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Home > Detail – RBI Monetary Policy Statement 2010-2011
Detail – RBI Monetary Policy Statement 2010-2011
Detail – RBI Monetary Policy Statement 2010-2011
India's growth – inflation dynamics are in contrast to the overall global scenario. The economy is recovering rapidly from the growth slowdown but inflationary pressures, which were triggered by supply side factors, are now developing into a wider inflationary process.

This Statement is in Two Parts:

A Monetary Policy

  • Global and Domestic macroeconomic developments;
  • Outlook and projections for growth, inflation and monetary aggregates
  • Explains the stance of monetary policy
  • Specifies the monetary measures.

B Developmental and Regulatory Policies

  • Financial Stability
  • Interest Rate Policy
  • Financial Markets
  • Credit Delivery and Financial Inclusion
  • Regulatory and Supervisory
  • Measures for Commercial Banks
  • Institutional Developments

PART – A Monetary Policy

Global and Domestic macroeconomic developments
The global economy continues to recover amidst ongoing policy support and improving financial market conditions. The recovery process is led by EMEs, especially those in Asia, as growth remains weak in advanced economies.

The Global economy continues to face several challenges such as unemployment. Core measures of inflation in EMEs, especially in Asia, have been rising.

The Reserve Bank had projected the real GDP growth for 2009-10 at 7.5 per cent. The index of industrial production (IIP) recorded a growth of 17.6 per cent in December 2009, 16.7 per cent in January 2010 and 15.1 per cent in February 2010.

After a continuous decline for eleven months, imports expanded by 2.6 per cent in November 2009, 32.4 per cent in December 2009, 35.5 per cent in January 2010 and 66.4 per cent in February 2010. The increase in non-oil import showing the evidence of recovery in domestic market. Several indicators of service sector activities also suggest increased economic activity.

On the whole, the economic recovery, which began around the second quarter of 2009-10, has since shown sustained improvement.

The headline inflation, as measured by year-on-year variation in Wholesale Price Index (WPI), accelerated from 0.5 per cent in September 2009 to 9.9 per cent in March 2010, exceeding the Reserve Bank's baseline projection of 8.5 per cent for March 2010 set out in the Third Quarter Review.

Growth in monetary and credit aggregates during 2009-10 remained broadly in line with the projections set out in the Third Quarter Review in January 2010. Non-food bank credit expanded steadily during the second half of the year.

The current account deficit during April-December 2009 was US$ 30 billion as compared with US$ 28 billion for the corresponding period of 2008. Net capital inflows at US$ 42 billion were also substantially higher than US$ 7 billion in the corresponding period last year. Consequently, on a balance of payments basis (i.e., excluding valuation effects), foreign exchange reserves increased by US$ 11 billion as against a decline of US$ 20 billion during the corresponding period a year ago.

Outlook and projections for growth, inflation and monetary aggregates

Global Outlook

In its World Economic Outlook Update for January 2010, the International Monetary Fund (IMF) projected that global growth will recover from (-) 0.8 per cent in 2009 to 3.9 per cent in 2010 and further to 4.3 per cent in 2011. Organization for Economic Co-operation and Development's (OECD) composite leading indicators (CLIs) in February

2010 continued to signal an improvement in economic activity for the advanced economies.

Three major factors contributed to the improved Global growth:

  • Massive monetary and fiscal support
  • Improvement in confidence
  • Strong recovery in EMEs.

Amongst EMEs, China continues to grow at a rapid pace, led mainly by domestic demand. Malaysia and Thailand have recovered to register positive growth in the second half of 2009. Indonesia recorded positive growth throughout 2009.

Globally, headline inflation rates rose between November 2009 and January 2010, softened in February 2010 on account of moderation of food, metal and crude prices and again rose marginally in some major economies in March 2010.

Domestic Outlook

The Indian economy is firmly on the recovery path. Exports have been expanding since October 2009, a trend that is expected to continue. The industrial sector recovery is increasingly becoming broad-based and is expected to take firmer hold going forward on the back of rising domestic and external demand.

According to the Reserve Bank's quarterly industrial outlook survey, although the business expectation index (BEI) showed seasonal moderation from 120.6 in Q4 of 2009-10 to 119.8 in Q1 of 2010-11, it was much higher in comparison with the level of 96.4 a year ago. The improved performance of the industrial sector is also reflected in the improved profitability in the corporate sector. Service sector activities have shown buoyancy, especially during the latter half of 2009-10. The leading indicators of various sectors such as tourist arrivals, commercial vehicles production and traffic at major ports show significant improvement. A sustained increase in bank credit and in the financial resources raised by the commercial sector from non-bank sources also suggest that the recovery is gaining momentum.

The baseline projection of real GDP growth for 2010-11 is placed at 8.0 per cent.

Headline WPI inflation, which moderated in the first half of 2009-10, firmed up in the second half of the year. It accelerated from 1.5 per cent in October 2009 to 9.9 per cent by March 2010.

The Reserve Bank's baseline projection of WPI inflation for March 2010 was 8.5 per cent. In addition, demand side pressures also re-emerged as reflected in the sharp increase in non-food manufactured products inflation from 0.7 per cent to 4.7 per cent between December 2009 and March 2010.

Three major uncertainties cloud the outlook of inflation:

  • The prospects of the monsoon in 2010-11 are not yet clear.
  • Crude prices continue to be volatile.
  • evidence of demand side pressures building up

The baseline projection for WPI inflation for March 2011 is placed at 5.5 per cent

Money Aggregates
During 2009-10, money supply (M3) growth decelerated from over 20.0 per cent at the beginning of the financial year to 16.4 per cent in February 2010 before increasing to 16.8 per cent by March 2010, slightly above the Reserve Bank's indicative projection of 16.5 per cent. This was reflected in non-food credit growth of 16.9 per cent, above the indicative projection of 16.0 per cent.

For policy purposes, M3 growth for 2010-11 is placed at 17.0 per cent. Consistent with this, aggregate deposits of SCBs are projected to grow by 18.0 per cent. The growth in non-food credit of SCBs is placed at 20.0 per cent.

Risk Factor
The following major downside risks to growth and upside risks to inflation need to be recognized:

  • First, uncertainty persists about the pace and shape of global recovery. Fiscal stimulus measures played a major role in the recovery process in many countries by compensating for the fall in private demand. Private demand in major advanced economies continues to be weak due to high unemployment rates, weak income growth and tight credit conditions. Therefore, the prospects of sustaining the recovery hinge strongly on the revival of private consumption and investment. While recovery in India is expected to be driven predominantly by domestic demand, significant trade, financial and sentiment linkages indicate that a sluggish and uncertain global environment can adversely impact the Indian economy.
  • Second, if the global recovery does gain momentum, commodity and energy prices, which have been on the rise during the last one year, may harden further. Increase in global commodity prices could, therefore, add to inflationary pressures.
  • Third, from the perspective of both domestic demand and inflation management, the 2010 south-west monsoon is a critical factor.
  • Fourth, it is unlikely that the large monetary expansion in advanced economies will be unwound in the near future. Accommodative monetary policies in the advanced economies, coupled with better growth prospects in EMEs including India, are expected to trigger large capital flows into the EMEs. While the absorptive capacity of the Indian economy has been increasing, excessive flows pose a challenge for exchange rate and monetary management.

The Policy Stance
In the wake of the global economic crisis, the Reserve Bank pursued an accommodative monetary policy beginning mid-September 2008. This policy instilled confidence in market participants, mitigated the adverse impact of the global financial crisis on the economy and ensured that the economy started recovering ahead of most other economies.

As inflation continued to increase, driven significantly by the prices of non-food manufactured goods, and exceeded the Reserve Bank's baseline projection of 8.5 per cent for March 2010 (made in the Third Quarter Review), the Reserve Bank responded expeditiously with a mid-cycle increase of 25 basis points each in the policy Repo rate and the reverse Repo rate under the LAF on March 19, 2010.

The monetary policy response in India since October 2009 has been calibrated to India's specific macroeconomic conditions. Accordingly, our policy stance for 2010-11 has been guided by the following three major considerations:

First, recovery is consolidating. The quick rebound of growth during 2009-10 despite failure of monsoon rainfall suggests that the Indian economy has become resilient.

Second, inflationary pressures have accentuated in the recent period. More importantly, inflation, which was earlier driven entirely by supply side factors, is now getting increasingly generalized. Inflation expectations also remain at an elevated level. There is, therefore, a need to ensure that demand side inflation does not become entrenched.

Third, notwithstanding lower budgeted government borrowings in 2010-11 than in the year before, fresh issuance of securities will be 36.3 per cent higher than in the previous year. This presents a dilemma for the Reserve Bank. While monetary policy considerations demand that surplus liquidity should be absorbed, debt management considerations warrant supportive liquidity conditions. The Reserve Bank, therefore, has to do a fine balancing act and ensure that while absorbing excess liquidity, the government borrowing programme is not hampered.

Against this backdrop, the stance of monetary policy of the Reserve Bank is intended to:

  • Anchor inflation expectations, while being prepared to respond appropriately, swiftly and effectively to further build-up of inflationary pressures.
  • Actively manage liquidity to ensure that the growth in demand for credit by both the private and public sectors is satisfied in a non-disruptive way.
  • Maintain an interest rate regime consistent with price, output and financial stability.

Monetary Policy
The Reserve Bank announces the following policy measures:

Bank Rate
The Bank Rate has been retained at 6.0 per cent.

Repo Rate
It has been decided to increase the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect.

Reverse Repo Rate
It has been decided to increase the reverse repo rate under the LAF by 25 basis points from 3.5 per cent to 3.75 per cent with immediate effect.

Cash Reserve Ratio
It has been decided to increase the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 5.75 per cent to 6.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning April 24, 2010.

As a result of the increase in the CRR, about Rs. 12,500 crore of excess liquidity will be absorbed from the system.

The Reserve Bank will continue to monitor macroeconomic conditions, particularly the price situation, closely and take further action as warranted.

Expected Outcomes

The expected outcomes of the actions are:

  • Inflation will be contained and inflationary expectations will be anchored.
  • The recovery process will be sustained.
  • Government borrowing requirements and the private credit demand will be met.
  • Policy instruments will be further aligned in a manner consistent with the evolving state of the economy.

Part B Developmental and Regulatory Policies

The global financial crisis has underscored the importance of pursuing financial sector policies in the broader context of financial stability and to serve the interests of the real economy. The periodic assessment of regulatory comforts and effective supervision are critical elements for developing the financial sector on a sound footing.

The focus of the Reserve Bank's regulation will continue to be to improve the efficiency of the banking sector while maintaining financial stability. Simultaneously, it will vigorously pursue the financial inclusion agenda to make financial sector development more inclusive.

Financial Stability
The first Financial Stability Report (FSR) was released on March 25, 2010.

The first FSR makes an assessment of the strength of the financial sector, with particular focus on banks, and has raised some concerns, including rising inflation, high government borrowings and likely surge in capital flows, from the financial stability standpoint. The FSR observed that the banks remained well-capitalized with higher core capital and sustainable financial leverage. Further, stress tests for credit and market risk confirmed banks' resilience to withstand high stress.

Interest Rate Policy
As indicated in the Annual Policy Statement of April 2009, the Reserve Bank constituted a Working Group on Benchmark Prime Lending Rate (Chairman: Shri Deepak Mohanty) to review the present benchmark prime lending rate (BPLR) system and suggest changes to make credit pricing more transparent. The Working Group submitted its report in October 2009.

It has been decided to mandate banks to switch over to the system of Base Rate from July 1, 2010. Guidelines on the Base Rate system were issued on April 9, 2010. It is expected that the Base Rate system will facilitate better pricing of loans, enhance transparency in lending rates and improve the assessment of transmission of monetary policy.

Financial Market

Financial Market Product

Interest Rate future
The Interest Rate Futures contract on 10-year notional coupon bearing Government of India security was introduced on August 31, 2009. Based on the market feedback and the recommendations of the Technical Advisory Committee (TAC), Foreign Exchange and Government Securities Markets, it is proposed:

  • To introduce Interest Rate Futures on 5-year and 2-year notional coupon bearing securities and 91-day Treasury Bills. The RBI-SEBI Standing Technical Committee will finalize the product design and operational modalities for introduction of these products on the exchanges.

Regulation of Non-Convertible Debentures (NCDs) of Maturity of Less than One Year
As indicated in the Second Quarter Review of October 2009, the draft guidelines on the regulation of non-convertible debentures (NCDs) of maturity of less than one year were placed on the Reserve Bank's website on November 3, 2009 for comments/feedback

The comments/ feedback received were examined and also deliberated by the TAC on the Money, Foreign Exchange and Government Securities Markets. Accordingly, it is proposed:

  • To issue the final guidelines on the issuance of NCDs of maturity less than one year by end-June 2010.

Introduction of Credit Default Swaps (CDS)
As indicated in the Second Quarter Review of October 2009, the Reserve Bank constituted an internal Working Group to finalize the operational framework for introduction of plain vanilla over-the-counter (OTC) single name CDS for corporate bonds for resident entities subject to appropriate safeguards. The Group is in the process of finalizing a framework suitable for the Indian market, based on consultations with market participants/experts and study of international experience. Accordingly, it is proposed:

  • To place the draft report of the internal Working Group on the Reserve Bank's website by end-July 2010.

Guidelines on Forex Derivatives
As indicated in the Second Quarter Review of October 2009, the draft guidelines on OTC foreign exchange derivatives were placed on the Reserve Bank's website on November 12, 2009 for public comments. On the basis of the discussions, it is proposed:

  • To issue final guidelines by end-June 2010.

Introduction of Exchange-Traded Currency Option Contracts
Currently, residents in India are permitted to trade in futures contracts in four currency pairs on two recognized stock exchanges. In order to expand the menu of tools for hedging currency risk, it has been decided:

  • To permit the recognized stock exchanges to introduce plain vanilla currency options on spot US Dollar/ Rupee exchange rate for residents.

Separate Trading for Registered Interest and Principal of Securities (STRIPS): Status
The final guidelines on stripping/reconstitution of government securities were issued on March 25, 2010. The guidelines, which came into effect from April 1, 2010, will enable market participants to strip/ reconstitute eligible Government of India dated securities through the negotiated dealing system (NDS) subject to certain terms and conditions.

Corporate Bond Market
In the recent period, the Reserve Bank initiated several measures to develop the corporate bond market as detailed below:

  • To facilitate settlement of secondary market trades in corporate bonds on a delivery versus payment-1 (DVP-1) basis on the Real Time Gross Settlement (RTGS) system, the National Securities Clearing Corporation Limited (NSCCL) and the Indian Clearing Corporation Limited (ICCL) have been permitted to maintain transitory pooling accounts with the Reserve Bank. Further, guidelines have been issued to all Reserve Bank regulated entities to mandatorily clear and settle all OTC trades in corporate bonds using the above arrangement with effect from December 1, 2009.
  • To facilitate the development of an active Repo market in corporate bonds, the guidelines for Repo transactions in corporate debt securities were issued on January 8, 2010. The guidelines, which came into force with effect from March 1, 2010, will enable Repo in listed corporate debt securities rated `AA' or above. Fixed Income Money Market and Derivatives Association of India (FIMMDA) is working on the development of reporting platform and also on the Global Master Repo Agreement to operationalise the repo in corporate bonds.

Non-SLR Bonds of companies engaged in infrastructure: Valuation

At present, banks' investments in non-SLR bonds are classified either under held for trading (HFT) or available for sale (AFS) category and subjected to `mark to market' requirements. Considering that the long-term bonds issued by companies engaged in infrastructure activities are generally held by banks for a long period and not traded and also with a view to incentivising banks to invest in such bonds, it is proposed:

  • to allow banks to classify their investments in non-SLR bonds issued by companies engaged in infrastructure activities and having a minimum residual maturity of seven years under the held to maturity (HTM) category.

Investment in Unlisted Non-SLR Securities
In terms of extant instructions, banks' investments in unlisted non-SLR securities should not exceed 10 per cent of their total investments in non-SLR securities as on March 31 of the previous year. Since there is a time lag between issuance and listing of security, banks may not be able to participate in primary issues of non-SLR securities, which are proposed to be listed but not listed at the time of subscription. In view of the above, it is proposed that:

  • investment in non-SLR debt securities (both primary and secondary market) by banks where the security is proposed to be listed on the Exchange(s) may be considered as investment in listed security at the time of making investment.

Financial Market Infrastructure

Reporting Platform for Certificates of Deposit (CDs) and Commercial Papers (CPs)
In order to promote transparency in the secondary market transactions for CDs and CPs, it is proposed:

  • to introduce a reporting platform for all secondary market transactions in CDs and CPs.

Reporting of OTC Derivative Transactions
The issue of transparency and the need for information repositories for transactions in OTC derivatives has assumed sharper focus in the post-crisis scenario. it is proposed:

  • to set up a Working Group consisting of members of the Reserve Bank, the CCIL and market participants to work out the modalities for an efficient, single point reporting mechanism for all OTC interest rate and forex derivative transactions.

Revision of Repo Accounting: Status
The revised guidelines for accounting of repo/reverse repo transactions were issued by the Reserve Bank on March 23, 2010. The revised accounting guidelines capture the economic essence of repo as a collateralised lending and borrowing instrument and not as outright sale and purchase. The revised accounting guidelines have been made applicable to market repo transactions with effect from April 1, 2010. These accounting norms will, however, not apply to repo/reverse repo transactions conducted under the Liquidity Adjustment Facility (LAF) with the Reserve Bank.

Credit Delivery and Financial Inclusion

Credit Flow to the MSE Sector
Credit Guarantee Scheme for MSEs it is proposed:

  • to mandate banks not to insist on collateral security in case of loans up to Rs.10 lakh as against the present limit of Rs.5 lakh extended to all units of the micro and small enterprises (MSEs) sector.

High Level Task Force on MSMEs
The Task Force submitted its Report on January 30, 2010 to the Government of India. The Task Force recommended several measures having a bearing on the functioning of MSMEs, viz., credit, marketing, labour, exit policy, infrastructure/technology/skill development and taxation. In particular, it recommended that: (i) all scheduled commercial banks should achieve a 20 per cent year-on-year growth in credit to micro and small enterprises to ensure enhanced credit flow; (ii) any shortfall in the achievement of sub-target of 60 per cent for lending to micro enterprises of the total advances granted to the micro and small enterprises, would also be taken into account for the purpose of allocating amounts for contribution to rural infrastructure development fund (RIDF) or any other Fund with other financial institutions as specified by the Reserve Bank, with effect from April 1, 2010; and (iii) all scheduled commercial banks should achieve a 15 per cent annual growth in the number of micro enterprise accounts.

Rural Co-operative Banks

Revival of Rural Co-operative Credit Structure
Based on the recommendations of the Task Force on Revival of Rural Co-operative Credit Institutions (Chairman: Prof.A.Vaidyanathan) and in consultation with the state governments, the Government of India had approved a package for revival of the short term rural co-operative credit structure.

Financial Inclusion through Grass-root Co-operatives
There is a need for better understanding of the grass-root level rural co-operatives, which can play a more effective role as vehicles of financial inclusion. It is proposed:

  • to constitute a Committee comprising representatives from the Reserve Bank, the NABARD and a few State Governments to study the functioning of well-run PACS, LAMPS, FSS and thrift and credit cooperative societies set up under the parallel Self-Reliant Co-operative Societies Acts to gather information on their working and assess their potential to contribute to financial inclusion.

Financial Inclusion Plan for Banks
With a view to increasing banking penetration and promoting financial inclusion, domestic commercial banks, both in the public and private sectors, were advised to take some specific actions. First, banks were required to put in place a Board-approved Financial Inclusion Plan (FIP) in order to roll them out over the next three years and submit the same to the Reserve Bank by March 2010. Banks were advised to devise FIPs congruent with their business strategy and to make it an integral part of their corporate plans.

Business Correspondents: Relaxations

It is proposed:

  • to permit banks to engage any individual, including those operating Common Service Centres (CSCs), as BC, subject to banks' comfort level and their carrying out suitable due diligence.

High Level Committee on Lead Bank Scheme

It is proposed:

  • to put in place an appropriate monitoring mechanism of the working of the SLBCs/DCCs.

Priority Sector Lending Certificates: Working Group

It is proposed:

  • to expand the terms of reference of the Working Group to also review the pros and cons of inclusion of bank lending to micro-finance institutions (MFIs) under priority sector lending. The Group is expected to submit its Report by end-June 2010.

Urban Co-operative Banks
Establishment of New Urban Co-operative Banks

It is proposed:

  • To set up a Committee comprising all stakeholders for studying the advisability of granting new urban co-operative banking licences under Section 22 of the Banking Regulation Act, 1949 [as applicable to co-operative societies (AACS)].

Liberalization of Off-site ATMs by UCBs

It is proposed:

  • To allow well-managed UCBs to set up off-site ATMs without seeking approval through the annual business plans.

Customer Service
The issue of `treating customers fairly' is assuming critical importance as the experience shows that consumer's interests are often not accorded full protection and properly attended to. Customer service in the banking industry is increasingly becoming important as banks are privileged institutions and banking is a special public utility service.

It is proposed:

  • to set up a Committee to look into banking services rendered to retail and small customers, including pensioners. The Committee will also look into the system of grievance redressal mechanism prevalent in banks, its structure and efficacy, and suggest measures for expeditious resolution of complaints. The Committee will also examine the international experiences in this regard.
  • to further strengthen the mechanism, for implementing the Reserve Bank's guidelines on customer service, through on-site and off-site inspections.
  • to require banks to devote exclusive time in a Board meeting once every six months to review and deliberate on customer service.

Regulatory and Supervisory Measures for Commercial Banks

Strengthening the Resilience of the Banking Sector
In December 2009, the Basel Committee on Banking Supervision (BCBS) had issued two consultative documents for public comments. The document on `Strengthening the Resilience of the Banking Sector' contains proposals for raising the quality, consistency and transparency of the capital base, enhancing risk coverage, prescribing leverage ratio and containing pro-cyclicality. The second document on `International Framework for Liquidity Risk Measurement Standards and Monitoring' focuses on measures for further elevating the resilience of internationally active banks to liquidity stress across the globe as well as increasing international harmonisation of liquidity risk supervision.

Working Group on Valuation Adjustment and Treatment of Illiquid Positions

It is proposed:

  • to constitute a Working Group with members from the Reserve Bank, FIMMDA, the IBA and a few banks to recommend an appropriate framework in this regard.

Convergence of Indian Accounting Standards with International Financial Reporting Standards

It is proposed:

  • to undertake a study of the implications of the IFRSs convergence process and also to issue operational guidelines as appropriate.
  • to disseminate information through learning programmes with a view to preparing banks and other entities to adhere to the roadmap.

Infrastructure Financing

It is proposed:

  • to treat annuities under build-operate transfer (BOT) model in respect of road/highway projects and toll collection rights, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities subject to the condition that banks' right to receive annuities and toll collection rights is legally enforceable and irrevocable.

Presence of Foreign Banks
In February 2005, the Reserve Bank had released the 'roadmap for presence of foreign banks in India' laying the gradual enhancement of foreign banks in a synchronized manner. The roadmap was divided into two phases, the first phase spanning the period March 2005 – March 2009, and the second phase beginning after a review of the experience gained in the first phase. In the first phase, foreign banks wishing to establish presence in India for the first time could either choose to operate through branch presence or set up a 100 per cent wholly-owned subsidiary (WOS), following the one-mode presence criterion. Foreign banks already operating in India were also allowed to convert their existing branches to WOS while following the one-mode presence criterion. The WOS was to be treated on par with the existing branches of foreign banks for branch expansion in India. No foreign bank, however, applied to establish itself as a WOS or to convert to a WOS during the first phase.

When the revision of presence of foreign banks in India was due in April 2009, the global financial markets were in turmoil and there were uncertainties surrounding the financial strength of banks around the world.

Drawing lessons from the crisis, it is proposed:

  • to prepare a discussion paper on the mode of presence of foreign banks through branch or WOS by September 2010.

Licensing of New Banks

It is proposed:

  • to prepare a discussion paper marshalling the international practices, the Indian experience as also the extant ownership and governance (O&G) guidelines and place it on the Reserve Bank's website by end-July 2010 for wider comments and feedback.

Introduction of Bank Holding Company (BHC)/Financial Holding Company (FHC) in India

It is proposed:

  • to constitute a Working Group with the representatives from the Government, the Reserve Bank, the SEBI, the IRDA and the IBA to recommend a roadmap for the introduction of a holding company structure together with the required legislative amendment/framework.

Conversion of Term Deposits, Daily Deposits or Recurring Deposits for Reinvestment in Term Deposits

It is proposed:

  • to permit banks to formulate their own policies towards conversion of deposits.

Compensation Practices

It is proposed:

  • to issue comprehensive guidelines based on Financial Stability Board (FSB) principles on sound compensation practices by end-June 2010.

The guidelines will cover effective governance of compensation, alignment of compensation with prudent risk-taking and disclosures for whole time directors (WTDs)/chief executive officers (CEOs) as well as risk takers of banks.

Implementation of Pillar 2 of Basel II

It is proposed:

  • to implement the SREP framework for banks from the inspection cycle 2010-11 as an integral part of the Annual Financial Inspection (AFI) of banks.

Cross-border Supervision

It is proposed:

  • to enter into bilateral MoU with overseas supervisory authorities within the existing legal provisions, consistent with the Basel Committee on Banking Supervision (BCBS) principles.

Information Technology and Related Issues: Enhancement to the Guidelines

It is proposed:

  • to set up a Working Group on information security, electronic banking, technology risk management, and tackling cyber frauds.

Credit Information Companies: Grant of Certificate of Registration
In April 2009, the Reserve Bank had issued in-principle approval to four entities to set up credit information companies. Out of the four companies, Experian Credit Information Company of India Private Ltd. and Equifax Credit Information Services Private Ltd. have been granted Certificate of Registration (CoR)

Institutional Developments

Non-Banking Financial Companies

Core Investment Companies (CICs): Regulatory Framework

It is proposed to:

  • treat CICs having an asset size of Rs.100 crore and above as systemically important core investment companies. Such companies will be required to register with the Reserve Bank.

The CICs fulfilling minimum capital and leverage criteria will be given exemption from maintenance of net owned fund and exposure norms applicable to NBFCs-ND-SI. They would be required to submit annual certificate from their statutory auditors regarding compliance with the prescribed norms. Draft guidelines will be placed on the Reserve Bank's website by April 30, 2010 for public comments.

Securitization Companies/Reconstruction Companies set up under the SARFAESI Act, 2002: Changes in Regulations

It is proposed to make the following modifications to the guidelines:

  • SCs/RCs can acquire the assets either in their own books or directly in the books of the trusts set up by them.
  • The period for realization of assets acquired by SCs/RCs can be extended from five years to eight years by their Boards of Directors, subject to certain conditions. Asset/Security Receipts (SRs), which remain unresolved/not redeemed as at the end of five years or eight years, as the case may be, will henceforth be treated as loss assets.
  • It will be mandatory for SCs/RCs to invest an amount not less than 5 per cent of each class of SRs issued under a particular scheme and continue to hold the investments till the time all the SRs issued under that class are redeemed completely.
  • With a view to bringing transparency and market discipline in the functioning of SCs/RCs, additional disclosures relating to assets realized during the year, value of financial assets unresolved as at the end of the year, value of SRs pending redemption, among others, are being prescribed.

Guidelines on Change in or Takeover of the Management of the Business of the Borrower by the SCs/RCs

The guidelines define the eligibility conditions and the grounds based on which SCs/RCs may exercise the powers. The guidelines provide for setting up of an Independent Advisory Committee (IAC) to evaluate the proposals of the SCs/RCs regarding the change in or taking over of the management of the business of the borrowers. Based on the feedback received and recommendations of the External Advisory Committee, it is proposed:

  • to issue the final guidelines by April 30, 2010.

Payment and Settlement Systems

Payment System Vision Document 2009-12
The Reserve Bank's responsibility with regard to regulation and supervision of payment systems, the 'Vision Document' for the period 2009-12 was released on February 16, 2010. The scope of the 'Vision Document' has been enhanced to ensure that all the payment and settlement systems operating in the country are safe, secure, sound, efficient, accessible and authorized.

Membership to the Committee on Payment and Settlement Systems
The Committee on Payment and Settlement Systems (CPSS), constituted under the aegis of the Bank for International Settlements (BIS), was recently broadened to include India and also nine other countries as members. The Reserve Bank is also represented on three

Working Groups of the CPSS set up for drawing up standards/guidelines towards efficient functioning of the payment and settlement systems and supporting market infrastructure across the world.

Standardization of Security Features on Cheque Forms
Cheques continue to be a predominant instrument for retail payments. To act as a deterrent to cheque frauds and to bring about uniformity across cheques issued/used by the banking industry, it was decided to examine the need for standardisation of security features on cheque forms.

Operationalisation of National Payments Corporation of India
The National Payments Corporation of India (NPCI), set up in December 2008 as an umbrella organization for operating and managing retail payment systems, has the envisioned role to look at future innovations in the retail payment space in the country.

Enhancements in National Electronic Funds Transfer System
To further strengthen the National Electronic Funds Transfer (NEFT) system in terms of availability, convenience, efficiency and speed, significant enhancements were introduced in the operational procedures and process flow, effective March 1, 2010.

Directions to Intermediaries and Payment Aggregators
In order to ensure the safety of such transactions, detailed guidelines were issued in November 2009.

Mobile Banking in India
The use of mobile phone channels for initiation and execution of banking transactions has been gaining significance the world over. The significance of this channel has been recognized by the Reserve Bank. Accordingly, regulatory guidelines for enabling mobile banking were notified in October 2008. The transaction limits were further relaxed in December 2009. Banks were also permitted to enable small value transactions up to Rs.1,000 without end-to-end encryption.

Automated Data Flow from Banks
As the policy and decision-making processes are becoming more information intensive, it is imperative to ensure quality of data and their timely submission. With a view to ensuring accuracy and integrity of data flow from the banking system to the Reserve Bank, a Core Group consisting of experts from banks, the Reserve Bank, IDRBT and the IBA has been constituted for preparing an Approach Paper on Automated Data Flow (a straight through- process) from the core banking solution (CBS) or other IT systems of 30 commercial banks to the Reserve Bank.

RTGS Upgradation
Working Group comprising representatives from the Reserve Bank and major commercial banks has been constituted for preparing the basic approach towards a next generation RTGS system, both from the business and IT perspective

The next review of the Developmental and Regulatory Policies will be undertaken as part of the Second Quarter Review of Monetary Policy on November 2, 2010.
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