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Volume XI  Issue 5
November 2014
MONETARY AND CREDIT INFORMATION REVIEW
Banking Regulation
Additional Guidelines on Savings Account
Non-maintenance of Minimum Balance in Savings Account
The Reserve Bank, on November 20, 2014, advised the scheduled
commercial banks (excluding regional rural banks) to adhere to the
following additional guidelines with effect from April 1, 2015, while
levying charges for non-maintenance of minimum balance in savings
bank account-
• In the event of a default in maintenance of minimum balance/
average minimum balance as agreed to between the bank and
customer, the bank should notify the customer clearly by SMS/
email/ letter that in the event of the minimum balance not being
restored in the account within a month from the date of notice, penal
charges will be applicable.
• In case the minimum balance is not restored within a reasonable
period, which shall not be less than one month from the date of
notice of shortfall, penal charges may be recovered under intimation
to the account holder.
• The policy on penal charges to be so levied may be decided with the
approval of Board of the bank.
• The penal charges should be directly proportionate to the extent of
shortfall observed. In other words, the charges should be a fixed
percentage levied on the amount of difference between the actual
balance maintained and the minimum balance as agreed upon at
the time of opening of account. A suitable slab structure for recovery
of charges may be finalised.
• The penal charges should be reasonable and not out of line with the
average cost of providing the services.
• The balance in the savings account does not turn into negative
balance solely on account of levy of charges for non-maintenance
of minimum balance.
The Reserve Bank has also advised the banks to bring these
additional guidelines to the notice of all customers apart from releasing
on their respective website and to take immediate steps to update
customer information so as to facilitate sending alerts through electronic
modes (SMSs/ emails) for effective implementation of the guidelines.
Clarifications on Periodic Updation under KYC
Advising on the continuance of the requirement of applying ‘client
due diligence’ measures to existing clients at an interval of two/eight/
ten years in respect of high/medium/low risk clients, respectively, the
Reserve Bank, on October 21, 2014, issued certain clarifications with regard to the KYC Norms, as under-
• Banks need not seek fresh proofs of identity and address at the time
of periodic updation, from those customers who are categorised
as ‘low risk’, in case of no change in status with respect to their
identities and addresses. A self-certification by the customer to that
effect should suffice in such cases. In case of change of address of
such ‘low risk’ customers, they could merely forward a certified copy
of the document (proof of address) by mail/post, etc. Banks may not
insist on physical presence of such low risk customer at the time of
periodic updation.
• If an existing KYC compliant customer of a bank desires to open
another account in the same bank, there should be no need for
submission of fresh proof of identity and/or proof of address for the
purpose.
As regards non-compliance of KYC requirements by the
customers despite repeated reminders by banks, banks should impose
‘partial freezing’ on such KYC non-compliant in a phased manner.
Meanwhile, the account holders can revive accounts by submitting the
KYC documents. While imposing ‘partial freezing’, banks are advised
to ensure that the option of ‘partial freezing’ is exercised after giving
due notice of three months initially to the customers to comply with
KYC requirement and followed by a reminder for further period of three
months. If the accounts are still KYC non-compliant after six months
of imposing initial ‘partial freezing’ banks may render them inoperative.
Further, it would always be open to the bank to close the account of
such customers.
Basel III–Intraday Liquidity Management
The Reserve Bank, on November 3, 2014, advised scheduled
commercial banks (excluding RRBs) to develop suitable strategy,
risk management policies and practices to monitor intraday liquidity,
ensure integrity of regulatory reporting and review the efficacy of
the monitoring tools. Accordingly, the banks will need to report
the monitoring tools to the Reserve Bank on a monthly basis from
January 1, 2015 to coincide with the implementation of the Liquidity
Coverage Ratio (LCR) reporting requirements as per the Reserve
Bank’s guidelines on “Basel III Framework on Liquidity Standards
– Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools
and LCR Disclosure Standards”.
Use of Business Correspondents
Taking into account the recommendations of the Nachiket Mor
Committee, the Reserve Bank, on October 29, 2014, reviewed
existing guidelines on appointment of Business Correspondents
(BCs) as under:
Eligible individuals/entities
• Regional Rural Banks will be permitted to engage non-deposit
taking NBFCs (NBFCs-ND) as Business Correspondents,
subject to the prescribed conditions.
Distance criteria
• To provide operational flexibility to RRBs and in view of the
technological developments in the banking sector, the Reserve
Bank has removed the stipulation regarding distance criteria.
The RRBs should, however, while formulating the Board
approved policy for engaging BCs, keep in mind their notified
area of operations and the objectives of adequate oversight of
the BCs as well as provision of services to customers.
RRBs may continue to take measures to address possible
reputational risks arising out of appointment and functioning of
BCs.
Financing of JLGs of ‘Bhoomi Heen Kisan’
The Reserve Bank, on November 13, 2014 issued guidelines
for financing of Joint Liability Groups (JLGs) of ‘Bhoomi Heen Kisan’
and advised the commercial banks to follow these guidelines, that
were based on the inputs received from NABARD. Considering the
priorities being attached by the Government of India in financing
landless farmers’ groups through JLG mode of financing, the
Reserve Bank has advised the banks to closely monitor the
progress in JLG financing, which will be monitored through State
Level Bankers’ Committees (SLBCs) and reviewed at the highest
corporate level of banks on a quarterly basis. The Reserve Bank
has further advised the banks to send the progress report on JLG
financing to NABARD (Micro Credit Innovations Department),
Mumbai, on a monthly basis as per the prescribed format.
The revised approach evolved by NABARD for financing
the JLGs, both for farm and non-farm activities, pertain to - (i)
enabling JLGs within and outside SHGs; (ii) cluster approach in
JLG promotion; (iii) assessing JLGs for bank finance; (iv) training
requirements; (v) incentive for promotion of JLGs; (vi) NABARD
refinance; and (vii)monitoring and review of financing through
JLGs.
Co-operative Banking
Display Full Name prominently
The Reserve Bank, on October 30, 2014, advised primary
(urban) co-operative banks (UCBs) to ensure that the full name
of the bank as appearing in the Certificate of Registration and the
licence granted by the Reserve Bank are displayed prominently
wherever abbreviated/abridged version of their name is used for
logo/brand building. Besides, the font size used for the full name
should not be smaller than the one used for their abbreviated
name/abridged name/logo.
Gold Loan Bullet Repayment Scheme
The Reserve Bank, on October 30, 2014, increased the
quantum of loans that primary (urban) co-operative banks
(UCBs) were permitted to grant under the bullet repayment
option scheme, from one lakh to two lakh Rupees subject to
certain conditions.
LAF to Scheduled UCBs
The Reserve Bank has provided an additional avenue for
liquidity management to scheduled urban co-operative banks
(UCBs), with effect from November 28, 2014, by extending
Liquidity Adjustment Facility (LAF) to those scheduled UCBs
which are core banking solution (CBS) enabled, have capital to
risk (weighted) assets ratio (CRAR) of at least 9 per cent and are
fully compliant with the eligibility criteria prescribed for LAF.
PMLA- Designated Director
The Reserve Bank, on November 5, 2014, clarified that to
ensure compliance with the obligations under the Prevention of
Money Laundering Amendment Act, 2013, primary (urban) cooperative
banks (UCBs) can also designate a person who holds
the position of senior management or equivalent as a ‘Designated
Director’. However, in no case, the Principal Officer should be
nominated as the ‘Designated Director’.
Essay Competition to promote Financial Literacy
The Reserve Bank of India’s College of Agricultural
Banking (CAB), Pune is conducting an essay competition to
promote financial literacy. The theme for the Essay Competition
2014 is “How to make India a financially literate country –
Strategies”.
The competition is open for participation for two channels
of participants- (i) the staff of various banks, namely, scheduled
commercial banks, regional rural banks, state cooperative
banks, National Bank for Agricultural and Rural Development
(NABARD), Small Industries Development Bank of India (SIDBI),
and the Reserve Bank of India and (ii) students, academicians,
financial literacy counsellors and general public. The last date
for submission of entries is December 30, 2014 and the results
will be announced on January 30, 2015.
The prize winning participants under each channel will
be given a certificate and `20,000 for first prize, `15,000 for
second prize, `10,000 for third prize and a consolation prize
of `5,000. Details of the competition are available on the CAB
website at http://cab.org.in
Non-Banking Regulation
Regulatory Framework for NBFC Revised
The Reserve Bank, on November 10, 2014, revised the regulatory
framework for NBFC (Non-Banking Finance Company) sector to a)
address risks wherever they exist, b) address regulatory gaps and
arbitrage arising from differential regulations, both within the sector as
well as vis-a-vis other financial institutions, c) harmonise and simplify
regulations to facilitate a smoother compliance culture among NBFCs,
and d) strengthen governance standards. With a view to transitioning,
over time, to an activity based regulation of NBFCs, the Reserve Bank
made the changes in the regulatory framework for NBFCs as under-
Requirement of Minimum NOF of ` 200 lakh
NBFCs are required to obtain a Certificate of Registration (CoR)
from the Reserve Bank to commence/carry on business of NBFI
(Non-Banking Finance Intermediary) and have the minimum Net
Owned Fund (NOF) as prescribed from time to time. Given the need
for strengthening the financial sector and technology adoption, and in
view of the increasing complexities of services offered by NBFCs, all
NBFCs should mandatorily attain a minimum NOF of:
• ` 100 lakh by the end of March 2016
• ` 200 lakh by the end of March 2017
NBFCs, the NOF of which currently falls below ` 200 lakh, have
to submit a statutory auditor’s certificate certifying compliance to
the revised levels at the end of each of the two financial years as
mentioned.
NBFCs failing to achieve the prescribed ceiling within the
stipulated time period shall not be eligible to hold the CoR as NBFCs.
The Reserve Bank will initiate the process for cancellation of CoR
against such NBFCs.
Deposit Acceptance
• To harmonise the deposit acceptance regulations across all
deposit taking NBFCs (NBFCs-D) and move over to a regimen
of only credit rated NBFCs-D accessing public deposits, existing
unrated Asset Finance Companies (AFCs) shall have to get
themselves rated by March 31, 2016.
• Those AFCs that do not get an investment grade rating by March
31, 2016, will not be allowed to renew existing or accept fresh
deposits thereafter.
• In the intervening period, i.e. till March 31, 2016, unrated AFCs or
those with a sub-investment grade rating can only renew existing
deposits on maturity, and not accept fresh deposits, till they obtain
an investment grade rating.
• For rated AFCs, the limit for acceptance of deposits across the
sector is reduced from 4 times to 1.5 times of NOF, with effect
from November 10, 2014.
Systemic Significance
The threshold for defining systemic significance for non-deposit
taking NBFCs (NBFCs-ND) has been revised in the light
of the overall increase in the growth of the NBFC sector. Non–
deposit taking systemically important NBFCs (NBFCs-ND-SI) will
henceforth be those NBFCs-ND which have asset size of ` 500
crore and above as per the last audited balance sheet. With this
revision in the threshold for systemic significance, NBFCs-ND shall
be categorised into two broad categories- (i) NBFCs-ND (those with
assets of less than ` 500 crore) and (ii) NBFCs-ND-SI (those with
assets of ` 500 crore and above).
Multiple NBFCs
NBFCs that are part of a corporate group or are floated by a
common set of promoters will not be viewed on a standalone basis.
The total assets of NBFCs in a group including deposit taking NBFCs,
if any, will be aggregated to determine if such consolidation falls within
the asset sizes of the two categories mentioned above. Regulations
as applicable to the two categories will be applicable to each of the
NBFC-ND within the group.
Prudential Norms
The regulatory approach in respect of NBFCs-ND with an asset
size of less than ` 500 crore will be as under:
• They shall not be subjected to any regulation either prudential or
conduct of business regulations viz., Fair Practices Code (FPC),
Know Your Customer (KYC), etc., if they have not accessed any
public funds and do not have a customer interface.
• Those having customer interface will be subjected only to conduct
of business regulations including FPC, KYC etc., if they are not
accessing public funds.
• Those accepting public funds will be subjected to limited prudential
regulations but not conduct of business regulations if they have
no customer interface.
• Where both public funds are accepted and customer interface
exist, such companies will be subjected both to limited prudential
regulations and conduct of business regulations.
• Irrespective of whichever category the NBFC falls in, registration
under Section 45 IA of the RBI Act will be mandatory.
• All of the above will also be subjected to a simplified reporting
system which shall be communicated separately.
All NBFCs-ND with assets of ` 500 crore and above, irrespective
of whether they have accessed public funds or not, shall comply with
prudential regulations as applicable to NBFCs-ND-SI. They shall also
comply with conduct of business regulations if customer interface
exists.
All NBFCs-ND which have an asset size of ` 500 crore and above,
and all NBFCs-D, shall maintain minimum Tier 1 Capital of 10 percent.
The compliance to the revised Tier 1 capital will be phased in as follows:
8.5 percent by end of March 2016; 10 percent by end of March 2017.
Asset Classification
The asset classification norms for NBFCs-ND-SI and NBFCs-D
are being brought in line with that of banks, in a phased manner, as
given below:
• Lease Rental and Hire-Purchase Assets shall become nonperforming
assets (NPAs) if they become overdue for nine months
(currently 12 months) for the financial year ending March 31, 2016;
• Assets other than Lease Rental and Hire-Purchase Assets shall
become NPA if they become overdue for 5 months for the financial
year ending March 31, 2016;
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Editor
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Cheque Related Frauds - Preventive Measures
The Reserve Bank, on November 5, 2014, advised scheduled
commercial banks (excluding RRBs) / local area banks to review and
strengthen the controls in the cheque presenting/passing and account
monitoring processes and to ensure that all procedural guidelines
including preventive measures are followed meticulously by the dealing
staff/officials. An indicative list of some of the preventive measures, that
banks may follow, are as under:
• Ensuring the use of 100 percent Cheque Truncation System (CTS)
- 2010 compliant cheques;
• Strengthening the infrastructure at the cheque handling service
branches and bestowing special attention on the quality of equipment
and personnel posted for CTS based clearing, so that it is not merely
a mechanical process;
• Ensuring that the beneficiary is KYC compliant so that the bank has
recourse to him/her as long as he/she remains a customer of the
bank;
• Examination under ultra violet lamp for all cheques beyond a
threshold of say, ` 2 lakh;
• Checking at multiple levels, of cheques above a threshold of say, ` 5 lakh;
• Close monitoring of credits and debits in newly opened transaction
accounts based on risk categorisation;
• Sending SMS alert to payer/drawer when cheques are received in
clearing;
In addition to the above, banks may consider the following preventive
measures for dealing with suspicious or large value cheques (in relation
to an account’s normal level of operations):
• Alerting the customer by a phone call and getting the confirmation
from the payer/drawer.
• Contacting base branch in case of non-home cheques.
The above may be resorted to selectively if not found feasible to be
implemented systematically.
The Reserve Bank has also advised banks to take appropriate
precautionary measures to ensure that the confidential information, such
as, customer name/account number/signature, cheque serial numbers
and other related information are neither compromised nor misused
either from the bank or from the vendors’ (printers, couriers etc.) side.
The Reserve Bank has further advised the banks to take due care and
ensure secure handling of cheques from the time they are tendered over
the counters or dropped in the collection boxes by customers. It has been
reported that in some cases even though the original cheques were in
the custody of the customer, cheques with the same series had been
presented and encashed by fraudsters.
The Reserve Bank, on November 13, 2014, has also advised primary
(urban) co-operative banks (UCBs), to review and strengthen the controls
in the cheque presenting/passing and account monitoring processes and
to ensure that all procedural guidelines including preventive measures
are followed meticulously by the dealing staff/officials.
Regulatory Framework for NBFC Revised (Continued)
• For all loan and hire-purchase and lease assets, sub-standard
asset would mean an asset that has been classified as NPA for
a period not exceeding 16 months (currently 18 months) for the
financial year ending March 31, 2016;
• For all loan and hire-purchase and lease assets, doubtful asset
would mean an asset that has remained sub-standard for a period
exceeding 16 months (currently 18 months) for the financial year
ending March 31, 2016;
• Overdue period will be reduced for the financial years ending
March 31, 2017 and 2018.
Provisioning for Standard Assets
Provision for standard assets for all NBFCs-ND-SI and NBFCs-D
has been increased to 0.40 percent in a phased manner- 0.30 percent,
0.35 percent and 0.40 percent by the end of March 2016, March 2017 and
March 2018, respectively.
Credit / Investment Concentration Norms for AFCs
The credit concentration norms for AFCs will be in line with
other NBFCs with immediate effect for all new loans excluding those
already sanctioned. All existing excess exposures would be allowed
to run off till maturity.
Corporate Governance and Disclosure norms for NBFCs
NBFCs-D with deposits of ` 20 crore and above, and NBFCs-ND
with asset size of ` 50 crore and above are required to constitute an
Audit Committee; NBFCs-D with deposits of ` 20 crore and above, and
NBFCs-ND with assets of ` 100 crore and above are advised to consider
constituting Nomination Committee to ensure ‘fit and proper’ status of
proposed/ existing Directors and Risk Management Committee.
Board Committees
The constitution of the three Committees of the Board and instructions
with regard to rotation of partners have now been made applicable to all
NBFCs-ND-SI, as also all NBFCs-D. Other NBFCs are encouraged to
continue such practices, if already being followed. The Audit Committee of all
NBFCs-ND-SI, as also all NBFCs-D must ensure that an Information Systems
Audit of the internal systems and processes is conducted at least once in two
years to assess operational risks faced by the company.
Fit and Proper Criteria for Directors
All NBFCs-ND-SI, as also all NBFCs-D, with effect from March 31,
2015 shall ensure a policy for ascertaining the fit and proper criteria at the
time of appointment of Directors and on a continuing basis, a declaration
and undertaking shall be obtained from the Directors by the NBFC. The
Directors shall sign a Deed of Covenant and the NBFCs shall furnish to
the Reserve Bank a quarterly statement on change of Directors certified
by the auditors and a certificate from the Managing Director that fit and
proper criteria in selection of directors have been followed.
Disclosures in Financial Statements
In addition to the existing disclosures, all NBFCs-SI (as redefined)
as also all NBFCs-D will have to make additional disclosures in their
financial statements, as prescribed in the revised guidelines.
The above revisions shall be applicable to NBFCs-MFI also
except wherever in conflict with the provision of Non-Banking
Financial Company- Micro Finance Institutions (Reserve Bank)
Directions, 2011, in which case the Directions will be followed.
Likewise, the above revisions shall be applicable to registered Core
Investment Companies except wherever contrary with the provisions
of Core Investment Companies (Reserve Bank) Directions, 2011, in
which case the Directions will be followed.
Edited and published by Alpana Killawala for the Reserve Bank of India, Department of Communication, Central Office, Shahid Bhagat
Singh Marg, Mumbai - 400 001 MCIR can be accessed at www.mcir.rbi.org.in |