POLICY
Declaration
of Dividend
The
Reserve Bank has revised its guidelines on dividends payable by banks as
under :
Eligibility
Criteria
- Only
those banks, which comply with the following minimum prudential requirements,
would be eligible to declare dividends without the Reserve Bank’s prior approval
:
The bank should -
(a)
have capital to risk-weighted assets ratio (CRAR) of at least 11 per cent for
preceding two completed years and the accounting year for which it proposes to
declare dividend.
(b) have net non-performing
assets (NPA) of less than 3 per cent.
(c)
comply with the provisions of Sections 15 and 17 of the Banking Regulation Act,
1949.
(d) comply with the Reserve Bank’s
prevailing regulations/ guidelines, including creating adequate provisions for
impairment of assets and staff retirement benefits, transfer of profits to statutory
reserves and investment fluctuation reserve, etc.
- The Reserve Bank should not have placed any explicit restrictions
on the bank for declaration of dividends.
Quantum
of Dividend
Banks which
qualify to declare dividends would be eligible to pay dividends without obtaining
the Reserve Bank’s prior approval provided -(i) The dividend payout ratio does
not exceed 33. 33 per cent.
(ii) The proposed
dividend should be payable out of the current year’s profit.
(iii)
The dividend payout ratio is calculated as a percentage of ‘dividend payable in
a year’ (excluding dividend tax) to ‘net profit during the year’.
(iv)
In case the profit for the relevant period includes any extraordinary profits/income,
the payout ratio should be computed after excluding such extra-ordinary items
for reckoning compliance with the prudential payout ratio ceiling of 33.33 per
cent.
(v) The financial statements pertaining
to the financial year for which the dividend is declared, should be free of any
qualifications by the statutory auditors, which have an adverse bearing on the
profit during that year. In case of any qualification to that effect, the net
profit should be suitably adjusted while computing the dividend payout ratio.
Banks
desirous of declaring dividend higher than the specified limit, should obtain
the Reserve Bank’s prior approval. The Reserve Bank would consider requests received
from banks on a case-to-case basis.
Interim
Dividend
Banks which
qualify for declaring dividend and satisfy the other requirements mentioned above,
may also declare and pay interim dividends out of the relevant accounting period’s
profit without the Reserve Bank’s prior approval provided, the cumulative interim
dividend(s) are within the prudential cap on dividend payout ratio (33.33 per
cent) computed for the relevant accounting period. Declaration and payment of
interim dividends beyond this ceiling would, however, require the Reserve Bank’s
prior approval.
Banks
which do not meet the Eligibility Criteria
Banks
which do not meet the eligibility criteria prescribed above, should obtain the
Reserve Bank ‘s prior approval before declaring any dividend. Requests
received from such banks would be considered by the Reserve Bank on a case-to-case
basis.
Highlights
of the Annual Policy Statement for the year
Domestic
Developments
- GDP
growth for 2004-05 projected at 6.5-7.0 per cent.
- Assuming
no significant supply shocks and appropriate management of liquidity, the inflation
rate projected for policy purposes at around 5.0 per cent during 2004-05.
- Growth
in reserve money and Money supply(M3) were higher during 2003-04 reflecting
capital inflows; the expansionary impact of foreign currency assets, however,
was neutralised to a large extent by substantial open market operation (OMO) including
sustained repo operations under LAF.
- Sustained
pick-up in non-food credit since September; total flow of resources to the commercial
sector was higher than last year.
- Government
market borrowing programme in 2003-04 completed at a much lower cost; while noting
reduction in fiscal deficit, need to step up capital expenditure stressed.
- Further
reduction in interest rates in money and government securities markets observed
in 2003-04.
- Public sector banks have reduced
their BPLR in the range of 25-100 basis points.
- RBI
to continue with its policy of active liquidity management; Market Stabilisation
Scheme (MSS), is an additional tool.
External
Developments
- lThe
exchange rate of the rupee appreciated vis-à-vis US dollar but depreciated
against the Euro, Pound sterling and Japanese yen in 2003-04.
- India’s
foreign exchange reserves increased by US $ 37.6 billion during fiscal 2003-04
and are at US $ 118.6 billion by May 7, 2004.
- India’s
exports in US dollar terms increased by 17.1 per cent while imports by 25.3 per
cent; the current account expected to register surplus during 2003-04 for the
third year in succession.
- The most distinguishing
feature of the external sector during 2003-04 relates to the large capital flows
with its inevitable implications for the conduct of domestic monetary policy and
exchange rate management.
Overall
Assessment
- Despite
uncertainties, India’s position among the top performers globally in terms of
GDP growth is expected to continue during 2004-05.
- As
regards prices, despite overhang of problems on account of oil prices and large
domestic liquidity, price situation unlikely to cause concern to macro stability
during 2004-05.
- Need to overcome the bottlenecks
in flow of bank credit to agriculture and small & medium enterprises emphasised.
- Restructuring
of rural banking sector stressed for enhancing the quality, purposiveness and
reach of banking in India.
Stance
of Monetary Policy
- Projected expansion
of money supply(M3) at 14.0 per cent with credit growth by 16.0-16.5
per cent during 2004-05.
- The overall stance
of monetary policy for 2004-05 will be:
(i) provision of adequate liquidity to meet credit growth
and support investment and export demand while keeping a very close watch on the
movements in the price level.
(ii) Consistent with the
above, while continuing with status quo, RBI to pursue an interest rate
environment that is conducive to maintaining momentum of growth and, macroeconomic
and price stability.
Measures
- Bank Rate kept stable
at 6.0 per cent. l Repo Rate unchanged at 4.5 per cent. l Revised LAF scheme operationalised.
- Entire
export credit refinance made available at reverse repo rate.
- Almost
all banks adopted the new system of BPLR and the rates are lower from their earlier
PLRs.
- Banks are encouraged to align the pricing
of credit to assessment of credit risk to improve credit delivery and credit culture.
- RBI
accepted some recommendations of the interim Report of Vyas Committee for implementation,
e.g., loans for storage facilities under priority sector, securitised agricultural
loans as priority sector lending, waiving margin/security requirements for certain
agricultural loans up to a limit, NPA norms for crop loans aligned to crop seasons.
- Development
of mechanism for debt restructuring for medium enterprises on the lines of corporate
debt restructuring.
- Definition of infrastrucutre
lending broadened.
- Working Group constituted
on Credit Enhancement by State Governments for financing infrastructure.
- A
Gold Card Scheme for creditworthy exporters drawn up.
- Various
restructuring options being considered by the government and other stakeholders
for rationalising the structure of RRBs - Vyas Committee is also looking into
restructuring of RRBs.
- Limit on the lending
of non-bank participants in the call/notice money market reduced to 45 percent
effective June 26, 2004.
- Automated value-free transfer of securities proposed between
market participants and the CCIL under CBLO.
- RBI
constituted Working Group to review the performance of negotiated dealing system
(NDS).
- Clearing of OTC derivatives through CCIL
being considered.
- CCIL to work out arrangement
for settlement of trades in non-SLR debt instruments for NDS members.
- Discussion paper on Capital Indexed Bonds being put in
public domain.
- The ECB limit already enhanced
to US $ 500 million under the automatic route for investment in the real sector.
- Resident
individuals already permitted to remit freely up to US $ 25,000 per calendar year.
- Indian
corporates and partnership firms allowed to invest overseas upto 100 per cent
of their net worth.
- Banks allowed to raise long-term
bonds to finance infrastructure.
- The extant
limit on unsecured exposures for banks withdrawn.
- Exposures
on all public financial institutions (PFIs) to attract a risk weight of 100 per
cent.
- Banks required to maintain capital charge
for market risk in a phased manner.
- Banks to
draw a road map for migration to Basel II.
- Banks
to make higher provisioning according to the age of NPAs.
- Banks/FIs
to provide credit information to CIBIL.
- Banks
to fully adhere to the KYC policy for opening new accounts.
- Report
of the Working Group on Financial Conglomerates being put in public domain.
- Risk
based supervision extended to more banks.
- Fresh
licences to UCBs only after a comprehensive policy.
- Report
of the Working Group on Development Finance Institutions being put in public domain.
- Technical
Group to evaluate the regulatory and supervisory systems deployed by refinancing
institutions (RFIs).
- Waiver of service charges
on banks for electronic funds transfer and electronic clearing services.
- RBI
sets up a Board for Payment and Settlement Systems.
- RBI
expects most commercial banks to join the RTGS system by June 2004.
- A
Working Group on Electronic Funds Transfer for Capital Market constituted.
- Single
window services for all transactions in RBI cash department.
- Operationalisation
of On-line Tax Accounting System by June 2004.
- Standing
Committee on Procedures and Performance Audit on Public Services has submitted
four Reports, being put in the public domain.
- Recommendations
of the Advisory/Technical Groups on International Financial Standards and Codes
being pursued.
Reporting
Banks
should report details of dividend declared during the accounting year within a
fortnight of payment of the dividend(s).
These
revised guidelines would be applicable to the dividends declared for the accounting
year ended March 31, 2004 onwards. Banks should place a copy of these guidelines
before their Board at its next meeting.
Banks
are further advised that violation of these guidelines would be viewed very seriously
and would attract penal action under Section 46 of the Banking Regulation Act,
1949. The Reserve Bank had, in consultation with the Standing Technical Advisory
Committee on Financial Regulation, reviewed the policy approach regarding payment
of dividends by banks. It was decided that the regulatory focus with regard to
payment of dividend by banks should shift from ‘quantum of dividend’ to ‘dividend
payout ratio’.
Information
System Audit
With
a view to ensuring uniformity in the Information System (IS) audit being followed
by banks, the Reserve Bank has advised all scheduled commercial banks to -(i)
Adopt an IS audit policy (if not already done) appropriate to their level of computerisation
and review the same at regular intervals in tune with the industry best practices
and guidelines issued by the Reserve Bank from time to time ii) Adopt appropriate
system and practices for conducting IS audit on an annual basis covering all the
critically important branches (in terms of nature and volume of business) iii)
Undertake such audits preferably prior to the statutory audit so that the IS audit
reports are available to the statutory auditors well in time for examination and
for incorporating comments, if any, in the audit reports iv) Place the IS audit
reports before their top management and ensure compliance within the time frame
as outlined in the audit policy.
Banks
have been advised to place these instructions before their board in its next meeting
and implement them during the current financial year.
The
Reserve Bank had, in the past, taken many initiatives in sensitising banks to
the risks and concerns that emerge from adoption of information technology. Various
committee reports, instructions and circulars were issued from time to time towards
assisting banks in adopting sound IS audit policy framework and practices.
The
Reserve Bank had recently conducted a study to assess the current practices being
followed by banks vis-à-vis IS audit.
The
study revealed that though banks have put in place a mechanism for conducting
IS/EDP audit, the practices differ from bank to bank depending upon the level
of adoption of technology. Further, many banks are in the process of implementing
IS audit system in place of computer/EDP audit.
Margins
for Bank Financing against Shares Reduced
On
the recommendation made by the Task Force constituted for monitoring developments
in the financial markets, it has been decided to restore, with immediate effect,
the status quo ante on margins that banks have to maintain for financing against
shares/ IPOs/issue of guarantees. The margins would now be 40 per cent against
the earlier 50 per cent. Furthermore, the minimum cash margin of 25 per cent (within
the margin of 50 per cent) stands reduced to 20 per cent.
It
may be recalled that the margins against shares were increased from the level
of 40 per cent to 50 per cent in January 2004.
CUSTOMER
SERVICE
Opening of Current Accounts
The
Reserve Bank has reiterated its earlier instructions to banks to scrupulously
ensure that their branches do not open current accounts of entities which enjoy
credit facilities (fund based or non-fund based) from the banking system without
specifically obtaining a no-objection certificate from the lending bank(s). Banks
have also been advised that non-compliance of these instructions would be perceived
as abetting the siphoning of funds and such violations, reported to the Reserve
Bank or noticed during its inspection would render the concerned banks liable
for penalty under the Banking Regulation Act, 1949.
In January
2000 banks were advised that at the time of opening current accounts, they should
insist on a declaration from the account-holder stating that he is not enjoying
any credit facility with any other bank or obtain a declaration giving particulars
of credit facilities enjoyed by the intending customer with any other bank(s).
Concerned lending bank(s) were required to be duly informed so that they could
take suitable precautionary measures, where necessary.
Customer
Information
The
Reserve Bank has advised all commercial banks that information collected from
customer while opening an account is confidential and divulging any details thereof
for cross selling or any other purpose would be in breach of customer confidentiality
obligations. Banks are, therefore, advised to instruct all the branches to strictly
ensure compliance with their obligations to the customer in this regard.
The
Reserve Bank has further advised banks that if they desire to collect any information
about their customer for a purpose other than ';Know Your Customer'; (KYC)
requirements, it should not form part of the account opening form. Such information
may be collected separately, purely on a voluntary basis, after explaining the
objectives to the customer and taking his express approval for the specific uses
to which such information could be put.
Banks have also
been advised to get their existing practices in this regard examined by the Ad
hoc Committee/Board and issue suitable instructions to their branches and ensure
compliance.
The Committee on Procedures and Performance
Audit on Public Services had observed that banks are using information collected
from their customers for cross selling of services of various products by their
subsidiaries and affiliates. Sometimes, such information is also provided to other
agencies.
Minimum
Balance
Banks have
been advised to inform, at least one month in advance, their existing account
holders any change in the prescribed minimum balance and the charges that would
be levied if the prescribed minimum balance is not maintained.
Earlier,
in August 2003, banks were advised that at the time of opening savings bank accounts,
they should inform their customers about the requirement of maintaining minimum
balance and levying of charges if such minimum balance is not maintained. Any
subsequent change in this regard should be informed to the account holders.
The
Committee on Procedure and Performance Audit on Public Services had observed that
banks added charges without informing the existing depositors. The Committee had
recommended that any charge levied subsequently should be transparently made known
to all depositors with one month’s advance notice.
Joint Accounts
The Reserve Bank has clarified that non-resident ordinary (NRO)
accounts may be held by non-residents jointly with residents.
In
August 2003, banks were advised that non-resident (external) (NRE) deposits should
be held jointly with non-residents only. Some banks had interpreted that these
instructions were equally applicable to NRO accounts and that NRO accounts could
not be held jointly with residents.
Processing Charges for EFT/ECS
In order to give further fillip to other types of electronic
modes of funds transfer, it has been decided to waive the service charges on banks
for Electronic Funds Transfer (EFT) and Electronic Clearing Service (ECS)
transactions up to March 31, 2006. The details in this regard are :
- The Reserve Bank would not levy ECS/EFT processing charges. The waiver would
be applicable to ECS (credit and debit clearing), centralised ECS, the normal
EFT as well as to the special EFT schemes.
- The
waiver would be effective from June 1, 2004, i.e., in respect of data submitted
by banks from June 1, 2004 and would be in vogue up to March 31, 2006.
- Banks should required to pass on this benefit to the customers in the form
of a reduction in the charges being levied for such transactions.
It
may be recalled that in December 2003, the Reserve Bank had waived the processing
charges for EFT transactions for two years. This measure was undertaken to encourage
electronic mode of payments which is fast and efficient.
Banks
have been further advised to inform the Reserve Bank of the steps taken by them
to pass on the benefit in terms of the change in tariff along with details of
pre and post waiver charges.
RRBs
Valuation
of Investment
The
Reserve Bank has advised all regional rural banks (RRBs)/ sponsor banks that the
exemption granted to RRBs from ‘mark to market’ norms in respect of stautory liquidity
ratio (SLR) securities has been extended for one more year i.e., for the financial
year 2004-05. Accordingly, RRBs should classify the entire investment portfolio
of SLR securities under ‘held to maturity’ for the financial year 2004-05 with
valuation on book value basis and amortisation of premium, if any, over the remaining
life of securities.
Edited
and published by Alpana Killawala for the Reserve Bank of India, Press
Relations Division, Central Office, Shahid Bhagat Singh Marg, Mumbai-400 001 and
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