III.Financial
Sector Reforms andMonetary Policy Measures 54. A
major objective of the annual policy Statements and mid-term Reviews of RBI, in
recent years, has been to review and assess the progress of the reform process
in the financial sector and to provide some guideposts for the future. In recent
years, there has been a move away from micro-regulation to macro-management with
an emphasis on structural measures for strengthening the financial system and
for improving the functioning of the various segments of financial markets. The
policy measures announced in these Statements generally aim at increasing the
operational efficiency of monetary policy, improving the regulatory and supervisory
functions of the Reserve Bank and strengthening the prudential and supervisory
norms along with developing technological and institutional infrastructure of
the financial sector and improving the credit delivery system. 55. The
Reserve Bank has been generally adopting the practice of introducing policy measures
after extensive consultations with experts and market participants in order
to ensure that the proposed measures are capable of easy and effective implementation
and are in accordance with the international best practices. 56. Against
this background, an attempt has been made in this section to review the progress
of implementation of the measures initiated so far. This would not only allow
the process of fine-tuning the measures already initiated, but also facilitate
the introduction of new measures as and when necessary to meet the emerging challenges. Monetary
Measures (a) Bank
Rate - It is proposed
to reduce the Bank Rate by 0.25 percentage point from 6.50 per cent with effect
from the close of business today (October 29, 2002). At this level, it is the
lowest Bank Rate since 1973.
57. It
may be mentioned that over the last four and a half years, the Bank Rate has been
reduced from 11.0 per cent to 6.25 per cent, i.e. by as much as 475 basis points.
This is the sharpest reduction in the Bank Rate since Independence. The sharp
reduction in the Bank Rate has also been reflected in a fall in call money rates
and Treasury Bill rates as well as yields on government securities across all
maturities. The yield on benchmark government securities of 10-year maturity is
now 7.07 per cent, a little above 7.0 per cent. In nominal terms, as well as in
"real" terms (in relation to the prevailing rate of inflation), it is
reasonable to observe that the Bank Rate, call money rates as well as yields on
government securities are now quite reasonable. 58. However,
the average lending rates of banks, despite significant reduction in the recent
period, continue to be substantially higher than the Bank Rate, yields on government
securities in nominal as well as in "real" terms. This is due to various
structural reasons which have been emphasised in earlier policy Statements (e.g.,
high proportion of long-term deposits at old and fixed interest rates with banks,
relatively high transaction costs and continued depositors’ preference for
fixed rather than variable interest rates on term deposits). In view of the structural
pattern, and the present substantial difference in the Bank Rate and lending rates
of banks, the sensitively of the latter to further changes in the Bank Rate is
now relatively weak. 59. Under
the circumstances, as the present level of the Bank Rate as well as call money
and other money market rates are quite comfortable and there is a sizeable gap
between these rates and the average lending rates of banks, no useful purpose
is likely to be served by a further reduction in the Bank Rate in the near future.
Unless circumstances change, the policy bias in regard to the Bank Rate is to
keep it stable at the present level at least until the end of the financial year.
(b) Repo Rate
- The repo rate under the Liquidity Adjustment
Facility (LAF) of RBI to be made available on October 30, 2002, is also being
reduced by 0.25 percentage point. Subsequently, the auction method for repos will
continue as previously.
60. It
may be recalled that while repo auctions are conducted without any preannounced
rate and bids are accepted on the basis of uniform price method, RBI has retained
the option to switch over to fixed rate repos on overnight basis. RBI will continue
to use this flexibility of switching over between the options so as to make efficient
use of the LAF system in the daily liquidity management. (c) Cash
Reserve Ratio - Reduction and Rationalisation 61. The
Reserve Bank has been pursuing its medium-term objective of reducing Cash Reserve
Ratio (CRR) to the statutory minimum level of 3.0 per cent. Taking into account
the progress achieved in the areas of enforcing prudential standards and operationalising
the LAF, RBI has reduced CRR from 11.0 per cent in August 1998 to 5.0 per cent
in June 2002 while withdrawing certain exemptions. Further, the modalities of
CRR maintenance have been rationalised with the introduction of a lagged (by one
fortnight) maintenance system. In addition, RBI is remunerating the eligible CRR
balances maintained by banks at the Bank Rate. As a further step in this direction
of moving towards the statutory minimum level of CRR, it is proposed:
- To reduce CRR from 5.0 per cent to
4.75 per cent effective from the fortnight beginning November 16, 2002. (With
this reduction, CRR has been reduced by as much as 3.75 percentage points over
the past two years).
62. At
present, banks are required to maintain a minimum of 50 per cent of the required
reserves in the first week and a minimum of 65 per cent in the second week of
the reporting fortnight. Despite this flexibility given to banks on the daily
maintenance, the actual daily CRR maintenance of majority of banks in relation
to the prescribed level is now quite high. While moving towards a low CRR, it
is necessary that the demand for bank reserves in the inter-bank market is modulated
and the volatility in CRR maintenance is minimised. In this direction:
- Banks will be required to maintain
a minimum of 80 per cent of required CRR amount on a daily basis during a fortnight
with effect from the fortnight beginning November 16, 2002. The minimum level
of 80 per cent would be applicable for all the days in a reporting fortnight.
(d) Interest on Cash Balances
Maintained with RBI under CRR 63. At
present, all scheduled commercial banks are paid interest at the Bank Rate on
eligible cash balances maintained with RBI under CRR requirement, without detailed
scrutiny by RBI, on the basis of quarterly interest claim statement submitted
by banks. Such interest payment is made to all banks within one month after the
end of the quarter. Based on the recommendations of the Regulations Review Authority,
it has been decided to:
- Pay interest on eligible CRR balances on a monthly basis
with effect from April 2003. In order to facilitate this, banks are urged to put
in place proper technology including adoption of the software package which will
help transmission of Form A data by banks directly to RBI.
(e)
Statutory Liquidity Ratio
of Regional Rural Banks 64. Regional
Rural Banks (RRBs) were required to maintain SLR at 25 per cent of their NDTL
in cash or gold or in unencumbered government and other approved securities. In
this regard, balances maintained in call or fixed deposits by RRBs with their
sponsor banks were treated as "cash" and hence, reckoned towards their
maintenance of SLR. As a prudential measure, it was considered desirable on the
part of all RRBs to maintain their entire SLR portfolio in government and other
approved securities. Accordingly, in the annual policy Statement of April 2002,
it was decided that all RRBs should maintain their entire SLR holdings in government
and other approved securities by converting their existing deposits with sponsor
banks into government securities by March 31, 2003. While a number of RRBs have
already achieved the minimum level of SLR in government securities, some RRBs
and their sponsor banks have expressed difficulty in premature withdrawal of deposits
reckoned for SLR purposes. Accordingly, it has been decided that:
- SLR holdings of RRBs in the form
of deposits with sponsor banks maturing beyond March 31, 2003 may be allowed to
be retained till maturity. These deposits may be converted into government securities,
on maturity, in case the concerned RRBs have not achieved the 25 per cent minimum
level of SLR in government securities by that time.
- Although deposits with sponsor
banks contracted before April 30, 2002 would be reckoned for SLR purpose till
maturity, RRBs are advised to achieve the target of maintaining 25 per cent SLR
in government securities out of the maturity proceeds of such deposits with sponsor
banks as well as from their incremental public deposits at the earliest.
Interest
Rate Policy (a)
Interest Rate Flexibility 65.
The recent monetary policy Statements have been drawing attention to the factors
causing rigidities in the structure of interest rates, particularly in the lending
rates of commercial banks. These factors, inter alia, include: a) fixed
rate deposits contracted by commercial banks; b) high average cost of funds and
non-interest operating expenses; c) large volume of NPAs; d) regulation of interest
rates on small savings and provident funds; and e) persistent and large volume
of market borrowing programme of the Government. 66. There
has been some improvement with regard to NPAs, operating expenses and cost of
funds of commercial banks. Gross NPAs of public sector banks as a percentage of
gross advances declined from 12.4 per cent in March 2001 to 11.1 per cent in March
2002. The net NPAs as a percentage of advances also declined from 6.7 per cent
to 5.8 per cent during the same period. The non-interest operating expenses of
public sector banks as a percentage of assets declined from 2.72 per cent in 2000-01
to 2.29 per cent in 2001-02. The overall cost of funds of public sector banks
has also declined from 6.8 per cent in 2000-01 to 6.7 per cent in 2001-02. This
is an encouraging development in so far as it has opened up the scope for further
improvement in these parameters and in bringing about a reduction in transaction
costs and in lending rates of commercial banks. 67. The
annual policy Statement of April 2002 had reviewed the issue and made certain
suggestions which, inter alia, include: (a) introduction of flexible interest
rate system (together with fixed rate option) for all new deposits with reset
of interest rate at six-monthly intervals; and (b) enabling banks to pay interest
at contracted rates on the existing long-term deposits for the period already
run and to waive penalty for premature withdrawal if the same deposit is renewed
at a variable rate. 68. In
order to further improve flexibility, banks have been given freedom to decide
the period of reset on variable rate deposits. According to the latest available
information, some banks have already introduced variable rate deposits. Although
the depositors’ response to variable rate deposits has not been very favourable
so far, banks are encouraged to make efforts to popularise flexible deposit schemes
among the depositors as these are in the long-term interest of banks as well as
depositors. (b) Prime Lending Rate and
Spread 69. The
annual policy Statement of April 2002 had indicated that spreads over PLR of some
banks are substantial. Banks were, therefore, urged to review the maximum spreads
over PLR and reduce them wherever they were unreasonably high. A few banks have
reduced marginally their maximum spreads. The Reserve Bank has been monitoring
maximum spread over PLR and also the range of lending rates at which maximum business
is contracted under a new information system. According to the latest available
information, both PLR and spread are varying widely across banks/bank-groups.
Ideally, in a competitive market, PLRs among various banks/bank-groups should
converge to reflect credit market conditions. Moreover, spreads around the PLR
should be reasonable. In the current environment of low inflation, unreasonably
wide spreads could adversely affect the overall credit portfolio of banks. Furthermore,
very wide spreads provide opportunities for non-transparency. In order to ensure
appropriate pricing of loans, banks are encouraged to review both their PLRs and
spreads and align spreads within reasonable limits around PLR subject to approval
of their Boards. (c)
Interest Rates on Deposits by Co-operative
Banks/Regional Rural Banks/Local
Area Banks 70. Interest
rates on deposits have been deregulated except deposits in savings bank accounts,
which is currently prescribed by RBI at 4.0 per cent. However, discretion was
given to Regional Rural Banks (RRBs)/Local Area Banks (LABs) to pay additional
interest of half per cent per annum over and above the interest rate prescribed
for scheduled commercial banks. Similarly, Urban Co-operative Banks (UCBs) are
allowed to pay additional interest not exceeding one per cent on the savings deposits
maintained with them. 71. Scheduled
commercial banks are not allowed to pay interest on current accounts maintained
with them. However, sponsor banks have been given the discretion to pay interest
on current account at mutually agreed rate for RRBs sponsored by them. In a similar
way, co-operative banks (Urban/Central/State) are permitted to offer at their
discretion, interest rate not exceeding half per cent per annum on current accounts.
72. The
above discretionary provisions generally add to increase in the cost of deposits
to the concerned institutions. In order to remove the above anomalies, the following
measures are suggested for implementation as early as possible:
- RRBs/LABs and co-operative banks are
encouraged not to pay any additional interest on the savings bank accounts over
and above what is payable by commercial banks.
- Co-operative banks are encouraged not
to pay interest on current accounts.
- Sponsor banks are encouraged not to
pay interest on the current accounts maintained by RRBs with them.
(d)
Interest Rates on Rupee Export Credit 73. Interest
rates on export credit in rupee terms were rationalised and ceilings were prescribed
for both pre-shipment and post-shipment credit linked to PLR in April 2001. Considering
the unusual international developments, effective September 26, 2001, as a temporary
measure, the ceiling rates on export credit were reduced to 2.5 percentage points
below PLR for pre-shipment credit upto 180 days and post-shipment credit upto
90 days, and to PLR plus 0.5 percentage point for pre-shipment credit beyond 180
days and upto 270 days and post-shipment credit beyond 90 days and upto 180 days.
In order to facilitate exporters to avail of credit at lower interest rates which
are internationally competitive, the validity period of this policy measure was
extended initially upto September 30, 2002 and subsequently upto April 30, 2003.
74. The
spread between ceiling rates of export credit in rupee terms relating to two time
buckets is as high as 3 percentage points. The actual interest rates charged by
banks on export credit in rupee terms in many cases are actually lower than the
ceiling rates stipulated by RBI. Moreover, the ceiling rate of 50 basis points
above PLR for pre-shipment credit beyond 180 days and upto 270 days and post-shipment
credit beyond 90 days and upto 180 days has lost its significance in view of the
freedom given to banks for lending at sub-PLR rates to creditworthy borrowers.
Exporters being prime borrowers could normally avail of export credit at sub-PLR
rates. 75. In
the annual policy Statement of April 2002, it was indicated that linking of domestic
interest rates on export credit to PLR has become redundant in the present circumstances
as effective interest rates on export credit in rupee terms are substantially
lower than the PLR. Therefore, a proposal was mooted to deregulate ceiling rates
on export credit in rupee terms and thereby encourage greater competition among
banks to extend such credit at lower rates to exporters with good track record.
In this direction, and with a view to encouraging competition among banks and
also to increase flow of credit to the export sector, it is proposed to liberalise
interest rates on export credit in rupee terms in two phases. Accordingly, it
is proposed that: - In
the first phase, the ceiling rate of PLR plus 0.5 percentage point on pre-shipment
credit beyond 180 days and upto 270 days and post-shipment credit beyond 90 days
and upto 180 days will be deregulated with effect from May 1, 2003. Banks would
have freedom to charge PLR or sub-PLR rates subject to approval of their Boards.
- In
the second phase, with effect from a date to be announced later, it will be considered
whether the ceiling rates on pre-shipment credit upto 180 days and post-shipment
credit upto 90 days should also be discontinued to encourage greater competition
in the interest of exports.
(e)
Flexibility in the Repayment of Export Credit 76. At
present, the pre-shipment credit granted to an exporter is liquidated out of export
bills purchased/discounted after shipment of goods. Based on the representations
received from exporters/export associations, it has been decided that:
- Subject to mutual agreement between
the exporter and the banker, the repayment/prepayment of pre-shipment credit would
henceforth be permitted. For this purpose, balances held in the EEFC account of
the exporter can also be used.
While
utilising this facility, exporters are advised to strictly adhere to the current
regulations in regard to repatriation of export proceeds within the stipulated
period. Detailed guidelines are being issued separately. This facility would be
available until further notice. (f)
Interest Rate on FCNR(B) Deposits 77. In
the annual policy Statement of April 2002, the ceiling rates on FCNR(B) deposits
were revised downward to LIBOR/SWAP rates for the corresponding maturities minus
25 basis points. Keeping in view the representations received from banks about
their difficulty in pricing Yen deposits due to very low LIBOR/SWAP rates, the
ceiling rate for Yen deposits was relaxed. Banks are free to decide FCNR(B) deposit
rates denominated in Yen which may be equal to or less than LIBOR/SWAP rates of
corresponding maturities till further notice. Interest rate ceiling on FCNR(B)
deposits denominated in other currencies will remain unchanged at the prevailing
level of LIBOR/SWAP rates of corresponding maturities minus 25 basis points. Short-term
Liquidity Assessment Model 78. As
mentioned in the annual policy Statement of April 2002, a short-term liquidity
forecasting model, developed under the guidance of eminent academic experts, is
currently being used for internal evaluation and information. The generic form
of the model has also been made available on the RBI website for wider public
debate. As any technical work of this type requires continuous refinements, RBI
welcomes comments/suggestions on the model. Money
Market 79. A
number of structural measures have been initiated to ensure balanced development
of various segments of the money market as also to preserve its integrity and
transparency. While implementing these measures, it is desirable to take cognisance
of the progress of developments made in other market segments and payments system
infrastructure. 80. In
order to preserve the integrity of the financial system and to facilitate the
development of term money and repo markets, the annual policy Statement of April
2002 had proposed the placing of prudential limits on both borrowing and lending
of banks in call/notice money market. After further consultations with select
banks, RBI stipulated these limits in a circular issued on June 27, 2002. These
stipulations have come into effect in two stages from the fortnight beginning
October 5, 2002. It is proposed to convene a meeting of the representatives of
select banks in the second half of November 2002 to review money market developments.
Non-banks may continue to lend, on an average in a reporting fortnight, upto 85
per cent of their average lending during 2000-01 as hitherto till further notice. 81. It
was stipulated that the daily borrowings of State Co-operative Banks (SCBs) and
District Central Co-operative Banks (DCCBs) in call/notice money market should
not exceed 2.0 per cent of their aggregate deposits as at the end of March of
the previous financial year. Accordingly, their transactions in call/notice money
market are being monitored on a daily basis by RBI. 82. A
Working Group was constituted to recommend the criteria for fixing the limits
for Primary Dealers (PDs) in the call/notice money market and to suggest a road
map for phasing them out from this market, in consonance with the annual policy
Statement of April 2002. The Working Group has since submitted its report and
RBI has issued the necessary instructions on July 31, 2002. Accordingly, with
effect from October 5, 2002, PDs are permitted to lend in call/notice money market
upto 25 per cent of their net owned funds (NOF). The prudential limit stipulated
on the borrowing of PDs from call/notice money market will, however, come into
effect in two stages, conditional upon certain developments in the repo market,
e.g., finalisation of uniform accounting and documentation procedures for repos,
allowing rollover of repos, introduction of collateralised borrowing and lending
obligation (CBLO), permitting repos out of available for sale (AFS) category etc.
83. In response to the representations
received from PDs, and in order to facilitate a smooth transition and functioning
of money market under the new prudential norms, PDs are permitted to adhere to
the limits of lending in call/notice money market upto 25 per cent of their NOF
on a fortnightly average basis.
- Rationalisation of Standing Facilities
84. With
the emergence of Liquidity Adjustment Facility (LAF) as the primary instrument
for modulating systemic liquidity on a day to day basis, the usage of standing
facilities to banks comprising export credit refinance (ECR) facility and collateralised
lending facility (CLF) has gone down substantially in the recent period. ECR facility
remains the only standing facility after the complete phasing out of CLF since
October 5, 2002. 85. At
present, the total limit under ECR facility has been split into the normal facility
(constituting two-thirds of the total limit) available at the Bank Rate and the
back-stop facility (constituting remaining one-third) available at a variable
rate (8.75 per cent now) announced by RBI from time to time linked to LAF operations
or NSE-MIBOR. 86. The
utilisation of the ECR facility has remained very low during the year so far in
view of existing liquidity position in the economy. Since LAF has emerged as a
very effective instrument in providing cushion to the market and with a view to
furthering the process of phasing out sector-specific standing facility in an
environment of low CRR, it is proposed that:
- Apportionment of normal and back-stop
facilities which is presently in the ratio of two-thirds to one-third (67:33)
will be changed to one-half each (50:50) from the fortnight beginning November
16, 2002.
(b)
Certificates of Deposit 87. In
order to increase investor base, minimum size of issues of Certificates of Deposit
(CDs) by banks and Financial Institutions (FIs) to a single investor has been
reduced to Rs.1 lakh and in multiples of Rs.1 lakh in June 2002. In consonance
with the announcement of annual policy Statement of April 2002, FIMMDA has issued
standardised procedures, documentation and operational guidelines for issue of
CDs on June 20, 2002. In order to impart more transparency and to encourage secondary
market transactions, the existing outstanding CDs were required to be converted
into demat form by October 2002. As per extant regulations, CDs are required to
be issued at a discount to face value and the issuing bank is free to determine
the discount rate. With a view to providing more flexibility for pricing of CDs
and to give additional choice to both investors and issuers, it is proposed that:
- Banks and FIs may issue CDs on floating
rate basis provided the methodology of computing the floating rate is objective,
transparent and market-based.
(c) OTC Rupee Derivatives 88. Foreign
Exchange Management Act (FEMA), 2000 permits banks risk management tools like
Swaps, Options, Caps, Collars and Forward Rate Agreements in order to hedge interest
rate risks involving foreign currency liabilities in the over-the-counter (OTC)
market. SEBI has allowed the use of options on indices and individual stocks on
the exchanges. With regard to OTC rupee derivatives, RBI has also allowed, from
July 1999, scheduled commercial banks (excluding RRBs), PDs and all-India financial
institutions to undertake Forward Rate Agreements/Interest Rate Swaps (FRAs/IRS)
as plain vanilla products for their balance sheet management and market making.
Since then, there has been substantial increase in volume in the FRAs/IRS market
with 5,700 contracts having notional principal amount of Rs.1,32,000 crore by
September 2002. In order to enlarge the menu for managing interest rate risks
for banks and other financial intermediaries as well as corporates in the rupee
derivatives market, it is proposed:
- To set up a Working Group with appropriate representations
from the market to look into, inter alia, the possible ways of extending
types of derivatives that are available in the foreign currency segment to rupee
derivatives. The Group will also review the guidelines for OTC rupee derivatives
in India and suggest further developments in this market.
Government
Securities Market 89. In
an effort to provide further transparency and stability in government securities
market, a number of measures have been put in place by RBI during 2002-03 so far.
These measures, inter alia, include announcement of a half-yearly calendar
for Government of India dated securities, mandatory holding of government securities
by both wholesale and retail investors in dematerialised form, disseminating NDS
data on near real-time basis on the RBI website. The Reserve Bank has also been
making sustained efforts to increase the investor base of government securities
market by encouraging retailing of government securities. Further, efforts have
been made to impart greater flexibility to both issuer and investors of government
securities through introducing STRIPS, floating rate bonds and bonds with call/put
option. The progress in this direction is reviewed below. (a)
Calendar for Issuance of Dated Securities
90. In order to enable the institutional
and retail investors to plan their investments in a better manner and also to
provide further transparency and stability in government securities market, the
system of releasing the issuance of calendar for Government of India dated securities
has been introduced in the current fiscal year 2002-03. The calendar for the first
half-year (April-September) was announced on March 27, 2002. This calendar was
generally adhered to with some relatively minor deviations with regard to the
timing of the auctions, amounts raised and also the tenor of the security from
the scheduled issuances. In continuation of this, RBI has announced the calendar
for the second half-year (October-March) of 2002-03 on September 18, 2002 in consultation
with the Government. In future, the calendar would be issued every half-year.
The calendar for the second half of the year will be based on the budgeted (i.e.,
as per Budget Estimates) borrowing programme of the Government which, as has been
borne out by past experience, is generally completed by January.
(b) Holding of Government Securities
in
Dematerialised Form 91. In
view of irregularities observed in some co-operative banks regarding their transactions
in government securities, RBI instructed commercial banks, co-operative banks,
PDs, FIs, LABs, RRBs and NBFCs to hold government securities in dematerialised
mode and suggested measures for reducing the scope of transactions in physical
form. 92. Further,
RBI has also been encouraging holding of government securities by other investors
such as provident funds, trusts, individuals etc., in dematerialised form in gilt
accounts with custodians. Such investors are entitled to receive a statement of
account from their authorised custodians periodically. The custodians should take
adequate care to give authentic information to their customers and to regularly
reconcile their books with the consolidated investment account held with RBI.
The custodians are also required to subject the transactions in custodial accounts
to rigorous audit mechanism. (c)
Primary Dealers 93. PDs,
as a category of NBFCs, have become systemically important since (a) their number
is now fairly large, (b) they are leveraged entities with mostly short-term funds
and relatively high interest rate risk, (c) their share in government securities
market is substantial and (d) their participation in the money markets is on par
with banks and is quite significant. Accordingly, in order to strengthen the supervision
of PDs, they have been brought under the oversight of BFS. Furthermore, PDs are
now required to publish their audited annual results along with certain minimum
disclosure in leading financial dailies and also on their website.
(d) Trading in Stock Exchanges
94. In
order to enlarge the number of participants and to provide country-wide access
to government securities, it is proposed to introduce anonymous screen based order
driven trading in government securities on the stock exchanges. The scheme, which
will follow accepted best practices relating to trading and settlement, is being
worked out jointly with SEBI. The scheme will be placed for comments from market
participants/public on the websites of RBI and SEBI.
(e) Retailing of Government Securities
through Non-competitive Bidding 95. The
scheme of non-competitive bidding to encourage mid-segment investors like individuals,
HUFs, PFs, UCBs, NBFCs, Trusts etc., to participate in the primary market of government
securities, was operationalised in January 2002. While most of the auctions of
central government securities in the first half of the current year had a provision
for the scheme, the scheme has been made an integral part of the auctions, announced
as per the calendar for the second-half of the current year. In the annual policy
Statement of April 2002, RBI had urged banks and PDs to introduce sale and purchase
facilities for government securities along with schemes for automatic finance
by banks against such investments to improve liquidity for the retail investors.
Subsequently, a few PDs have introduced schemes for retailing using the network
of bank branches/post offices. It is expected that banks/PDs will actively involve
themselves in introducing schemes to promote retailing of government securities.
This will become even more important on the introduction of trading of government
securities on the stock exchanges. (f)
Extension of Repo to CSGL Account Holders 96. Currently,
only entities maintaining SGL accounts with RBI in Mumbai are permitted to undertake
repo transactions in government securities. This requirement excludes a large
number of potential users of repo who maintain 'gilt accounts' with banks etc.,
which, in turn, maintain CSGL accounts with RBI on their behalf. However, with
a view to making call/notice money market a pure inter-bank market, non-bank participants
are being phased out and instead, they are being allowed to participate in the
repo market. In order to facilitate this process, particularly in the context
of their not having an SGL facility, the issue of extending repo eligibility to
CSGL/gilt account holders has been under RBI’s consideration for quite some
time. Based on the advice of the Technical Advisory Committee (TAC) on Money and
Government Securities Markets, it is proposed to extend repo eligibility to a
select category of non-SGL account holders, with adequate safeguards, to ensure
Delivery Versus Payment (DVP) and transparency. Operative guidelines are being
issued separately. (g)
Guidelines for Uniform Accounting of Repo/
Reverse Repo Transactions between
Banks 97. In
the mid-term Review of October 2000, revised guidelines were issued on categorisation
and valuation of banks’ investments in consonance with best international
practices. As banks are not following a uniform accounting system for repo/reverse
repo transactions, draft guidelines on ‘Uniform Accounting Norm for Repo
Transactions’ on the lines suggested by a Sub-Group of TAC were circulated
to banks and FIMMDA for their comments. Based on the feedback, the draft guidelines
would be finalised. (h)
Development of the Repo Market 98. The
repo market in India has been developed gradually with proper safeguards. Since
1994, the repo market has been expanded in terms of products and participants.
In the early stages, repos were allowed only in central government securities.
Only banks holding SGL and current accounts with RBI were allowed to participate.
Later, all SGL account holders were permitted and state government securities
were also made eligible for repos. Operation of Liquidity Adjustment Facility
through repos by means of daily auctions sets the benchmark for collateralised
lending and borrowing in the money market. This mechanism has helped in providing
liquidity to the government securities market. 99. The
Reserve Bank will continue to explore, in consultation with market participants,
further measures to deepen the repo market and make it more liquid. In this direction,
RBI proposes, in the first stage, to extend repos to all regulated entities with
gilt/CSGL accounts as long as all transactions are mandatorily reported and settled
through the Delivery Versus Payment mechanism. Further, RBI proposes to allow
rollover of repo contracts using the same securities between the same counterparties.
These measures are expected to develop the repo market further. 100. While
ensuring transparency and safe settlement procedures, further measures may be
considered, in consultation with experts and participants at a later stage, such
as (a) allowing sale of securities purchased under repo, (b) widening of the repo
market to all entities including corporates and (c) extending the eligibility
to all debt instruments including corporate bonds.
(i) Collateralised Borrowing and
Lending
Obligation (CBLO) 101. The
Reserve Bank has been promoting collateralised lending/ borrowing operations by
market participants so that their reliance on call/notice money market may be
reduced. The use of such collateralised products is expected to minimise the credit
risk of lenders and help in evolving a short-term rupee yield curve. In this direction,
Collateralised Borrowing and Lending Obligation (CBLO), a product developed by
CCIL for its members was discussed in various fora including the TAC. As proposed
by TAC, an inter-departmental Group has worked out the regulatory and prudential
aspects to be put in place before the introduction of CBLO. Accordingly :
- CBLO would be considered as a money
market instrument with original maturity between one day and upto one year. There
will be no restrictions on the minimum denomination as well as lock-in period
for its secondary market transactions. The regulatory provisions for CBLO will
be the same as applicable to other money market instruments. Since CBLO is fully
collateralised by government securities, the risk weight as applicable to government
securities for market risk will be applicable to CBLO. Detailed operating instructions
in this regard will be issued by RBI separately.
(j) Negotiated Dealing System
102. As
indicated in the annual policy Statement of April 2002, in order to ensure full-fledged
operations of NDS/CCIL, all entities having SGL accounts with RBI were advised
to become members of NDS by end-May 2002. However, in the light of the representations
received from some market participants indicating difficulties in adhering to
the time schedule, it was decided to continue to allow each of such market participants
to submit physical SGL transfer forms till the date specifically agreed in respect
of each of them as the last date for such submission. As on October 23, 2002,
141 SGL account holders have become members of NDS. Further, data on SGL transactions
settled in Public Debt Office (PDO), RBI, Mumbai are put on the RBI website on
a daily basis. With operationalisation of NDS, price and trade information on
government securities and related data reported on NDS is now available on the
RBI website (www.nds.rbi.org.in)
on near real time basis. (k)
Call/Put Option and Floating Rate Bonds 103. For
the first time, on July 17, 2002, RBI issued (6.72 per cent Government Stock 2007/12)
a bond with embedded put and call options exercisable on or after 5 years from
the date of issue. In order to facilitate investors to manage their increased
duration risk arising out of their large investments in government securities,
another Floating Rate Bond (FRB) was issued on July 1, 2002 for Rs.3,000 crore
at a spread of 34 basis points above the variable base rate based on the cut-off
yields in the last six auctions of 364-day Treasury Bill. The coupon for the first
half of 2002-03 stood at 6.84 per cent. It may be noted that the two FRBs issues
of November and December 2001 had negative cut-off spread of 5 and 1 basis point,
respectively. 104. On
the experience gained so far, RBI will consider more frequent issuance of FRBs
with some modifications in design based on feedback received from market participants.
The fresh issues of FRBs will provide for annual reset of base rate instead of
semi-annual reset as is the case for outstanding FRBs. The base rate for the fresh
issues will be determined on the basis of average cut-off yields of 364-day Treasury
Bill in the preceding three auctions as against preceding six auctions as applicable
for existing FRBs. The new features are expected to improve the pricing of the
bonds in secondary market and enhance their liquidity.
105. Though FRBs enable banks to
hedge their interest rate risk, apart from facilitating ALM and offering products
with flexible interest rates, they have not attracted adequate attention of banks.
Banks are urged to take advantage of floating rate bonds and develop a market
for this instrument. Credit
Delivery Mechanism 106. It
has been the endeavour of the Reserve Bank to improve the credit delivery mechanism
by simplifying procedures, encouraging decentralised decision making and enhancing
competition. As a further step in this direction, the following measures are proposed. (a)
Priority Sector Lending
(i) Agriculture 107. In
order to improve credit delivery to the priority sector and in particular to agriculture,
the following measure is proposed:
- The limit on advances granted to dealers
in drip irrigation/sprinkler irrigation system/agricultural machinery, located
in rural/semi-urban areas is being increased from Rs.10 lakh to Rs. 20 lakh under
priority sector lending for agriculture.
(ii)
Small Business and Weaker Sections 108. In
order to further increase credit flow to the small business and to weaker sections,
it is proposed: - To
increase the existing overall limit of Rs.10 lakh in respect of small business
to Rs.20 lakh without any ceiling for working capital. Further, banks are free
to fix individual limits for working capital depending upon the requirements of
different activities.
- To
increase the individual credit limit to artisans, village and cottage industries
to Rs.50,000 from the existing limit of Rs.25,000. The limits will be under the
overall limit of 25 per cent advances to weaker sections under priority sector
or 10 per cent of net bank credit.
(iii)
Repairs of Damaged Houses in Rural and Other Areas 109. In
order to increase credit flow to the housing sector, it is proposed:
- To increase the existing limit of housing
loans for repairing damaged houses from Rs.50,000 to Rs.1 lakh in rural and semi-urban
areas and to Rs.2 lakh in urban areas.
(b)
Kisan Credit Cards 110. The
annual policy Statement of April 2002 had proposed a survey for assessing the
impact of the Kisan Credit Cards (KCC) Scheme on the beneficiaries. Accordingly,
preparatory work has been initiated to conduct a survey with the help of an outside
agency. (c)
Micro Finance 111. The
annual policy Statement of April 1999 and the mid-term Review in October 1999
emphasised the importance of Micro-credit Institutions and Self Help Groups (SHGs)
as important vehicles for credit delivery to self-employed persons, particularly
women in rural and semi-urban areas. The Reserve Bank’s objective was to
accelerate the flow of bank credit to micro-finance institutions while maintaining
their decentralised, voluntary and non-bureaucratic character. 112. Accordingly,
a number of initiatives have been taken by RBI. Comprehensive guidelines were
issued to banks for mainstreaming micro-credit and enhancing the outreach of micro-credit
providers. Banks were permitted to treat micro-finance extended by them as part
of their priority sector lending. Banks were also allowed to classify their credit
under the SHG-bank linkage programme as advances to weaker sections. As a result
of these initiatives, significant strides have been made in purveying of micro-finance
across the country and in providing micro-finance intermediaries substantial access
to bank credit. The SHG-bank linkage programme has proved that banking with the
poor is a viable proposition. It also benefited the banks by externalising the
credit delivery process and ensuring more than 95 per cent recoveries, besides
being cost effective. 113. During
the current year 2002-03, RBI is planning a series of interactive sessions to
review the progress made in this vital area and to put in place a more vibrant
micro-finance delivery environment in the country where complementary and competitive
models of micro-finance would be encouraged. The Reserve Bank will also like to
identify any policy or co-ordination gap for giving further impetus to the on-going
micro-finance movement. In this context, RBI has been interacting on all micro-finance
related policy issues with a wider group of experts and micro-finance professionals.
(d)
Exemption of Advances granted to Self Help
Groups (SHGs) against Group Guarantee
from
the Limit of Unsecured Guarantees and Advances 114. At
present, banks are required to limit their commitment by way of unsecured advances
in such a manner that 20 per cent of banks’ outstanding unsecured guarantees
together with total of outstanding unsecured advances should not exceed 15 per
cent of their total outstanding advances. Banks generally lend to SHGs against
group guarantee without insisting on any security. Considering the high recovery
rate in respect of banks’ advances to SHGs and that this programme helps
the poor, it has been decided that:
- Unsecured advances given by banks to SHGs against group
guarantees would be excluded for the purpose of computation of the prudential
norms on unsecured guarantees and advances until further notice. The matter would
be reviewed after a year in the light of growth in aggregate unsecured advances,
and the recovery performance of advances to SHGs.
Urban Co-operative
Banks (a) Proposal
for an Apex Supervisory Body 115. The
annual policy Statement of April 2001 had announced a proposal to set up a new
Apex Supervisory Body to take over the entire inspection/supervisory functions
relating to scheduled and non-scheduled UCBs in consultation with the Central
Government. Subsequently, RBI has submitted a draft Bill which is under consideration
of the Government. 116. In
the annual policy Statement of April 2002, RBI had again drawn attention to the
present system of dual/triple regulatory and supervisory control (involving the
Centre, States and RBI) and stated that it is not conducive to efficient functioning
of the co-operative banks in the interest of their depositors. Several committees
in the past have also recommended elimination of multiple layers of supervision
and regulation of this sector. In view of the local interest involved, it is also
clear that there is no consensus at present in favour of removing supervisory
and regulatory responsibilities at Central/State Government levels, and for entrusting
it exclusively to RBI. As a result, the managements and boards of several co-operative
institutions continue to reflect political interests rather than genuine co-operative
spirit, and are not always amenable to normal banking discipline in their operations.
In view of the above, RBI mooted a proposal to set up a separate supervisory authority
in the interest of the public depositors, with representatives of the Centre,
States and other interested elements. 117. This
important issue was examined recently by a Committee under the Chairmanship of
Hon. Minister of State for Finance. While RBI will do its best in implementing
the final decisions of the Government in this regard, it may be kept in view that
in case immediate measures are not taken to remove duality of control, it will
be difficult to make the supervisory system effective. (b)
Supervisory Rating System for UCBs 118. In
order to strengthen the supervisory regime for UCBs, as announced in the annual
policy Statement of April 2002, based on the recommendations of the Working Group
set up for the purpose of rating system for UCBs, RBI has finalised a CAMELS based
supervisory rating system for UCBs. This would be implemented on trial basis for
scheduled UCBs from March 2003. Supervision
and Monitoring 119. Progress
made in respect of certain announcements made in the annual policy Statement of
April 2002 is reviewed below. (a)
Risk Based Supervision 120. The
annual policy Statement of April 2002 had indicated that RBI would switch over
to risk based supervision (RBS) of banks by 2003 and accordingly, certain change
management processes were initiated by the Project Implementation Group formed
for the purpose. A review of the progress made revealed that banks have initiated
steps for implementation of actions required to switch over to RBS. The risk profile
template (RPT) developed covering various business and control risks was circulated
among banks for their suggestions as also for identification of information gaps,
if any, which need to be addressed for compilation of risk profile. The RPT would
be finalised in the light of the feedback received from banks. Specialised trainings
with focus on risk management and RBS have been imparted to the officials of commercial
banks and RBI. The compilation of supervision manual for the use of supervisors
is in progress and the RBS approach is scheduled to be operationalised during
2003. (b)
Prompt Corrective Action 121. It
was indicated in the annual policy Statement of April 2002 that the scheme of
prompt corrective action (PCA) developed as a supervisory tool based on certain
trigger points, was cleared by the Government with some suggestions. An internal
Group has been set upto study the impact of the PCA framework on select weak banks.
(c)
Macro-prudential Indicators 122. It
was indicated in the annual policy Statement of April 2002 that pilot reviews
using macro-prudential indicators (MPIs) were prepared for internal circulation.
Subsequently, the scope and coverage of MPIs were enhanced in the review for the
half-year ended March 2002. The salient features of the MPI report are proposed
to be published in the RBI Bulletin. (d)
Consolidated Accounting and Supervision 123. As
indicated in the annual policy Statement of April 2002, draft guidelines on consolidated
accounting and supervision were circulated to banks in June 2002 seeking their
views. In the light of feedback received from banks, the guidelines are being
finalised. Pending legislative amendments to various Acts, in order to provide
enabling provisions to facilitate consolidated accounting and quantitative methods
under Indian conditions, a working arrangement with other regulators, viz. SEBI
and IRDA, for sharing of information by way of Memorandum of Understanding (MoU)
is being explored. Prudential
Measures 124. Prudential
regulation and supervision have formed a critical component of the financial sector
reform process since the beginning and these norms have been progressively tightened
over the years in line with international best practices. Despite a turbulent
global economy and series of challenges, noteworthy progress has been made towards
developing a stable financial system. The progress made in the implementation
of prudential measures announced so far along with further measures considered
necessary are indicated below. (a)
Time-table for Adoption of 90 days Norm for Recognition
of Loan Impairment
by State Co-operative Banks/
District Central Co-operative Banks 125. With
a view to moving towards international best practices and to ensure greater transparency,
commercial banks were advised to adopt 90 days norm for recognition of loan impairment
from the year ending March 31, 2004. The 90 days norm has also been made applicable
to urban co-operative banks and regional rural banks with effect from March 31,
2004. In order to have a consistent and uniform approach towards all segments
of the banking system, it has been decided:
- To extend the 90 days norm for recognition
of loan impairment to the State Co-operative Banks and District Central Co-operative
Banks from the year ending March 31, 2006. To facilitate smooth transition, banks
are advised to move over to charging interest on monthly rests effective April
1, 2004. Detailed guidelines in this regard will be issued separately.
(b) Adoption of 90 days Norm for Recognition
of Loan
Impairment - Charging of Interest at Monthly Rests 126. As
indicated in the annual policy Statement of April 2001, in order to facilitate
adoption of 90 days norm for recognition of loan impairment from the year ending
March 31, 2004, banks were advised to switch over to a system of charging interest
on advances at monthly rests with effect from April 1, 2002. Based on the suggestions
received and discussions with banks on some operational and procedural issues,
consolidated instructions were issued in July 2002. Accordingly, banks were advised,
inter alia, as under:
- Banks have the option to charge interest at monthly rests
effective either from April 1, 2002 or July 1, 2002 or April 1, 2003.
- As emphasised in the July 2002 circular,
with effect from the quarter beginning July 1, 2002, banks should ensure that
the effective rate does not go up merely on account of the switchover to
a system of charging/compounding interest at monthly rests.
- Charging of interest at monthly rests
shall not be applicable to agricultural advances and banks would continue to follow
the existing practice of charging/compounding of interest linked to crop seasons.
- In respect of advances to short duration
crops and allied agricultural activities such as dairy, fishery, piggery, poultry,
bee-keeping etc., banks should take into consideration due dates fixed on the
basis of fluidity with borrowers and harvesting/marketing season while charging
interest and compounding the same if the loan/instalment becomes overdue.
(c) New Capital Accord 127. The
Reserve Bank is continuing its efforts towards obtaining international agreement
on the proposals on the New Capital Accord so that in its final version due next
year, it would provide sufficient flexibility for national regulation to take
into account the differences in institutional framework and capacity in different
countries, including developing countries. In various international fora where
this issue is being discussed, RBI and several other supervisory agencies have
proposed that for non-complex banks, national authorities should have the discretion
to use simpler methodologies for calculation of risk-weighted capital requirements.
It is encouraging to note that in its further deliberations, the Basel Committee
is responding to these concerns and it is expected that a consensus would emerge
to make the New Accord primarily focused on the international banks that compete
in the global capital markets and that there could be different, and yet perfectly
valid, choices available for the capital regulation of banks that are neither
highly complex in their operations nor internationally active. 128. India
is also participating in the Quantitative Impact Study (QIS 3) being conducted
by the Basel Committee to assess the impact of the New Accord. As mentioned in
the annual policy Statement of April 2002, RBI has since constituted a group of
seven banks (three public sector banks, two new private banks and two old private
banks) that have begun participating in the exercise.
(d) Banks’ Entry into Insurance Business
- Referral Arrangement 129. It
may be recalled that with the passage of Insurance Regulatory and Development
Authority (IRDA) Act, 1999, guidelines for entry of banks into insurance business
were issued in the annual policy Statement of April 2000. With subsequent amendments
to the IRDA Act, banks are now allowed to undertake referral business through
their network of branches with prior permission from IRDA and RBI. Under the referral
arrangement, banks provide physical infrastructure within their select branch
premises to insurance companies for selling their insurance products to the banks’
customers with adequate disclosure and transparency, and in turn earn referral
fees on the basis of premia collected. Accordingly, a few banks have been permitted
to enter into referral arrangements with insurance companies subject to certain
conditions to protect the interests of their customers. (e)
Technical Group on Market Integrity 130. The
Standing Committee on International Financial Standards and Codes constituted
an internal Technical Group which assessed India’s position vis-à-vis
international standards on ‘market integrity’. The report of the Group
has been placed on the RBI website for wider dissemination. (f)
Guidelines on ‘Know Your Customer’
Norms and Cash Transactions 131. As
indicated in the annual policy Statement of April 2002, guidelines on ‘Know
Your Customer’ (KYC) norms and cash transactions, reinforcing the existing
instructions in this regard were issued in consultation with banks. The guidelines
covered both domestic and foreign currency accounts/transactions. Banks are advised
to put in place a sound KYC policy, adopt anti-money laundering measures comprising
systems and procedures for customer identification while opening accounts, institute
internal control and audit mechanism and lay down risk management and monitoring
procedures. Detailed guidelines are available on the RBI website. (g)
Offshore Banking Units in Special Economic Zones 132. The
EXIM Policy for 2002-07 has announced the setting up of Offshore Banking Units
(OBUs) in SEZs. Accordingly, RBI formulated a scheme of OBUs in SEZs as branches
of banks operating in India and obtained the approval of the Government. Detailed
guidelines in this regard would be issued to banks shortly.
(h) Prudential Guidelines on Non-SLR Investments
by Banks and Financial Institutions 133. As
indicated in the annual policy Statement of April 2002, the draft prudential guidelines
on management of non-SLR investment portfolio were circulated to banks for their
comments. Subsequently, the Working Group (Chairman: Shri S.R. Iyer, Chairman,
CIBIL) to evolve a framework for collecting and sharing of information on private
placement of debt had recommended that the investing banks/FIs should invest only
if the issues are rated by a rating agency. The draft guidelines as modified after
taking into account the recommendations of the Working Group as also the feedback
received from banks were referred to the RBI-SEBI Technical Committee to take
a view on the disclosure and regulation of private placement.
(i) Country Risk Management
134. With
a view to moving further in complying with the Core Principles of Banking Supervision,
it was indicated in the annual policy Statement of April 2002 that RBI would be
issuing draft guidelines on country risk management and provisioning. Accordingly,
the draft guidelines on country risk management together with a ‘Note for
Discussion’ were forwarded to banks and were also placed on the RBI website
seeking comments/views thereon. Based on the feedback, the final guidelines would
be issued. (j)
Investment Fluctuation Reserve 135. As
indicated in the annual policy Statement of April 2002, with a view to building
up of adequate reserves to guard against any possible reversal of interest rate
environment in future, banks were advised to build up Investment Fluctuation Reserve
(IFR) with reference to investments, in two categories, viz., ‘Held for Trading’
(HFT) and ‘Available for Sale’ (AFS). The IFR as at end-March 2002 constituted
0.91 per cent of the investment held under HFT and AFS categories. The distribution
of IFR holdings of banks showed that while about 47 per cent of the banks have
built up reserve upto one per cent, about 16 per cent of banks are yet to make
any provisions for IFR. As per the extant guidelines, banks are required to build
up IFR of a minimum 5 per cent within a period of 5 years. Deposit
Insurance 136. As
indicated in the annual policy Statement of April 2000, the Deposit Insurance
and Credit Guarantee Corporation (DICGC), in consultation with RBI, examined the
recommendations of the Advisory Group on Reforms in Deposit Insurance in India
and forwarded a draft outline of the proposed new Bill to the Government for their
consideration. In the Budget 2002-03, it was announced that the DICGC would be
converted into the Bank Deposits Insurance Corporation (BDIC). In order to evolve
a suitable system for India, a joint team of officials from the Government, RBI
and DICGC studied the Federal Deposit Insurance Corporation (FDIC) model and other
regulatory and supervisory agencies in the US. Further legislative changes, if
any, would be referred to the Government for consideration after finalisation
of the report of the team. Working
Groups on Prudential
and Supervisory Norms, etc.
137. As a part of the consultative
process in initiating financial sector reforms, RBI constituted a number of Working
Groups on various policy issues, with members drawn from banks, market participants
and experts in the relevant areas. Working Groups were also set up for suggesting
road maps for implementation of international best systems and practices in the
financial sector with particular reference to the banking sector. The reports
of the Working Groups were examined internally and were also put on the RBI website
where necessary for wider dissemination and comments. Constitution of new working
groups and the progress made in respect of some of the Working Groups is given
in the Annex I to the Review. Technology
Upgradation 138. An
important objective of the programme for technology upgradation in the financial
sector is to link various payment and settlement systems into an efficient and
integrated system. The roadmap for development is provided in the ‘Payment
System Vision Document’, prepared by RBI and is available on the RBI website.
The reform process in payment and settlement system is gaining momentum with the
implementation of Negotiated Dealing System (NDS), Centralised Funds Management
System (CFMS), forex clearing by Clearing Corporation of India Limited (CCIL)
and a secured message transfer system through Structured Financial Messaging Solution
(SFMS). In addition, Electronic Funds Transfer (EFT) facilities have been extended
to multiple settlements in a day and preparatory work for RTGS system has been
completed. Further details on the development of technology are given in Annex
II. Legal
Reforms 139. In
the recent period, with the advancement in information and communication technologies,
the financial system has been undergoing a continuous process of change. It is
important for RBI to have sufficient flexibility in orienting the operative, regulatory,
and supervisory framework appropriately so as to keep pace with the developments.
Accordingly, RBI has proposed for consideration of the Government various amendments
to the existing Acts in order to provide more flexibility in day to day operations.
Some Working Groups have also been constituted to suggest further changes in the
legal framework, as necessary, and some of the proposed changes are at various
levels of consideration of the Government. Details of proposed changes are in
Annex III. Mumbai October
29, 2002
Annex
I Working
Groups: Progress Report Expert
Committee on Bank Frauds The
Expert Committee on Bank Frauds (Chairman: Dr. N. L. Mitra) submitted its report
in September 2001 to RBI. The recommendations of the Committee consist of two
parts. Part I covers the recommendations which could be implemented without any
legislative changes and these were forwarded to banks in May 2002 for implementation.
The recommendations in Part II require legislative changes. The report along with
comments of RBI was forwarded to the ‘High Level Group on Frauds in Banking
Sector’ constituted by Central Vigilance Commission (CVC) for comments. Consultative
Group for Strengthening the Internal
Supervisory Role of Boards of Banks The
consultative Group of Directors of Banks and FIs (Chairman: Dr. A.S. Ganguly,
Director, Central Board, RBI) has submitted its report which contains important
recommendations to strengthen the supervisory role of the Boards of banks. The
Reserve Bank has advised the banks to place the report before their Board and
adopt and implement the recommendations which were within the regulatory ambit
of RBI. Recommendations of the Group which require legislative amendments have
been forwarded to the Government for consideration. Working
Group to Recommend the Criteria
for Fixing the Limits for Primary Dealers
in
Call/Notice Money Market A
Working Group was constituted (Chairman: Shri Mohammad Tahir, Executive Director,
RBI) to recommend the criteria for fixing the limits for PDs in call/notice money
market and suggest a road map for phasing them out of the call/notice money market.
The Working Group also reviewed the apportionment of liquidity facilities to PDs
as between normal and back-stop. The Group has since submitted its report and
based on the recommendations, RBI has issued a circular stipulating prudential
limits on PDs’ lending and borrowings in call/notice money market which are
linked to their net owned funds. Informal
Working Group on Separate
Trading of Registered Interest and
Principal
of Securities (STRIPS) As
announced in the annual policy Statement of April 2002, RBI had constituted a
Working Group (Chairman: Shri M.R. Ramesh, Managing Director, CCIL) with representatives
from banks and other market participants to suggest operational and prudential
guidelines on STRIPS. The Working Group has since submitted its report which is
placed on the RBI website for wider dissemination. The Group’s recommendations
are under examination of RBI. The proposed Government Securities Act, which will
enable Stripping, is under consideration of the Government. Securitisation
of Housing Loans As
proposed in the annual policy Statement of April 2002, a Working Group (Chairman:
Shri R.V. Verma, Executive Director, NHB) was set up with members from banks,
HDFC and RBI to examine the modalities for widening the investor base, improving
the quality of assets, creating liquidity for trading in Mortgage Backed Securities
(MBS) of Housing Finance Companies (HFCs) and other related issues. The Group
is yet to submit its report. Corporate Debt
Restructuring (CDR)
As announced in the Union Budget 2002-03, a Working Group was constituted
(Chairman: Shri Vepa Kamesam, Deputy Governor, RBI) to suggest various measures
for making the operations of CDR mechanism more efficient. The Working Group has
submitted its report on July 31, 2002 which is under examination of RBI and the
Government. As on date, the CDR Cell has received 32 references, of which 8 restructuring
packages have been approved for implementation with an aggregate exposure of banks/institutions
of Rs.2,018 crore. Of the balance 24 references, 7 have been rejected or withdrawn
and the remaining cases are under various stages of processing. So far, all domestic
banks (except 8 private sector banks) have signed the agreements. However, foreign
banks have not yet signed the legal agreements as they are seeking clarifications.
New Working Groups Provisioning
Requirements - Review Some
banks in India have published their financial results under Indian Accounting
Standards, as also under United States-Generally Accepted Accounting Practices
(USGAAP). In order to review the entire issue of provisioning requirements and
in the context of some of the banks exploring conformity with USGAAP, a Working
Group has been constituted to suggest changes in tune with the emerging international
practices and suitable to the Indian financial system. Working
Group on Cheque Truncation The
annual policy Statement of April 2001 had mentioned about legal requirements for
cheque truncation. One of the bottlenecks in the realisation of cheques sent for
collection pertains to the actual physical movement of paper based instruments.
Cheque truncation will usher in the capacity to drastically reduce the time needed
for realisation of cheques and other paper based instruments and will facilitate
straight through processing, benefiting banks and customers. Since various models
of cheque truncation are available the world over, it has been decided to constitute
a Working Group to suggest an appropriate model suitable for Indian conditions.
Annex II Technology
Upgradation: Review of Developments Introduction
of National Electronic Funds Transfer The
annual policy Statement of April 2002 had emphasised the usage of Electronic Funds
Transfer (EFT) on a large scale to bring about greater efficiency in the movement
of funds, and reduction in risks in funds transfer. In order to ensure that the
benefits of electronic modes of funds transfer are available across almost all
the locations of the country and to provide for transfer of messages relating
to EFT in a safe and secure manner, it is proposed to commence a National EFT
(NEFT) using the facilities available under the Structured Financial Messaging
Solution (SFMS) over the Indian Financial Network (INFINET). This would result
in EFT being available from any branch of a bank which has connectivity to INFINET
with the settlement taking place in the books of account of the Reserve Bank at
a single location. Branch
Automation and Networking The
annual policy Statement of April 2002 emphasised the need for banks bestowing
special attention on the computerisation and networking of the branches on a time-bound
basis, in order to fully prepare themselves to participate effectively in the
new products aimed at better payment and settlement services. While about 80 per
cent of the banking business of Public Sector Banks is captured though computerisation,
most of these efforts are on stand alone basis. However, integration and consolidation
have immense benefits for customers in terms of ‘anytime banking’ and
‘anywhere banking’ facilities. As these are built up on total branch
automation and networking of branches, it is essential that the pace of internal
computerisation of branches of banks and their inter-connectivity, providing for
core banking solutions or centralised data base access/clustered solutions needs
to be expedited. Sharing
of Payment System Delivery Points Developments
in the delivery channels in the banking sector show the proliferation of multiple
payment delivery points such as branch banking, Automated Teller Machines (ATMs),
Tele-banking, Internet-banking, Mobile-banking etc. While such separate efforts
by individual banks ensure competition and product differentiation, in respect
of providing ATM services, these efforts have very often been proved to be sub-optimal
and high cost services. In order that competition and variety of services are
not reduced and that the services are provided in a cost effective manner, banks
which are maintaining sub-optimal ATMs are encouraged to join shared and strong
network of ATMs operated by a service provider or other banks. Information
Security (IS) on the Network
in the Banking and Financial Sector The
banking and financial sector is increasingly depending on internal and external
networks for their operations. In order to protect information on the networks,
a variety of tools like firewalls, intrusion detection, anti-virus authentication,
public key infrastructure (PKI) etc. are available. The Institute for Development
and Research in Banking Technology (IDRBT) has been approved as the certification
authority (CA) for the banking and financial sector. The secured network, INFINET
established by IDRBT for the financial sector uses the PKI for enhancing information
security. Banks are encouraged to use the PKI by creating the required Registration
Authority (RA). Forex Clearing by CCIL Clearing
Corporation of India Limited (CCIL) is on the threshold of launching net forex
clearing in India on a guaranteed settlement basis. All the participants are advised
to contribute to the Settlement Guarantee Fund so as to enable CCIL to collateralise
the facility and commence operations in early November.
Annex
III Legal Reforms: Review
of Developments
- A new Bill on Negotiable Instruments (Amendment) Bill,
2002 (replacing the Negotiable Instruments Bill, 2001) has been introduced in
the Parliament after incorporating the changes recommended by the Standing Committee
on Finance which took into consideration the recommendations of the Working Group
on Negotiable Instrument (NI) Act, 1881. The Bill provides for the introduction
of ‘Electronic Cheque’ and ‘Cheque Truncation’.
- The Securitisation and Reconstruction
of Financial Asset and Enforcement of Security Interest Ordinance, 2002 which
was promulgated on June 21, 2002, has been repromulgated on August 21, 2002. The
Ordinance provides for: (a) legal framework as well as the machinery for securitisation
and reconstruction of financial assets of banks and financial institutions, (b)
enforcement of security interest by banks and financial institutions by taking
over the possession of the secured assets and its sale directly without the intervention
of the court, (c) creation of a Central Registry for registering the security
interest created in favour of the secured creditors, and (d) empowers RBI for
registering the Securitisation Companies (SCs) and Reconstruction Companies (RCs),
determining the policy and giving directions in respect of prudential norms and
framing guidelines for measures covering asset reconstruction. Accordingly, Rules
have been notified by the Government in so far as the Enforcement of Security
Interest is concerned. The Reserve Bank has constituted two Working Groups for
stipulating suitable norms for registration, prescribing prudential norms, recommending
proper and transparent accounting and disclosure standards and framing appropriate
guidelines for the conduct of asset reconstruction/securitisation.
- The Committee constituted
to consider draft legislation on the payment system has since submitted its report.
- A
Bill on Factoring of Debts due to Industrial and Commercial Undertakings has been
submitted to the Government for consideration.
- Amendments have been proposed to the
State Bank of India Act, 1955 to facilitate the enhancement of authorised capital,
bring the voting rights of the shareholders in conformity with the provisions
of Banking Regulations Act, rationalise the powers of Local Board, acquisition
of the business of other banks and to provide for procedural matters relating
to shares on the lines of Companies Act. Also, similar amendments have been proposed
in the State Bank of India (Subsidiary Banks) Act, 1959 to enhance the authorised
capital and reduce SBI stake in its subsidiaries to 51 per cent. The Reserve Bank
has submitted its views on the same to the Government.
- Based on the recommendations of the
Mathur Committee’s report, the proposal for amendments to SBI Act, NHB Act
and NABARD Act for disinvestment of RBI holdings in these institutions has been
sent to the Government.
- Prevention of Money Laundering Bill, 1999, which was cleared
by Rajya Sabha with certain amendments, is awaiting clearance of Lok Sabha.
*
In this Part, figures on monetary and banking aggregates have generally been rounded
off to the nearest hundred crore. | 