1961, to be made by an individual or a person (not being a

company or a firm) claiming certain receipts without deduction of tax of tax.

66 What is called Basic Savings account?

During August 2012,RBI has given instructions to banks to replace the No frills accounts , with Basic savings bank Deposit Accounts. In no frills accounts, the banks were free to decide the facilities on such accounts. Now RBI has brought uniformity in the rules for such accounts. There will be no minimum balance requirements for these accounts. All the services including deposits and withdrawals at Bank Branches, ATMs, Receipt/Credit of money through electronic payment channels, deposit of cheques drawn on Central or State Government agencies or departments etc should be made available to the holders of these accounts. While there will be no limit on the number of deposits that can be made in a month, account holders will be allowed a maximum of four withdrawals in a month, including ATM withdrawals; and Facility of ATM/Debit cards .

The above facilities will be provided without any charges. Further, no charge will be levied for non-operation/activation of in-operative ‘Basic Savings Bank Deposit Account’.

Holders of ‘Basic Savings Bank Deposit Account’ will not be eligible for opening any other savings bank deposit account in that bank. If a customer has any other existing savings bank deposit account in that bank, he/she will be required to close it within 30 days from the date of opening a ‘Basic Savings Bank Deposit Account’.

All existing no frills accounts will be converted to Basic Savings Bank Deposit Accounts.

The ‘Basic Savings Bank Deposit Account’ would be subject to RBI instructions on KYC/AML guidelines.

67 What is called Small account?

Small account: If such account is opened on the basis of simplified KYC norms, the account would additionally be treated as a ‘Small Account’ and would be subject to the following conditions

(i) the aggregate of all credits in a financial year does not exceed rupees one lakh;

(ii) the aggregate of all withdrawals and transfers in a month does not exceed

http://taxguru.in/income-tax/senior-citizen-age-reduced-60-years-sections-80d-80ddb-197a-form-15h.html


rupees ten thousand; and

(iii) the balance at any point of time does not exceed rupees fifty thousand .

an individual who desires to open a small account in a banking company may be allowed to open such an account on production of a self-attested photograph and affixation of signature or thumb print, as the case may be, on the form for opening the account.

Provided that –

i. the designated officer of the banking company, while opening the small account, certifies under his signature that the person opening the account has affixed his signature or thumb print, as the case may be, in his presence;

ii. a small account shall be opened only at Core Banking Solution linked banking company branches or in a branch where it is possible to manually monitor and ensure that foreign remittances are not credited to a small account and that the stipulated limits on monthly and annual aggregate of transactions and balance in such accounts are not breached, before a transaction is allowed to take place;

iii. a small account shall remain operational initially for a period of twelve months, and thereafter for a further period of twelve months if the holder of such an account provides evidence before the banking company of having applied for any of the officially valid documents within twelve months of the opening of the said account, with the entire relaxation provisions to be reviewed in respect of the said account after twenty four months.

iv. a small account shall be monitored and when there is suspicion of money laundering or financing of terrorism or other high risk scenarios, the identity of client shall be established through the production of officially valid documents, as referred to in sub rule ( 2) of rule 9"; and

foreign remittance shall not be allowed to be credited into a small account unless the identity of the client is fully established through the production of officially valid documents, as referred to in sub-rule (2) of rule 9.”

68 Whar are the salient features of Banking Laws(Amendment) act 2012?

The Banking Laws (Amendment) Act, 2012 amends the Banking Regulation Act, 1949, the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 and also makes consequential amendments to certain other enactments including the Indian Stamp Act, 1899 and the Indian Contract Act, 1972 (“Contract Act”).

The Act has made an effort to balance the twin goals of inviting investment without compromising on the interest of the depositors and the public.

This Act is expected to pave the way for issuing new banking licenses by giving the Reserve Bank of India (“RBI”) greater regulatory power over the banking sector before it issues new licenses to various private players. Increased


competition in the banking sector will be beneficial to banking customers giving them more choice at competitive prices.

The amendments introduced by the Act can be categorised under two broad heads,

(a) those intended to attract private sector investment and build investor confidence in the banking sector; and

(b) those intended to strengthen the RBI‟s regulatory powers over banks.

This Act would strengthen the regulatory powers of Reserve Bank of India (RBI) and to further develop the banking sector in India. It will also enable the nationalized banks to raise capital by issue of preference shares or rights issue or issue of bonus shares. It would also enable them to increase or decrease the authorized capital with approval from the Government and RBI without being limited by the ceiling of a maximum of Rs. 3000 crore. Beside above, the Act would pave the way for new bank licenses by RBI resulting in opening of new banks and branches. This would not only help in achieving the goal of financial inclusion by providing more banking facilities but would also provide extra employment opportunities to the people at large in the banking sector. The salient features of the Act are as follows:

• To enable banking companies to issue preference shares subject to regulatory guidelines by the RBI;

• To increase the cap on restrictions on voting rights;

• To create a Depositor Education and Awareness Fund by utilizing the inoperative deposit accounts;

• To provide prior approval of RBI for acquisition of 5% or more of shares or voting rights in a banking company by any person and empowering RBI to impose such conditions as it deems fit in this regard;

• To empower RBI to collect information and inspect associate enterprises of banking companies

; • To empower RBI to supersede the Board of Directors of banking company and appointment of administrator till alternate arrangements are made;

• To provide for primary cooperative societies to carry on the business of banking only after obtaining a license from RBI;


• To provide for special audit of cooperative banks at instance of RBI by extending applicability of Section 30 to them; and

• To enable the nationalized banks to raise capital through “bonus” and “rights” issue and also enable them to increase or decrease the authorized capital with approval from the Government and RBI without being limited by the ceiling of a maximum of Rs. 3000 crore under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980.

Certain additional official amendments have been proposed on the basis of recommendations of the Standing Committee of Finance which gave its report on the Bill on the 13th December, 2011 and has recommended enactment of the Bill, subject to the following modifications:

i) Voting rights in banks may be restricted up to 26%.

ii) The Depositors’ Education and Awareness Fund may be used for the purpose of promoting depositors’ interests.

Further, pursuant to the discussion with Indian Banks’ Association (IBA), RBI and Industry Associations, the following additional amendments are proposed:

a) to exempt guarantee agreements of banks from the purview of the section 28 of the Indian Contract Act, 1872 to bring finality to redemption of such guarantees;

b) to allow select Directors on the Board of RBI a fixed maximum tenure of eight years with terms of not more than two terms of four years each either continuously or intermittently;

c) to exempt conversion of branches of foreign banks to wholly owned subsidiary entities of foreign banks and transfer of shareholding of banks to the Holding Company structure pursuant to guidelines of RBI from payment of stamp duty; and

d) to ensure that unnecessary inspections are avoided and to encourage regulatory coordination, a condition has been added such that the inspection of the associate enterprise of a banking company would be conducted by RBI jointly with the sector regulator.

69 What are the salient features of Prevention Of Money Laundering Act 2012?

Prevention of Money Laundering [Amendment]Act, 2012, -Feb 2013

Prior to the amendment there was a monetary threshold of Rs 30 lacs to

initiate action/investigation for the offences of money laundering. The

threshold is removed in the amended Act. Consequently Under the

amended Act, there is no monetary threshold to initiate investigations

under PMLA.


The PMLA (Amendment) Act, 2012 has enlarged the definition of money

laundering by including activities such as concealment, acquisition,

possession and use of proceeds of crime as criminal activities

The Prevention of Money Laundering Act, 2002 levies a fine up to Rs five

lakh. The In the amended act this upper limit is removed.

The Act provides for provisional attachment and confiscation of property of any person (for a period not exceeding 180 days). This power may be exercised by the authority if it has reason to believe that the offence of money laundering has taken place.

The Act confer powers upon the Director to call for records of transactions or any additional information that may be required for the purposes of investigation. The Director may also make inquiries for non-compliance of the obligations of the reporting entities.

The Bill seeks to make the reporting entity, its designated directors on the Board and employees responsible for omissions or commissions in relation to the reporting obligations.

The Bill states that in the proceedings relating to money laundering, the funds shall be presumed to be involved in the offence, unless proven otherwise.

The Bill proposes to provide for appeal against the orders of the Appellate Tribunal directly to the Supreme Court within 60 days from the communication of the decision or order of the Appellate Tribunal.

The Bill seeks to provide for the process of transfer of cases of the Scheduled offences pending in a court (which had taken cognizance of the offence) to the Special Court for trial. In addition, on receiving such cases, the Special Court shall proceed to deal with it from the stage at which it was committed.

70 Salient features of the Amendment of 2013 of The Securitization And Reconstruction of Financial Assets And Enforcement Of Security Interest Act, 2002

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) is an Act which lays down a relatively simple procedure for banks and other financial institutions to recover their debts from borrowers. It provides for circumstances and procedure as to how a lender can recover a non-performing asset without substantial involvement of the courts of law. The Act empowers lenders to take possession of the borrowers’ property, take control of the management of the borrowers’ business etc. in satisfaction of the debt of the lender.


The Act was amended in January 2013 by The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012. The act brought about the following major changes in the SARFAESI Act:

• The lenders will be allowed to convert any part of the debt of the defaulting company into equity. Such a conversion would imply that lenders would tend to become an equity holder rather than being a creditor of the company.

• It allows banks to bid for any immovable property (of the defaulting borrower) they have put out for auction themselves, if they do not receive any bids during the main auction. In such a scenario, banks will be able to adjust the debt with the amount paid for this property.

• Multi state Co-Operative Banks are now included within the meaning of “a bank” under this Act.

• A securitization or reconstruction company may have its name substituted in place of the name of the original lender in any pending suit in the D.R.T. or D.R.A.T. This may be done either by the company or the tribunal suo-moto. • In case of multiple creditors, Rights can be exercised by the individual creditors only if that creditor represents at least 60% of the debt amount.

• The Amended Act allows a secured creditor to file a Caveat in the D.R.T., if an appeal is expected to be preferred against it based on of the proceedings of the lender under the Act. Once such caveat has been filed, the borrower has to inform the creditor details about the appeal that he will be filing/already filed.

• The Act provides that the secured creditor can seek the assistance of the District Magistrate to take possession of a secured asset. The amendment has laid down certain guidelines as to when such assistance can be asked for. The creditor has to furnish an affidavit stating that the debt is proportional to the property being possessed, the borrower has indeed defaulted in payment of the debt, the borrower has created a security interest over the property, the borrower has been served a 60 day notice before taking any action under the act etc. These requirements have been laid down to ensure that there is no action on the part of the bank which is not justified. If the bank takes any action with the assistance of the District Magistrate based on false allegation, it can be held accountable later on.

• If the lender fails to inform the Central Registry/Central Government about the securitization of an asset as laid down in Sections 23, 24, 25 of the Act. The Court can take cognizance of such an offence only with the approval of the Reserve Bank of India or the Central Registry. Also such cognizance can be taken only by a court not inferior to a Metropolitan Magistrate/Judicial Magistrate. Also if there has been a defect in filing details about creating a security interest, the same can be rectified at a later date by the applicant on application to the Central Registry. The Act has been criticized till date because it does not take into account the interest of the borrower’s, on account of it being arbitrary and biased towards


lenders. Borrowers are however, allowed to appeal against the action taken by the lenders by virtue of Section 17 of the Act, which lays down circumstances in which such an appeal, can be preferred. The Courts through various judgments have interpreted the Section 17 of the Act in a liberal way so as to give relief to borrowers in many circumstances. In spite of that, appeals rarely get accepted and in certain circumstances banks even get the opportunity to rectify the matter against which the appeal has been preferred.

The Amendment of 2013 to the Act has brought about many major changes in the procedure of recovery of non-performing assets. However, the major amendment that was needed was putting in place more safeguards to protect the rights of the borrowers and curbing the arbitrary misuse of powers by the lenders. The same has not been done.

An in-depth analysis of the new amendments, with respect to the rights of the borrowers reveals the following:

• Section 18C of the new Act allows for the filing of a caveat by the lender in cases in which an appeal is expected, takes away a major portion of the rights of the borrowers, as they will be unable to procure an ex-parte order if a caveat has been filed and the tribunal will compulsorily be required to hear the lender. The Caveator in such a circumstance shall have full opportunity to oppose any order which might be adverse to its interests.

• Section 14 of the new Act can be considered to be a major safeguard for the rights of the borrower. According to this section the lender has to submit via affidavit exhaustive details of the property that is sought to be possessed. The details have to satisfy the conditions laid down in the Act which allows the lenders to take possession of a defaulting borrower’s asset. This clause ensures that lenders do not proceed to take action based on partial satisfaction of the requisite conditions. Strict adherence to provisions of the Act regarding taking possession is emphasized. • Once an asset has been securitized and the same has been registered with the Central Registry, the procedure to cure any default on the part of the securitization company, in the process of securitization is quite complicated and it requires approvals of the R.B.I. and can be heard by a superior court only. Lenders are given full liberty to cure defects in securitization applications at a later date which an added advantage is given to them to escape from penalties. This again allows for the suppression of borrowers interests, as the process of rectifying fallacies if any in the securitization process is quite complicated and it may be difficult to take action against defaulting securitization companies in most cases. • In the case of an unsuccessful auction of a non-performing asset, banks are allowed to buy the said asset at the reserve price set by them, which is beneficial for them as they can satisfy that debt with their own money. This enables the bank to secure the asset in part or complete fulfillment of the defaulted loan. Banks can then sell off this property to a new bidder at a later date to clear off the remaining portion of the debt, if any. Previously there was almost always a delay


in the selling off of a property as buyers did not want to buy debt assets in auctions. This gave the defaulting lenders a window of opportunity to satisfy their debts and recover their property. However, now that the lenders themselves are allowed to buy out the assets, they may do so in most cases leaving the borrowers hardly any time to settle their debts.

• The clause which allows the lender to acquire equity in the defaulting borrower’s firm upto the extent of the debt allows the lender to effectively take control of the borrowers company in certain circumstances. This is again a serious drawback in the new law which greatly prejudices the interests of the borrower. In certain situations the lenders may end up procuring major controlling shares in the company in the event of a large loan default. On the other hand lenders in many situations may not want to exercise this right as it would involve buying taking control of equity of a company, whose share value may already have been greatly eroded due to the loan defaults on the part of the borrower. The Amendment of 2013 to the SARFAESI Act in essence is similar to the earlier act, mainly because the act continues to be greatly partial towards money lenders like before. The Act gives blanket powers to banking institutions to recover their non-performing assets by suppressing the rights of the borrowers. The lenders are allowed wide discretionary powers to the method in which they would like to recover their debt.

A direct outcome of the draconian SARFAESI Act is the advent of unregistered financial institutions. These organizations put lenders in a much more secure position as the borrowers assets are not in threat of being possessed and they are given other options in case of a loan default.

The aim of the Act is mainly to ensure that errant borrowers are effectively penalized and the lenders can recover their debt effectively.

71 What is the difference between SoI and RFD?

SoI-Statement of Intent and RFD-Result Frame Work Document –They are PSBs plan of action and vision document of the PSBs.

Every year, PSBs prepare their plan of action ie projection of targets on various business parameters and after discussions with Ministry of Finance, submit Statement of Intent to MoF.

This system is being replaced with a new mechanism called RFD-Result Frame Work Document. Under RFD, PSBs will have to provide an overall vision on their own with out discussing with the MoF. However, after approval by MoF, it will be uploaded in Bank’s website by April 15th of every year. RFD requires the final results of the Bank to be uploaded by May 1st of every year. In SoI , the banks, in their projections are only confining to a particular year, whereas RFD , being a vision document extends beyond the particular year.

72 What is called PCR and “ Counter Cyclical provisioning Buffer’?

PCR-Provisional Coverage ratio is the ratio of provisioning to Gross NPAs and indicates the extent of funds a bank has kept aside to cover loan losses.


Mandated ratio is 70%.

Banks should augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent. Accordingly, banks were advised to achieve this norm not later than end March 2011. PCR of our Bank as on 31.03.2012 is 67.68%.(59% as on 31.12.2012)

“Counter-Cyclical buffer “is a cushion to be set up by the banks , out of any surplus available after complying with the stipulated PCR of 70%.RBI has advised banks to create special buffer to be used for making specific provisions for bad loans during system wide down turns.

73 What is LCR ? How it differs from SLR?

LCR-Liquidity Coverage Ratio.

Banks are expected to maintain LCR -Liquidity Coverage Ratio under Basel III. Banks are expected to hold a minimum level of high liquid assets that can be sold in the open market to tide over a liquidity crisis, if happens. In normal conditions, these assets must be equal to the total net cash flow of the bank on a regular crisis.

Under SLR , banks are mandated to keep 23% of their Net Demand and Time liabilities in Govt securities. However SLR , does not meet the Basel requirement on LCR as the Assets held by the banks are not unencumbered and not liquid

74 What is called Payment Gate Way?

A payment gateway is an e-commerce application. Through this a service provider authorizes payments for e-businesses, online credit and debit card payments . Payment gateways protect credit card details by encrypting sensitive information, such as credit card numbers and ensure that information is passed securely between the customer and the merchant and also between merchant and the payment processor.

A payment gateway facilitates the transfer of information between a payment portal (such as a website, mobile phone or IVR service) and the Front End Processor or acquiring bank. When a customer orders a product from a payment gateway-enabled merchant, the payment gateway performs a variety of tasks to process the transaction.

Payment gateways are new business opportunities for the banks in e banking. It is like providing a PoS terminal to a merchant. Payment Gate way applications are useful for online retail merchants like flip kart to enlarge their business.

75 What is called CSR?

CSR - Corporate Social Responsibility is self regulatory and voluntary mechanism by which Corporates spend a portion of their profit on Social and Society welfare.

As per the recently passed Companies Bill 2011,it is mandatory for the profit

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making companies to spend on activities related to CSR. Profit making PSBs can make Donations , up to 1% of the profit of the bank in the previous year . ( loss making banks can make donations up to RS 5 lacs in a financial year) It is not mandatory that bank should do CSR and exhaust this ceiling . The limit is maximum only and it is up to the banks to utilise it .Normally PSBs not only as a measure of CSR , undertake sponsorship and donations , as a sort of Publicity and Image building exercise.

. 76 What is called Business process re-engineering?

Business Process Reengineering , is a more powerful management today. It is a sharply focused practice that delivers extraordinary benefits. It is radical and dramatic if it is process centric and the operations and functions are redesigned effectively. The success of BPR depends upon the involvement of staff , more so from the gross root level of the organization. The very essence of BPR is the modeling of cross functional business process- those chains of tasks that span the organizational chart and create value for customers. In Banking Organization BPR will help to improve the customer service. The personnel working in Branches shall have more time to concentrate on the customer service. This enables the Bank to bifurcates the front office and back office operations. Issuance of ATM cards/Debit Cards, Issuance of statement of accounts, Opening of accounts, issuance of cheque book other related correspondence can be looked after by the back office at processing centres. This will help the front office staff to spend more time in serving the customers.

77 What is called Out Sourcing?

Outsourcing involves using the service of a third party (either affiliated or external to the corporate entity) to perform activities on a continuing basis that would normally be undertaken by the bank itself. Third party or service provider refers to the entity that is undertaking the outsourced activity on behalf of the bank . The bank will have to ensure effective management of certain risks associated with outsourcing like strategic risk, reputation risk, compliance risk, operational risk, country risk, contractual risk, access risk, systemic risk, etc., so as to avoid damage to bank's business operation, reputation or profitability.

78 What is the RBI guidelines on reporting frauds in PSBs?

1.Cases involving cheating of Rs 1 crore and above to be reported to CBI.

2.Frauds involving an amount of Rs1 lacs and above( if staff/employees involved-Exceeding Rs 10,000/-) should be reported to police.

3. Cases involving an amount more than Rs7.5 crores should be reported to Banking Security and Fraud cell, which is a specialized cell of the Economic Offences Wing of CBI.

4. All frauds of Rs 1 lac and above to be reported to the Board promptly.


79 What is the name of the Journal published by Department of Financial Services?

Banking, Insurance , Pension.

80 WHAT IS CREDIT-DEPOSIT RATIO?

Credit Deposit Ratio=Total advances/Total Deposits *100.

The ratio gives the first indication of the health of a bank. It is the ratio of how much a bank lends out of the deposits it has mobilised. It indicates how much of a bank's core funds are being used for lending, the main banking activity. A higher ratio indicates more reliance on deposits for lending and vice-versa . , A very low ratio indicates banks are not making full use of their resources. And if the ratio is above a certain level, it indicates a pressure on resources.

81 What does the very high CD ratio of Banks Indicate?

It indicates a pressure on resources. It also indicates that banks are lending from other resources than deposits.

A credit-deposit ratio of over 70 per cent indicates pressure on resources as they have to set aside funds to maintain a cash reserve ratio of 4.5 per cent and a statutory liquidity ratio of 23 per cent. Profitability of Banks may also be affected as it may push Cost of Deposits upwards .

A very high ratio is not considered positive, because, in addition to indicating pressure on resources, it may also hint at capital adequacy issues, forcing banks to raise more capital. Moreover, the balance sheet would also be unhealthy with asset-liability mismatches.

A high loan-to-deposit ratio will make it difficult for lenders to lower borrowing costs .

82 What is called White Label ATM? These are ATMs managed by Non Bank entities. At present, only banks are permitted to set up automated teller machines (ATMs) in India. The Reserve Bank in its Policy statement 2012-13, reviewed the policy on ATMs and decided to permit non-banks to set up, own and operate ATMs to accelerate the growth and penetration of ATMs in the country.

Such ATMs will be in the nature of white label ATMs (WLA) and would provide services to customers of all banks. While such WLAs will be owned and operated by non-bank entities, cash management and customer grievance redressal will be in the domain of the sponsor banks. Roles and responsibilities of the stakeholders (WLA operators, sponsor banks and ATM network operators) were indicated in the draft circular keeping in view various aspects, including cash management, ATM network membership and customer grievance redressal.

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83 What is called RuPay? It is a domestic Rupee debit card. It is a card payment net work like Visa, Master Card. In tune with its Payment System Vision document 2009-12, where in the Reserve Bank had envisaged the possibility of launching a domestic card. The RuPay card is meant to promote a payments and settlement platform for card transactions at a low processing fee, making it viable for smaller merchant establishments to accept card payments for even low-value transactions. This is expected to provide a further fillip to card transactions in the country, thereby reducing the use of currency. This is a domestic card scheme, to ensure efficient price discovery and healthy competition with other international card payment networks, NPCI was granted approval under the PSS Act, 2007 to issue RuPay cards by banks in India under the RuPay domestic card payment scheme. NPCI launched India’s first domestic card, the RuPay card (ATM and micro-ATM cards) through banks in India. Subsequently, in March 2012, NPCI was permitted to launch RuPay debit cards that are accepted at POS terminals in India.

84 What is the difference between Mandate and Power of Attorney? Mandate is an authority letter given by a customer to a particular banker to permit another person to operate the account. It is between a customer and a particular banker. A mandate given to one bank will not be applicable and acted upon by another bank. Mandate is an authority to operate an account. Power to draw, endorse cheques and bills does not include powers to accept bills or overdraw the account. It is therefore necessary that the customer’s instructions to his/her banker should specifically state so, if the customer wishes the banker to allow his/her agent to overdraw the account and or accept bills drawn upon the agent. In other words the banker will only act strictly in accordance with what is contained in the mandate letter. In case of Joint accounts, if a mandate is given to an agent, all the other joint account holders should join to give such a mandate. In case of partnership firm the mandate letter has to be signed by all the partners. In case of Limited Companies it will be through Board resolutions. Cheques signed by the Mandate holder can be passed , after receipt of notice of his death., as the Principal (Account Holder) is alive. But Cheques signed by the Mandate Holder can not be passed after receipt of notice of death of the Principal(Account Holder) For operating Locker accounts, mandate is not sufficient. Power of attorney is required. Power of Attorney: While mandate is concerning power conferred to an agent, as regard to operation of an account with a specified banker, a Power of Attorney is a document hat can be issued for any legal transaction . It has to be duly stamped and registered. A Power of Attorney can be general or specific. Death of the donor or the principal will terminate the POA. POA issued abroad is required to be stamped( called adjudication) in India with in


3 month of its arrival in India. Procedure for issue of POA abroad: POA to be executed in an Indian embassy/consulate and to be notarized by an authorized officer of Indian Embassy/consulate. With in three months of its arrival in India it has to be properly stamped and adjudicated in a Sub Registrar office in India.

85 a. What is the relationship between the Banker and the Nominee of the

deceased depositor?

b. What is the relationship between the nominee and the legal heirs of the

deceased depositor?

c. What is the relationship between the Banker and the Legal heirs of the

deceased depositor, in cases where no nomination exist?

There is no direct contractual relationship on the cases cited. Legal status and

position arises due Banking law and Practice .In nomination, Banker is discharged

by making payment to the nominee, unless restrained by a court order. Where as

the nominee cannot derive ownership for the amount received and nominee is

answerable to the legal heirs of the deceased .The money received by the

nominee is in Trust for the benefit of legal heirs. There is a difference between

Will and Nomination. In Will, the legatee is vested with ownership rights where

as in Nomination it is not so. The relationship is to be derived on the basis of

above .The relationship is as under

a. Trustee-Beneficiary(Trustee for the legal heirs) b. Trustee-Beneficiary(Legal heirs) c. Trustee-Beneficiary (legal heirs)

When a claim is settled under Nomination, the role of the nominee is to act like a

trustee for the benefit of legal heirs of the deceased. Legal heirs can always

make a claim against the nominee and entitled for their rightful share. That is why

the relationship is Trustee-Beneficiary. In case of C also the Banker settles the

amount in favour all the legal heirs. Hence the relationship is Trustee-

Beneficiary.

86 What is the difference between Executor and Administrator?

Executor is the person appointed in the will. An executor is a person who is appointed by a testator to execute his Will. In other words, an executor is duty bound to distribute the assets of the testator as per the provisions of his Will. He is the legal representative of the deceased person (testator)


Probate is a copy of the Will, certified under the seal of a competent Court. Probate can be granted only to the executor appointed by the will.

Administrator: Appointed by the Competent Court by letter of administration, to dispose the property of the deceased person.

Letter of Administration is issued by a competent authority (court) and appoints the Administrator to dispose of the property of a person. Letter of Administration is valid through out the State( outside the State if the value of the property does not exceed Rs 10,000/- .It is required when :

a. If there is no will and the party dies intestate. b. Testator failed to appoint an executor under a Will or the executor

appointed refuses to act or the executor has died before administrating the will.

87 What is the Difference between Probate , Succession Certificate and Letter of Administration?

A probate differs from succession certificate. A probate is issued by the court, when a person dies testate i.e. having made a will and the executor or beneficiary applies to the court for grant of probate. In case a person has not made a will his legal heirs will have to apply to the court for grant of a succession certificate which will be given as per applicable laws of inheritance. Under Section 370 of the Indian Succession Act. A Succession Certificate can be granted only in respect of debts and securities and not for any kind of property. It cannot be granted in respect of ornaments pledged by the deceased with the Bank by way of security for the debt which the bank had advanced as it is not the debt due from the bank and for articles entrusted with bank for safe custody/safe deposit locker.

If the customer dies intestate( with out making a will) the proper form of legal representation for deposit accounts is Succession Certificate and for safe custody/Locker/Pledged Jewels – Letter of administration.

88 Some Legal Terms often used in Claim settlement:

1. Testate: When a person dies leaving a will, they are said to have died testate.

2. Intestate : When a person dies without leaving a will , they are said to have died intestate.

3. Testator is a person who makes a Will. 4. Legatee/Beneficiary is a person who inherits the property under a

Will. 5. Codicil is an instrument made in relation to a Will, explaining,

altering or adding to its dispositions and is deemed to be a part of the Will.


6. Executor An executor is a person who is appointed by a testator to execute his Will.

7. Administrator: Appointed by Letter of administration, normally when there is no will.

8. Probate : Certified copy of the Will. 9. Succession Certificate: In case a person dies intestate, his legal

heirs approach a competent court for a Succession Certificate. A Succession Certificate will have a list of all his legal heirs entitled to his property.

89 What is called 'Escrow' account? What is the term Escrow denotes with reference to Negotiable Instruments?

Escrow Account-The term Escrow denotes Money or deed held by a third party

, until certain conditions are fulfilled. Simply it is money, property or document

kept for future.

It is a no lien account or trust account wherein the cash inflows are pooled to meet certain permitted payments like taxes, insurance, installments etc.

Escrow Account opened by banks are normally non operative accounts, where

in the money parked will be released only on fulfillment of some conditions of

contract The beneficiary of the account can get the money after fulfilling the

prescribed conditions.

In some cases, Escrow is a trust account held in borrower’s name to pay future

obligations such as property tax or Insurance. It is an account placed on Trust by

the borrower for specific purpose and to be delivered to the borrower only on the

fulfillment of certain conditions.

In some cases Escrow accounts are opened as an alternative to LC .

Professional Intermediaries like Lawyers, Chartered Accountants, Stock Brokers

are allowed to open escrow accounts for their clients. In such cases funds held

by the intermediaries , each account should be attributable to the beneficial

owner . In case of pooled accounts , all the beneficial owners are to be identified

(KYC norms to be fulfilled)

‘Escrow’ with reference to NI Act: Section 46 of NI act deals with Delivery of NIs

.Delivery may be conditional or for specific purpose. Delivery may be made

conditional under Escrow arrangement. Where the bill is delivered conditionally

under an escrow arrangement the relation between the person who delivers the

bill and the third person is that of principal and agent.

90 What is a TPA and what are its functions?

TPA is a Third Party Administrator. They are commercial entities duly licensed by IRDA. Their services are utilised by Insurance Companies, both Life and Non-Life, to render, on their behalf, post-sales services to health insurance policyholders.


They provide services like: • Guiding the insured with regard to claims • Issuing photo ID cards to insured persons • Issuing pre-authorisation to hospitals to facilitate insured persons to avail of the cashless facility .

91 What is meant by Insurable Interest?

The financial interest that the assured possesses in whatever is being insured is known as “Insurable interest”. In other words, it is the right of a person to insure something which, when lost or damaged, would mean a financial loss to him. If a person is allowed to insure something that he does not own it becomes a wagering contract and therefore void under Section 30 of Indian Contract Act. Therefore Insurable interest is a pre-requisite for insurance and the compensation is

limited by the value of the subject matter of insurance and the extent of insurance

coverage. In Life Insurance, though human life value cannot be measured in

monetary terms, insurers determine the sum assured as a multiple of the income of

the life assured and his remaining productive years

92 What is the difference between Business Correspondents and facilitators?

Business Correspondents- The banks may engage the following individuals/entities as BC.

i) Individuals like retired bank employees, retired teachers, retired government employees and ex-servicemen, individual owners of kirana / medical /Fair Price shops, individual Public Call Office (PCO) operators, agents of Small Savings schemes of Government of India/Insurance Companies, individuals who own Petrol Pumps, authorized functionaries of well run Self Help Groups (SHGs) which are linked to banks, any other individual including those operating Common Service Centres (CSCs);

ii) NGOs/ MFIs set up under Societies/ Trust Acts and Section 25 Companies ;

iii) Cooperative Societies registered under Mutually Aided Cooperative Societies Acts/ Cooperative Societies Acts of States/Multi State Cooperative Societies Act;

iv) Post Offices; and

v) Companies registered under the Indian Companies Act, 1956 with large and widespread retail outlets, excluding Non Banking Financial Companies (NBFCs).

Scope of Activities; The scope of activities may include (i) identification of borrowers; (ii) collection and preliminary processing of loan applications including verification of primary information/data; (iii) creating awareness about savings and other products and education and advice on managing money and debt counseling; (iv) processing and submission of applications to banks; (v) promoting, nurturing and monitoring of Self Help Groups/ Joint Liability


Groups/Credit Groups/others; (vi) post-sanction monitoring; (vii) follow-up for recovery, (viii) disbursal of small value credit, (ix) recovery of principal / collection of interest (x) collection of small value deposits (xi) sale of micro insurance/ mutual fund products/ pension products/ other third party products and (xii) receipt and delivery of small value remittances/ other payment instruments.

The activities to be undertaken by the BCs would be within the normal course of the bank's banking business, but conducted through the BCs at places other than the bank premises/ATMs.

The distance between the place of business of a retail outlet/sub-agent of BC and the base branch should ordinarily not exceed 30 kms in rural, semi-urban and urban areas and 5 kms in metropolitan centers.

Business Facilitator: Under the "Business Facilitator" model, banks may use intermediaries, such as, NGOs/ Farmers' Clubs, cooperatives, community based organisations, IT enabled rural outlets of corporate entities, Post Offices, insurance agents, well functioning Panchayats, Village Knowledge Centres, Agri Clinics/ Agri Business Centers, Krishi Vigyan Kendras and KVIC/ KVIB units, depending on the comfort level of the bank, for providing facilitation services. Such services may include (i) identification of borrowers and fitment of activities; (ii) collection and preliminary processing of loan applications including verification of primary information/data; (iii) creating awareness about savings and other products and education and advice on managing money and debt counseling; (iv) processing and submission of applications to banks; (v) promotion and nurturing Self Help Groups/ Joint Liability Groups; (vi) post-sanction monitoring; (vii) monitoring and handholding of Self Help Groups/ Joint Liability Groups/ Credit Groups/ others; and (viii) follow-up for recovery. As these services are not intended to involve the conduct of banking business by Business Facilitators, no approval is required from RBI for using the above intermediaries for facilitation of the services indicated above.

The main difference between facilitator and correspondent is that the scope of activities to be undertaken by the Business Correspondents will include (i) disbursal of small value credit, (ii) recovery of principal / collection of interest (iii) collection of small value deposits (iv) sale of micro insurance/ mutual fund products/ pension products/ other third party products and (v) receipt and delivery of small value remittances/ other payment instruments.

Business facilitator cannot undertake or conduct banking business , where as Business Correspondent can conduct specified Banking Business.

93 What is called Para Banking and what are its advantages? Banks can undertake certain eligible financial services. These are called Para Banking. eg-Insurance Business , Mutual Fund Business, Merchant banking etc. Para banking helps the Bank in improving Other Income ie Non Interest Income and thus helps in improving Profitability of Operations .

94 What is called STRIPS? STRIPS stands for Separate Trading of Registered Interest and Principal


Securities. Stripping is a process of converting periodic coupon payments of an existing Government security into tradable zero-coupon securities, which will usually trade in the market at a discount and are redeemed at face value. For instance, stripping a five-year Govt security would yield 10 coupon securities (representing the coupons), maturing on the respective coupon dates and one principal security representing the principal amount, maturing on the redemption date of the five-year security. Reconstitution is the reverse process of stripping, where, the Coupon STRIPS and Principal STRIPS are reassembled into the original Government security.

95 What is called Digital Signature? Digital signatures are often used to implement electronic signatures, a broader term that refers to any electronic data that carries the intent of a signature. Digital signature gives the receiver reason to believe the message was sent by the claimed sender. Digital signatures are equivalent to traditional handwritten signatures in many respects, but properly implemented digital signatures are more difficult to forge than the handwritten type. Digital signature schemes, are cryptographically based.

Digital signatures can also provide non-repudiation, meaning that the signer

cannot successfully claim they did not sign a message, Digital signatures can be used to authenticate the source of messages. When ownership of a digital signature secret key is bound to a specific user, a valid signature shows that the message was sent by that user.

96 What is called Shell bank? A shell bank is a bank which is incorporated in a country where it has no physical presence and is unaffiliated to any regulated financial group. Shell banks are not permitted to operate in India. Banks should not enter into relationship with shell banks and before establishing correspondent relationship with any foreign institution, banks should take appropriate measures to satisfy themselves that the foreign respondent institution does not permit its accounts to be used by shell banks.

97 What is called Financial Inclusion? FINANCIAL INCLUSION : Refers to the delivery of banking service at an affordable cost to the vast sections of disadvantaged and low income groups of the population. The purpose of financial inclusion is to provide access to banking, access to affordable credit and access to free information on money matters. This concept has become a part of public policy so as to make available banking and payment services to the entire population without discrimination. The primary aim is to avoid the pitfalls of financial exclusion in the form of social tension arising from lack of empowerment of the low- income strata of the population..

98 What is called Corporate Governance? CORPORATE GOVERNANCE : It is a process to improve relationship between

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companies or organisations and their shareholders and other stakeholders. It is also defined as a system by which business operations are directed and controlled. It specifies the distribution of rights and responsibilities among different participants in the corporation such as the board, managers, shareholders and other stakeholders and spells out the rules and procedures for making decision on corporate affairs. According to the World Bank, Corporate Governance is about promoting corporate fairness, transparency, and accountability. Corporate governance is becoming crucial for banks and financial institutions to promote effective risk management and financial stability. As part of financial sector reforms banks are required to follow due diligence procedures for appointment of directors on the boards of private sector banks and regarding role and responsibilities of independent directors. Banks are also required to take steps to strengthen risk management framework and constitute various committees in conformity with corporate governance. The purpose is to ensure that owners and managers of banks are persons of sound integrity so as to protect the interest of depositors and integrity of financial system.

Corporate Governance is a process by which an institution is governed to achieve the set goals, resolving conflict of interest between different stakeholders, both internal and external. So, governance is primarily a Board level function, managing the affairs of the company, driven top-down, based on the principle of fiduciary duty, centered on oversight of management functioning, to ensure ethical, legal and regulatory compliance. Securities and Exchange Board of India (SEBI) defined corporate governance as the "acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the

management of a company."2 This scope has however undergone changes over

time to include ethical conduct by the organization and its functionaries, rather than just ensuring strict compliance with laws and precise regulation.

99 What is called IT Governance? Governance is an oversight function through which organizations ensure compliance with laws and regulations, not only in letter but in spirit as well, with adequate, effective safeguards for interests of all stakeholders and society.

IT governance, as a subset of corporate governance, also requires to be driven from the board level. The core of the IT governance is to create IT strategy that forms part of the effective corporate strategic planning process and thus ensuring alignment of IT design and its controls with the business goals .The basic objectives of the IT governance is as follows:

Aligning IT strategy with Business Strategy IT as strategic resource to deliver value IT risk management IT resource and financial management IT performance management IT Policies and Procedures

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100 What is called Transfer Price Mechanism? Each branch can not be a profit centre on its own. Depending upon the segment and location some branches can mobilise more deposits than advances. In such cases ,the cost of deposits will be more than the Yield on advances. The branch working results will show a loss . As the resources mobilised, will be utilised by some other branches for lending , CO compensates the branch for the resources mobilised, treating it as money borrowed from that branch. Like wise , for the advances given , branches have to pay CO interest treating it as money borrowed from CO. For Deposits oriented branch the net effect will be CO interest received, where as for advances oriented branch the net effect will be CO interest paid . In nutshell, Transfer Price Mechanism (TPM) refers to the process in which branches are allowed to: earn interest on their lending to Central Office viz. the balances held in Deposit accounts in their books pay interest on their borrowings from Central Office viz. Balances held in Advances accounts in their books. The primary objective of this exercise is to arrive at the working-results of the branches on "realistic-basis".

101 What is called Interest Income and Non Interest Income?

Interest income :The sum total of discount, interest from loans, advances and investment and other interest income.

Non Interest Income; This is other income of a bank. It includes items such as exchange commission, brokerage, gains on sale and revaluation of investments and fixed assets and profits from exchange transactions, Insurance Commission, Income from Sale of Gold Coin Etc,

102 What is the difference between Net Interest income and Net Interest Margin(NIM)? Net Interest Income- This is the difference between the interest income and the interest expenses). Net Interest Margin- This is the Net Interest Income divided by Average Interest earning assets.

103 What is the difference between Interest Spread and Burden? Interest Spread: This is the excess of total interest earned over total interest expended. Burden: It is the difference between Non Interest Expenses over Non Interest Income.( Other Expenses-Other Income).

104 What is called Channel Financing?

Channel Financing is an innovative product to extend working capital finance to


dealers having business relationships with large companies in India. This may be in the form of either cash credit facilities or as a bill discounting line of credit. .It provides an Integrated Financial & Commercial solution to the Supply and distribution Channels of a Business unit /Corporate/OEMS.(Original Equipment Manufacturers) Under this Banks can extend : Discounting of trade bills drawn by Corporate/OEMs and accepted by the dealer/distributor overdraft /CC facility to the dealer/distributor for his business dealing with large corporate. Under this facility, Dealers are able to leverage their relationship with reputed companies in sourcing low cost funds with support from their counterparts. As an extension to Channel Financing some private sector banks are offering supply chain management solutions that will electronically integrate the dealers with the bank to provide a platform for B2B transactions.

105 Supply Chain Management (SCM)? It is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers , right from the point of origin to point of consumption (supply chain). It is the planning and management of all activities involved in sourcing, procurement, conversion, and logistics management. It also includes the crucial components of coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. Supply Chain of Companies comprises of the Corporate supplying to Channel Partners for further sale to customers. Corporates have longstanding relationship with these Channel Partners make a tie up with their banks for providing Channel financing to these dealers/channel partners.

106 In RTGS what is the meaning of Real time and Gross Settlement. What is the Minimum and Max limit for RTGS transactions? Real Time means the processing of instructions at the time they are received rather than at some later time. 'Gross Settlement' means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis).Minimum Rs 2 Lacs. Max-No upper ceiling.

107 In RTGS, What is the time limit for the beneficiary Bank to Credit the Beneficiary or return the amount? 2 Hours.

108 How RTGS is different from National Electronics Funds Transfer System (NEFT)? NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place with all transactions received till the particular cut-off time. These transactions are netted (payable and receivables) in NEFT whereas in RTGS the transactions are settled individually. For example, currently, NEFT operates in hourly batches - there are eleven settlements from 9 am to 7 pm on week days and five settlements from 9 am to 1 pm on Saturdays. Any transaction initiated after a designated settlement time would have to wait till the next

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designated settlement time Contrary to this, in the RTGS transactions are processed continuously throughout the RTGS business hours.

109 What are the categories of Advances in which Int rates are still regulated by

RBI ?

All Categories of Advances deregulated except DRI and in Deposits- Except

FCNR int rate all are deregulated.

110 What is the meaning of “Cheque in the Electronic form” and “A truncated Cheque’ ?

(a) “a cheque in the electronic form” means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;

(b) “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

It is defined in Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002.

Cheque Truncation: Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point with the presenting bank en-route to the drawee bank branch. In its place an electronic image of the cheque is transmitted to the drawee branch by the clearing house, along with relevant information like data on the MICR band, date of presentation, presenting bank, etc. Cheque truncation thus obviates the need to move the physical instruments across branches, other than in exceptional circumstances for clearing purposes. This effectively eliminates the associated cost of movement of the physical cheques, reduces the time required for their collection and brings elegance to the entire activity of cheque processing.

111 . What is CTS 2010 Standard?

CTS 2010 Standard-Cheque Truncation System , require some standard norms in the size and features of cheques .these standards are called CTS 2010 standard.

Compliance CTS 2010 standard is mandatory , for cheque books.. However, it may be noted that the residual non-CTS-2010 Standard cheques that get presented in the clearing system beyond this extended period will continue to be accepted for the clearing but will be cleared at less frequent intervals. The modalities, charges applicable if any, etc. will be subject to RBI guidelines.

112 What is Cheque Standardisation and what does CTS 2010 Standard mean ?

Standardisation of cheque forms (leaves) in terms of size, MICR band, quality of paper, etc., was one of the key factors that enabled mechanization of cheque processing. A Working Group was set-up by RBI for examining further


standardisation of cheque forms and enhancement of security features therein. Accordingly, certain benchmarks towards achieving standardisation of cheques issued by banks across the country have been prescribed like – quality of paper, watermark, bank’s logo in invisible ink, void pantograph, etc., and standardisation of field placements on cheques. In addition, certain desirable features have also been suggested to be implemented by banks based on their need and risk perception.

The set of minimum security features would not only ensure uniformity across all cheque forms issued by banks in the country but also help presenting banks while scrutinising / recognizing cheques of drawee banks in an image-based processing scenario. The homogeneity in security features is expected to act as a deterrent against cheque frauds, while the standardisation of field placements on cheque forms would enable straight-through-processing by use of optical / image character recognition technology. The benchmark prescriptions are collectively known as "CTS-2010 standard". Indian Banks Association (IBA) and National Payments Corporation of India (NPCI) are coordinating with the banks on implementation of the new standard. Accordingly, the cheques issued are tested and certified by NPCI and only after such certification the cheques would be issued to the customers.,

113 What are the significant changes brought under Negotiable Instruments Amendments and Miscellaneous Act 2002?

The amendments in the Act are aimed at early disposal of cases relating to dishonor of cheques, enhancing punishment for offenders, introducing electronic image of a truncated cheque and a cheque in the electronic form as well as exempting an official nominee director from prosecution under the Negotiable Instruments Act,1881. It has also brought in a significant change to the Information Technology Act 2000 (ITA-2000) bringing Cheques within its purview.

It has amended the amend the Negotiable Instruments Act, 1881, the Bankers' Books Evidence Act, 1891 and the Information Technology Act, 2000.

114 What is the present RBI guidelines for Mobile Transactions in India, for the following a. end to end Encryption b. Cap for daily transaction limit c.. Transfer of funds for delivery in cash.?

a. Banks have also been permitted to facilitate mobile banking transactions without end-to-end encryption up to `5000.

b. RBI has removed the daily Transaction Limit-Rs50,000/-. Individual Banks to decide.

c. Transfer of Funds for delivery in cash-Rs 10,000/- per transaction(enhanced from Rs5,000) –Maximum Value –Rs25,000/- per month.

115 Name the Committee set up by RBI to re-examine the existing classification and to suggest revised guidelines with regard to priority Sector Lending, classification and related issues M V Nair Committee


116 Name some Important Committees set by RBI .

1. Shri T K A Nair High Level Task Force-Issues related to MSME and flow of credit to MSME.

2. Malegam Committee-committee on MFI-I. Creation of a separate category of NBFC-MFIs; (ii) a margin cap and an interest rate cap on individual loans; (iii) transparency in interest charges; (iv) lending by not more than two MFIs to any individual borrower; (v) creation of one or more credit information bureaus; (vi) establishment of a proper system of grievance redressal procedure by MFIs; (vii) creation of one or more “social capital funds”; and (viii) continuation of categorisation of bank loans to MFIs, complying with the regulation laid down for NBFC-MFIs, under the priority sector.

3. Shri.R.Gandhi Working Group -to examine ways to enhance liquidity in the G-Sec and interest rate derivatives markets.

4. Shri M. V. Nair committee- to re-examine the existing classification and suggest revised guidelines with regard to priority sector lending classification and related issues.

5. Damodaran Committee Oct 2011- 232 recommendations-107 implemented--on customer service in Banks.

6. Shri Anand Sinha Working Group- Oct 2011- to review the current practice regarding pricing of floating rate loan products in India vis-à-vis the international practices. The Group will also study the methodology of determination of credit spreads and its components and suggest measures for appropriate pricing of floating rate loan products to improve transparency in pricing and loan documentations.

7. Shri B. Mahapatra working Group-Jan 2012- to review the existing prudential guidelines on restructuring of advances by banks/financial institutions and suggest revisions taking into account the best international practices and accounting standards.

8. Dr. K. C. Chakrabarty A High Level Steering Committee-to review the existing supervisory processes in respect of commercial banks in India. A Technical Committee, comprising officers from the Reserve Bank and representatives from a few banks, has also been constituted to aid and assist the Steering Committee. The Committee, among others, has taken up the work with regard to (i) moving supervisory approach from examining the past performance through capital adequacy, asset quality, management, earning, liquidity and system and control (CAMELS) model to predicting the path and passage of risks; (ii) preparing the supervisory apparatus to focus not just on regulatory compliance and solvency of a bank but also on finding out riskiness of a bank, its business preparedness to adopt risk lines irrespective of the size and delineate the impact of a failure; (iii) prescribing necessary ingredients for adapting risk based business conduct with indicative time lines; and (iv) devising rating methods which also capture fair,


transparent and non-discriminatory pricing to customers.

The Committee was mandated to review the extant approaches, methodologies, processes/tools for onsite and off-site supervision, Supervisory Rating & Stress Testing Frameworks and recommend measures for a gradual progression to a Risk Based Supervision Framework

The committee recommends a Risk Based Approach to Supervision of Commercial Banks in India to meet the present and emerging challenges. It describes the extant supervisory processes under the CAMELS framework and approach to supervision under the proposed Risk Based Supervision (RBS) Framework.

Under RBS, the approach to on-site supervision changes whereby probability of failure and the likely impact of failure of a bank rather than the volume of business determines the periodicity/intensity of on-site inspection process. Thus, the banks assessed as having a low risk/impact profile would be inspected only once in a 2 to 3 year cycle. However, irrespective of the supervisory stance/approach determined in respect of a particular bank, a comprehensive report highlighting the financials, level/ direction of material risks, risk mitigants and a risk mitigation plan, wherever applicable, would need to be prepared and put up to the Board of Financial Supervision on an annual basis.

A technical committee under the stewardship of Shri G. Gopalakrishna has suggested measures for refining the supervisory rating system for banks.

9. Smt Usha Throat Working Group to examine a range of emerging issues pertaining to the regulation of the NBFC sector in view of their growing importance and inter-connectedness with other segments of the financial system, which would have a bearing on financial stability.

10. Shri Anand Sinha standing Committee- to monitor the progress of implementation of IT vision of the Reserve Bank for 2011-17.

11. Dr. K. C. Chakrabarty High Level Committee on Demand for Coins- to

examine the issues relating to increase in demand for coins and supply/distribution bottlenecks so as to ensure regular and smooth availability of coins to the public at large

. 12. Smt. K. J. Udeshi Committee: Committee for Review of Procedures relating

to Facilities to Individuals – Residents/NRIs and PIOs- to identify areas for streamlining and simplifying the procedure so as to remove the operational impediments, and assess the level of efficiency in the functioning of authorised persons, including the infrastructure created by them. The Committee submitted its report in August 2011. The recommendations of the Committee were examined by the Reserve Bank. Some of the recommendations of the Committee, which have already been implemented, are: (i) permission to non-resident Indians (NRIs) to be joint holders in resident bank accounts; (ii) permission to residents to be joint holders in non-resident (external) Rupee account (NRE) scheme/foreign currency (non-resident) (FCNR) account (banks) scheme; (iii) permission to residents to gift


shares/debentures up to US $50,000 to non-residents; (iv) sale proceeds of foreign direct investment (FDI) allowed to be credited to NRE/FCNR (B) accounts; and (v) permission to residents to repay loans given to NRIs’ close relatives, as also bear medical expenses of NRIs.

13. Dr. K. C. Chakrabarty High Level Committee- constituted by the Reserve Bank to prepare an IT vision document for the period 2011-17, made recommendations relating to both the Reserve Bank and commercial banks. Action points stemming from the IT vision document have been identified and a Standing Committee (Chairman: Shri Anand Sinha) has been formed to monitor the progress of implementation of the IT vision document. A Steering Committee (Chairman: Shri G. Padmanabhan) has been constituted to ensure the smooth implementation of the recommendations as given in the IT vision document.

14. Smt. Usha Thorat -High Level Group on Systems and Procedures for Currency Distribution was that to address the tendency of under-reporting of cases of detection of counterfeit notes to the Reserve Bank/police, the requirement of filing first information report (FIR) should be done away with, where any person inadvertently in possession of counterfeit notes up to five pieces tenders the same at a bank counter. Taking into account all relevant issues and in consultation with the Government of India, the Reserve Bank instructed the banks that (i) for cases of detection of counterfeit notes up to four pieces, in a single transaction, a consolidated report should be sent to the police authorities at the end of the month; and (ii) for cases of detection of counterfeit notes of five or more pieces, in a single transaction, FIRs should be lodged with the nodal police station/police authorities as per jurisdiction. It will ensure that all cases of detection of counterfeit notes at bank branches/treasuries are promptly reported to the Reserve Bank/police authorities.

117 What is BCSBI? Name the Committee under whose recommendation it was set up? What is the name and objective of the code brought by BCSBI? BANKING CODES AND STANDARD BOARD OF INDIA (BCSBI) : This Board was set in pursuance of a recommendation of the Committee on Procedures and Performance Audit on public services( Tarapore Committee) to benchmark the existing level of public services in the banking sector. This is an autonomous body established by the RBI and the banks to evaluate and oversee the observance of voluntary code of conduct by the banks. The purpose is to ensure that comprehensive code of conduct for fair treatment of customers is evolved and adhered to. As a part of the collaborative arrangement, the Reserve bank would build up corpus of BCSBI to make it a self-sustaining organization. The Banking Codes and Standards Board of India (BCSBI) was set up on 18th February 2006.

The BCSBI would plan, evolve, prepare, develop, promote and publish voluntary comprehensive codes and standards for banks for providing fair treatment to their


customers.

The BCSBI would function as an independent and autonomous watch dog to monitor and to ensure that the banking codes and standards voluntarily adopted by banks are adhered to, in true spirit by banks in delivering the services, as promised, to their customers. The Board will not handle individual cases of complaints and grievances (all such cases will continue to be handled by Banking Ombudsman). RBI had requested Indian Banks' Association to set up a Working Group to draft a comprehensive fair practice code covering all the areas of customer service for uniform adoption by banks. Accordingly, the IBA had set up a Working Group. Working Group prepared a draft Bankers' Fair Practice Code and submitted to BCSBI for approval.

BCSBI had made certain further refinements to the Code and the "Code of Bank's Commitment to Customers" was brought out. During July 2006. The Code sets minimum standards of banking practices for banks to follow when they deal with individual customers.

Member banks of BCSBI would put in place the following grievance redressal mechanism in their banks:

(1) Have a Help desk / Helpline at the branch (2) Have a Code Compliance Officer at each Controlling office above the level

of the branch (3) Display at each branch name and contact number of Code Compliance

Officer (4) Display Name and address of the Banking Ombudsman.

Name and Objective of the code given by BCSBI- Code of Bank's Commitment to Customers"

This is a voluntary Code, which sets minimum standards of banking practices for banks to follow when they are dealing with individual customers. It provides protection to customers and explains how banks are expected to deal with customers in day-to-day operations.

Objectives of the Code

The Code has been developed to

a. promote good and fair banking practices by setting minimum standards in dealing with you;

b. increase transparency so that you can have a better understanding of what you can reasonably expect of the services;

c. encourage market forces, through competition, to achieve higher operating standards;

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d. promote a fair and cordial relationship between you and your bank;

e. foster confidence in the banking system.

118 What is called Off Balance Sheet Exposure ? Off-Balance Sheet exposures refer to the business activities of a bank that generally do not involve booking assets (loans) and taking deposits. Off-balance sheet activities normally generate fees, but produce liabilities or assets that are deferred or contingent and thus, do not appear on the institution's balance sheet until and unless they become actual assets or liabilities.

119 What is a Depository? What is meant by dematerialization of shares? A depository is a bank for securities. In other words, Depository Is an organization , where the securities of the shareholder are held in electronic form at the request of a shareholder through a Depository Participant. When an investor deposits securities with a depository, the investor’s account with the depository is credited for the deposit, and the securities are sent for transfer in the name of the depository. Dematerialization is the process of holding shares /securities in electronic form.

120 What is Money laundering? What are the steps/ measures of anti money laundering taken by the regulator ? Money laundering can be described as the process of transforming illegitimate money into legitimate money. Illegal or dirty money is put through a cycle of transactions , or washed , so that it comes out the other end as legal or clean money. Here the true ownership and the real source of money is concealed. Some Basic kind of suspicious transactions involving international operations are

1) Frequent exchange of cash into other currencies 2) Customers transferring large sums of money to and fr4om overseas

locations with instructions for payment in cash. Large cash withdrawals from previously dormant accounts which has just received unexpected large credit from abroad.

3) Building up of large balances not consistent with the known turnover of the business of the customer/known source of income of the customer.

4) Paying in large third party cheques endorsed in favor of the customer. 5) Large number of individuals making payments into the same account with

out an adequate explanation. In order to arrest money laundering series of measures are initiated by RBI

a. Know Your Customer- Banks should know its customers. b. Banks should determine the customer’s true identity and have

effective procedure for bonafides of new customers. c. Banks are required to ensure that business is conducted in

conformity with high ethical standards, that rules and regulations are strictly adhered to.

d. Banks should ensure that Banking service is not provided where there is good reason to believe that the transaction is associated with laundering activities.

e. Banks are required to furnish details of all cash deposits and withdrawals of above Rs10 lacs and report suspicious transactions


to their respective controlling authorities. f. Documents and other information should be collected from

customers keeping in mind the requirements of PML act 2002.

121 What is called Medium Term Note?

It is a debt instrument. A medium term note (MTN) is a debt note that usually matures (is paid back) in 5–10 years, but the term may be less than one year or as long as 50 years. They can be issued on a fixed or floating coupon basis. Floating rate medium term notes can be as simple as paying the holder a coupon linked to Euribor +/- basis points or can be more complex structured notes linked, for example, to swap rates, treasuries, indices, etc. When they are issued to investors outside the USA, they are called "Euro Medium Term Notes".

MTNs can be issued with a fixed maturity date (non callable) or can be issued with embedded call or put options and triggers where the notes will redeem early based on certain parameters. MTNs are most commonly issued as senior, unsecured debt of investment grade credit rated entities which have fixed rates. MTNs offer more flexibility to the issuer and investor both in terms of structure and documentation.

In short it is an instrument to ensure constant cash flows and allowing the financial Institutions to design their debt issuances in line with the financing needs of their overseas branches.

MTN is a form of debt is used by banks to ensure constant cash flows. This allows them to tailor their debt issuances to meet financing needs in their overseas branches.

Dollar MTN issues are priced over six-month Libor (London interbank offered rate), which is currently very low. Indian banks are preferring the five-year tenure to raise money through such notes..

122 What is the difference between Sale and Marketing? Sale involves only product delivery and service. Where as Marketing is an effort to sell. Marketing includes Planning, Targeting , Advertising, Collection of feed back and product improvement in delivery and Service.

123 What is called Blue ocean Strategy? Blue Ocean Strategy – It is about How to create uncontested market space and make the competition irrelevant it is a business strategy outlined in a book authored by W.Chan Kim and Renee Mauborgne Is a business strategy book . The book illustrates how an organization can generate high growth and profits, by creating new demand in an uncontested market space or a blue ocean then by competing head to head with other suppliers for known customers in an existing industry,

124 What is the present latest number of the Financial Stability Report and when it was released? 6th Financial Stability Report (FSR) was released during December 2012..


125 What are the concerns and out look for Banking Sector outlined in 6th FSR? For the banking sector, concerns are 1.Tight liquidity conditions and 2.Deteriorating asset quality . Out look :Though the sector has remained resilient to credit, market, and liquidity risks it is capable of withstanding macroeconomic shocks, given the comfortable capital to risk-weighted assets ratio (CRAR) for the system as a whole.

126 What are the domestic factors and risks to Macro Economic stability outlined in 6th FSR? 1.Domestic factors such as decline in growth coupled with relatively high inflation, fall in domestic saving, and particularly household financial saving, were found to have increased risks to macroeconomic stability. 2. In addition, the high CAD along with weakening external sector parameters, the stressed fiscal situation, and increasing corporate leverage, especially external commercial borrowings with unhedged exposures were identified as other challenges to macroeconomic stability.

127 Who are the Financial Sector Regulators? Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority and Pension Fund Regulatory and Development Authority. They are also members of Financial Stability and Development Council (FSDC).

128 What is called National Strategy for Financial Education (NSFE)? National Strategy for Financial Education (NSFE) is approved by Financial Stability and Development Council (FSDC). The NSFE entails provision of financial education for all Indians so as to understand the need and use of saving, the advantages of using the formal financial sector and various options to convert saving into investment, protection through insurance and a realistic recognition of the attributes of these options.

129 What is the difference between holder and holder in Course? What is the difference between Holder and Holder in due Course?

Holder- Defined under Section 8 of NI Act- “Holder”.—The “holder” of a

promissory note, bill of exchange or cheque means any person entitled in his own

name to the possession thereof and to receive or recover the amount due thereon

from the parties thereto. Where the note, bill or cheque is lost or destroyed, its

holder is the person so entitled at the time of such loss or destruction.

Holder in Due Course- Defined in Sec 9 of NI act

“Holder in due course”.—“Holder in due course” means any person who for

consideration became the possessor of a promissory note, bill of exchange or


cheque if payable to bearer, or the payee or indorsee thereof, if 1[payable to

order], before the amount mentioned in it became payable, and without having

sufficient cause to believe that any defect existed in the title of the person from

whom he derived his title.

Holder - any person who is in lawful possession of a cheque/ NI is a mere holder.

If a person is in possession of a cheque as a payee or endorsee with out

consideration ,he is a mere holder.( eg- cheque derived by way of gift , or a

person as payee receiving money as a facilitator or on behalf of the drawer as in a

case of self cheques where bearer is a friend or a family member)

Holder in due course- the holder one who receive the cheque for consideration

either from the drawer or endorser is a holder in due course. The spl feature of NI

is that holder in due course ( who for consideration received it) always gets a

good title , notwithstanding any defective title of the transferor.

A person taking a cheque marked not negotiable can not be holder in due course

even if he receive it for consideration.

The main difference between holder and Holder in due course is consideration . Apart from it the holder in due course is the one who becomes holder in the believe no defect existed in the title

130 What is the difference between Payment and Payment in due course? Payment in Due course is defined under Section 10 of NI Act

“Payment in due course”.—‘‘Payment in due course” means payment in

accordance with the apparent tenor of the instrument in good faith and without

negligence to any person in possession thereof under circumstances which do not

afford a reasonable ground for believing that he is not entitled to receive payment

of the amount therein mentioned.

Payment is a general term , meaning a regular payment , where as payment in due course is a fit and proper payment after due diligence

. Payment- the following payments can not be considered as payment in due course. 1. Payment at the counter,out of office hours.

2. payment of cash for a crossed cheque( other than to a banker for collection) 3. Payment of account payee cheque to other payee.

131 What is the difference between Banking Co and NBFC?

Difference between Bank Companies and NBFCs.


Both Banking Companies and NBFCs are governed by RBI regulations /guidelines in carrying out their business. Subject to norms and guidelines both can accept deposits from public and make advances to public and can make investment also. Both are subject to Prudential Norms of RBI. Money deposited in a Bank is withdraw able by cheque, order or otherwise while in case of NBFCs this can not be done. That is why they are called as Non Banking Finance Companies. Non-banking financial company” means only the non-banking institution which is a loan company or an investment company or an asset finance company or a mutual benefit financial company;

Banking and Banking Company - defined in Sec 5 of Banking Regulation Act.

NBFCs can be a Housing Finance CO, Micro Finance Co, Mutual Fund Companies, Venture Capital Fund Cos, Nidhi Cos, Chit Cos, Mortgage Guarantee Cos , Merchant Banking Co etc. There are different Type of NBFCs- Deposit taking NBFC, Non Deposit Taking NBFCs, Systemically Important Non-deposit taking NBFC.

NBFCs raise funds for their operations from various sources like public deposits, bank borrowings, inter-corporate deposits, secured/unsecured debentures, etc.

NBFCs are doing functions akin to that of banks; however there are a few differences:

(i) an NBFC cannot accept demand deposits; (ii) an NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself; and (iii) deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors unlike in case of banks.

Though it is Mandatory for NBFCs to register with RBI, certain categories of NBFCs like Merchant Banking Cos are exempted as they are regulated and registered with SEBI.


Vijayaraghavan’s Notes- Promotion Interview -Q & A -Basel, Capital & Risk Management

1 Define Regulatory Capital and Economic Capital with reference to Banks. Basel II Pillar-I stipulate the Regulatory Capital as a percentage of the risk weighted asset of the Bank, calculated based on the standardized approach or internal rating based approach as explained earlier. The Basle Accord II also stipulates another capital known as Economic Capital. Economic Capital is the amount of capital so as to cover the potential loss under the extreme market conditions. It is the difference between mark to market value of assets over liabilities that the bank should aim. The Regulatory capital is the minimum level prescribed by the regulator whereas the Economic Capital is the level of capital requirement assessed by each bank. But the Economic capital can not be less than the regulatory capital. ECONOMIC CAPITAL : As distinguished from Regulatory capital, the Economic Capital is defined by the Global Association of Risk Professionals (GARP) as the capital cushion required against the underlying credit, market and operational risk exposure of a banking organization. It is called 'economic" capital because it measures risk in terms of economic realities rather than potentially misleading regulatory or accounting)

2 Define Capital. What is Tier 1 and Tier 2 Capital Capital: Equity contribution of owners. The basic approach of capital adequacy framework is that a bank should have sufficient capital to provide a stable resource to absorb any losses arising from the risks in its business. . Banks are required to maintain a minimum Capital to Risk-weighted Assets Ratio (CRAR) of 9 percent on an ongoing basis Capital is divided into different tiers according to the characteristics / qualities of each qualifying instrument. For supervisory purposes capital is split into two categories: Tier I and Tier II. Tier I Capital: A term used to refer to one of the components of regulatory capital. It consists mainly of share capital and disclosed reserves (minus goodwill, if any). Tier I items are deemed to be of the highest quality because they are fully available to cover losses Hence it is also termed as core capital. PSBs to maintain a Minimum of Tier I CRAR-6%. Tier II Capital: Refers to one of the components of regulatory capital. Also known as supplementary capital, it consists of certain reserves and certain types of subordinated debt. Tier II items qualify as regulatory capital to the extent that they can be used to absorb losses arising from a bank's activities. Tier II's capital loss absorption capacity is lower than that of Tier I capital. Remarks: Presently, a bank’s capital comprises Tier 1 and Tier 2 capital with a restriction that Tier 2 capital cannot be more than 100% of Tier 1 capital. Within Tier 1 capital, innovative instruments are limited to 15% of Tier 1 capital. Further, Perpetual Non-Cumulative Preference Shares along with Innovative Tier 1 instruments should not exceed 40% of total Tier 1 capital at any point of time. Within Tier 2 capital, subordinated debt is limited to a maximum of 50% of Tier 1 capital. However, under Basel III, with a view to improving the quality of capital, the Tier 1 capital will predominantly consist of Common Equity. The qualifying criteria for instruments to be included in Additional Tier 1 capital outside the


Common Equity element as well as Tier 2 capital will be strengthened. Revaluation Reserves: Revaluation reserves are a part of Tier-II capital. These reserves arise from revaluation of assets that are undervalued on the bank's books, typically bank premises and marketable securities. The extent to which the revaluation reserves can be relied upon as a cushion for unexpected losses depends mainly upon the level of certainty that can be placed on estimates of the market values of the relevant assets and the subsequent deterioration in values under difficult market conditions or in a forced sale. Capital Reserves: That portion of a company's profits not paid out as dividends to shareholders. They are also known as un distributable reserves and are ploughed back into the business.

3 What are the elements of Tier I and Tier II capital ?

Elements of Tier I capital: The elements of Tier I capital include

i. Paid-up capital (ordinary shares), statutory reserves, and other disclosed free reserves, if any;

ii. Perpetual Non-cumulative Preference Shares (PNCPS) eligible for inclusion as Tier I capital - subject to laws in force from time to time;

iii. Innovative Perpetual Debt Instruments (IPDI) eligible for inclusion as Tier I capital; and iv. Capital reserves representing surplus arising out of sale proceeds of assets.

Elements of Tier II capital: The elements of Tier II capital include undisclosed reserves, revaluation reserves, general provisions and loss reserves, hybrid capital instruments, subordinated debt and investment reserve account.

4 Under Basel II what are the guidelines for Tier I (core capital) and Tier II (Supplementary capital?)

Under Basel II, total regulatory capital should be at least 9% of risk weighted assets and within this, Tier 1 capital should be at least 6% of risk weighted assets. Within Tier 1 capital, innovative Tier 1 instruments are limited to 15% of Tier 1 capital. Further, Perpetual Non-Cumulative Preference Shares along with Innovative Tier 1 instruments should not exceed 40% of total Tier 1 capital at any point of time. Also, at present, Tier 2 capital cannot be more than 100% of Tier 1 capital and within Tier 2 capital, subordinated debt is limited to a maximum of 50% of Tier 1capital.

5 What is called Leverage? Ratio of assets to capital.

6 What is Subordinate debt & Participative debt?

Subordinated debt Refers to the status of the debt. In the event of the bankruptcy or liquidation of the debtor, subordinated debt only has a secondary claim on repayments, after other debt has been repaid.

Participative debt-They are unsecured Corporate debt securities which participate in the


profits of the company.

7 What is called Hybrid debt capital instruments? In this category, fall a number of capital instruments, which combine certain characteristics of equity and certain characteristics of debt. Each has a particular feature, which can be considered to affect its quality as capital. Where these instruments have close similarities to equity, in particular when they are able to support losses on an ongoing basis without triggering liquidation, they may be included in Tier II capital.

8 What is BASEL Committee on banking Supervision? The BASEL Committee is a committee of bank supervisors consisting of members from each of the G10 countries. The Committee is a forum for discussion on the handling of specific supervisory problems. It coordinates the sharing of supervisory responsibilities among national authorities in respect of banks' foreign establishments with the aim of ensuring effective supervision of banks' activities worldwide.

9 Brief explaination of BASEL I, II and III Briefly explanation of BASEL I, II and III All these speak about Capital Requirement of Banks. Earlier to Basel norms, there was no correlation between the Capital of the Banks to the Assets( Loans). As a part of risk management , the capital adequacy norms are introduced based on its risk exposure. BASEL I – This framework was formally adopted in 1988 world-wide by all banks. The Reserve Bank of India during 1992 introduced a risk asset ratio system for banks (including foreign banks) in India as a capital adequacy measure in line with the Capital Adequacy Norms prescribed by Basel Committee.( Basel I ) Under the above system the balance sheet assets, non-funded items and other off-balance sheet exposures are assigned prescribed risk weights and banks have to maintain unimpaired minimum capital funds equivalent to the prescribed ratio on the aggregate of the risk weighted assets and other exposures on an ongoing basis. The Accord, in its original form, addressed only the credit risks in the banks’ operations. It was only in 1996 that an amendment was made to cover the market risks also. Minimum CRAR prescribed is 9% . BASEL II: The Basel –I Accord addressed only the credit risk and market risk in the banks’ operations, ignoring several other types of risks inherent in any banking activity. For instance, the operational risk, was not at all addressed – as were the liquidity risk, credit concentration risk, interest rate risk in the banking book, etc. The Accord was replaced with a new capital adequacy framework (BASEL II),released in 2004. BASEL II is based on three pillars that allow banks and supervisors to evaluate properly the various risks that banks face. One of the unique aspects of Basel II is its comprehensive approach to risk measurement in the banking entities, by adopting three-Pillar structure, which goes far beyond the first Basel Accord. Pillar 1 – the minimum capital ratio, Pillar 2 – the supervisory review process and Pillar 3 – the market discipline. The Pillar 1 provides a menu of alternative approaches, from simple to advanced ones, for determining the regulatory capital towards credit risk, market risk and operational risk, to cater to the wide diversity in the banking


system across the world. Pillar 2 requires the banks to establish an Internal Capital Adequacy Assessment Process (ICAAP) to capture all the material risks, including those that are partly covered or not covered under the other two Pillars. The ICAAP of the banks is also required to be subject to a supervisory review by the supervisors. The Pillar 3 prescribes public disclosures of information on the affairs of the banks to enable effective market discipline on the banks’ operations. RBI has issued the guidelines for the new capital adequacy framework in regard to Pillar 1 and Pillar 3 on 2007. As regards Pillar 2, the banks have been advised to put in place an ICAAP, with the approval of the Board. A two-stage implementation of the guidelines is envisaged to provide adequate lead time to the banking system. Accordingly, the foreign banks operating in India and the Indian banks having operational presence outside India are required to migrate to the Standardised Approach for credit risk and the Basic Indicator Approach for operational risk with effect from March 31, 2008. All other Scheduled commercial banks are encouraged to migrate to these approaches under Basel II in alignment with them, but, in any case, not later than March 31, 2009. As regards the market risk, under Basel II also, the banks will continue to follow the Standardised-Duration Method as already adopted under the Basel I framework. For migration to the advanced approaches available under the framework, prior approval of the RBI would be required. BASEL III-BASEL III standards written by the Bank of International Settlements Committee on banking Supervision spell out new Capital rules for Banks in keeping with their risk profile. The new global standards to address both bank-specific and broader systemic risks have been referred to as Basel III. Measures suggested under Basel III, among others, include revisions to the definition of regulatory capital, capital conservation buffer, counter-cyclical buffer, the treatment of counterparty credit risk, the leverage ratio, and the global liquidity standards.

RBI , during 2012 issued final guidelines on Basel III Capital regulations.

The Basel III capital ratios will be fully implemented as on March 31, 2018. The capital requirements for the implementation of Basel III guidelines may be lower during the initial periods and higher during the later years. Up to the financial year ending March 31, 2013, banks disclosed the capital ratios computed under the existing guidelines (Basel II) on capital adequacy as well as those computed under the Basel III capital adequacy framework. Banks are required to maintain a minimum Pillar 1 Capital to Risk- weighted Assets Ratio (CRAR) of 9% on an on going basis (other than capital conservation buffer and countercyclical capital buffer etc.) Banks have to increase their core tier one capital ratio- a key measure of banks’ financial

strength-to 4.50% by 2015.

In addition they will have to carry a further ‘countercyclical’ capital conversion buffer of 2.5 %

by 2019.


Minimum Capital Requirements

As a % to Risk Weighted Assets

April 1, 2013 January 1,2014 January 1,2015

Minimum Common Equity tier 1 Capital

3.5% 4.0% 4.5%

Minimum Tier 1 Capital

4.5% 5.5% 6.0%

Total Capital 8.0% 8.0% 8.0%

Capital Conservation Buffer: In addition to the minimum total of 8%, banks will be required to hold a capital conservation buffer of 2.5% of RWAs in the form of Common Equity to withstand future periods of stress bringing the total Common Equity requirement of 7% of RWAs and total capital to RWAs to 10.5%. The capital conservation buffer in the form of Common Equity will be phased-in over a period of four years in a uniform manner of 0.625% per year, commencing from January 1, 2016. Additional aspects covered in Basel III reform package are • Capital Conservation Buffer and • Leverage Ratio .

Basel III – A Snap shot- Latest Guidelines on Basel III)

The Basel III capital regulations continue to be based on three-mutually reinforcing Pillars,

viz. Minimum capital requirements (Pillar 1), Supervisory review of capital adequacy (Pillar2),

and market discipline (Pillar 3)of the Basel II capital adequacy framework. Banks are required to

maintain a Capital Conservation Buffer(CCB) of 2.5%, comprised of Common Equity Tier 1

capital, above the regulatory minimum capital requirement of 9%. Under the Framework, a

simple, transparent, non-risk based leverage ratio has also been introduced. The leverage ratio

is calibrated to

act as a credible supplementary measure to the risk based capital requirements. All the

provisions guidelines in respect of the above requirements are discussed hereunder :

A. Guidelines on Minimum Capital Requirement

The total regulatory capital fund under Basel III Frame work, as stated earlier , will consist of the

sum of the following categories:

(i) Tier 1 Capital (going-concern capital*):comprises of


(a)Common Equity tier 1 capital

(b)Additional Tier 1 capital

(ii) Tier 2 Capital (gone-concern capital*)

*From regulatory capital perspective,' going-concern capital' is the capital which can absorb

losses without triggering

bankruptcy of the bank. 'Gone-concern capital' is the capital which will absorb losses only in a

situation of liquidation of the bank.

Banks are required to compute the Basel III capital ratios in the following manner

Common Equity Tier I Capital Ratio

Common equity Tier I Capital Credit Risk RWA+ Market risk RWA+ Operational risk RWA

Tier I capital Ratio Eligible Tier I Capital Credit Risk RWA+ Market risk RWA+ Operational risk RWA

Total Capital (CRAR) Eligible Total Capital Credit Risk RWA+ Market risk RWA+ Operational risk RWA

RWA-Risk Weighted Assets

CRAR- Capital to Risk weighted asset Ratio.

With the full implementation of Capital ratios and CCB, the Capital Requirements would be as

follows

Regulatory Capital As a % to RWAs

1 Minimum Common Equity Tier 1 Ratio ( MCE Tier 1 Ratio)

5.50

2 Capital Conservation Buffer (CCB) 2.50

3 MCE Tier 1 ratio + CCB 8.00

4 Additional Tier 1 Capital 1.50

5 Minimum tier 1 Capital Ratio (1+4) 7.00

6 Tier 2 Capital 2.00

7 Minimum Total Capital Ratio –MTC(5+6) 9.00

8 MTC+ CCB 11.50

Other Provisions:

1. The Term Common Equity Tier 1 Capital does not include Capital Conservation Buffer

and counter Cyclical Capital buffer. In other words , Capital funds comprises of Common

equity Tier 1 Capital + Additional Tier 1 Capital +Tier 2 Capital.

2. A Counter cyclical Capital buffer of 0.205% of RWAs in the form of Common equity or

other fully loss absorbing capital is to be created to mitigate/protect the banking sector

from periods of excess aggregate credit growth and resultant system wide risk being an

extension of CCB.


Basel III – Revised Guidelines- March 2014

In terms of Basel III Capital Regulations issued by the Reserve Bank of India, the Capital

Conservation Buffer (CCB) is scheduled to be implemented from March 31, 2015 in phases and

would be fully implemented as on March 31, 2018. It has been decided that the implementation

of CCB will begin as on March 31, 2016. Consequently, Basel III Capital Regulations will be

fully implemented as on March 31, 2019.

Transitional Arrangements-Scheduled Commercial Banks (excluding LABs and RRBs)

(% of RWAs)

Minimum capital ratios

April

1,

2013

March

31,

2014

March

31,

2015

March

31,

2016

March

31,

2017

March

31,

2018

March

31,

2019

Minimum Common Equity Tier 1

(CET1)

4.5 5 5.5 5.5 5.5 5.5 5.5

Capital conservation buffer (CCB) - - - 0.625 1.25 1.875 2.5

Minimum CET1+ CCB 4.5 5 5.5 6.125 6.75 7.375 8

Minimum Tier 1 capital 6 6.5 7 7 7 7 7

Minimum Total Capital* 9 9 9 9 9 9 9

Minimum Total Capital +CCB 9 9 9 9.625 10.25 10.875 11.5

Phase-in of all deductions from

CET1(in %)#

20 40 60 80 100 100 100

* The difference between the minimum total capital requirement of 9% and the Tier 1

requirement can be met

with Tier 2 and higher forms of capital;

# The same transition approach will apply to deductions from Additional Tier 1 and Tier 2

capital.

Minimum capital conservation standards for individual bank

Common Equity Tier 1 Ratio after including the current

periods retained earnings

Minimum Capital

Conservation

Ratios

(expressed as %

of earnings)

As on

March 31, 2016

As on

March 31, 2017

As on

March 31, 2018

5.5% - 5.65625% 5.5% - 5.8125% 5.5% - 5.96875% 100%

>5.65625% - 5.8125% >5.8125% - 6.125% >5.96875% - 6.4375% 80%

>5.8125% - 5.96875% >6.125% - 6.4375% >6.4375% - 6.90625% 60%

>5.96875% - 6.125% >6.4375% - 6.75% >6.90625% - 7.375% 40%


>6.125% >6.75% >7.375% 0%

Details: In view of the implementation of Basel III Capital Regulations, banks need to improve

and strengthen their capital planning processes. While conducting the capital planning exercise,

banks may consider the potential impact of the changing macro-economic conditions and the

outcomes of periodic stress tests on the adequacy and composition of regulatory capital. A

forward looking capital planning process will enable banks to appropriately assess the level of

capital needed to support their business strategies over the medium-term.

The capital requirements may be substantially lower during the initial years as compared to

later years of full implementation of Basel III Guidelines. Accordingly, banks should keep this

aspect in view while undertaking their capital planning exercise. Boards of banks should actively

engage themselves in the capital planning process and oversee its implementation.

Of late, industry-wide concerns have been expressed about the potential stresses on the asset

quality and consequential impact on the performance / profitability of the banks. This may

necessitate some lead time for banks to raise capital within the internationally agreed timeline

for full implementation of the Basel III Capital Regulations. Accordingly, the transitional period

for full implementation of Basel III Capital Regulations in India is extended up to March 31,

2019, instead of as on March 31, 2018. This will also align full implementation of Basel III in

India closer to the internationally agreed date of January 1, 2019.

In addition to the above, certain other aspects of the guidelines, more specifically, those relating to the loss absorption features of non-equity capital instruments have been reviewed in response to clarifications sought in this regard.

10 What is the difference between Basel 1, and Basel II and III?

Basel I Basel II

Only Credit Risk (Although included capital for market risk subsequently in 1996)

Credit, Market and Operational Risk

Credit Risk: One measure fits all Broad brush approach

Based on Underlying Risk

Single Risk Measure: Minimum Capital Requirement

Package of Minimum Capital Requirement, Supervisory Review Process and Market Discipline working complementary to each other

Basel III-

It also aims to strengthen the regulation, Supervision and Risk Management of banks.

It aims to improve the banking sector’s ability to absorb shocks, arising from financial and economic stress.

Banks would need a minimum Capital adequacy Ratio (CRAR) of 10.5%, which consists of Core Equity 7%, 1.5% of Non equity Tier I capital and 2% of tier II capital.


The counter Cyclical buffer at 2.5% would increase the total capital adequacy requirement to 13%.

(It gives greater focus on Core or Common equity. Minimum is 4.5% of risk weighted assets, after deductions.(CET-I) There will be 14 strict criteria to determine what can be counted as CET-I. In addition ”Capital Conservation Buffer”, amounting to 2.5% of risk weighted assets, also made up of highest quality capital-effectively making the ratio 7%.)

11 What is the Basel III norms prescribed by RBI?

Date of commencement for implementation of Basel III by banks in India-April,1,2013.(Postponed from 01.01.13)

The Basel III capital ratios will be fully implemented as on March 31, 2018.

As per existing norms, the minimum required CRAR is 9%, comprising tier I and Tier II Capital. The capital requirement including Capital Conservation buffer, as per Basel III would be a minimum of 11.50% as follows

1.Minimum Common Equity tier I-5.5%

2.Capital Conservation Buffer-2.5%

3.total of 1& 2 Minimum CET I + CCB=8%

4.Additional Non Equity Tier I capital -1.5%

5.Minimum Tier I capital=7%(total of 1&4)

6.Tier II capital=2%

7.Minimum total Capital Ratio(MTC)=9%(5&6)

8.Minimum Total Capital Ratio+Capital Conservation Buffer=11.50%(Total of 7&2)

What is called Leverage Ratio?

LEVERAGE RATIO . Under Basel III, a simple, transparent, non-risk based leverage ratio has been introduced. The leverage ratio is calibrated to act as a credible supplementary measure to the risk based capital requirements. The leverage ratio is intended to achieve the following objectives: (a) constrain the build-up of leverage in the banking sector, helping avoid destabilising deleveraging processes which can damage the broader financial system and the economy; and (b) reinforce the risk based requirements with a simple, non-risk based “backstop” measure. DEFINITION AND CALCULATION OF THE LEVERAGE RATIO The provisions relating to leverage ratio contained in the Basel III document are intended to serve as the basis for testing the leverage ratio during the parallel run period. The Basel Committee will test a minimum Tier 1 leverage ratio of 3% during the parallel run period from 1


January 2013 to 1 January 2017. During the period of parallel run, banks should strive to maintain their existing level of leverage ratio but, in no case the leverage ratio should fall below 4.5%. A bank whose leverage ratio is below 4.5% may endeavor to bring it above 4.5% as early as possible. Final leverage ratio requirement would be prescribed by RBI after the parallel run taking into account the prescriptions given by the Basel Committee. The leverage ratio shall be maintained on a quarterly basis.

12 What is called Basel 2.5? The July 2009 amendment to Basel accord is generally called Basel 2.5. It is in between Basel II and III. The revised guidelines on Basel II and the New Capital Adequacy frame work is called Basel 2.5. RBI issued guidelines on NCAF, by Feb 2010. Eventually the meeting of BCBS on 12.09.2010 paved the way for formation of Basel III.

13 What is called Risk Weighted Asset? The notional amount of the asset is multiplied by the risk weight assigned to the asset to arrive at the risk weighted asset number. Risk weight for different assets vary e.g. 0% on a Government Dated Security and 20% on a AAA rated foreign bank etc.

14 What is called CRAR?(Capital to Risk Weighted Assets Ratio) Capital to risk weighted assets ratio is arrived at by dividing the capital of the bank with aggregated risk weighted assets for credit risk, market risk and operational risk. The higher the CRAR of a bank the better capitalized it is.

15 Define Credit Risk The risk that a party to a contractual agreement or transaction will be unable to meet its obligations or will default on commitments. Credit risk can be associated with almost any financial transaction.

16 Define Market Risk Market risk is defined as the risk of loss arising from movements in market prices or rates away from the rates or prices set out in a transaction or agreement. The capital charge for market risk was introduced by the BASEL Committee on Banking Supervision through the Market Risk Amendment of January 1996 to the capital accord of 1988 (BASEL I Framework).

17 Define Operational Risk Operational risk is the risk of human error or failure of systems leading to financial loss,

18 Define Liquidity Risk It is the risk resulting from a Bank’s inability to meet its obligations as they come due, because of difficulty in liquidating assets (market liquidity risk) or in obtaining adequate funding (funding liquidity risk).


19 Define Reputational risk Reputational risk can be defined as the risk arising from negative perception on the part of customers, counterparties, shareholders, investors, debt-holders, market analysts, other relevant parties or regulators that can adversely affect a bank’s ability to maintain existing, or establish new, business relationships and continued access to sources of funding (eg through the interbank or Securitisation markets). Reputational risk is multidimensional and reflects the perception of other market participants

20 What is ICAAP?( Internal Capital Adequacy Assessment Process ) In terms of the guidelines on BASEL II, the banks are required to have a board-approved policy on internal capital adequacy assessment process (ICAAP) to assess the capital requirement as per ICAAP at the solo as well as consolidated level. The ICAAP is required to form an integral part of the management and decision-making culture of a bank. ICAAP document is required to clearly demarcate the quantifiable and qualitatively assessed risks. The ICAAP is also required to include stress tests and scenario analyses, to be conducted periodically, particularly in respect of the bank’s material risk exposures, in order to evaluate the potential vulnerability of the bank to some unlikely but plausible events or movements in the market conditions that could have an adverse impact on the bank’s capital. ICAAP is an important component of the Supervisory Review Process. The Pillar 1 stipulates only the minimum capital ratio for the banks whereas the Pillar 2 provides for a bank-specific review by the supervisors to make an assessment whether all material risks are getting duly captured in the ICAAP of the bank. If the supervisor is not satisfied in this behalf, it might well choose to prescribe a higher capital ratio, as per its assessment. Another dimension of the ICAAP would be to monitor compliance with the Pillar 1 and Pillar 3 requirements. Banks’ ICAAP should take in to account of the credit concentration risk, interest rate risk in the banking book, business and strategic risk, liquidity risk, and other residual risks such as reputation risk and business cycle risk.

21 What is supervisory Review Process? Supervisory review process envisages the establishment of suitable risk management systems in banks and their review by the supervisory authority. The Pillar 2 of the framework deals with the ‘Supervisory Review Process’ (SRP). The objective of the SRP is to ensure that the banks have adequate capital to support all the risks in their business as also to encourage them to develop and use better risk management techniques for monitoring and managing their risks. This, in turn, would require a well-defined internal assessment process within the banks through which they would determine the additional capital requirement for all material risks, internally, and would also be able to assure the RBI that adequate capital is actually held towards their all material risk exposures.

22 What is the objective of market discipline? Market Discipline seeks to achieve increased transparency through expanded disclosure requirements for banks.


Vijayaraghavan’s Notes- Promotion Interview - Q & A –Foreign Exchange

1 What is called Revolving credit? A credit agreement that allows consumers to pay all or part of the outstanding balance on a loan or credit card. As credit is paid off, it becomes available again to use for another purchase or cash advance.

2 What is the Maximum Period up to which Packing Credit can be sanctioned?

Packing Credit can be sanctioned up to 180 days or270 days or more depending upon the requirement. As per earlier guidelines when BPLR was in vogue, Rupee PC was eligible for concession rate of Interest up to a Maximum period of 270 days(BPLR-2.50%). With the advent of Base rate , wef 01.07.2010,it has lost it relevance, as banks were permitted to Charge interest rates applicable for all tenors of rupee export credit advances at or above Base Rate.

3 What is called Crystallization? How it is done in case of Over Due export Bills purchased?

The concept of crystalisation is to transfer of Exchange risk to the exporter, for overdue export bill, by crystallising the foreign currency liability into rupee liability on the 30th day after the transit period in case of unpaid demand bills. In case of unpaid usance bills, crystallisation will take place on the 30th day from the due date.

In case the 30th day happens to be a holiday or Saturday, the export bill will be crystallised on the next working day.

Crystallisation of over due bills - as per Fedai rules, bills which were purchased/ discounted/negotiated must be crystallised on the 30 th day from the notional : actual due date to eliminate the foreign exchange risk to the bank . For this purpose , the TT selling rate or the actual rate at which the bill was originally purchased/ discounted or negotiated which ever higher should be used. The bill will be debited to AAOEBR and the DBPF/UBDF entry will be eliminated.

Note:. FEDAI has removed the 30 day period prescribed earlier.

30th day after the notional due date (In IOB) @ T.T.Selling rate. Swap gain if any, will be passed on to the exporter. Additional 15 days can be granted at the discretion of Bank.

Amount to be blocked against bills limit till recovery. Bill acquires collection bill status. On realization vouching at T.T.Buying

rate.

4 Import Bill Crystallisation:

All foreign currency import bills under LCs should be crystallised into rupee liability on the 10th day from the date of receipt of documents at the LC issuing


branch, in case of demand bills and on the due date, in case of usance bills. In case the 10th day or the due date falls on a holiday or Saturday, the importer’s liability should be crystallised into rupee liability on the next working day. However, the import bill payable on demand may be crystallised before the said period of 10 days with the specific understanding and written request from the customer. If the crystallisation of the rupee liability of an import bill under Forward Exchange Contract results in early/late delivery, the bank shall recover swap charges and interest if any as per Rule 8 of FEDAI guidelines. Branches should arrive at the rupee equivalent at the bills selling rate as on the date of crystallisation or the forward sale rate, in case a forward sale contract has been booked.

5 What are the courses available to LC issuing bank, if the documents presented are not in conformity with the credit issued?

Article 16 of UCP 600 provides that when a bank determines that the documents do not comply, it may refuse to honour or negotiate. The issuing bank should issue notice of refusal with in 5 banking days and at its discretion may contact the applicant for waiver.

6 What is called LIBOR?

LIBOR is the interest rate that banks charge each other for one-month, three-month, six-month and one-year loans. LIBOR is an acronym for London Interbank Offered Rate. This rate is that which is charged by London banks, and is then published and used as the benchmark for bank rates all over the world. LIBOR is compiled by the British Bankers Association (BBA), and is published 11 am each day in conjunction with Reuters. It is comprised from a panel of banks representing countries in each of the quoted currencies. The banks are asked what rate they would charge for a given currency and a given length of time. Based on the survey, the BBA quotes the LIBOR rate for each of ten currencies, for 15 different maturities -- anywhere from overnight to 12-month loans. thus producing 150 rates each business day. Australian Dollar-AUD, Canadian Dollar (CAD) , Swiss Franc (CHF) , Danish Krone (DKK) Euro (EUR) , British Pound (GBP) , Japanese Yen (JPY) , New Zealand Dollar (NZD) Swedish Krona (SEK) , U.S. Dollar (USD)

7 What is called Cooling Period? Cooling period is the time up to which banks wait after receiving provisional credit for the amount of cheque in their Nostro account for possible return of the cheque under provisions of the laws of USA by the drawee bank, before giving credit to the customers.

8 What is called Normal Transit Period? Answer: 'Normal transit period' means the average period normally involved from the date of negotiation / purchase / discount till the receipt of bill proceeds

http://useconomy.about.com/od/glossary/g/Interest_Rate.htm

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http://www.wikinvest.com/wiki/Swedish_Krona_%28SEK%29

http://www.wikinvest.com/wiki/U.S._Dollar_%28USD%29


in the Nostro account of the bank concerned, as prescribed by FEDAI from time to time It is the period of time taken for realizing the export proceeds. It is not to be confused with the time taken for the arrival of goods at overseas destination. Depending upon the average period taken for realization FEDAI prescribes NTP for export to various countries. Note: Fixed Due Date: In case of Export Usance Bills, where due dates are reckoned from the date of shipment or from the date of bill of exchange etc., no Normal transit period shall be applicable, since the actual date is known

9 In LC Transactions involving buyer and seller who is the applicant and who is the beneficiary ? Applicant (Opener): Applicant which is also referred to as account party is normally a buyer or customer of the goods, who has to make payment to beneficiary. LC is initiated and issued at his request and on the basis of his instructions. Beneficiary : Beneficiary is normally stands for a seller of the goods, who has to receive payment from the applicant. A credit is issued in his favour to enable him or his agent to obtain payment on surrender of stipulated document and comply with the term and conditions of the L/c. If L/C is a transferable one and he transfers the credit to another party, then he is referred to as the first or original beneficiary.

10 In LC transactions Who is called Second Beneficiary? Second Beneficiary : Second Beneficiary is the person who represent the first or original Beneficiary of credit in his absence. In this case, the credits belonging to the original beneficiary is transferable. The rights of the transferee are subject to terms of transfer.

11 In LC transactions define Issuing Bank, Advising Bank, Negotiating Bank, Confirming Bank, Reimbursing Bank Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter of credit and takes the responsibility to make the payments on receipt of the documents from the beneficiary or through their banker. If the documents are discrepant one, the rejection thereof to be communicated within 5 banking days from the date of of receipt of documents at their end. Advising Bank : An Advising Bank provides advice to the beneficiary and takes the responsibility for sending the documents to the issuing bank and is normally located in the country of the beneficiary. Confirming Bank : Confirming bank adds its guarantee to the credit opened by another bank, thereby undertaking the responsibility of payment/negotiation acceptance under the credit, in additional to that of the issuing bank. Confirming bank play an important role where the exporter is not satisfied with the undertaking of only the issuing bank. Negotiating Bank: The Negotiating Bank is the bank who negotiates the documents submitted to them by the beneficiary under the credit either advised through them or restricted to them for negotiation. On negotiation of the documents they will claim the reimbursement under the credit and makes the payment to the beneficiary provided the documents submitted are in accordance with the terms and


conditions of the letters of credit.

Reimbursing Bank : Reimbursing Bank is the bank authorized to honor the reimbursement claim in settlement of negotiation/acceptance/payment lodged with it by the negotiating bank. It is normally the bank with which issuing bank has an account from which payment has to be made.

12 What is the difference between Revocable and irrevocable LC? Revocable LC: A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification. It is rarely used in international trade and not considered satisfactory for the exporters but has an advantage over that of the importers and the issuing bank. There is no provision for confirming revocable credits as per terms of UCPDC, Hence they cannot be confirmed. It should be indicated in LC that the credit is revocable. if there is no such indication the credit will be deemed as irrevocable. Irrevocable Letter of Credit LC:

In this case it is not possible to revoked or amended a credit without the agreement of the issuing bank, the confirming bank, and the beneficiary. Form an exporters point of view it is believed to be more beneficial. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required documents are presented and the terms and conditions are complied with, payment will be made.

13 What is called Confirmed LC? Confirmed Letter of Credit is a special type of L/c in which another bank apart from the issuing bank has added its guarantee. Although, the cost of confirming by two banks makes it costlier, this type of L/c is more beneficial for the beneficiary as it doubles the guarantee.

14 What is the difference between Sight LC and Usance LC? Sight credit states that the payments would be made by the issuing bank at sight, on demand or on presentation. In case of usance credit, draft are drawn on the issuing bank or the correspondent bank at specified usance period. The credit will indicate whether the usance draft are to be drawn on the issuing bank or in the case of confirmed credit on the confirming bank.

15 What is called Back to back LC?

Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is known as back to back credit when a L/C is opened with security of another L/c.

A back to back credit which can also be referred as credit and counter credit is actually a method of financing both sides of a transaction, which involve a third party, who buys goods from one customer and sells them to another.

The parties to a Back to Back Letter of Credit are:


1. The buyer and his bank as the issuer of the original Letter of Credit. 2. The seller/manufacturer and his bank, 3. The manufacturer's subcontractor and his bank.

The practical use of this Credit is seen when L/C is opened by the ultimate buyer in favour of a particular beneficiary, who may not be the actual supplier/ manufacturer offering the main credit with near identical terms in favour as security and will be able to obtain reimbursement by presenting the documents received under back to back credit under the main L/c. The need for such credits arise mainly when :

1. The ultimate buyer not ready for a transferable credit 2. The Beneficiary do not want to disclose the source of supply to the

openers. 3. The manufacturer demands on payment against documents for goods

but the beneficiary of credit is short of the funds

16 What is called Transferable Letter of Credit?

A transferable documentary credit is a type of credit under which the first beneficiary which is usually a middleman may request the nominated bank to transfer credit in whole or in part to the second beneficiary. The LC does state clearly mentions the margins of the first beneficiary and unless it is specified the LC cannot be treated as transferable. It can only be used when the company is selling the product of a third party and the proper care has to be taken about the exit policy for the money transactions that take place. This type of LC is used in the companies that act as a middle man during the transaction but don’t have large limit. In the transferable L/c there is a right to substitute the invoice and the whole value can be transferred to a second beneficiary.

17 What is called Stand by LC? A stand by LC is an irrevocable, independent documentary and binding undertaking. It is akin to Letter Of Guarantee(LG) . In countries where issuance of LG is not in vogue(like in USA & Canada) Standby LC is used to guarantee payment. In other words, drawing under standby LC will arise only when there is non performance of the underlying contract. ICC publication ICC 590 called ISP 98 covers Stand by LC.

18 What are the risks involved in opening Import LC?

The basic risk associated with an issuing bank while opening an import L/C are

1. The financial standing of the importer As the bank is responsible to pay the money on the behalf of the importer, thereby the bank should make sure that it has the proper funds to pay.


2. The goods Bankers need to do a detail analysis against the risks associated with perishability of the goods, possible obsolescence, import regulations packing and storage, etc. Price risk is the another crucial factor associated with all modes of international trade.

3. Exporter Risk There is always the risk of exporting inferior quality goods. Banks need to be protective by finding out as much possible about the exporter using status report and other confidential information.

4. Country Risk These types of risks are mainly associated with the political and economic scenario of a country. To solve this issue, most banks have specialized unit which control the level of exposure that that the bank will assumes for each country.

5. Foreign exchange risk Foreign exchange risk is another most sensitive risk associated with the banks. As the transaction is done in foreign currency, the traders depend a lot on exchange rate fluctuations.

19 What are the role and responsibility of LC Advising Bank?

The basic responsibility of an advising bank is to advise the credit received from its overseas branch after checking the apparent genuineness of the credit recognized by the issuing bank. It is also necessary for the advising bank to go through the letter of credit, try to understand the underlying transaction, terms and conditions of the credit and advice the beneficiary in the matter. The main features of advising export LCs are: 1. There are no credit risks as the bank receives a onetime commission for the advising service. 2. There are no capital adequacy needs for the advising function.

20 What is called Confirmation of Export LC ?

It constitutes a definite undertaking of the confirming bank, in addition to that of the issuing bank, which undertakes the sight payment, deferred payment, acceptance or negotiation. Banks in India have the facility of covering the credit confirmation risks with ECGC under their “Transfer Guarantee” scheme and include both the commercial and political risk involved.

21 What is called Negotiation of Export LCs?

When the exporter requires funds before due date then he can discount or negotiate the LCs with the negotiating bank. Once the issuing bank nominates the negotiating bank, it can take the credit risk on the issuing bank or confirming bank. However, in such a situation, the negotiating bank bears the risk associated


with the document that sometimes arises when the issuing bank discover discrepancies in the documents and refuses to honor its commitment on the due date.

22 What is called Reimbursement of Export LCs?

Sometimes reimbursing bank, on the recommendation of issuing bank allows the negotiating bank to collect the money from the reimbursing bank once the goods have been shipped. It is quite similar to a cheque facility provided by a bank. In return, the reimbursement bank earns a commission per transaction and enjoys float income without getting involve in the checking the transaction documents. reimbursement bank play an important role in payment on the due date ( for usance LCs) or the days on which the negotiating bank demands the same (for sight LCs)

23 What are the regulatory requirements in opening LC?

Trade Control Requirements

The movement of good in India is guided by a predefined set of rules and regulation. So, the banker needs to assure that make certain is whether the goods concerned can be physically brought in to India or not as per the current EXIM policy.

Exchange Control Requirements

The main objective of a bank to open an Import LC is to effect settlement of payment due by the Indian importer to the overseas supplier, so opening of LC automatically comes under the policies of exchange control regulations.

UCPDC Guidelines

Uniform Customs and Practice for Documentary Credit (UCPDC) is a set of predefined rules established by the International Chamber of Commerce (ICC) on Letters of Credit. The UCPDC is used by bankers and commercial parties in more than 200 countries including India to facilitate trade and payment through LC. UCPDC was first published in 1933 and subsequently updating it throughout the years. In 1994, UCPDC 500 was released with only 7 chapters containing in all 49 articles . The latest revision was approved by the Banking Commission of the ICC at its


meeting in Paris on 25 October 2006. This latest version, called the UCPDC600, formally commenced on 1 July 2007. It contain a total of about 39 articles covering the following areas, which can be classified as 8 sections according to their functions and operational procedures.

24 What is called ISBP 2002?

ISBP 2002

The widely acclaimed International Standard Banking Practice(ISBP) for the Examination of Documents under Documentary Credits was selected in 2007 by the ICCs Banking Commission. First introduced in 2002, the ISBP contains a list of guidelines that an examiner needs to check the documents presented under the Letter of Credit. Its main objective is to reduce the number of documentary credits rejected by banks.

25 What is called FEDAI guidelines?

Foreign Exchange Dealer's Association of India (FEDAI) was established in

1958 under the Section 25 of the Companies Act (1956). It is an association of

banks that deals in Indian foreign exchange and work in coordination with the

Reserve Bank of India, other organizations like FIMMDA, the Forex

Association of India and various market participants.

FEDAI has issued rules for import LCs which is one of the important area of

foreign currency exchanges.

26 What is the difference between Option and Forward Transactions? OPTION A contract that gives a holder the right to buy (Call Option) or sell (Put Option) a certain number of shares of a company at a specified price is known as the 'Striking Price' or 'Exercise Price'. Option Contract gives the holder the right to buy or sell but not the obligation to do it. Forward Transactions A forward transaction is an order to buy or sell a security at a future period at a specific price. Forward transactions are not exchange traded or standardized. There is no margin paid over between the counter parties, only a settlement on the agreed date.

27 What is Forward Exchange Rate? FORWARD EXCHANGE RATE : A forward exchange rate is a rate of exchange which is fixed immediately, by means of a forward exchange contract, but the exchange transaction to which it is applicable would take place at some future date as agreed upon. A forward exchange contract is a firm and binding bargain between a bank and its customer, or between two banks, under which one party undertakes to deliver and the other to receive a


fixed sum in foreign currency against payment in Indian rupees, on a fixed future date, or between two fixed dates, at a pre determined rate fixed at time the contract is made. Forward exchange operations enable the creditor who has to receive payment of his debt, in terms of a foreign currency, at a future date, to know exactly the value of money he has to receive in terms of his own currency. Similarly, it enables a debtor who has to pay certain amount, at some future date, in terms of a foreign currency, to know precisely the probable cost to him in terms of his own currency.

28 What is called FRA and IRS?

'Forward Rate Agreement - FRA' An over-the-counter contract between parties that determines the rate of interest, or the currency exchange rate, to be paid or received on an obligation beginning at a future start date. The contract will determine the rates to be used along with the termination date and notional value. On this type of agreement, it is only the differential that is paid on the notional amount of the contract.

Also known as a "future rate agreement".

INTEREST RATE SWAPS (IRS)

Interest rate swap is an agreement between two parties to exchange interest obligations (payments) at different rates related to the same notional principal amount. As a rule, fixed interest rates payments are exchanged for the variable ones. This means that only interest payments are swapped, not the principal is exchanged (i.e. no the capital flow occurs) The buyer of an interest rate swap (payer of fixed interest rates) benefits from the rise in interest rates. The seller of an interest-rate swap (acquirer, recipient of fixed interest rates) benefits from a fall in interest rates. The return on an interest-rate swap cannot be determined in advance.

The interest-rate risk results from the uncertainty over future changes in market interest rates. The buyer or seller of an IRS is exposed to the risk of loss if interest rates fall or rise.

29 What is meant by the term Crowling peg?

It is related to management of Exchange rate with due intervention of Central

Bank Of the Country. This denotes apart of exchange rate system which allows

depreciation or appreciation in an exchange rate gradually .

In other words it is a system by which The Central bank of the Country

intervenes and pegging the rapid movement in the value of the home currency.

It is called Crawling Peg.

30 What is the present Limit up to which an Exchange earner, out of Forex Earnings,

can retain in EEFC account?

Earlier limit of 100% exchange earned restored, subject to certain conditions.

31 What is called Nostro and Vostro Account?


Nostro account: Foreign currency settlement account that a bank maintains with its overseas correspondent banks. Nostro accounts with Credit balance are assets of the domestic bank. Vostro account-is a local currency account maintained by a overseas correspondent bank. Vostro Account with a credit balance is a liability for the Domestic bank.

32 Define capital account Transaction Capital Account Transaction: The transaction which alters the assets and liabilities outside India of a person resident in India or assets and liabilities in India of person resident outside India is known as Capital Account transaction. Example transfer or sale of security, investments, etc. Classes of capital account transactions of Persons resident in India a) Investment by a person resident in India in foreign securities b) Foreign currency loans raised in India and abroad by a person resident in

India c) Transfer of immovable property outside India by a person resident in India d) Guarantees issued by a person resident in India in favour of a person

resident outside India e) Export, import and holding of currency/currency notes f) Loans and overdrafts (borrowings) by a person resident in India from a

person resident outside India g) Maintenance of foreign currency accounts in India and outside India by a

person resident in India h) Taking out of insurance policy by a person resident in India from an

insurance company outside India i) Loans and overdrafts by a person resident in India to a person resident

outside India j) Remittance outside India of capital assets of a person resident in India k) Sale and purchase of foreign exchange derivatives in India and abroad

and commodity derivatives abroad by a person resident in India. Classes of capital account transactions of persons resident outside India a) Investment in India by a person resident outside India, that is to say, i) issue of security by a body corporate or an entity in India and

investment therein by a person resident outside India; and ii) investment by way of contribution by a person resident outside India to

the capital of a firm or a proprietorship concern or an association of persons in

India. b) Acquisition and transfer of immovable property in India by a person

resident outside India. c) Guarantee by a person resident outside India in favour of, or on behalf of,

a person resident in India. d) Import and export of currency/currency notes into/from India by a person

resident outside India. e) Deposits between a person resident in India and a person resident outside

India.


f) Foreign currency accounts in India of a person resident outside India. g) Remittance outside India of capital assets in India of a person resident

outside India.

33 Define Current Account Transactions Transactions other than Capital account transactions are called Current Account Transactions, which include i) Payment in connection with Foreign Trade, payment dues such as Interest on loans, Remittances for living expenses of parents, spouse, and children residing abroad, Expenses in connection with foreign travel.

34 Explain the reasons for Rupee depreciation against Dollar

Exchange rate of any currency operates on a simple concept of demand and supply. In simple terms, when demand for Rupee increases, its value appreciates and when demand decreases, its value depreciates.

When there is a good inflow of Dollars to India, to use those in India they need to be converted to Indian Rupee which means Indian Rupee has an increased demand to convert the Dollar. In this case, the value of the Rupee is appreciated and Dollar decreases.

And vice versa case holds good for depreciation of the Rupee. There are many other factors which will influence the exchange particularly when the currency value is left to market forces such as: Growth, Inflation, reserve, Current account deficit,, Import etc. When all the factor listed above are favorable to a particular country, people across the world gets confidence about the stability of a particular country and more investments will flow in and demand for the currency of that particular country increases, thus appreciating the particular currency's value.

Earlier to the current trend why value of rupees was decreasing?

Increasing Current Account Deficit [CAD], high trade deficit, slowing economic growth, rising inflation are weakening Rupee. Further Euro Zone crisis and risk aversion [flight of investments] are the causes for Rupee depreciation.

35 In respect of Rupee PC , whether substitution of contract can be allowed for liquidating the PC. If so on what grounds and what are the conditions to be met?

Yes . Can be allowed with exporters with good track record . Banks should satisfy that the reasons are valid . Banks have been permitted to adjust the PC out of the proceeds of export of other orders for the same commodity or for any other commodity exported by the exporter. Substitution of Commodity and substitution of the buyer can be allowed by the


AD. Banks are also permitted to adjust the advance out of proceeds of any other export documents for which no PC has been granted . Wherever substitution of order is permitted , it is to be ensured that no PC has been released against that order Banks should ensure that it is commercially necessary and unavoidable. Bank should ensure that the substitution is allowed , if the export customer maintains account with the Bank only and in case of multiple banking it requires consent from other banks also. Such facility should not be extended for transactions with Sister / Associate concerns . In any case ,If pre-shipment advances are not adjusted ,within 360 days from the date of advance, the advances will cease to qualify for prescribed rate of interest for export credit to the exporter ab initio. Remarks: Each bank has got their own conditions to extend the facility to the exporter- customer. Some additional conditions are 1. Exporter should be a regular customer of the bank and should have a sound track record. 2.Credit rating/ minimum A . 3. Account should be standard and performing. 4.Credit limit should be in force - should have been renewed / reviewed annually. 5.Prompt realisation of export bills and overdue export bills outstanding should not be more than 5% of the total export proceeds realised in the previous calendar year . 6.PC can also be adjusted either from EEFC funds of the exporter or from local funds. Concessional rate /prescribed rate will be protected only up to the extent exports have actually taken place .

36 What is called Merchant Trade or Intermediary Trade?( Fex)

Merchanting or Intermediary Trade involves purchase of goods by Indian residents from non-residents and then reselling them to another non-resident directly without the goods touching the Indian ports.

Although the merchanting trade transactions do not contribute to the exports from India, they result in net foreign exchange inflows. The Technical Committee on Services / Facilities to exporters (Chairman: Shri G.


Padmanabhan) in its report (May 2013) recommended that the procedure be simplified.( earlier RBI guidelines were issued in 2003)

Under the revised guidelines, total period of merchanting trade has been extended from six months to nine months and short term financing for both export and import leg has been enabled. Half yearly reporting of outstanding merchanting trade by AD Banks has also been prescribed to ensure better monitoring.

37 What is called REER? What is the recent change in computing it?

REER-Real effective Exchange Rate. It indicates movement in exchange rates of home currency against a basket of currencies of trade partner countries. It is an indicator of international competitiveness. The weighted average of a country’s currency relative to an index or basket of other major currencies adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of one country’s currency, with each other country with in the index.

This exchange rate is used to determine an individual country’s currency value relative to the other major currencies in the index, as adjusted for the effects of inflation.

This is also the value that an individual consumer will pay for an imported goods at the consumer level.

Till now in case of India RBI was providing REER index using the whole sale Price Index(WPI) for India and CPI for partner countries.

Shifting focus to retail inflation, RBI would compute and release REER only on the basis of Consumer Price Index( CPI) as price index for India from the financial year beginning from April 14 onwards. REER index constructed using a CPI for both India and Trade Partner Countries would ensure a higher degree of comparability of India’s International Competitiveness against trading partner countries.

With greater focus on CPI inflation as primary objective of domestic monetary policy , it is more pertinent to have REER based on CPI.


Vijayaraghavan’s Notes- Promotion Interview- Q & A - Advances

1 What is called Reverse Mortgage? A financial product, which provides senior citizens with funds against their home equity. Senior citizens can get a regular amount monthly, quarterly or as a lump sum. They can live in their homes for their lifetime and after that banks can recover the amount by selling the property or if the heirs of the property want they can claim it by repaying the dues to the bank.

2 What is CERSAI and What are the RBI guidelines on Central Electronic Registry under SARFAESI Act, 2002?

The Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), a Government Company licensed under Section 25 of the Companies Act 1956, has been incorporated for the purpose of operating and maintaining the Central Registry under the provisions of the SARFAESI Act, 2002. This Registry has become operational on March 31, 2011.

Transactions relating to securitization and reconstruction of financial assets and those relating to mortgage by deposit of title deeds to secure any loan or advance granted by banks and financial institutions, as defined under the SARFAESI Act, are to be registered in the Central Registry. The records maintained by the Central Registry will be available for search by any lender or any other person desirous of dealing with the property. Availability of such records would prevent frauds involving multiple lending against the security of same property as well as fraudulent sale of property without disclosing the security interest over such property. It may be noted that under the provisions of Section 23 of the SARFAESI Act, 2002 particulars of any charge creating security interest over property is required to be filed with the Registry within 30 days from the date of creation.

3 What is called Interest Suspense account?

It is un debited Interest in NPA accounts. As per earlier guidelines of RBI discretion was given to Banks, in debiting interest to an NPA account, either taking the same to Interest Suspense Account or maintaining only a record of such interest in proforma accounts. It is applicable, when such Interest Suspense accounts are maintained and it should be deducted from Gross advances as well from Gross NPAs while arriving at Net Gross advances and Net NPAs. As per present guidelines of RBI,, banks should continue to record such accrued interest in a Memorandum account in their books. For the purpose of computing Gross Advances, interest recorded in the Memorandum account should not be taken into account. So presently while computing Gross advances, such un debited interest, kept in a Memorandum account, is not reckoned while calculating gross advances as well for computing Net NPA.


4 How Gross Advances is calculated?

.Gross Advances=Standard Advances+ Gross NPAs

5 How Net advances and Net NPA is calculated?

To arrive at Net advances and Net NPAs ,the following amounts are

deducted from gross advances and Gross NPAs.

i)Provisions held in the case of NPA Accounts as per asset classification (including additional Provisions for NPAs at higher than prescribed rates)+

(ii)DICGC / ECGC claims received and held pending adjustment+

(iii)Part payment received and kept in Suspense Account or any other similar account+

(iv)Balance in Sundries Account (Interest Capitalization - Restructured Accounts), in respect of NPA Accounts+

(v)Floating Provisions**+

(vi)Provisions in lieu of diminution in the fair value of restructured accounts classified as NPAs+

(vii)Provisions in lieu of diminution in the fair value of restructured accounts classified as standard assets.

(**Floating Provisions would be deducted while calculating Net NPAs, to the extent, banks have exercised this option, over utilising it towards Tier II capital.)

Banks to furnish as Supplimentary details ,he amount of interest

receivable on NPAs, held in proforma /Memorandum accounts, as a

foot note in the report to RBI.

6 Define Gross NPA and Net NPA Gross NPA= Total NPA with out any deductions for provisions. Net NPA=Gross NPA- (Provisions held in NPA accounts+DICGC/ECGC claim recd+part payment recd=Floating provisions**) **Floating Provisions- Floating provisions are part of profits kept for contingencies. As per RBI earlier guidelines banks are to add floating Provisions in Tier II capital. Initially, Banks were not allowed to deduct it from Gross NPAs to arrive at net NPAS. Now RBI permits Banks to deduct floating provisions, while calculating Net NPAs, to the extent, banks have exercised this option, over utilising it towards Tier II capital.


7 What is called Marginal Cost?

“ Marginal cost of a product -" is its variable cost". This is normally taken to be; direct Labour, direct material, direct expenses and the variable part of overheads. The marginal cost varies directly with the volume of production and marginal cost per unit remains the same. It consists of prime cost, i.e. cost of direct materials, direct labor and all variable overheads. It does not contain any element of fixed cost which is kept separate under marginal cost technique. Marginal costing may be defined as the technique of presenting cost data wherein variable costs and fixed costs are shown separately for managerial decision-making. It should be clearly understood that marginal costing is not a method of costing like process costing or job costing. Rather it is simply a method or technique of the analysis of cost information for the guidance of management which tries to find out an effect on profit due to changes in the volume of output.

8 What is called Contribution?

Contribution = Sales revenue less variable cost (marginal cost) . Contribution may be defined as the profit before the recovery of fixed costs. Thus, contribution goes toward the recovery of fixed cost and profit, and is equal to fixed cost plus profit (C = F + P).

9 What is called Break Even point?

Break-even point is that point at which there is neither profit nor loss. It is at point costs are equal to sales. In case a firm neither makes profit nor suffers loss, contribution will be just equal to fixed cost (C = F). this is known as break even point. At BEP, Sales – Variable cost = Fixed costs. OR Contribution = Fixed costs.

10 What is called Margin of Safety?

Margin of safety represents the strength of the business. It enables a business to know what is the exact amount it has gained or lost and whether they are over or below the break even point.

Margin of safety = (current output - breakeven output)

11 What is called P/V ratio?

The proportion of contribution to sales is known as P/V ratio which remains the same under given conditions of production and sales.

12 What is called Solvency Certificate/Capability Certificate?

Solvency certificates/capability certificates are issued by the Constituents Bankers to certify the Credit Worthiness/Capability of the Constituent in meeting the financial obligations.

Solvency Certificates/Capability Certificates are required by our Customers –Contractors/Students. Various Government Departments insist on contractors furnishing a “Solvency Certificate” from their bankers in order to consider their


tenders. Banks can also issue the capability certificate for students going abroad for higher studies(Some of the foreign universities require the students to submit a certificate from their bankers about the sponsors' solvency/ financial capability, with a view to ensure that the sponsors of the students going abroad for higher studies are capable of meeting the expenses till completion of studies

Points to be taken care while issuing such certificates

1.To be issued to Customers only.

2.To be issued as per Discretionary powers.

3.Prescribed Service charges to be collected.

4.Such Certificates should be issued in the prescribed format only and should be signed by two authorized officers one of whom must be First Line Manager.

5. A letter of request should be obtained from the customer along with the following

i) Credit report cum opinion sheet/Assets and Liabilities statement of the applicant;

(ii) Copies of latest Income Tax and Wealth Tax assessment orders; and

(iii) Copies of latest available Balance Sheet and other financial statements of the applicant.

6. It is to be mentioned in the certificate that this information is furnished without any risk and responsibility on our part in any respect whatsoever more particularly either as guarantor or otherwise. This certificate is issued at the specific request of the customer.(Though these certificates are ordinarily issued without attracting any responsibility on the part of the Bank, branch issuing such certificates should take care to see that the information mentioned in the certificate are based on facts and material available on record with the branch and depending upon the credit-worthiness of the applicant.)

7. No contra entry need be passed in the books of account of the branch as they are not be brought under contingent liability.

8. A copy of the certificate issued should be retained with the branch 9. It is preferable to issue such Solvency Certificate , after ascertaining

from the applicant the purpose, addressed to specific Department marking P&C, in Bank’s letter pad template. There is no harm in issuing it to Whom So ever it May concern, in cases where it is issued for educational purpose and in cases where it is specifically requested by the applicant. In such cases bank should take care to mention that it is issued at the specific request of the applicant duly specifying the purpose for which it is issued.


13 What is the meaning of Obligant/Co Obligant?

Meaning of Obligant ( by commercial usage): One who binds himself by a legal tie to pay or perform something to or for another person. Obligant is also used in various Encyclopedia and dictionaries. Though the term “Obligant” more often refers to another person than the borrower, by usage and custom the word Co-obligant comes to stay, while referring a co-borrower or a guarantor. In IBA Glossary the term Co-Obligant is defined to refer the guarantor. Co-Obligant is the term more often used by Banks and FIs and Obligor (somebody who legally agrees to do or pay some thing) is the term not being commercially used to refer a borrower or guarantor.

14 What is called LTV Ratio?

LTV ratio is called Loan to Value ratio. It is the ratio of the Loan amount to the value of the security mortgaged.

It is a risk assessment tool used by the lenders before approving a loan . Assessments with high LTV ratio, are generally seen at higher risk and there fore, the loan will generally cost the borrower more.

Loan to value ratio=Loan amount/Value of the property.

It is calculated as a percentage of Loan outstanding to the value of the property. It is computed as a percentage with total outstanding in the account (viz. “principal + accrued

interest + other charges pertaining to the loan” without any netting) in the numerator and the realisable value of the residential property mortgaged to the bank in the denominator

15 What is called Holiday period ?

While arriving at the project cost/repayment schedule and EMI , bankers do factor in the absence of revenue generation during the construction of project period, which is a cooling period of revenue generation. While fixing repayment schedule, Bankers allow the borrower not to repay the installments during such cooling period which is called as Holiday period. Depending upon the project, nature of activity and type of loan it varies from borrower to borrower.

16 Can we grant Jewel Loans against Gold Coins?

Yes. RBI permits granting of loans against coins sold by banks , for approved, non speculative and not for buying /investing in Gold. The same may be granted subject to our internal guidelines.( Maximum Loan against Gold Coins-50 grams per Borrower)


17 What is the difference between factoring and Bank finance against receivables?

Difference between factoring and bank finance against receivable is that a factor can purchase receivables with out recourse, where as a bank does not do so while financing against receivables. Actual purchase of debt is the unique feature of factoring . A factor offers a package of services for administrating receivables , which will not be there in Bank finance against receivables. Through an amendment in Banking regulation act , during 1990, commercial banks were allowed to start factoring activities, through separate subsidiaries, on getting RBI approval for the same. As such factoring services are not being extended directly by commercial banks.

18 What is the mode of creation of Security for a Ship? Being a movable property, Whether the mode would be Hypothecation or by Mortgage? Ships, being movable property, would generally be hypothecated. However, ships registered under specific Act(s) may have to be secured by following a different procedure as specified in such Act(s) – e.g. ships registered under the Merchant Shipping Act, 1958, are required to be mortgaged, by filling in the particulars of the mortgage on a specific form (Form 11) and filing the same with the concerned Mercantile Marine Department.

19 Define Tangible and Intangible Securities. What is the difference between Intangible Assets and Intangible Securities? Tangible securities are securities are physical in nature and that can be

touched or felt. Eg- Land and building, Inventory, Machinery, Jewels ,

Automobiles etc. Intangible securities are securities that cannot be touched or

felt but represents something of value. Eg of Intangible securities-Book Debts,

Rent Receivables( Future rent or income)etc.

Often the term Intangible Securities is confused with the term Intangible

Assets. Both are different. Tangible and Intangible assets are balance sheet

items and viewed from Balance sheet point of view.

Intangible assets are those assets where there is no physical asset creation.

include preliminary / pre-operative expenses debit balance in profit and loss

account, deferred revenue expenditure not written off, trade marks, patents,

copy right, brand etc.

Where as Tangible and Intangible Securities are class of securities and to be

seen from the lenders’ point of view.

Item Like Book Debts comes under Current Assets in Balance sheet classification, Where as the same comes under Intangible security from Lenders’ point of view.


20 In case of mortgage by deposit of title deeds, all original title deeds must be deposited with the mortgagee. Where the original documents have been lodged for registration ,and in the mean time equitable mortgage on the property is required to be created, as a banker what you would do? Wherever the original documents of title have been lodged for registration, registration copies of such documents as certified by the sub-registrar of assurance, along with original lodgement receipt and certified true copy of duly acknowledged letter addressed by the mortgagor to such sub-registrar instructing him to forward the original documents to the mortgagee after registration may be accepted. Banker should follow and ensure receipt of original document after registration from registrar. Broken period EC to be held with No other encumbrance. Banker should ensure deposit of other documents as envisaged in legal opinion . Where ever applicable, registered memorandum of DTD should also be done

21 In case of mortgage by deposit of title deeds, all original title deeds must be deposited with the mortgagee. In cases, where the original deeds are laminated , as a lending banker and Mortgagee what you would do? In cases where the original title deeds are laminated and there is a definite possibility of the title deeds been torn / damaged in case the lamination is removed, then laminated title deeds can be accepted without removal of the same from the lamination if the empanelled lawyer who has given the title / search report to us gives a certificate stating that the documents are correct as verified from the office of the Sub-Registrar where the documents have been registered. In addition, a suitable confirmation should be taken separately from the mortgagor that the laminated copies are authentic and original.

22 A borrower who has created equitable mortgage by Deposit of Title deeds wants the lender banker to part with the documents to him temporarily to be shown to the prospective buyer. How as a banker will you handle the case? Title deeds once lodged with the bank should not be parted with , so long as the advance amount subsists .So they cannot be handed over . However , the mortgager can be allowed to inspect the TDs , in the presence of the Manager or Dy Manager . Depending upon the circumstances and the standing of the mortgager and his lawyer and the purpose Bank can also take a view ,to temporarily part with the original documents at Mortgager's request . (It is Bank's prerogative to take a view on this to accept or reject such request ).In that case, the branch can hand over the documents to the Bank's approved lawyer for delivery to the Mortgager's lawyer against at accountable receipt in which the latter acknowledges receipt of the documents and undertakes to return them when called upon to so with out retaining a lien or creating any encumbrance there on . The bank's lawyer should get back the documents in tact and hand them over to the bank


. Delivery of documents in this manner must be recorded and branch should follow and ensure that the documents are returned in tact and with out delay. Lawyer's fee + appropriate bank charges for extending this service are to be recovered from the borrower. Branch should get a written request from the borrower / mortgager . Branches should refer such requests to SA / RO , Law department for taking a view on such requests and guidance.

23 In case of advances against immovable properties , secured by equitable mortgage , what is the procedure for release of Title deeds, when the advance is fully repaid a. To the mortgager b. to the legal heir , on the death of the sole mortgager or surviving mortgagor(s)Is it to be treated as a claim and whether Sanction is required from Competent authority ( as per DP laid down) for claim settlement ? In both the cases 1. A written request to be made by the mortgager or legal heirs. 2. A written request to be made by the concerned branch , where the account was held ,to the notified centre branch confirming the discharge of mortgage . Notified centre branch can release the title deeds to the Mortgager, legal heirs or to the concerned branch against their acknowledgment in the TD Register If one of the joint mortgagors is reported to be dead, the title deeds may be returned to the surviving mortgagor(s) on receiving a true copy of the death certificate . On the death of sole mortgagor ,the title deeds may be returned to all the legal heirs on getting the following a. True copy of Death Certificate b. Legal heir ship certificate or Affidavit in the prescribed format duly notarised. Branch may accept authorisation letter from other legal heirs fog a legal heir to receive the Title Deeds. The release of security , in the case of registered mortgage or equitable mortgage with registered memo , may also be registered with the respective sub registrar at the expense of mortgagor/s. Before releasing the title deeds the branch/notified centre branch should ensure that no other liability / encumbrance exist against the mortgagor as borrower or guarantor / against the property , towards the bank and there is no notice of second mortgage exist against the same property .

24 What is the limitation period for equitable mortgage ?What is the procedure for extending limitation for equitable mortgage ? 12 years ,from the date when the money sued for becomes due. For the purpose of extending the limitation, for equitable mortgage with in 12 years from the date of mortgage , any one of the following options can be exercised.


1.Fresh Mortgage- return and re deposit of title deeds to create fresh editable mortgage . 2. By Supplementary narration . For this the mortgagor should call at the branch and follow the usual procedure for Supplementary narration viz entry , confirmation letter followed by suppli regd memo where ever applicable .broken period EC to be obtained and verified for Nil encumbrance . 3. Branch should obtain a security confirmation letter in the prescribed format . The security confirmation letter should be signed by the borrower/s, guarantor/s over revenue stamps, as in the case of revival letters . It should be noted that both the options for extending limitation , should be exercised with in the period of limitation . Consequences of non extension of limitation period: A mortgage suit can be filed with in 12 years from the date, money secured by mortgage ,become due for enforcement of payment . A suit filed after the limitation period can be dismissed by the court. It should be noted that limitation act is applicable for actions under SARFEASI also. Time barred debts can not be recovered under SARFEASI. Remedy : The Limitation period bars the remedy of filing suit. However, the right of recovering the debt through right of lien , right of set off will be still available to the banker . If the borrower is cooperative , fresh equitable mortgage can be created for time barred debts. Bank can also proceed against the borrower and guarantor personally , based on DPN and guarantee executed by them , duly backed by RLs . Though legally , every supplementary narration or second mortgage has the effect of extending limitation for a further period of 12 years, as per guidelines, re-deposit of title deeds, obtention of security confirmation letter to be done with in 12 years from the date of first mortgage . At that time all the aggregate limits given to the same borrower and to any other borrower (if any) will be covered and the fresh limitation period starts from that date In case of limited companies, extension of limitation would be done by supplemental narration . It is not necessary to file modification of charge with Registrar of Companies, since the supplemental narration is done only for the purpose of extending the limitation .However a copy of board resolution to be held.

25 What is called Broken Period EC? Broken period EC -It covers the date of last EC(up to which period last EC is held ) and the date of Mortgage . It has be obtained after the date of mortgage and to be verified for Nil encumbrance , just to ensure no other entry other than Bank's charge(in case if registered mortgage or registered memo ). For renewal of mortgage ( extension of limitation period) also Bank should get broken period EC for nil encumbrance .( other than bank's).


26 What is called Margin ? What are the different types of margin? whether the concept of margin can be called as security ? Participative Margin -Margin is the borrower's stake in the business/ project. It is borrower's contribution in the project in case of Term Loans and NWC in case Working Capital Advance . It is called Participative Margin . Security Margin- In addition to that , depending upon the scheme requirement and security , Security margin is required to take care of fluctuations in the value of goods and securities . Liability Margin: Margin on LC/LG/Bills Margin on LC/LG Margins are prescribed based on risk perception of the Bank , status and line of business of the customer, financial position of the customer and amount involved in extending Non -Fund based limits like LC,LG etc Margin on Bills: While financing against bills / cheques ( DBP/UBD), Sanctioning Authority stipulate that a % of Margin should be maintained on the sanctioned limits .These margin amounts are usually kept in Margin on Bills Purchased Account, at the time of purchase/ discount itself . Or it can be kept in the form of Deposits under lien to Bank . The limit sanctioned would mean the net amount ie value of the bills purchased/ discounted less the stipulated margin .In such cases full amount will be debited to DBP / UBD and branches should ensure that the net liability of the customer does not exceed the sanctioned limit at any time (Gross bills purchased/ discounted- cash margin ) Margins are prescribed by the bank on risk perception /policy guidelines in extending fund based / non fund based limits . While prescribing Margin, Banks to follow RBI guidelines ,Norms of Refinancing Institutions, where ever applicable . Considering the concept of Margin and its nature , Margin can be called as a form of security to the lender for the amount financed . Margin on guarantees , ranging from 10% to 100% is fixed based on the rating of the customer, risk involved, line of business, past experience, purpose and amount . Normally 100% margin is insisted in respect of guarantees issued covering payment of Income tax , Sales Tax and other Govt dues.

27 What is called PariPasu Charge? What is the correlation between Paripassu and Mortgage? Paripassu Charge means- Charge on equal footing with no distinction between lenders who created the charge. This is a charge over the securities given to more than one creditor( Consortium/Multiple Banking)with the condition that all will be entitled to the charge on equal footing in proportion to the amount of advance. In Multiple Banking Multiple Banking Appraisal of credit limits should be done


by Individual Bank independently . Appraisal notes of other bankers lending under MBA will be shared among banks. Documentation is to be done individually by the banks. However, charge on the current/fixed assets can be on paripassu basis, wherever applicable. When ever Collateral Security is charged depending upon the arrangements it will have paripassu charge or as per arrangement. There is no correlation between Paripassu and Mortgage except the first one gives equal rights on a charge, where as Mortgage is a way of securing immovable properties.

28 What is the difference between Consortium Lending and Multiple Banking Lending? Consortium Lending –Under Consortium Lending Two or More banks join together in financing a single borrower who is having a huge exposure(both Fund based and Non fund based, Including WC and Term Loan. Earlier there was a ceiling for financing a single borrower and formation of consortium of banks was t mandatory for financing huge credit requirements of borrowers beyond the stipulated limit. Now though it is not mandatory now for financing huge credit requirements of borrowers, the concept of consortium holds good as all the banks may not be in a position to have huge credit exposure to a particular borrower. The risks are also shared in a consortium In Multiple Banking arrangement, borrower is t financed by two more banks . In Consortium there will be a lead Bank , a common or joint appraisal note. In Consortium the borrower is required to execute only one set of documents with the lead bank instead of executing separate documents with each member bank. Meeting of consortium members will approve the appraisal note, Terms and conditions, Documentation , share in lending , share on the assets charged to the consortium. In Multiple Banking Appraisal of credit limits should be done by Individual Bank independently . Appraisal notes of other bankers lending under MBA will be shared among banks. Documentation is to be done individually by the banks. However, charge on the current/fixed assets can be on paripassu basis, wherever applicable. Monitoring should be done by the individual Banks by regular exchange of information with other banks Normally lending banks used to obtain full details of credit facilities (including adhoc facilities) availed of by such borrowers from the banking system, duly certified by their auditors, each time any fresh facility/enhancement is sought. When ever Collateral Security is charged depending upon the arrangements it will have paripassu charge or as per arrangement.

29 What is the term Hair cut is meant for Bankers The difference between the market value of a security being used as collateral for a loan and the amount of money that a lender will advance against the security.


30 What is the difference between Fixed and Floating Charge? Answer: A “fixed charge” is a charge where specific identified movables are secured in favour of the lender (e.g. specific item of machinery / equipment, vehicle, etc.). In the case of a fixed charge, the property charged must be described, and the information of the existence of the charge thereon must be specified on the property itself / place where the property is installed / stored / lying, e.g. by affixing a board / notice thereon. The rights available to the lenders / hypothecatee in respect of the charge (e.g. the right to appoint a receiver, enter and inspect, sell the properties, restrain the borrower from dealing with the property, etc.) must be specified in the security documents. A “floating charge” is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varying condition in which it happens to be from time to time. An essential term of such charge is that the security provider may continue to use its assets in the ordinary way until the charge is crystallized, when it fastens on the underlying assets. The charge, so to say, is kept latent and dormant, till it crystallizes by the happening of some event which fixes the charge, e.g. liquidation / bankruptcy / insolvency of the security provider or the appointment of a receiver for taking possession of the charged property, or default by the security provider / borrower, which would entitle its holder to take action for the enforcement of the security. In simple terms, Floating charge crystallises in to Fixed charge, when the company ceases to carry on business or when the security is enforced upon.

31 What is the difference between indemnity and guarantee? A guarantee involves three parties – the obligor, the beneficiary and the guarantor. There is assumed to be a contract between the obligor and the guarantor, pursuant to which the guarantee is issued. In the case of an indemnity, only two parties are involved – the indemnifier and the indemnified (e.g. in a contract of insurance), and the obligor, if any, need not be aware of the indemnity. A guarantee is usually payable on demand, without there being any requirement for the beneficiary to prove any loss. A guarantee is provided as security against any default by the obligor, and the guarantor may be treated on par with the principal debtor if provided in the guarantee. An indemnity is enforced normally against the loss occasioned to the indemnified party in the transaction. An indemnifier is not automatically entitled to the rights of a surety. a. Section 124 of Indian Contract Act deals with contract of indemnity‘. A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person is called a contract of indemnity‘. The cases where an indemnity is obtained by the banks are issue of duplicate demand drafts, issue of duplicate deposit receipt, settlement of minor‘s share, etc. b. Section 126 to 146 of Indian Contract Act deals with a contract of guarantee.


A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety and the person in respect of whom the guarantee is given is called the principal debtor. The person to whom the guarantee is given is called the creditor. A surety‘s liability is co-extensive with that of the principal debtor. c.In a contract of indemnity, there will be two parties but in a contract of guarantee, there will be three parties.

32 In Credit proposals and in Circulars, we often come across the terms Co Applicant, Co Obligant, Guarantor. What exactly the terms refer? Co Applicant: Refers to Co-Borrower. It denotes a person who applies for any loan with the primary borrower and takes on the responsibility for repayment of the debt. This is done to improve the eligibility for loan and simultaneously mitigating the risk of banks who can exercise the option of recovery from both parties- jointly as well as severally. In case of Joint borrowings, Co-obligant is the term to differentiate between principal borrower and the joint borrower. Guarantor: It denotes a person, who guarantees the loan taking responsibility for repayment in case , the debtor or borrower fails to repay. Here the term Co Obligant refers to the guarantor. Co-Obligant: A Co-obligant can either be a Co- borrower or a guarantor for a loan, with the primary applicant, responsible for repayment of the loan along with the applicant either as a co borrower or as a guarantor. A co- borrower is jointly and severally liable as principal borrowers for repayment of the loan. As such lender can demand payment from the Co borrower instead of making demand from the principal borrower.Where as in case of guarantee, the lender first demand payment from the debtor, before going after the guarantor. As the guarantor is also a co-obligant, acknowledgement of Debt, in the format of revival letter, should be obtained from both borrowers and guarantors. Meaning of Obligant ( by commercial usage): One who binds himself by a legal tie to pay or perform something to or for another person. Though the term “Obligant” more often refers to another person than the borrower, by usage and custom the word Co-obligant comes to stay, while referring a co-borrower or a guarantor. In IBA Glossary the term Co-Obligant is defined to refer the guarantor. Co-Obligant is the term more often used by Banks and FIs .

33 What is called Contingent Liabilities? A claim which is not considered as a liability on the date of Balance sheet, but which may give rise to a liability on the happening of a certain event is known as Contingent Liability.(eg-Liabilities under LC/LG)

34 What is called letter of Pegging? It is a letter to be given by the ( Borrowers’) Creditors of the unsecured loan to the effect that the unsecured loan will not be withdrawn during the currency of the bank loan and till the loan is fully liquidated.


35 What is called Right of Subrogation? Right of Subrogation(Sec 140 of Indian Contract Act) On payment of the debt, the guarantor is entitled to all the rights enjoyed by the creditor against the principal debtor . Such a right is known as Right of Subrogation. Soon after making a payment and discharging the liability of principal debtor, the surety is clothed with all the rights of the creditor and will step into his shoes. The surety can , after payment of the guaranteed debt, require the creditor to assign to him all the securities held by the creditor in respect of the debt. This right of the surety covers all securities whether received by the creditor , before , at, or after the creation of the guarantee and whether the guarantor was aware of the existence of those securities or not . But before allowing the guarantor to exercise this option , to take the securities , it is preferable for the bank to give notice to the borrower and allow reasonable time to repay the dues and take back the securities . Only after exhausting this remedy against the borrower , bank can allow the guarantor to settle the dues and to step into its shoes . This is in order to follow fair trade practice , when the value of securities are disproportionately high comparing with outstanding dues .

36 What is the difference between prime and collateral securities ? What is the difference between tangible and intangible securities?

Prime security: "Primary security" in respect of a credit facility shall mean the assets created out of the credit facility so extended and/or existing unencumbered assets which are directly associated with the project or business for which the credit facility has been extended. Also when a loan is granted against Misc securities or granted exclusively based on securities like Land, Building, Jewel or Liquid securities like Insurance policies, NSC/KVP these securities are called Prime Securities. Collateral Security: "Collateral security" means the security provided in addition to the primary security, in connection with the credit facility extended by to a borrower. Collateral Security is additional security other than that of prime security.

Tangible securities are securities are physical in nature and that can be

touched or felt. Eg- Land and building, Inventory, Machinery, Jewels ,

Automobiles etc. Intangible securities are securities that cannot be touched or

felt but represents something of value. Eg of Intangible securities-Book Debts,

Rent Receivables( Future rent or income)etc.

37 What is the difference between Lien and Negative Lien? Lien: As per Indian Contract Act , Banker is empowered to retain all securities of the customer, that comes into his hand during the natural course of business,, in respect of general balance due from him/her. The ownership of


the security will rest with the customer. It is an implied pledge. Banker gets the right to sell the securities under certain circumstances. Negative Lien: Under Negative Lien, banker does not get the right to retain any assets of the borrower. The borrower submits a declaration to the Banker that his assets mentioned are free from encumbrances. He shall also provide an undertaking that he shall not create a charge over these assets or dispose them with out the permission of the bank.

38 Hypothecation-where it is defined? Hypothecation is defined in SARFAESI Act. A charge upon or in any movable property, existing or future, created by the borrower in favour of a secured creditor with out delivery of possession of movable property to such a creditor as a security for financial assistance and includes a floating charge and Crystalisation of such charge in to fixed charge on any movable property.

39 What is called Actionable Claim? It is defined in Transfer of Property Act. Actionable claim is a claim to any debt ( other than debts secured by mortgages, Hypothecation, Pledge) or any beneficial interest. As such unsecured debts like book debts, ( Sundry Debtors) , Future Rent, Supply Bills, benefits under LIC policy etc are actionable claims. The debt or beneficial interest could be present or future, conditional or contingent. Mode of Security- By assignment.

40 What is called Omni bus resolution? Any general resolution of a Company is called Omni bus resolution. When a company passes a resolution authorizing to open accounts in the name of the company with any bank at any place it is called Omni bus resolution.

41 What is called “Ultra Vires”? It is an act exceeding the power/authority given. Ultra Vires the Company - It is an act of the Company, exceeding the authority/Provision /rules/Powers of the company. If an advance is granted to a company, for a purpose not authorised in the MOA, it will not be binding on the company. Share holders cannot ratify such a borrowing later. Such borrowing is ultra vires the company and it cannot be cured.

42 What is the difference between floating and fixed Charge? Floating Charge: It is an equitable charge on the assets of a company( going concern), which will be in varying conditions from time to time. It crystallises in to affixed charge, when the Company ceases to carry on business or at the happening of enforcement of security. Fixed Charge: Which is created on some definite property of the company like Land, Building etc. The Company cannot deal with the property with out the consent of the holder of the charge.


43 What is called Take out Finance? When a bank granted loan for a long term say 12 years, to avoid ALM mismatch, bank may avail ”Take out Finance” from a FI. For eg in case of infrastructure loan granted by a bank for more than 12 years, if IDFC(Infrastructure Development Financial Corporation) agrees to take over the loan after 5 years bank may accede to that request to reduce ALM mismatch, by availing take out finance.

44 WHAT ARE THE LEGAL AND PROCEDURAL ASPECTS TO BE LOOKED INTO WHILE FILING SUIT? a. Filing of suit should be the last resort available for recovery. The prospects of recovery to be looked into while deciding to file suit. It should be ensured that a recall notice (legal notice or bank‘s notice) has already been served on the borrower as well as co-obligant and guarantor. b. It should be ensured that the suit is filed before the date of limitation. c. Before handing over the documents to the advocate, it should be ensured that the loan papers are in order and complete in all respects. d. In respect of any deficiencies, legal opinion should be sought either from legal section of Circle Office or Panel advocate. e. Original loan documents to be handed over to the advocate against acknowledgement. f. All the correspondence, statement of accounts, interest worksheet, etc. to be handed over to the advocate. g. The present available postal address of the borrowers / co-obligants/ guarantors to be furnished to the advocate. h. It should be ensured that all the necessary parties are impleaded in the suit. i. Suit is to be filed in the courts having proper jurisdiction. j. Mortgage suits are to be filed in an appropriate court having jurisdiction over the mortgaged property. k. The plaint should be signed by an officer having power of attorney after proper scrutiny. l. Suits are to be filed before the courts close for vacation. Otherwise, it should be filed on the reopening day of the court. m. Plaint should be verified with reference to suit amount, future interest, remedies prayed, stamp duties payable and court fee, etc. n. Certificate to the courts should be produced under Bankers Book Evidence Act.

45 WHICH ARE ALL THE POINTS TO BE LOOKED INTO WHILE VERIFYING A DECREE? a. To be verified whether suit is decreed against all the defendants in the suit. b. Whether the relief sought against the securities is allowed. c. Whether the suit amount/ rate of interest and cost of suit has been allowed as prayed. d. Any defects noticed to be brought to the attention of the advocate for rectification. e. Copy of the decree to be forwarded to RO. In case of mortgage, suits the following points to be noted:


f. Court will pass a preliminary decree, allowing specific time to redeem the mortgage. g. If the judgment debtor fails to a settle the dues as per terms of preliminary decree, immediate steps to be taken to file application for a final decree also by claiming all expenses incurred. h. Application for final decree to be filed within 3 years from the due date specified in the preliminary decree to save limitation. i. The limitation period for executing a decree is 12 years from the date the decree becomes executable.

46 WHICH ARE ALL THE DIFFERENT MODES OF EXECUTION OF A DECREE? a. Before going for execution, it is advisable to send notice to all parties, informing our intention to execute the decree unless they come forward for an immediate settlement. b. For executing decree, a separate application seeking execution of decree, has to be filed. c. The application should contain all the required particulars of the decree, duly verified and signed by the decree holder. d. The application should indicate the mode in which the assistance of the court is required like e. by delivery of any property specifically decreed f. by attachment or attachment and sale of any property g. by arrest and detention of the judgment debtor in prison. h. by appointment of a receiver, etc. i. Inventory of property to be attached should be furnished in the application. j. In the case of immovable properties, full description of the property along with latest Encumbrance Certificate to be furnished.

47 In execution of a decree, certain things/properties of the judgment debtor can not be attached .What are they? a. The necessary wearing apparel, cooking vessel, bed and bedding of the Judgment Debtor, his wife and children and such personal ornaments in accordance with religious usage cannot be parted with by a woman. b. Tools of artisan/agricultural implements, etc., which are necessary for livelihood. c. House belonging to an agriculturist or a laborer occupied by him.(If House property is mortgaged then it can be attached) Books of accounts, stipends, gratuities, family pension, etc., wages of laborers and domestic servants. d. Salary to the extent of first Rs.1000/- and 2/3 of the remainder. e. Pay and allowance of Army, Air force and Navy Personnel, PPF , etc., exempted from attachment.

48 In recovery action Lok adalat plays an important role. Why it is important and What is the Role of Lok Adalats in recovery proceedings?. Lok Adalats are an effective forum for settlement of disputes and for arriving at a compromise with borrowers. Reference of disputes to Lok Adalats will: 1. Save time


2. Save suit expenses (no court fee / no advocate fee)

3. Avoid protracted litigation

4. Reduction of NPA. Lok Adalat is a legal authority constituted under Legal Services Authorities Act to encourage settlement of disputes in a conciliatory manner without going to Courts and arriving at a workable settlement amicably. Lok Adalats can even take cognizance of any existing suit in the Court & non suit filed cases. The award of Lok Adalat is deemed to be a decree of a Civil Court or an order of any other Court. Every award made by Lok Adalat shall be final and binding on all the parties to the dispute and no appeal shall lie to any Court against the award. Before referring any accounts to Lok Adalat for settlement, in principle clearance has to be obtained from the appropriate sanctioning authorities depending upon the concession to be extended. b. Cases involving up to Rs.20 lakhs may be referred to Lok adalat. e. The authority who can permit compromise settlement will have to appear during the adalat. f. There may not be need to engage an advocate and this saves cost also. g. Where, in a suit filed account and subsequently referred to lok adalat and if the borrower fails to honour his commitment as per the settlement reached , the case can be referred back to the court for continuing normal legal course.

49 What is the cut off amount for recovery under Debt Recovery Tribunal? When the amount due/claim is Rs.10 lacs and above in respect of recovery of loans/Advances the matter is to be taken up before DRT, under Recovery of Debts dues.

50 What is called SARFAESI?

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest.-. The Act enacted in 2002 contains four parts addressing four separate areas. 1.Facilitates Securitization-this enables Banks to sell down secured Loans. By this transfer of assets from banks to other intermediaries like Insurance companies and Mutual Funds.2.It provides for the establishment of Asset Reconstruction Companies.ARC will function as a Trustee and buy distressed assets from the banks.3.It provides for establishment of Central Registry to register all charges created on assets 4.Provides enforcement of security interest by the secured creditors. In Branch Banking we are enforcing the fourth part only for recovering NPAs with out court intervention. Sale of immovable property mainly involves Land and building excluding Agri Land. Movable property involves Machinery , Vehicles Stocks hypothecated. Hypothecation is defined in the act.

Regarding third part Central Registry comes in to effect wef 31.03.2011.

Branches should know the latest amendments on the fourth part. If any objection/representation is received from the borrower, Bank has to send


mandatory reply with in one week.

Statutory right is vested with any person including borrower aggrieved by Bank-s action . to file petition before DRT with in 45 days. DRT to dispose off with in 60 days- can be extended up to 4 months. If not disposed off with in 4 months Party/Bank may approach DRAT. Simultaneous action under both SARFAESI and DRT is possible.

51 What is the difference between Recovery Agents and SARFAESI Agents? Recovery agents: Debt Recovery Agent is defined as a person o r en t i t y engaged by a bank fo r the pu rpose o f co l lec t ing specified loans, or advances or other kind of dents from the debtors (or borrowers) in accordance with the specified terms a n d c o n d i t i o n s . Recovery agents governed by RBI guidelines. They should strictly adhere to RBI guidelines and instructions, including the BCSBI Code, while engaged in the process of recovery of bank dues. Mainly engaged for Recovery of bank dues. Banks to ensure that the contracts with the recovery agents do not induce adoption of uncivilized, unlawful and questionable behaviour or recovery process. (Reserve Bank has requested the Indian Banks’ Association to formulate, in consultation with Indian Institute of Banking and Finance (IIBF), a certificate course for Direct Recovery Agents with minimum 100 hours of training. Once the above course is introduced by IIBF, banks should ensure that over a period of one year all their Recovery Agents undergo the above training and obtain the certificate from the above institute. Further, the service providers engaged by banks should also employ only such personnel who have undergone the above training and obtained the certificate from the IIBF.) SARFAESI AGENTS- governed by the provisions in SARFAESI Act. Will assist the Recovery Officer in entire procedure and legal actions as laid down under Chapter III of the SARFAESI act and THE SECURITY INTEREST ENFORCEMENT RULES, 2002. The Chapter III of SARFAESI Act deals with the second part of the act i.e. ENFORCEMENT OF SECURITY INTEREST (Sections 13 to 18A of the SERFAESI ACT, which deals with the procedures for issuing demand notices; taking symbolic and physical possession of the secured assets; valuation and sale of secured assets; procedure of sale; and security and management of the secured assets, etc. Apart from that agency commission/Fee structure is also different for Recovery Agents and SARFAESI Agents.

52 In OTS/OCS proposal , while Calculating Notional dues what is the Interest Rate to be applied? It is simple Interest from the date of last debit , till date of expected payment at the rate of …..% p.a,/Contract Rate/Decreed Rate of Interest which ever is less.(subject to review once in 6 months)

53 What is the normal time limit for payment of OTS? The sanctioned OTS to be recovered with in 3 months from the date of conveying the Sanction with out charging interest.


54 In OTS/OCS proposals what is called Waiver, Write-off and Sacrifice? Waiver-Un debited Interest Write-off-Reversal off Book Outstanding portion Sacrifice-Difference between Notional Dues-OTS offer or Sacrifice=waiver + write off.

55 What is called Present Value Interest Factor Of Annuity - PVIFA? or What is called Net Present Value? Definition of Present Value Interest Factor Of Annuity - PVIFA: A factor which can be used to calculate the present value of a series of annuities. If you deposit Rs 100 in RDP , for 6 years ,when the interest rate is 12%, the maturity value will be Rs 200. In other words, the present value of Rs 200 at 2018 is Rs 100. This is called present value or discounted value of money after a certain period. In recovery of NPA, while considering OTS, banks used to consider the present value of money that may be realisable after a certain period . Approximately , if bank can realise 1.30 lacs , after three years , its present value , at the discount rate of 8% will be nearly 1 lac and bank may consider the offer of 1 lac now as good for settlement . Like wise in accounting , for calculating the present value of Bonds or annuity after a certain known period the table PVIF will be used. . In simple terms , with the help of PVIF table one can arrive at the present value of future money .

56 IN OTS/OCS proposals what is the Minimum Acceptable amount /Bench Mark amount for Secured advances? Minimum Acceptable amount should be arrived by using Net present Value Method, which will be the Minimum acceptable Amount. Net Present Value Means –the present value of the present money compared to the present value (discounted value) of future money. The present value of the recovery made to day should be greater than the present value(discounted value) of the recovery that may be made at a later date. To arrive at the future recoverable value, the value of the securities(forced sale value) should be taken into account along with appropriate time for realizing the securities.

57 What is called Technical Write-off? RBI guidelines provide Writing –Off NPA accounts at Central Office level even though the relative advances are still outstanding in the branch books, provided necessary provision is made as per classification accorded to respective accounts. In tune with the above guidelines and to avail the tax


benefits, banks may carry out the Write-off exercise at Central Office level. This is called Technical Write-off. Such accounts shall be maintained at Central Office to ensure that such accounts are taken to logical conclusion .

58 What is the difference between Reserve and Provision? Provision- is a Charge on the Profit . Some Provisions are Provision on NPAs, Provision on Standard assets, Provision for Retirement Benefits etc .Provision can be general as well as specific. Reserve is an appropriation to Profit- when profits have been ascertained after deducting all expenses which includes provision and others. Reserves are residual earnings after all expenses and taxation which belongs to the owners namely the shareholders. Provision is a charge to the profit whilst a reserve is an appropriation to the profit. Reserve is shown on debit side of profit and loss appropriation account and liabilities side of balance sheet. Provision is shown on debit side of profit and loss account and assets side of balance sheet as deduction from the concerned asset. Reserve is created when there is enough profit in the business. Provision is created even if there is loss in the business. Reserve can be distributed to shareholders as dividend. Provision can not be distributed as dividend to shareholders. Reserve can be Capital Reserve as well as Revenue Reserve. Capital Reserves: Are appropriation from profits which cannot be distributed by way of cash dividends. These capital reserves arises mainly from (i) equity transactions between the enterprise and its shareholders; (ii) from adjustments arising in accounting for business combinations; (iii) from differences arising on translation of foreign currency operations; (iv) from surpluses arising from asset revaluation; (iv) any unrealized gain which has not been included in income. Examples of capital reserves includes: share premium, capital redemption reserves, capital reserves arising on merger and acquisition, statutory reserves, asset revaluation reserve and exchange fluctuation reserves. Revenue Reserves are: Are appropriation from profit which can be distributed by way of cash dividends although some may be set aside for other purposes. Examples like retained profits and general reserves.

59 Bank fixes exposure norms for various segments. How to calculate this exposure?. (Limit-Fund Based, % of Non fund based, DP or O/S?) Credit Exposure will include both Fund based and Non fund based credit .The


Sanctioned Limit or Outstanding, which ever is higher, will be reckoned for arriving at the exposure limit.In respect of Term Loans only outstanding will be reckoned.

Define “Exposure “with reference to Risk management in Banking.?

Exposure in financial terms refers getting exposed to a certain risk uncovered. Mitigating the risk is part of risk management. In respect of individuals, investments consist of different classes like Bank Deposits, Equity, MFs, Real Estate , Gold etc. If proper asset allocation is not made depending upon the financial goals, the individual run the Concentration risk in capital protection and return on investments. Even in a particular class of asset investment eg in Equity /MFs, if invested in one particular stock or MF( Different funds) the risk of over exposure has to be managed. In Banks exposure is mainly related to Credit and investment. Credit exposure consists of Both funded and non funded and Investment exposure includes Underwriting, Investment concentration. As a part of Risk Management, Banks prescribe ceiling for Single Borrower exposure and Group Borrower exposure. They have substantial exposure limit also. Apart from that there is exposure limit for particular segment like Trust, society, Educational Institutions, NBFC, Capital Market, Real Estate, Gold Loans, Ceiling for Film Industry, aviation, Infrastructure. Also depending upon the Credit concentration , past performance, present trend and Government directives with Board approval Banks prescribe ceiling ( sublimit ) for various Industries. Banks fix ceiling for total Term Loan exposure also. To arrive at the exposure Limit , Sanctioned limit or outstanding which ever is higher will be reckoned. In case of Term Loans only Outstanding will be reckoned. Banks will compute Credit exposure for both fund and non fund based credit limits, based on RBI guidelines. The exposure Limits are based on the Capital funds of the Bank. Banks are l permitted to fix risk exposure ceiling with the approval of the board.

60 What is called Off balance sheet exposure? Off Balance Sheet Exposure

Off-Balance Sheet exposures refer to the business activities of a bank that generally do not involve booking assets (loans) and taking deposits. Off-balance sheet activities normally generate fees, but produce liabilities or assets that are deferred or contingent and thus, do not appear on the institution's balance sheet until and unless they become actual assets or liabilities.

61 What is called Securitization? A process by which a single asset or a pool of assets are transferred from the balance sheet of the originator (bank) to a bankruptcy remote SPV (trust) in return for an immediate cash payment.


62 What is the difference between carpet area, built-up and super built-up area?

The area of an apartment or building, not inclusive of the area of the walls is known as carpet area. This is the area that is actually used and in which a carpet can be laid. When the area of the walls including the balcony is calculated along with the carpet area, it is known as built-up area. The built-up area along with

the area under common spaces like lobby, lifts, stairs, garden and swimming pool

is called super built-up area.

The area of an apartment or building, not inclusive of the area of the walls is known as carpet area. This is the area that is actually used and in which a carpet can be laid. When the area of the walls including the balcony is calculated along with the carpet area, it is known as built-up area. The built-up area along with the area under common spaces like lobby, lifts, stairs, garden and swimming pool is called super built-up area.

63 What is FSI?

Floor Space Index(FSI) means the quotient of the ratio of the combined gross floor area of all floors excepting areas specifically exempted under these Regulations to the total area of the plot.

64 What is called Quasi Equity? Quasi-equity investments are debt instruments with embedded equity features, such as convertible loans . It is a debt taken on by a company that has some traits of equity, such as having flexible repayment options or being unsecured. Examples of quasi-equity -subordinated debt.

65 What is called Sweat Equity? The equity allotted to the Working or Managing Director for sweating out for the growth of the Company.

66 What is called Contingent liability?

A liability that a company may have to pay, but only if a certain future event occurs. A liability that is not currently a liability but may become one upon the happening of some future event is called contingent liability.

Eg-Guarantee- Guarantor becoming liable for payment in the event the original borrower defaults .In bank balance sheet these liabilities are reported under Off balance sheet items.

67 In Credit Monitoring what is called Diversion? Diversion takes place ,When a borrowing unit has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

Diversion of funds, would be construed to include any one of the undernoted

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occurrences:

a. utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanction;

b. deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned;

c. transferring funds to the subsidiaries / Group companies or other corporates by whatever modalities;

d. routing of funds through any bank other than the lender bank or members of consortium without prior permission of the lender;

e. investment in other companies by way of acquiring equities / debt instruments without approval of lenders;

f. shortfall in deployment of funds vis-à-vis the amounts disbursed / drawn and the difference not being accounted for.

68 What is called Siphoning of Funds? Siphoning of funds, should be construed to occur if any funds borrowed from Banks / FIs are utilised for purposes un-related to the operations of the borrower, to the detriment of the financial health of the entity or of the lender. The decision as to whether a particular instance amounts to siphoning of funds would have to be a judgment of the lenders based on objective facts and circumstances of the case.

69 What is the definition for Wilful Default?

"A wilful default would be deemed to have occurred if any of the following events is noted :-

A The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations.

b. The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

c. The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.

70 What is the meaning of Restructuring an account? Restructuring

A restructured account is one where the bank, grants to the borrower concessions that the bank would not otherwise consider. Restructuring would normally involve modification of terms of the advances/securities, which would generally include, among others, alteration of repayment period/ repayable amount/ the amount of installments and rate of interest. It is a


mechanism to nurture an otherwise viable unit, which has been adversely impacted, back to health.

71 What is the difference between Financial and Performance Guarantee? FINANCIAL GUARANTEES These are guarantees which are given in lieu of purely monetary obligations.

Advance payment guarantees, guarantees issued in lieu of Earnest Money

Deposit, Security deposits etc., take the form of financial guarantees

PERFORMANCE GUARANTEES These are guarantees issued in respect of performance of a contract or obligation. Although these guarantees are for performance, the quantum of the pecuniary obligation is reduced to money terms .

72 What are the Interest Subvention Schemes available at present?

Agricultural-2.00% pa on short term production credit(crop Loan ) up to Rs 3

lacs.-Max for 1 year- Banks should make credit available at 7% up to Rs3 lacs

to farmers. Addl interest subvention of 3% pa to those farmers who repay their

short term credit with in 1 year-up to Rs3 lacs-Effective rate of interest to

farmers-4%.

73 What is the provision for Standard Assets, SS, Doubtful assets? All Standard assets-provision-0.40%-For Agri direct and Small and Micro-0.25% Medium enterprises-40%) Minimum 0.40% on standard assets .-Provisions eligible for inclusion in Tier II capital. Advances to Commercial Real Estate-1.00% Advances to Commercial Real Estate – Residential Housing Sector(CRE - RH) at 0.75 %

The provisions on standard assets should not be reckoned for arriving at net NPAs.

The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet.

Housing Loan –Teaser Rates For housing loans sanctioned at teaser rates, the standard asset provisioning on the outstanding amount, in respect of such loans, increased from 0.40 per cent to 2.0 per cent.


The provisioning on these assets to revert to 0.40 per cent after 1 year from the date on which the rates are reset at higher rates if the accounts remain ‘standard’. Restructured Accounts:

i. Restructured accounts classified as standard advances will attract higher provision in the first two years from the date of restructuring. In cases of moratorium on payment of interest/principal after restructuring, such advances will attract higher provision for the period covering moratorium and two years; and

ii. Restructured accounts classified as non-performing advances, when upgraded to standard category will attract higher provision in the first year from the date of upgradation Substandard assets Provisioning .

The above-mentioned higher provision on restructured standard advances (2.75 per cent as prescribed vide circular dated November 26, 2012) would increase to 5 per cent in respect of new restructured standard accounts (flow) with effect from June 1, 2013 and increase in a phased manner for the stock of restructured standard accounts as on May 31, 2013 as under :

3.50 per cent - with effect from March 31, 2014 (spread over the four quarters of 2013-14)

4.25 per cent - with effect from March 31, 2015 (spread over the four quarters of 2014-15)

1.00 per cent - - with effect from March 31, 2016 (spread over the four

quarters of 2015-16).

Substandard Provisioning:

A general provision of 15 percent on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available.

The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 25 per cent on the outstanding balance. However, in view of certain safeguards such as escrow accounts available in respect of infrastructure lending, infrastructure loan accounts which are classified as sub-standard will attract a provisioning of 20 per cent instead of the aforesaid prescription of 25 per cent. To avail of this benefit of lower provisioning, the banks should have in place an appropriate mechanism to escrow the cash flows and also have a clear and legal first claim on these cash flows. The provisioning requirement for unsecured ‘doubtful’ assets is 100 per cent.

Unsecured exposure is defined as an exposure where the realisable value of the security, as assessed by the bank/approved valuers/Reserve Bank’s inspecting officers, is not more than 10 percent, of the outstanding exposure. ‘Exposure’ shall include all funded and non-funded


exposures (including underwriting and similar commitments). ‘Security’ will mean tangible security properly discharged to the bank and will not include intangible securities like guarantees (including State government guarantees), comfort letters etc.

Doubtful Assets Provisioning

The provisioning requirement for unsecured ‘doubtful’ assets is 100 per cent. Unsecured exposure is defined as an exposure where the realisable value of the security, as assessed by the bank/approved valuers/Reserve Bank’s inspecting officers, is not more than 10 percent, of the outstanding exposure. ‘Exposure’ shall include all funded and non-funded exposures (including underwriting and similar commitments). ‘Security’ will mean tangible security properly discharged to the bank and will not include intangible securities like guarantees (including State government guarantees), comfort letters etc.

Doubtful Assets-100% of unsecured portion. In regard to Secured portion

Doubtful up to 1 year-25% of secured portion

Doubtful 1-3 years-40% of secured portion

More than 3 years-100% of the secured portion

Loss Asset Provisioning-100% of outstanding

74 Define Unsecured Exposure

Unsecured exposure is defined as an exposure where the realizable value of the security, as assessed by the bank/approved valuers/Reserve Bank’s inspecting officers, is not more than 10 percent, of the outstanding exposure. ‘Exposure’ shall include all funded and non-funded exposures (including underwriting and similar commitments). ‘Security’ will mean tangible security properly discharged to the bank and will not include intangible securities like guarantees (including State government guarantees), comfort letters etc.

75 What are the RBI approved Credit Rating Agencies in India and abroad? Domestic Credit rating agencies (arranged in alphabetical order) for the purposes of risk weighting their claims for capital adequacy purposes: a) Credit Analysis and Research Limited; b) CRISIL Limited; c) FITCH India; and d) ICRA Limited The Reserve Bank of India has decided that banks may use the ratings of the following international credit rating agencies ,for the purposes of risk weighting their claims for capital adequacy purposes where specified: a. Fitch;


b. Moodys; and c. Standard & Poor’s

76 What is called Credit Information Co? Name the Credit Information Cos approved by RBI.

Credit Information Companies (Regulation) Act, 2005 came into force on 14th December, 2006.

The Act require every credit institution to become member of at least one credit information company before the expiry of three months from such commencement.

Such CIS have to be registered with RBI and DBOD, RBI will issue Certificate of registration to commence the business of credit information.

A CIC collects and maintains records of an individual’s payments pertaining to loans and credit cards. These records are submitted to the CIC by banks and other Credit Institutions, on a monthly basis. This information is then used to create Credit Information Reports (credit report) which are provided to Credit Institutions in order to help evaluate and approve loan applications or any other credit applications. The credit report is often used tool in evaluating loan applications. If required by the loan provider, a CICs will also provide a Credit Score, which is a 3 digit numeric summary of your credit report. The CIBIL TransUnion Score is used my many lenders during the loan application process.

CICs are also commonly referred to as “Credit Bureaus”.

List of CICs approved by RBI

1. Credit Information Bureau (India) Ltd.( CIBIL) 2. Experian Credit Information Company of India Private Ltd 3. Equifax Credit Information Services Pvt. Ltd 4. High Mark Credit Information Services Pvt. Ltd.

77 What is the difference between Cash flow and Funds Flow Statement? Cash Flow Statement : Statement showing changes in inflow & outflow of cash during the period. Funds Flow Statement :Statement showing the source & application of funds during the period. Major Difference: The CFS allows investors/Bankers to understand how a company's operations are running, where its money is coming from, and how it is being spent. FFS is showing the fund for the future activities of the Company.


Cash flow simply means a factual presentation of cash inflows and outflows. This will give a clear picture of cash and cash equivalents movement during a period of time. On the other side fund flow is broader term which never confine to cash movements only but this will show the sources & application of funds and its movements over a period of time. The major key aspect of fund flow is its working capital presentation. Business operations can be easily be analyzed through pointing out the movements of working capital. The key decisions of management which affect capital structure can be planned by utilizing data presented in fund flow statement through making a comparison of working and fixed capital which will enable progressive growth in prospective environment.

78 What is called Risk weighted asset? Risk Weighted Asset The notional amount of the asset is multiplied by the risk weight assigned to the asset to arrive at the risk weighted asset number. Risk weight for different assets vary e.g. 0% on a Government Dated Security and 20% on a AAA rated foreign bank etc.

79 What is called CRAR?

CRAR(Capital to Risk Weighted Assets Ratio)

Capital to risk weighted assets ratio is arrived at by dividing the capital of the bank with aggregated risk weighted assets for credit risk, market risk and operational risk. The higher the CRAR of a bank the better capitalized it is.

80 What does the term CRE ( Commercial Real Estate denotes)? Commercial real estate is defined as “fund based and non-fund based exposures secured by mortgages on commercial real estates (office buildings, retail space, multi-purpose commercial premises, multi-family residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction etc.)”

81 What is called CRE Exposure?

CRE-Commercial Real Estate Exposure

Commercial real estate Exposure is defined as “fund based and non-fund based exposures secured by mortgages on commercial real estates (office buildings, retail space, multi-purpose commercial premises, multi-family residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction etc.)”

82 Define CRE-RH

Commercial Real Estate - Residential Housing

As loans to residential housing projects under the commercial real estate (CRE) sector exhibit lesser risk and volatility than the CRE sector taken as a


whole, it has been decided to carve out a separate sub-sector called ‘commercial real estate – residential housing’ (CRE-RH) from the CRE sector. CRE-RH would consist of loans to builders/developers for residential housing projects (except for captive consumption) under CRE segment. Such projects should ordinarily not include non-residential commercial real estate. Integrated housing projects comprising some commercial space (e.g. shopping complex, school, etc.) can also be classified under CRE-RH, provided the commercial area in the residential housing project does not exceed 10 per cent of the total floor space index (FSI) of the project. In case the FSI of the commercial area in the predominantly residential housing complex exceeds the ceiling of 10 per cent, the project loans should be classified as CRE and not CRE-RH.

The CRE-RH segment will attract a lower risk weight of 75 per cent and lower standard asset provisioning of 0.75 per cent as against 100 per cent and 1.00 per cent, respectively for the CRE segment.

It has been decided to rationalise the prudential norms on risk-weight, provisioning and loan to value (LTV) ratio for individual housing loans, CRE and CRE-RH exposures, as under:

Category of Loan. Individual Housing Loans

LTV Ratio % Risk weight % Standard asset Provisioning %

Up to Rs 20 lakh 90 50 0.40

Above Rs 20 lakh up to Rs 75 lakh

80 50 0.40

Above Rs 75 lakh 75 75 0.40

CRE-RH NA 75 0.75

CRE NA 100 1.00

Note: (1) The LTV ratio should not exceed the prescribed ceiling in all fresh cases of sanction. In case the LTV ratio is currently above the ceiling prescribed for any reasons, efforts should be made to bring it within limits. (2) Banks’ exposures to third dwelling unit onwards to an individual will also be treated as CRE exposures

Additional risk-weight of 25 percentage points for restructured housing loans and higher provisioning of 2 per cent for housing loans extended at teaser rates by banks will continue.

83 To get the protection under Sec 138 of NI act, Banks are taking Post dated cheques for EMII , for additionally securing their loans. In cases where ECS –debit Mandate is taken, whether it is necessary to take PDCs also?

RBI Guide lines: Considering the protection available under Section 25 of the Payment and Settlement Systems Act, 2007 which accords the same rights and remedies to the payee (beneficiary) against dishonor of electronic funds transfer instructions under insufficiency of funds as are available under Section 138 of the Negotiable Instruments Act, 1881, there is no need for Banks to take additional cheques, if any, from customers in addition to ECS (Debit)


mandates. Cheques complying with CTS-2010 standard formats shall alone be obtained in locations, where the facility of ECS/RECS is not available.

84 What is a Credit Rating? A credit rating represents the rating agency's opinion on the likelihood of a rated debt obligation being repaid in full and on time. A simple alphanumeric symbol is normally used to convey a credit rating.

85 How does a Credit Rating Agency differ from a Credit bureau? A credit rating agency provides an opinion relating to future debt repayments by borrowers. A credit bureau provides information on past debt repayments by borrowers.

86 How does a Credit rating differ from an Audit? A credit rating agency relies on a variety of information sources, including published annual reports. An audit process is designed to detect fraud or misrepresentation of information, whereas the credit rating process is not.

87 How does a credit rating differ from credit scores assigned by credit information companies?

Both credit rating and credit scores are a measure of credit risk and reflect the varying level of probability of default of a given borrower.

The difference is in the methodology used by them to assess the credit risk. While credit ratings are forward looking opinion about credit risk, credit scores assigned by credit bureaus are based on credit history of a borrower. Credit ratings take into account the risk that a borrower may face during a given time horizon in the future, whereas credit scores are based on the past performance of a borrower with regard to servicing of debt.

The second difference is that credit scores are assigned to a particular borrower while credit ratings can be assigned to a specific facility.

While credit rating generally denotes a rating assigned by a credit rating agency, there is also a mechanism of internal ratings by banks. A mechanism of internal credit rating of borrowers was in existence in banks much before external credit rating of bank loans were introduced under Basel II regulations. In line with Reserve Bank’s guidelines on ‘Risk Management Systems in Banks’ issued in October 1999, banks in India have put in place an internal credit rating framework.

In addition to the internal credit rating framework, which are generally used to rate corporate clients, banks also use simple credit scoring models to rate smaller borrowers and retail borrowers. Credit scoring models for retail customers generally look at the following four groups of indicators – demographic indicators, financial indicators, employment indicators and behavioural indicators.


88 What is called CRF? (Credit –risk Rating Framework?

In line with Reserve Bank’s guidelines on ‘Risk Management Systems in Banks’ issued in October 1999, banks in India have put in place an internal credit rating framework.

‘A Credit-risk Rating Framework (CRF) is necessary to avoid the limitations associated with a simplistic and broad classification of loans/exposures into a “good” or a “bad” category. The CRF deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure. Such a rating framework is the basic module for developing a credit risk management system and all advanced models/approaches are based on this structure.

The credit rating assigned by a bank could be used for the following:

a. Individual credit selection – to decide whether to lend or not to a particular borrower

b. Pricing (credit spread) and specific features of the loan facility - While risk based pricing is an essential component of credit risk management, available evidence suggest that competitive factors influence the pricing of a bank loan more than the risk rating. However, for traded debt instruments, like commercial paper, there is still link between rating and credit spreads.

c. Portfolio-level analysis. d. Surveillance, monitoring and internal MIS e. Assessing the aggregate risk profile of bank/ lender. These would be

relevant for portfolio-level analysis. For instance, the spread of credit exposures across various CRF categories, the mean and the standard deviation of losses occurring in each CRF category and the overall migration of exposures would highlight the aggregated credit-risk for the entire portfolio of the bank.

89 What is the relation between NPA, Credit Risk and Credit Rating/Scores?

Since credit ratings/scores are a measure of credit risk, it has a strong link with NPAs. Loans extended by banks are classified as NPAs when the bank considers that borrower has not serviced his debt or is unlikely to service his debt as per the terms and conditions of the contract. As such NPAs are manifestation of credit risk.

Since credit ratings are relative measure of credit risk, the likelihood of default of a borrower with a higher credit rating should be lower than a borrower with a lower credit rating. As a corollary, a higher proportion of borrowers with good credit rating in the books of a bank should translate into lower level of NPAs. Whether that assertion is true or not requires us to evaluate the credit ratings assigned by a credit rating agency by juxtaposing them against the actual default experience.

Another important factor that needs to be kept in mind while comparing the


ratings by a CRA with that by a bank is what constitutes a ‘default’? Credit rating agencies recognise default even if there is a default of one rupee or a delay of one day in servicing the scheduled debt obligations. As far as banks are concerned, an asset is treated as non-performing asset only when a scheduled payment remains overdue for a period of more than 90 days. The definition of default is different as the purpose of recognition of default is different.

Banks’ Role:

There is growing need for banks to strengthen their internal credit appraisal system i.e. on their credit assessment and risk management mechanisms. At the same time, banks should also consider using external credit appraisals in conjunction with their own assessment. This would mean getting the house in order and at least on this score, banks would be on stronger ground. Banks would still be vulnerable to other factors such as economic slowdown, or policy changes or wilful defaults. But, one area of concern would be plugged. This is where credit rating agencies can play an important role given their experience as well as steady track record over the years.

90 What is called Soft Loan?

Soft Loans are normally given as a measure of liquidity support with a concessional rate of interest. For meeting Margin requirement for Technology Up gradation, soft loans will be given carrying Concessional rate of interest. In case of rehabilitation of Sick units, these soft loans are provided To extend to the entrepreneurs equity or quasi-equity assistance, the Committee recommends the setting up of a soft loan assistance fund or a National Equity Fund Soft Loans are Loans normally extended as a measure of liquidity support with concessional rate of interest with liberal repayment terms including extended holiday period, longer repayment schedules. Normally it is provided by Banks for units under Rehabilitation . Development FI set separate funds to provide Soft loans/Interest Subsidy for Technology up gradation (to meet margin requirements ), Venture Capital, MSME, Infrastructure development etc,. National Equity Fund was set up in 1987 to provide equity type support to small entrepreneurs to establish new projects in the tiny and small scale sector. The scheme is being operated by Small Industries Development Bank Of India (SIDBI) in consultation and with joint funding from Government of India. Government of India through SIDBI has since advised that no budgetary allocations would be available from the financial year 2008 onwards.


91 What is called Legal Audit?

Large Value Accounts - Legal Audit of Documents

Banks in respect of all Credit exposure of Rs 5 crores and above should conduct to periodic legal audit and re-verification of title deeds and other documents, with relevant authorities as part of regular audit exercise till the loan stands fully repaid.

Further, banks should furnish a review note to its Board/Audit Committee of the Board at quarterly intervals on an ongoing basis giving therein information in respect of such legal audits which should cover aspects like, number of loan accounts due for legal audit for the quarter, how many accounts covered, list of deficiencies observed by the auditors, steps taken to rectify the deficiencies, number of accounts in which the rectification could not take place, course of action to safeguard the bank's interest in such cases, action taken on issues pending from earlier quarters.

92 Credit Monitoring-What is called Peer monitoring?

The term Peer Monitoring has been mentioned in the RBI guidelines issued , while dispensing with the requirement “ No due Certificate” for lending by banks. During Credit Appraisal, for due diligence, RBI has suggested that Banks may use any one or more of the following.

Credit history check through credit information companies Self declaration or an affidavit from the borrower CERSAI registration Peer monitoring Information sharing among lenders Information search (writing to other lenders with an auto deadline)

It has been used in the context , that Banks may obtain market information about the borrower applicant from the neighbors, co borrower , members from the same or different group or from the persons in the same line of activity.

The term Peer monitoring denotes monitoring by a partner or associate with mutual interest and joint responsibility. In cases of loans sanctioned to SHG, JLG and Loans with Co borrowers , the joint liability clause lowers the risk of default. The joint responsibility clause in group lending provides peer monitoring. It cast a responsibility on the Co borrower/group members to exercise prudence over the end use of the funds so that the likelihood of repayment is enhanced. The partner or group member who is also responsible for the repayment of loan will be in a better position to monitor the function of the unit or group. Thus peer monitoring helps the borrower and the bank . Bank can monitor the asset with the help of feed back and signals received from the partner or group members. This is called peer monitoring. Peer monitoring is largely responsible for the successful financial performance of the Grameen Bank of Bangladesh and of similar group lending programs.


IOB-FINANCIAL INDICATORS Rs in Crore

S NO Particulars 30.06.16 31.03.16 31.03.15 31.03.14

1 Global Deposits 218484 224514 246049 227976

2 Global Advances 165556 172727 179041 181081

3 Mix 384040 397241 425090 409057

4 Operating Profit 690.55 2885.46 3322.34 3997.24

5 Net Profit -1450.50 -2897.33 -454.32 601.74

6

CRAR-Basel –III

Basel III Tier I-7.39%

CET I- 6.78% Tier II-2.08% Total-9.47%






CET I-7.13% Tier II-3.31% Total-10.78%

Basel II Tier I % Tier II % Total Basel II-11.15%

7 Dividend 12%

8 Net Int Margin 1.87% 1.94 2.06% 2.28%

9 Return on Assets

-0.16% 0.23%

Return on Equity Negative

10 Weighted average EPS

-5.56% -3.68% 6.05

11 Book Value Per Share

105.71

12 CD ratio 75.77% 76.93% 72.77% 79.43%

13 Gross NPA to Gross Adv

20.48% 33913.15

17.40% 30049

8.33% 14922.45

4.98% 9020.48

14 Net NPA 13.97% 21321.24

11.89% 19213

5.68% 9813.33

3.20% 5658.12

15 Govt share in Equity

73.58% 77.32% 73.80% 73.80%

Public Share Holding

22.68% 26.20% 26.20%

16 Capital 1807.26 1235.35 1235.35

17 Authorized Capital

3000 3000 3000

18 Total capital funds

19988.73

19 CASA Deposits 30.17% 29.10% 25.09% 25.34%

20 Provisional Coverage ratio

47.61% 47.39% 50.92% 54.94%

21 Cost to Income Ratio

63.62% 63.53% 42.43% 48.40%

22 Business Per employee

13.24 13.67

23 Profit per employee

Negative Negative 2.01


During the year 2015-16 the Bank has raised capital to the tune of Rs 2009 crore from Government of India and Rs 202 crore from LIC of India (including share premium). IT INITIATIVES: Bank has embarked on Technology Upgrade and IT Transformation, to improve the operational efficiency and customer service.CBS migration project for all branches has been completed by February 2016. Quarter ended 30.06.16 During the quarter ended 30.06.16 bank raised capital of Rs 261.94 crores.

GOI advised their decision of allocating Rs 3101 crores by way of preferential allotment of equity. Of this Rs1551 crores are marked for immediate infusion. With this our CRAR position will be 10.37%, well above regulatory minimum of 9.625%.

Bank has completed Technological upgradation and IT transformation to new outsourced CBS (Finacle ) to improve operational efficiency and customer service. Bank has also installed Self pas s Book Printers ,Bulk Note accepters, besides hosting lot of services through alternative delivery channel.

CATEGORY OF BRANCHES Based on business mix of avg dep+avg Adv for last 2 years.(including20% of Non fund business)

Category Avg Business Mix Incumbency

Small Below Rs5 Crore Scale-I

Medium Rs5 cr-Below Rs20 cr Scale-II

Large Rs 20 Cr-Below75 cr Scale-III

Very Large Rs75 cr-below Rs200 cr Scale-IV

Excep Large Rs200 cr Scale-V

Excep Very Large Rs1500 cr and above(Min adv-Rs750 cr

Scale-VI

WISH YOU ALL GOOD LUCK !