Mid-Term Review of the Annual Policy Statement for 2007-08, RBI Credit Policy, Reserve Bank of India: Banknet India

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Part II. Mid-term Review of Annual Statement on Developmental and Regulatory Policies for the Year 2007-08

IV. Institutional Developments

Payment and Settlement Systems

181. The Reserve Bank continued to strengthen the framework for payment and settlement systems by utilising the full potential of information technology (IT) to improve operational efficiency. The main focus has been on ensuring business continuity, prompt customer service and development of electronic payment products.

(a) Adequacy of Business Continuity Plans

182. The Annual Policy Statement of April 2007 emphasised adequate business continuity plans by banks as part of disaster recovery management, with a view to ensuring continuous and prompt customer services. With increasing reliance on the use of IT-based processing of day-to-day operations for extending banking and financial services, ensuring appropriate business continuity plans assumes critical importance. The Reserve Bank conducts regular and periodic drills in respect of critical inter-bank systems in order to facilitate banking services and ensure continuity. The level of preparedness by the participating banks in these exercises conducted by the Reserve Bank is, however, inadequate. Banks are urged to ensure that adequate disaster recovery systems are put in place so as to fully comply with the requirements of the next drill of the Reserve Bank.

(b) Implementation of Core Banking Systems

183. Implementation of core banking systems (CBS) for banking operations has increased and banks have been encouraged to install the CBS in a phased manner. In view of the advantages of these systems in promoting better costumer services, banks are urged to draw up time-bound action plans for implementation of CBS across all their branches.

(c) Electronic Payment Products: Status and Proposed Action

184. The coverage of the Real Time Gross Settlement (RTGS) system has increased significantly. By October 23, 2007 RTGS connectivity was available in more than 34,023 branches and the Reserve Bank continues to improve the quality of services through the RTGS.

185. The Committee (Chairman: Dr.R.B. Barman) constituted for introduction of the National Settlement System (NSS) examined various models and recommended the Centralised Funds Transfer System (CFTS) model for implementation. Under the CFTS model, banks would be able to transfer funds across all Deposit Accounts Departments (DADs) on real time basis. The CFTS interface would enable the member banks to transfer funds from surplus centre for meeting the clearing obligations smoothly. So far, 11 DADs - Mumbai, Chennai, New Delhi, Kolkata, Hyderabad, Bangalore, Nagpur, Ahmedabad, Chandigarh, Kanpur and Jaipur - have been connected to the CFTS. The remaining five centres would be connected after the system stabilises in these 11 centres.

186. The Electronic Clearing Service (ECS), which facilitates bulk payments, is currently available at 67 centres. The Reserve Bank proposes to operationalise the National Electronic Clearing Service (NECS) using the existing infrastructure of National Electronic Funds Transfer (NEFT) system with a view to widening the geographical coverage of the ECS. Under the NECS, the clearing and settlement would be centralised at Mumbai. Banks would receive their ECS centrally and transfer the transactions either on their core banking solution or arrange to distribute to their branches. Banks having their branches under the core banking solution can derive maximum benefits out of this system. It is proposed to draw up an action plan for its implementation in consultation with banks.

(d) Eligibility Criteria for Access to Payment Systems

187. An Internal Working Group, constituted to prepare comprehensive draft guidelines on minimum eligibility criteria for direct members of the clearing houses, submitted its report in September 2007 which has been placed on the Reserve Bank’s website for public comments. The Group has recommended a set of financial parameters as criteria for clearing house membership and has also suggested for periodical review of compliance by members with a view to ensuring continued safety and soundness of the system.

(e) Annual Review of Payment and Settlement Systems

188. The Annual Policy Statement of April 2007 proposed an annual review of payment and settlement systems and accordingly, its first review was undertaken for the year ended March 31, 2007. The comments/views of banks, chambers of commerce and industry/trade bodies were obtained on the review and a policy paper would be placed on the Reserve Bank’s website by November 15, 2007.

Urban Co-operative Banks

Information Technology Support to UCBs

189. Considerable progress has been made in the area of human resources development for facilitating the growth of the UCB sector, pursuant to the Reserve Bank entering into MoUs with State Governments and the Government of India. During 2006-08, 69 programmes have been held in which 675 Directors, 515 Executives, 163 Auditors have participated with a view to professionalising the management of UCBs. In furtherance of commitments under the MoUs and with a view to identifying the areas requiring IT support for UCBs, it is proposed:

• to constitute a working group comprising representatives of the Reserve Bank, State Governments and the UCB sector to examine the various areas where IT support could be provided by the Reserve Bank.

Committee on Financial Sector Assessment

190. The Annual Policy Statement of April 2007 outlined the approach and progress made by the Committee on Financial Sector Assessment (CFSA) (Chairman: Dr.Rakesh Mohan; Co-Chairman: Dr.D.Subbarao) to undertake a self-assessment of the Indian financial sector. As envisaged, the CFSA has constituted four Advisory Panels for the assessment of Financial Stability and Stress Testing, Financial Regulation and Supervision, Institutions and Market Structure and Transparency Standards. The Advisory Panels would prepare separate reports covering each of the above aspects. These Advisory Panels comprise of non-official experts with domain knowledge in respective areas and officials with similar expertise represented as Special Invitees.

191. The Advisory Panel on Financial Stability and Stress Testing (Chairman: Shri M.B.N. Rao) would conduct macro-prudential surveillance (including system-level stress testing) to assess the soundness and stability of financial system and suggest measures for strengthening the financial structure and system and its development in a medium-term perspective. The other three Advisory Panels would identify and consider the relevant standards and codes as currently prescribed and applicable to different areas, evaluate their implementation in the Indian context, identify gaps in adherence to respective standards and suggest possible roadmaps towards compliance in a medium-term perspective. The Advisory Panel on Financial Regulation and Supervision (Chairman: Shri M.S. Verma) would consider the relevant standards and codes applicable for financial regulation and supervision pertaining to the banking sector, financial markets and insurance; the Advisory Panel on Institutions and Market Structure (Chairman: Shri C.M. Vasudev) would consider the relevant standards and codes applicable to bankruptcy laws, accounting and auditing, payment and settlement systems and corporate governance policies; and the Advisory Panel on Transparency Standards (Chairman: Shri Nitin Desai) would consider the relevant standards and codes applicable for transparency in monetary, financial, fiscal and data dissemination policies.

192. The CFSA, before setting up of the Advisory Panels, had set up Technical Groups comprising of officials representing mainly regulatory agencies and the Government in all the above-mentioned subject areas which have progressed with technical work in their respective areas. These Groups also provide the Advisory Panels with technical notes and background material as necessary.

193. The CFSA submitted an interim report delineating its approach and reviewing the progress of work to the Finance Minister and Governor, Reserve Bank of India in July 2007. As mentioned in the Annual Policy Statement, the CFSA would publish Advisory Panel reports and also its own Synthesis Report. Based on an objective analysis of the present strengths and weaknesses of the financial sector and the status with regard to standards, the CFSA is also expected to lay out a road-map for further reforms in a medium-term perspective. The CFSA is expected to complete the assessment by March 2008.

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