Second Quarter Review of the Monetary Policy for 2011-12
-Announced on the 25th October 2011
Part B. Developmental and Regulatory Policies
VI. Institutional Developments
Non-Banking Financial Companies
Regulatory Framework for Non-Banking Financial Company – Micro Finance Institution
109. As announced in the Monetary Policy Statement of May 2011, the broad framework of regulations recommended by the Malegam Committee, which had been constituted to study issues and concerns of the micro finance institution (MFI) sector, was accepted by the Reserve Bank. Guidelines with regard to priority sector treatment of MFI loans were also issued to banks. It is further proposed:
to introduce a new category of NBFCs called Non-Banking Financial Company – Micro Finance Institutions (NBFC-MFIs), the regulatory framework of which will be broadly based on the recommendations of the Malegam Committee.
110. Detailed guidelines in this regard will be issued by end-November 2011.
Overseas Investment by Core Investment Companies
111. Under the extant regulations, NBFCs desirous of investing overseas require prior approval from the Reserve Bank. These investments are allowed by the Reserve Bank subject to certain eligibility conditions, and only in the regulated financial activities. Core investment companies (CICs), however, have as their primary activity, investment in equity shares of group entities for the sake of holding stake in these companies. Such group companies may be in different sectors of the economy and not confined to the financial sector alone. As a holding company, a CIC may need to invest in non-financial entities overseas. It is, therefore, proposed:
to issue a separate set of guidelines for overseas investment by CICs in both financial and non-financial sector companies.
112. Detailed guidelines in this regard will be issued separately.
Review of the Existing Regulatory Framework for NBFCs
113. The Reserve Bank had constituted a Working Group (Chairperson: Smt. Usha Thorat) to examine a range of emerging issues pertaining to the regulation of the NBFC sector in view of their growing importance and inter-connectedness with other segments of the financial system, which will have a bearing on financial stability. The major issues examined by the Committee were: definition and classification of NBFCs keeping in view the need for addressing regulatory gaps and regulatory arbitrage; improving standards of governance in the sector; and adopting appropriate approach to NBFC supervision. The key recommendations of the Committee, which submitted its report in August 2011, are: minimum asset size of more than `50 crore for registering any new NBFC; 12 per cent as Tier I capital; prescription of a liquidity ratio for NBFCs; raising of the percentage of total financial assets and income from these assets to 75 per cent each of the total assets and income respectively, from the existing stipulation of 50 per cent each for the classification of the entity as an NBFC; asset classification and provisioning norms to be made similar to banks; adopting financial conglomerate approach for larger NBFCs; and undertaking comprehensive inspection of NBFCs having assets of `1,000 crore and more. The report was placed on the Reserve Bank’s website for comments/feedback from the public till September 30, 2011. The responses are under examination.
Payment and Settlement Systems
Working Group for Card-based Transactions
114. As indicated in the Monetary Policy Statement of May 2011, a Working Group, comprising representatives from public/private/foreign banks, card companies, National Payments Corporation of India (NPCI) and the Reserve Bank, was formed to recommend an action plan for enabling additional authentication for transactions at points of sale (PoS) using existing cards in a cost effective manner and propose a timeframe for migrating the card infrastructure to enabling issuance and acceptance of chip-based and personal identification number (PIN)-based cards. The recommendations of the Group, which submitted its report in June 2011, include (i) strengthening the technology and payment infrastructure, like implementation of unique key per terminal (UKPT) and terminal line encryption (TLE), etc., within 18-24 months; (ii) introducing an additional factor for all debit card transactions within 24 months for domestic transactions; (iii) review of the progress made in the roll out of Aadhaar after 18 months so as to examine the use of biometric finger print capture in lieu of PIN at the ATM and PoS as an additional factor of authentication; (iv) introducing europay, mastercard and visa (EMV) chip and PIN for credit cards and debit cards by 5 and 7 years, respectively, for all domestic transactions; and (v) EMV chip card and PIN to be issued in lieu of magstripe cards when at least one purchase is evidenced at an overseas location. The recommendations of the Group were largely accepted, and suitable instructions were issued to all the stakeholders in September 2011.
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