Volume VI  Issue 11 May 2010
MONETARY AND CREDIT INFORMATION REVIEW
POLICY
Stripping/Reconstitution of Government Securities
The Reserve Bank has decided to introduce separate trading
of registered interest and principal of securities (STRIPS)
in government securities as part of the efforts to develop the
government securities market. Detailed guidelines outlining the
process of stripping/reconstitution and other operational
procedures regarding transactions in STRIPS have been
provided. STRIPS in government securities will ensure
availability of sovereign zero coupon bonds, which will lead to
the development of a market determined zero coupon yield
curve (ZCYC). STRIPS will also provide institutional investors
with an additional instrument for their asset-liability
management. Further, as STRIPS have zero reinvestment risk
(discounted instruments with no periodic interest payment
thereby obviating the need for reinvestment of intermediate cash
flows arising out of the investment), they can be attractive to
retail/non-institutional investors.
Investment Portfolio of Primary Dealers
The Reserve Bank, while reviewing the guidelines in
respect to categorisation of government securities for the
standalone primary dealers (PDs), has decided to permit the
standalone PDs to hold government securities in the held-to
maturity (HTM) category to the extent of their audited net owned
funds (NOFs) as at the March end of the preceding financial
year. The NOFs will be computed in terms of the explanatory
note to section 45-IA of chapter III-B of the Reserve Bank of India
Act, 1934. As per earlier provisions, the standalone PDs were
allowed to categorise government securities up to 100 per cent
of their paid up capital in the HTM category, subject to certain
conditions. Banks undertaking PD activities departmentally
would continue to follow the extant guidelines applicable to
banks in regard to the classification and valuation of the
investment portfolio issued by the Reserve Bank.
Educational Loan Scheme
The Reserve Bank has directed all scheduled commercial
banks to ensure meticulous compliance of its directives
regarding educational loan scheme which requires that no
security may be insisted upon for loans upto Rs.4.00 lakh. The Reserve Bank have been receiving representations from various
quarters that banks were demanding collateral security even for
loans upto Rs.4.00 lakh. Keeping this in view, banks have been
asked to issue suitable instructions to their branches/
controlling offices in this regard.
Clearing-related Overdraft
As per the extant provisions, for unauthorised overdrafts
on account of adverse clearing position, defaulting banks are
required to pay penal interest at the rate applicable to clean
overdrafts plus 2 per cent from the following working day till
the position is regularised. The Reserve Bank has been
receiving a number of references regarding exorbitant
interest being levied by some clearing house managing
banks for extending clearing-related overdrafts in member
bank settlement accounts and also some member banks routinely demanding overdraft free of interest from settlement
banks to meet clearing-related shortfalls during the day. A
meeting of major clearing house managing banks was
conducted where the issue was discussed and, for the sake
of uniformity in levy of interest for clearing-related overdrafts,
it has been decided as under:
-
To benchmark the applicable interest rate for clearingrelated
overdrafts to the Reserve Bank liquidity adjustment
facility (LAF) repo rate.
-
For intra-day overdraft (the day when the overdraft is
extended, irrespective of the time period for which the
overdraft facility is enjoyed), interest shall be charged at
relevant LAF repo rate + 100 basis points.
-
If the overdraft extends to the following day (overnight and
beyond), interest shall be charged at relevant LAF repo rate
+ 300 basis points.
-
The cushion of 100 and 300 basis points over the relevant
LAF repo rate is provided as the clearing-related overdraft
is non-collateralised whereas repo is collateralised in
nature.
-
In instances where settlement accounts of member banks
(with the settlement bank at the concerned clearing
location) are not credited in time and the settlement bank
has levied overdraft charges, though funds have already
been remitted and credited to the settlement bank’s
account at Mumbai (or any other central location - through
RTGS or otherwise), the overdraft charges shall be
refunded, on member banks proving that the funds were
received in time by the settlement bank.
Micro and Small Enterprises (MSEs)
Accepting the recommendations of a working group to
review the credit guarantee scheme (CGS) of the credit
guarantee fund trust for micro and small enterprises (CGTMSE),
the Reserve Bank has directed all scheduled commercial
banks including regional rural banks and local area banks to
not to accept collateral security in the case of loans upto Rs.10
lakh extended to units in the MSE sector. Banks have also been
asked to strongly encourage their branch level functionaries to
avail of the CGS cover, including making performance in this
regard a criterion in the evaluation of their field staff. It may be
recalled that the report of the working group to review CGS
containing several recommendations was released on March
06, 2010.
Non-SLR Investments
As per prudential norms for classification, valuation and
operation of investment portfolio by banks, bank’s investment
in unlisted non-SLR securities should not exceed 10 per cent
of its total investment in non-SLR securities as on March 31,
of the previous year. Further, banks have been allowed to invest
in unrated bonds of companies engaged in infrastructure
activities within the ceiling of 10 per cent of unlisted non-SLR
securities. Since there is a time lag between issuance and
listing of securities, which are proposed to be listed but not
listed at the time of subscription, banks may not be able to participate in primary issues of non-SLR securities. In view of
the above the Reserve Bank has now decided 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. However, if such
security is not listed within the period specified, the same will
be reckoned for the 10 per cent limit specified for unlisted non-
SLR securities. In case such investments included under
unlisted non-SLR securities lead to a breach of the 10 per cent
limit, the bank would not be allowed to make further
investment in non-SLR securities (both primary and secondary
market) as also in unrated bonds issued by companies
engaged in infrastructure activities till such time bank’s
investment in unlisted non-SLR securities comes within the
limit of 10 per cent.
Priority Sector Lending
The Reserve Bank has clarified that loans granted by
banks for agricultural and allied activities are eligible for
classification under priority sector, irrespective of whether
borrowing entity is engaged in export or otherwise. The export
credit granted for agricultural and allied activities may be
reported separately under heading: “export credit to agriculture
sector”. Some of the banks had sought clarification in respect
of classification of working capital limits granted to borrowers
engaged in agricultural and allied activities and to food and
agro-based processing units by way of export credit, under
priority sector.
Business Correspondents
The Reserve Bank has permitted banks to engage any
individual, including those operating common service centres
(CSCs) as business correspondents(BCs), subject to banks’
comfort level and their carrying out suitable due diligence as
also instituting additional safeguards as may be considered
appropriate to minimise the agency risks. The policy in this
regard was announced earlier as a part of the annual policy
statement for the year 2010-11 of the Reserve Bank.
FEMA
Current Account Transactions – Liberalisation
As per the extant provisions, prior approval of the
ministry of commerce and industry, Government of India, is
required for drawing foreign exchange for remittances under
technical collaboration agreements where payment of royalty
exceeds 5 per cent on local sales and 8 per cent on exports
and lump-sum payment exceeds USD 2 million. While
reviewing the extant policy in regard to foreign technology
agreements, the government has decided to omit the
aforesaid provision as a measure of further liberalisation.
Accordingly, authorised dealer Category-I banks (AD
Category-I banks) may permit drawal of foreign exchange by
persons for payment of royalty and lump-sum payment under
technical collaboration agreements without the approval of
ministry of commerce and industry, Government of India.
External Commercial Borrowings (ECB) Policy
On a review of the policy, the Reserve Bank has decided
to modify the extant ECB policy in respect of the infrastructure
finance companies (IFCs) i.e. non-banking finance companies
(NBFCs) categorised as IFCs by the Reserve Bank. As per the
extant norms, IFCs have been permitted to avail of ECBs for
on-lending to the infrastructure sector, as defined in the extant
ECB policy, under the approval route. As a measure of
liberalisation of the existing procedures, it has been decided
to permit the IFCs to avail of ECBs, including the outstanding
ECBs, up to 50 per cent of their owned funds under the
automatic route, subject to their compliance with the
prudential guidelines already in place. ECBs by IFCs above 50
per cent of their owned funds would require the approval of
the Reserve Bank and will, therefore, be considered under the
approval route. Designated authorised dealer banks have been
directed to ensure compliance with the extant norms while
certifying the ECB application both under the automatic and
approval routes. All the other aspects of ECB policy such as
USD 500 million limit per company per financial year under
the automatic route, eligible borrower, recognised lender,
end-use, average maturity period, prepayment, refinancing of
existing ECB and reporting arrangements remain unchanged.
Foreign Direct Investment (FDI)
The Reserve Bank, in consultation with the Government of
India, has reviewed the extant guidelines applicable to issue of
equity instruments to a person resident outside India under the
foreign direct investment (FDI) policy. As per the extant policy, an
Indian company may issue equity shares, compulsorily
convertible preference shares and compulsorily convertible
debentures (equity instruments) to a person resident outside
India under the FDI policy, subject to inter-alia, compliance with
the pricing guidelines. Further, a general permission is
available for transfer of equity instruments, by way of sale, from
residents to non-residents (including transfer of subscriber’s
shares) of an Indian company in sectors other than financial
services sector (i.e. banks, NBFCs, insurance, asset
reconstruction companies, infrastructure companies in
securities market namely, stock exchanges, depositories and
clearing corporations, credit information companies and
commodity exchanges) from residents to non-residents and
vice-versa. The extant guidelines have been reviewed and
accordingly the pricing guidelines in respect of issue of
shares including preferential allotment have been revised. The
main highlights of the revised instructions applicable to transfer
of shares of an Indian company are as follows:
I. Transfer by resident to non-resident (i.e. to foreign
national, non-resident Indian, foreign institutional investor
and incorporated non-resident entity other than erstwhile
overseas corporate body)-
(a) Where shares of an Indian company are listed on a
recognised stock exchange in India, the price of
shares transferred by way of sale shall not be less
than the price at which a preferential allotment of
shares can be made under the Securities and
Exchange Board of India (SEBI) guidelines, as applicable, provided that the same is determined for
such duration as specified therein, preceding the
relevant date, which shall be the date of purchase or
sale of shares.
(b) Where the shares of an Indian company are not
listed on a recognised stock exchange in India, the
transfer of shares shall be at a price not less than the
fair value to be determined by a SEBI registered
Category-I merchant banker or a chartered accountant
as per the discounted free cash flow method. The
price per share arrived at should be certified by a
SEBI registered Category-I merchant banker/chartered
accountant.
II. Transfer by Non-resident to resident-
(a) Price of shares transferred by way of sale, by nonresident
to resident shall not be more than the
minimum price at which the transfer of shares can
be made from a resident to a non-resident as
given above.
Foreign Exchange for Visits Abroad
In terms of the extant provisions, authorised dealers and
full fledged money changers are permitted to sell foreign
exchange in the form of foreign currency notes and coins, up
to USD 2,000 or its equivalent, to the travellers proceeding to
countries other than Iraq, Libya, Islamic Republic of Iran,
Russian Federation and other Republics of Commonwealth of
Independent States. The existing limits have been reviewed
and the Reserve Bank has decided to increase this ceiling,
with immediate effect, to USD 3,000 to the travellers without
the prior permission from the Reserve Bank. Authorised
dealers and full fledged money changers may, as hitherto,
continue to sell foreign exchange in the form of foreign
currency notes and coins up to USD 5,000 or its equivalent to
the travellers proceeding to Iraq or Libya, out of the overall
foreign exchange released and full foreign exchange may be
released in the form of foreign currency notes and coins to the
travellers proceeding to the Islamic Republic of Iran, Russian
Federation and other Republics of Commonwealth of
Independent States.
NBFCs
Finance for Housing Projects
The Reserve Bank has directed that while granting finance
to housing/development projects, non-banking finance
companies (NBFCs) should stipulate as a part of the terms and
conditions that:
(i) the builder/developer/owner/company would disclose in the
pamphlets/brochures/advertisements etc., the name(s) of
the entity to which the property is mortgaged.
(ii) the builder/developer/owner/company should indicate in
the pamphlets/brochures, that they would provide no
objection certificate (NOC)/permission of the mortgagee
entity for sale of flats/property, if required.
It may be recalled that earlier in a case which had come up
before the Hon’ble High Court of Judicature at Bombay, the
Hon’ble Court had observed that the bank granting finance in
housing should insist on disclosure of the charge or any other
liability on the plot in question or development project being duly
made in the brochure or pamphlet etc., which may be published
by developer/owner inviting public at large to purchase flats and
properties. The Court had also added that this obviously would
be part of the terms and conditions on which the loan may be
sanctioned by the bank. Keeping in view the observations made
by the Hon’ble court, the Reserve Bank has advised NBFCs also
to ensure compliance with the above stipulations so that funds
are not released unless the builder/developer/owner/company
fulfils the above requirements.
Overseas Investment by NBFCs
The Reserve Bank has emphasised that all NBFCs
desirous of making any overseas investment must obtain ‘No
Objection Certificate’ (NoC) from the Reserve Bank before
making such investment. Applications in this regard shall clearly
state the activities intended to be undertaken by the overseas
entity. NBFCs are not permitted to make direct investment in a
foreign entity engaged in activities not approved under FEMA. As
per the extant regulations, an Indian party requires prior approval
of the concerned regulatory authorities both in India and abroad,
to make an investment in an entity outside India engaged in
financial services activities. Regulated entities in the financial
sector making investments in any activity overseas are required
to comply with the above regulation. Any investment made by
NBFCs without regulatory clearance would be treated as a
violation of FEMA and would attract penal provisions.
URBAN CO-OPERATIVE BANKS
Opening of Off-site ATMs
The Reserve Bank has decided to allow well managed
urban co-operative banks (UCBs) to set up off-site ATMs without
seeking approval through the annual business plans subject to
UCBs meeting the following conditions:
i) Maintenance of a minimum CRAR of 10 per cent on a
continuous basis with minimum owned funds
commensurate with entry point capital norms for the centre
where the off-site ATM is proposed/where the bank is
registered.
ii) Net NPAs being less than 5 per cent.
iii) No default in the maintenance of CRR/SLR during the
preceding financial year.
iv) Continuous net profit for the last three years.
v) Sound internal control system with at least two
professional directors on the board.
vi) Regulatory comfort based on inter-alia, track record of
compliance.
UCBs, satisfying the above mentioned norms may prepare
an application for opening off-site ATMs, as per their requirement,
in their existing area of operation, with the approval of their board
of directors. All other instructions on functional facilities provided
at off-site ATMs, inter-account transfer, telephone connection
between the ‘stand alone’ ATMs with branch ATMs and shared
payment network system, posting of person other than security
guard, sharing/interlinking of ATMs etc., remain unchanged
INFORMATION
Better Facilities for Pensioners
Providing better facilities to pensioners has always been
a top priority of the government as well as the Reserve Bank.
The steps taken in this regard inter-alia include:
i. The scheme for payment of pension to central civil
pensioners by authorised banks provides that, if a pensioner
is unable to obtain a life certificate from an authorised bank
official on account of serious illness/incapacitation etc., the
officer-in-charge of the paying branch may nominate an
officer to visit the pensioner at his/her residence/hospital for
the purpose of recording the life certificate.
ii. Banking Codes and Standards Board of India (BCSBI) has
included pension as payment services for application of
‘Code of Commitment by Banks to Customers’.
Accordingly, banks are committed to extend the banking
services under the adopted code. The BCSBI sets
minimum standards of banking services.
iii. The Reserve Bank has advised the banks to implement
promptly the government orders increasing the dearness
allowance to pensioners.
iv. No disbursement or delay in disbursement of pension ( to
the extent the grievance can be attributed to the action on
part of the bank concerned, but not with regard to its
employees) is one of the grounds of complaints prescribed
under Banking Ombudsman Scheme, 2006. The
complaints received at the banking ombudsman offices are
also redressed promptly by taking up the matter with
concerned banks as per the provisions of the scheme.
v. Indian Banks’ Association has also advised banks to
frame guidelines to ensure that customers, especially
senior citizens are not put to inconvenience in transacting
the business.
vi. Further, directions have also been issued by the
government to all public sector banks to ensure
establishment of central pension processing centres, in
terms of RBI guidelines dated October 01, 2008.
Source: Parliament Questions
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