(b) Prudential Norms for Financial Institutions

96. As per the extant guidelines, financial institutions (FIs) are required to treat a credit facility as non-performing if interest is overdue for more than 180 days and/or the principal is overdue for more than 365 days. Over the years, a number of steps have been taken by Government of India to improve the legal framework governing recovery of dues of banks and FIs. The Reserve Bank has already circulated to banks and FIs the ground-rules on certain areas requiring co-ordination, particularly in respect of large value projects jointly financed by banks and FIs, with a view to avoiding delays and facilitating better solution to the common problems for implementation. Since the banking system is moving towards 90 days norm for recognition of loan impairment, it has been decided to bring in convergence in the norms for asset classification between FIs and banks over a reasonable period. Accordingly, to start with, the asset of a financial institution would be treated as non-performing if interest and/or principal remain overdue for 180 days instead of the present 365 days, with effect from the year ending March 31, 2002.

(c) Norms for Statutory Central Auditors
in respect of Private Sector Banks

97. Of late, it was observed by RBI that there was no uniformity amongst private sector banks in regard to the appointment of their Statutory Central Auditors (SCAs). Many banks were appointing audit firms of a smaller size and proprietary concerns with comparatively less experience. Considering the fast changes that are taking place in the financial sector in general and in the field of banking in particular as also the use of latest technology by some of the new private sector banks in their day-to-day operations, RBI had examined the issue of prescribing minimum eligibility standards for the audit firms before approving their names as statutory auditors for Indian private sector banks. Accordingly, with effect from the year 2001-02, the audit firms recommended by Indian private sector banks for appointment as their SCAs will have to satisfy the prescribed standards in this regard such as minimum standing, minimum number of full time partners associated with the firm for a period of at least 3 years, minimum number of chartered accountants exclusively associated with the firm, number of professional audit staff as well as minimum statutory central audit experience for the auditors. With a view to applying the prescribed minimum standards, Indian private sector banks have been classified into two categories on the basis of their asset size as at end-March of the previous year, i.e., banks with an asset size up to Rs.5,000 crore and those with above Rs.5,000 crore.

(d) Revised Guidelines for Recovery of NPAs

98. As announced in the Union Budget for 1999-2000, guidelines for constitution of Settlement Advisory Committees (SACs) for compromise settlement of chronic Non-Performing Assets (NPAs) of small sector were framed. While banks were required to take effective measures to strengthen the credit appraisal and post credit monitoring to arrest the incidence of fresh NPAs, a more realistic approach was needed to reduce the stock of existing and chronic NPAs in all categories. The guidelines were, therefore, modified in July 2000 which provided a simplified, non-discretionary and non-discriminatory mechanism for recovery of NPAs. The guidelines are in RBI website. The Government and RBI have received a number of representations from industry/trade associations, individual borrowers as also from banks that the period of the guidelines should be extended. Accordingly, the revised guidelines, operative till March 31, 2001 were extended up to June 30, 2001; for processing these applications/cases, banks have been given time up to September 30, 2001. All public sector banks are required to uniformly follow these guidelines, so that they maximise recovery of NPAs within the stipulated time.

(e) Credit Exposure to Individual/Group Borrowers

99. It was announced in the Mid-term Review of October 2000 that a review of current practices regarding credit exposure limits vis-à-vis international practices shows that there are certain issues which require further consideration. The first relates to the concept of `capital funds’; second relates to the scope of the measurement of credit exposure, in particular, the coverage of non-fund and other off-balance sheet exposures; and the third relates to the level of exposure limit itself. Taking into account the complexities involved, a discussion paper on the subject was prepared and circulated among a few public sector, private sector and foreign banks. Based on the comments and suggestions received from the banks on the issues, following measures are announced:

Internationally, exposure ceilings are computed in relation to total capital as defined under capital adequacy standards (Tier I and Tier II Capital). Taking into account the best international practices, it has been decided to adopt the concept of capital funds as defined under capital adequacy standards for determining exposure ceiling uniformly both by domestic and foreign banks, effective from March 31, 2002.

In line with international best practices, it has been decided that non-fund based exposures should be reckoned at 100 per cent and in addition, banks should include forward contracts in foreign exchange and other derivative products like currency swaps and options, at their replacement cost value in determining individual/group borrower exposure ceiling, effective from April 1, 2003.

As the concept of capital funds has been broadened to represent total capital (Tier I and Tier II), it has been decided to adjust the exposure ceiling for single borrower from the existing 20.0 per cent to 15.0 per cent effective from March 31, 2002. Similarly, the group exposure limits will be adjusted effective from March 31, 2002 to 40.0 per cent of capital funds. In case of financing for infrastructure projects, the limit is extendable by another 10.0 per cent, i.e., up to 50.0 per cent.

(f) Debt Recovery Tribunals

100. It has been announced in the Union Budget for 2001-02 that the Government has decided to set up 7 more Debt Recovery Tribunals (DRTs) during 2001-02 in addition to the existing 22 DRTs and 5 Appellate Tribunals to facilitate banks to quickly recover their dues from borrowers. Besides, the Government has proposed to bring in legislation for facilitating foreclosure and enforcement of securities in case of default so as to enable banks and financial institutions to realise their dues.

(g) Defaulters’ List - Widening the Coverage

101. The RBI annual publication of the list of defaulters to banks and financial institutions of Rs.1 crore and above, introduced in 1995, is confined to suit filed cases due to the secrecy provisions enshrined in the banking laws. The coverage of the scheme was widened by bi-annual circulation of the names of defaulters of Rs.1 crore and above in the doubtful or loss category as well. A scheme for collection and dissemination of information on willful defaulters with outstanding balance of Rs.25 lakh and above, on quarterly basis, was also introduced in February 1999. Pending appropriate amendments in banking laws, RBI has also advised banks to incorporate a condition in the loan agreement for obtaining consent of the borrowers to disclose their names in the event of their becoming defaulters. Banks, which have not yet put in place the system of obtaining consent of the borrowers, are advised to complete the process by September 30, 2001.

(h) Revised Guidelines on Exposure
of Banks to Stock Market

102. As announced in the Mid-term Review of October 2000, the RBI-SEBI Technical Committee has reviewed the RBI guidelines on banks’ investments in shares as also advances against shares and other connected exposures. In making its recommendations, the Committee has taken into account the recent experiences of the banks and the exposures taken by them by way of advances against shares and financial guarantees. The report of the RBI-SEBI Technical Committee, which was submitted to RBI on April 12, 2001 was released on the same day by RBI for comments/suggestions by experts/market participants and others. The report is available on RBI website.

103. The Technical Committee has found that the overall exposure of banks in capital markets (both in terms of funded and non-funded credit facilities) continues to be modest at 1.76 per cent of total advances of banks in February 2001. Banking system as a whole and public sector banks, accounting for the overwhelming proportion of deposits and advances in the economy, have currently an exposure of 1.76 per cent and 0.49 per cent of total advances, respectively, compared to 1.88 per cent and 0.53 per cent, respectively, in March 2000, showing overall, a negligible impact of the guidelines issued last year. However, some relatively small banks (in terms of their share in total advances) do not seem to have observed appropriate risk management guidelines, particularly in respect of advances against shares and non-funded guarantees to a few stock broking entities (including their associated and inter-connected companies). This concentration of exposure on a few entities by these few banks was unjustified on prudential grounds and substantially increased the risks attached to such advances/guarantees, besides raising serious ethical concerns.

104. The Technical Committee’s recommendations are expected to minimise the possibility of such unwarranted and unethical "nexus" emerging between some inter-connected stock broking entities and promoters/managers of some private sector or co-operative banks. At the same time, the Technical Committee’s recommendations provide head-room for growth of banks’ financial support to capital market with appropriate disbursal of funds by multiplicity of banks among the customers.

105. In the light of the recommendations of the Technical Committee, RBI proposes to revise the guidelines issued earlier in November 2000 on banks’ investments in shares as also advances against shares and other connected exposures. It is proposed to issue the final guidelines in this regard in early May 2001 after taking into account further comments/suggestions received by RBI.

106. It is also proposed to review the actual working of the revised guidelines again after six months. Financing of assets backed by equity is a relatively new activity for most banks. It was anticipated by RBI, when the present guidelines were issued in November 2000, after intensive and open consultations with all concerned, that some revisions in these guidelines might be required in the light of actual experience. Banks were also requested to keep a close watch on their operations and monitor data relating to this sector. All banks, large and small, are once again advised to carefully monitor their operations in this sensitive sector in order to minimize risk and maximize transparency.

(i) Reliance on Call Money Market

107. With the progressive deregulation, it is essential that banks adopt asset-liability management technique for scientific management of balance sheets. Accordingly, RBI issued comprehensive guidelines on Asset-Liability Management System in February 1999, advising banks to put in place a scientific system with effect from April 1, 1999. As a prudent measure, banks were, inter alia, advised that mismatches in cash flows during the first two time-buckets, viz., 1-14 days and 15-28 days should not, in any case, exceed 20 per cent of the cash outflows. Further, to contain short-term funding, banks were advised to set caps on inter-bank borrowings, especially call borrowings.

108. Narasimham Committee II has also recommended that there must be clearly defined prudent limits beyond which banks should not be allowed to rely on the call money market and that access to the call market should essentially be for meeting unforeseen swings and not as a regular means of financing banks’ lending operations. Recognising, however, that the money and fixed income securities markets were not well-developed and that banks had been advised to comply with the prudential limits on mismatches, it was decided to move away from placing product-specific limit. However, a review undertaken by RBI had revealed that a few banks were overly exposed to the call money market. These banks were specifically advised to chart definite plans to reduce maturity mismatches and avoid excessive reliance on call money market. A recent assessment has indicated that some of the banks have taken concrete steps in building core deposit base, arranging committed lines of credit, etc., in order to reduce their dependence on call money borrowings. If, however, any bank continues to rely excessively on call money market for carrying out their banking operations, after discussion with such bank, RBI will lay down specific ceilings to reduce its long-term dependence on call money.

(j) Commercial Paper

(i) Preference for Dematerialised holding

109. As part of the new guidelines for issue of CP released in October 2000, banks, FIs, PDs and SDs were advised to invest and hold CP only in dematerialised form, as soon as arrangements for such dematerialisation are put in place. As the existing arrangements for dematerialised holding of CP are now considered adequate and satisfactory, it has been decided that with effect from June 30, 2001, banks, FIs, PDs and SDs will be permitted to make fresh investments and hold CP only in dematerialised form. Outstanding investments in scrip form should also be converted into dematerialised form by October 31, 2001.

110. As a corollary, it is also considered expedient to extend the demat form of holding to other investments like bonds, debentures and equities. Accordingly, with effect from October 31, 2001 banks, FIs, PDs and SDs will be permitted to make fresh investments and hold bonds and debentures, privately placed or otherwise, only in dematerialised form. Outstanding investments in scrip form, should also be converted into dematerialised form by June 30, 2002. As regards equity instruments, they will be permitted to be held by the above mentioned institutions only in dematerialised form, from a date to be notified in consultation with SEBI.

(ii) Documentation and Procedure

111. As part of the new guidelines on issue of CP released in October 2000, FIMMDA was entrusted with the task of prescribing standard procedures and documentations that are to be followed by the participants, in consonance with the international best practices. In this regard, FIMMDA has been in dialogue with RBI and in the process of devising such standard procedures and documentation. Before finalisation, FIMMDA would circulate a draft of these guidelines among its members and other market participants.

(k) New Basel Capital Accord

112. The Basel Committee on Banking Supervision has recently released the second set of consultative documents on a new Capital Accord. The new Accord provides a range of options of increasing sophistication for providing explicit capital for credit, market and operational risks. It is envisioned that the new Accord will be implemented in member jurisdictions in 2004. In RBI, an internal Working Group is currently examining the implications of the new Accord.

113. While the 1988 Accord could be easily adopted on account of its simplicity and flexibility, the more sophisticated provisions incorporated in the new Accord pose significant implementation challenges for banks and supervisors. The feedback received from a few banks indicates that they would have to substantially upgrade their existing MIS, risk management practices and procedures and technical skills of staff. Banks should, therefore, initiate necessary steps to ensure that they are geared to adopt the new Accord, as and when approved. In this context, banks are advised to assess their preparedness to adopt the new Accord, and formulate a plan for implementation.

(l) Consolidated Accounting and Supervision

114. The Board for Financial Supervision has evolved an approach for consolidated supervision as appropriate in the Indian context based on which, a set of measures was announced last year. A multi-disciplinary Working Group has been set up to look into the introduction of consolidated accounting and quantitative techniques for consolidated supervision, in line with international best practice. The Group is expected to submit its report before July 2001.

(m) Move towards Risk-based Supervision

115. As indicated in April 2000 Policy Statement, there is a growing acceptance that risk based supervision (RBS) approach would be more efficient than the traditional transaction based approach. Accordingly, following the recommendations of an international consultant, appointed to advise on a proper structuring of the RBS approach, a dedicated Group has been set up within RBI for project implementation and to drive the change management implication. To meet the requirements of RBS, banks would have to take immediate measures to improve the reliability and robustness of their risk management, management information, and supervisory reporting systems.

(n) Credit Information Bureau

116. A mention was made in the April 2000 Policy Statement regarding State Bank of India entering into a Memorandum of Understanding with HDFC Ltd. and other foreign technology partners to set up a Credit Information Bureau (CIB) which would provide an institutional mechanism for sharing of credit information among banks and FIs. CIB has since been set up with a paid up capital of Rs.25 crore. The Bureau will collect, process and share credit information on the borrowers of credit institutions. As per the existing legislative framework, success of CIB would largely depend on the banks’ efforts to obtain consent of borrowers for disclosure and make available the information to the Bureau. While CIB can be functional within the existing framework, to strengthen the legal mechanism for making the functioning of CIB effective, a draft master legislation covering responsibilities of the Bureau, rights and obligations of the member credit institutions, safeguarding of the privacy rights, has been forwarded to Government of India.

(o) Prompt Corrective Action

117. As indicated in the Mid-term Review of October 2000, a framework for Prompt Corrective Action (PCA) was prepared with various trigger points for prompt responses by the supervisors. The draft scheme was posted on the RBI website, and sent to select banks. Based on the suggestions received, the scheme has been modified. The scheme will be finalised in consultation with banks and the Government.

(p) Macro-Prudential Indicators

118. The Mid-term Review of October 2000 indicated that a half-yearly financial stability review using Macro-Prudential Indicators (MPIs) would be prepared for internal circulation. In this regard, an inter-departmental Group was constituted and a pilot review of MPIs for the half-year ended March 2000 was finalised and a review for September 2000 has since been prepared. While the initial reviews are likely to be largely compilations of MPIs, over time, these reviews are expected to act as the foundation of an early warning system by highlighting potential vulnerabilities in the financial system. They would also show linkages between the macroeconomic indicators and the balance sheets of individual institutions with the eventual objective of building appropriate models in the Indian context. These periodical reviews would also identify issues for further examination or internal research and suggest improvements in the data collection/ compilation process through constant analysis of emerging literature in this area.

Urban Co-operative Banks

(i) Prudential Measures

119. It has to be recognised that the present prudential norms and the regulatory system prescribed for Urban Co-operative Banks (UCBs) are relatively soft in comparison with those for commercial banks. This is partly on account of historical reasons, and partly due to their size being generally small and the preferential treatment of co-operative structure in general. At present, three authorities are involved in regulatory and promotional aspects concerning the UCBs - the Central Government (in case of banks having multi-state presence), State Governments and RBI. At times, this results in overlapping jurisdiction and difficulties in carrying out administrative/prudential measures with the required speed and stringency. The recent experience has also shown that irresponsible and unethical behaviour on the part of even a few co-operative banks in the country can have some contagion effect beyond the particular area or the state concerned and may cause severe harm to depositors, including smaller co-operative banks, and impair the confidence in the system. It is necessary to ensure that immediate interim measures are taken to ward off such contingencies with serious adverse consequences without continuing to wait for legal and institutional reform. The following measures are proposed:

Even at present, co-operative banks are not permitted to invest directly in stock markets or lend to stock brokers. They can, however, lend to individuals against pledge of shares up to Rs.10 lakh per borrower, if the shares are in the physical form, and up to Rs.20 lakh if they are in demat form. Available information shows that a few UCBs have ignored the present guidelines and established a nexus with certain stock brokers in order to operate in the stock market. In order to prevent any possible misuse in the future, it is necessary to stop lending by UCBs directly or indirectly to individuals or corporates against security of stocks. With immediate effect, UCBs are being advised not to entertain any fresh proposals for lending directly or indirectly against security of shares either to individuals or any other entity. They are also advised to unwind existing lending to stock-brokers or direct investment in shares, which were not permissible, at the earliest. Advances to individuals against security of stocks that have already been disbursed, up to permissible amounts, may however, continue till the contracted date. The managements of co-operative banks should immediately communicate above measures to the concerned members and the steps being taken by the bank to implement the new guidelines.

In order to reduce the excessive reliance of some UCBs in the call money market, it is being provided that their borrowings in the call/notice money market on a daily basis should not exceed 2.0 per cent of their aggregate deposits as at end March of the previous financial year. The existing freedom to lend in the call/notice money market will continue.

As parking of funds by UCBs with other UCBs may pose a systemic risk, as a safety precaution, UCBs are advised not to increase their term deposits with other UCBs. While UCBs will not be permitted to increase their term deposit balances with other UCBs, the outstanding deposits with other UCBs as on April 19, 2000, could be unwound before end of June 2002. UCBs may maintain current account balances at their discretion with other UCBs to meet their day-to-day clearing and remittance requirements.

UCBs are allowed to maintain their SLR (25.0 per cent of NDTL) in the form of investments in government and other approved securities or as deposits with District Central Co-operative Banks/State Co-operative Banks. As per extant guidelines, the scheduled UCBs are required to maintain at least 15.0 per cent of NDTL in government and other approved securities; non-scheduled UCBs with deposits of Rs.25 crore and above are required to maintain at least 10.0 per cent of their NDTL in government and other approved securities; and in respect of non-scheduled UCBs with deposits of less than Rs.25 crore there is no stipulation regarding maintenance of SLR in the form of government and other approved securities. It is now proposed to increase the proportion of SLR holding in the form of government and other approved securities as percentage of NDTL in the following manner, which should be achieved by end-March 2002:

With effect from April 1, 2003, the scheduled UCBs will need to maintain their entire SLR assets of 25.0 per cent of NDTL only in government and other approved securities. Further, compliance with CRR requirements on par with scheduled commercial banks would be prescribed in due course.

All the scheduled UCBs and non-scheduled UCBs with deposits of Rs.25 crore and above would henceforth be required to maintain investments in government securities only in SGL Accounts with RBI or in constituent SGL Accounts of public sector banks and PDs. Non-scheduled UCBs with deposits of less than Rs.25 crore will have the facility of maintaining government securities in physical or scrip form.

UCBs should, in their operations, take note of the fact that commercial banks may establish appropriate inter-bank monetary limits for discounting of pay-orders issued by scheduled co-operative banks, taking into account the size of their deposits/net worth, etc.

120. It may be noted that, in order to minimize any immediate financial impact on UCBs, all the measures are either "prospective" in nature or sufficient time has been allowed for UCBs to implement them in the interest of their members. The above measures should provide greater security for depositors and members of UCBs and contribute to the development of the UCB sector on sound lines.

(ii) A New Supervisory Structure for UCBs?

121. As mentioned earlier, three authorities (Central and State Governments and RBI) are presently involved in regulating, supervising and/or administering UCBs. There are as many as 2,084 UCBs of which 51 are scheduled UCBs and the rest are unscheduled. In view of the large number as well as their dispersed and local character, their supervision and inspection pose special problems. At present, while accounts of UCBs are required to be audited by state governments, there has been substantial delay in completing audit of a large number of UCBs. RBI conducts statutory inspections normally once in two years in respect of scheduled UCBs, once in two to three years in respect of non-scheduled UCBs, while the identified weak banks are inspected on annual basis.

122. Concerned about the potential consequences of the present multiplicity of authorities involved in supervising and regulating the UCBs and other problems that had been observed, RBI had set up a high level committee in May 1999 under the Chairmanship of Shri K.Madhava Rao. The Committee also had representatives of the co-operative banking sector and RBI as well as other experts as members. The Committee submitted its Report in November 1999 and this report was also sent to Central and State Governments for consideration. The Committee made wide-ranging recommendations for improving the functioning of the co-operative banks. These recommendations, inter alia, included proposals to substantially improve the entry-point norms, induction of professional management, abolition of dual supervisory control, and stiffer prudential and other parameters. Most of the recommendations of the Committee have been accepted by RBI, but recommendations requiring legislative action at the level of State Governments have yet to be implemented. RBI is following up with State Governments to implement the recommendations of the Committee as early as possible.

123. In the light of the recent experience, one of the options that deserves to be seriously considered is the setting up of a new apex supervisory body which can take over the entire inspection/supervisory functions in relation to scheduled and non-scheduled UCBs. This apex body could be under the control of a separate high-level supervisory board consisting of representatives of the Central Government, State Governments, RBI as well as experts and it may be given the responsibility of inspection/and supervision of UCBs and ensuring their conformity with prudential, capital adequacy and risk-management norms laid down by RBI.

124. RBI proposes to consult the Central Government on the above suggestion, and if found acceptable in principle, the proposal could be pursued further in consultation with State Governments and others concerned. RBI will be prepared to provide manpower and other assistance to the new apex supervisory body as necessary.

Ownership Functions of Reserve Bank of India

125. The Reserve Bank holds at present shares in State Bank of India (SBI), National Housing Bank (NHB), Infrastructure Development Finance Company (IDFC), Deposit Insurance and Credit Guarantee Corporation (DICGC), National Bank for Agriculture and Rural Development (NABARD), Bharatiya Reserve Bank Note Mudran Ltd. (BRBNML), Discount and Finance House of India (DFHI) and Securities Trading Corporation of India (STCI).

126. It may be recalled that Narasimham Committee II was of the view that appropriately, RBI should not own the institutions it regulates. In the Discussion Paper prepared by RBI on Harmonising the Role and Operations of Development Financial Institutions and Banks (January 1999), it was suggested that in order to enable RBI to concentrate its regulatory and supervisory functions, the ownership of financing institutions could ideally be delinked from RBI through transfer of such ownership to the Government. It was stated indeed that RBI should desist from continuing with its ownership functions in both commercial banking and refinance or development finance segments.

127. RBI has accepted the recommendation for transfer of ownership of its shares in SBI, NHB and NABARD to the Central Government, and is in touch with the Government in this regard. The matter has to be examined further by the Government and RBI in detail, and a view taken by the Government since policy decisions and legislative actions are involved.

128. RBI also plans to initiate the process in respect of IDFC at an appropriate time in future. In respect of BRBNML, there is no intention to divest RBI’s shareholding at this stage since RBI is a captive customer and there are no regulatory implications. In respect of DICGC, RBI had already submitted proposals to the Government for framing a new Act to make it consistent with financial sector liberalization.

129. RBI has, consistent with the above approach, already divested most of its shareholding in DFHI and STCI. Currently, RBI holds only 10.50 per cent of the shares in DFHI and 14.40 per cent of the shares in STCI. It has been decided to completely divest these shareholdings in the current year.

Credit Delivery Mechanism

Relief Measures for Gujarat

130. In view of the devastating effect of earthquake in the state of Gujarat in January 2001 resulting in wide-spread damage to the properties and heavy loss of life, RBI announced a package of relief measures for the State. These measures cover:

The loan classification status in case of borrowers affected by the earthquake is frozen on an ‘as-is-where-is’ basis up to March 31, 2003 at concessional interest rate of 10.0 per cent without application of penalty provisions.

Notwithstanding the present loan classification status, the affected small traders, small business, self-employed and small road transporters, etc., would be sanctioned fresh loans up to Rs.1 lakh for the purpose of restoration/rehabilitation of their business at interest rates not exceeding PLR.

Banks are advised to grant loans up to Rs.2 lakh at interest rate not exceeding PLR for repairs/reconstruction of houses/shops damaged by the earthquake.

Provision of additional limits/rescheduling of existing limits for affected small scale industries (SSI), business, trade and industry under a need based approach at PLR up to Rs.10 lakh and at banks’ discretion beyond Rs.10 lakh.

Loans for repair/construction of houses and shops and to small traders, small business, self-employed and small road transport operators, etc., will be reckoned as priority sector lending.

Waiving of processing fee for the affected beneficiaries.

In respect of agricultural loans, banks are not to recover principal or interest from the affected farmers for a period of two years with a provision for reschedulement up to 7 years.

For purposes of interest rate on loans to affected borrowers, PLR of the SBI will be uniformly applied by all banks.

On the request from National Housing Bank (NHB), RBI has sanctioned a long-term loan of Rs.1,000 crore at 6.0 per cent rate of interest per annum repayable over 18 years to enable NHB to provide refinance assistance to housing finance companies, banks, etc., providing loans for reconstruction of houses, etc., to the affected people.

Relief/concessions for affected exporters include extending the period of packing credit, conversion of dues into short-term loans repayable in suitable instalments and relaxation in NPA classification norms.

Non-Banking Financial Companies

131. In recent years, the Reserve Bank has taken a number of initiatives and steps to speed up the reform process in the functioning of Non-Banking Financial Companies (NBFCs). In terms of the extant Regulations (Section 45-IA of the amended RBI Act, 1934), NBFCs are not permitted to commence/carry on financial business as defined in the Act without a Certificate of Registration (CoR) from RBI. The Bank has received applications for CoR from 36,870 NBFCs, of which 12,690 applications were approved and 17,736 were rejected as at end-February 2001. Out of the total approvals of 12,690 applications, only 734 have been permitted to accept public deposits. It may be mentioned that, of these, only 25 NBFCs have public deposits of over Rs.50 crore. It may be reiterated that NBFCs not registered with RBI, and those institutions which are not permitted to accept public deposits, should not raise public deposits. Further, NBFCs are advised to repay public deposits as per the terms of their acceptance and continue to adhere to the provisions of RBI Act and other directives issued from time to time.

132. With a view to further strengthening the regulatory/supervisory framework on NBFCs, the following measures are proposed:

(a) Separate Act for Non-Banking
Financial Companies

133. In order to facilitate NBFCs to effectively perform their role in the economic development of the country, the Government has proposed a separate legislation to provide for enhanced protection to the depositors of NBFCs. The Bill is under consideration of the Government.

(b) Draft Guidelines for Asset Liability
Management for Non-Banking
Financial Companies

134. The Reserve Bank has concluded its consultations with NBFCs and other concerned institutions on the draft guidelines for asset-liability management for NBFCs. The final guidelines would be issued shortly.

Technology Upgradation

135. Improvement in payment system has been one of the priority areas of financial sector reform. In this direction, the following further steps are being taken:

(a) Payments System Vision Document

136. The Mid-term Review of October 2000 mentioned about the preparation of a "Payments System Vision Document" focussing on the implementation of the systemically important payment system applications having impact on large value inter-bank funds transfers. The draft Vision Document was prepared and widely circulated. RBI has received feedback from banks and comments from the members of apex bodies such as the National Payments Council. The Reserve Bank is examining these comments/feedback and the final version of the Vision Document would be published shortly. The Vision Document would provide a road map of important developments in the payment system project. This would facilitate banks in getting themselves fully prepared to participate effectively in the new products aimed at better payment and settlement services.

(b) ‘Imaging’ as Pre-cursor
for Cheque Truncation

137. As part of the Mid-term Review of October 2000, stages of development relating to introduction of imaging to serve as pre-cursor for cheque truncation were mentioned. A Working Group constituted by the Ministry of Finance, Government of India is examining the legal requirements for cheque truncation under the Negotiable Instruments Act.

(c) Internet Banking

138. As indicated in the Mid-term Review of October 2000, the Working Group on Internet Banking has since submitted its report which has been accepted for implementation. As a part of this process, a staggered approach, based on the levels of technology usage in different banks is being prepared covering the conduct of internet based transactions in a highly secured environment with appropriate risk control measures and risk management techniques.

(d) Indian Financial Network

139. In addition to the extensive use of Indian Financial Network (INFINET) for information flow and funds movements, further steps have been taken in improving the infrastructure for facilitating efficient funds management. Accordingly, it has been decided to set up a structured financial messaging backbone system for which SWIFT like message formats have been finalised and circulated to the banks to encompass various types of intra and inter-bank applications including those of government transactions and debt-related transactions.

140. The other technology related infrastructure such as the Securities Settlement System, the Negotiated Dealing System, the Centralised Funds Management System and the Real Time Gross Settlement System are all slated for completion shortly. Banks, therefore, need to take suitable measures by ensuring intra-city connectivity and networking of branches and setting up of gateways at major cities. The 21 centres where RBI has a presence have been identified for network connectivity by the National Payments Council. However, intra-city and intra-bank networking within these 21 centres will have to be done by individual banks.

Legal Reforms

141. The major legal reforms initiated in the banking sector in the recent months encompass areas such as security laws, Negotiable Instruments Act, fraud on banks and regulatory framework of banking. RBI has forwarded its recommendations to Government of India for comprehensive amendments to the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949, which are under consideration by the Government. Government of India has constituted a Working Group for suggesting changes in the provisions of Negotiable Instruments Act, 1881, to bring it in conformity with the Information Technology Act, 2000 and also to examine the incorporation of electronic cheque, securitised certificate and other evolving products within the ambit of Negotiable Instruments Act. Further, with the increasing level and complexity of frauds and the difficulties being faced by banks in recovering the financial loss by recourse to legal process, RBI has constituted a Committee on legal aspects of bank frauds to define financial frauds, lay down procedural laws, examine the process of investigation of bank frauds and prosecution of persons involved.

142. Government of India constituted an Expert Committee under the chairmanship of Shri T.R.Andhyarujina for the purpose of formulating specific proposals to give effect to the suggestions made by Narasimham Committee II relating to changes needed in the legal framework. The Committee submitted its report in February 2000. As a follow-up, Government of India constituted a Working Group (Chairman: Shri S.H.Bhojani, with Shri M.R.Umarji, as a member from RBI) on asset securitisation in July 2000 to examine the Expert Committee’s recommendations for implementation. This Working Group has drafted a Bill on asset securitisation for enactment and submitted to the Government.

143. Another Working Group was constituted by the Government in July 2000 (Chairman: Shri M.R.Umarji), to examine the vesting of powers with banks and FIs for taking possession and sale of securities without intervention of the courts and to draft a Bill for consideration of the Government. The report of the Group is expected to be submitted shortly.

International Financial Standards and Codes

144. In the Mid-term Review of October 2000, it was mentioned that some of the Advisory Groups on International Standards and Codes had submitted their reports in part/full to the Standing Committee, constituted by RBI in consultation with the Government. Advisory Groups, which consist of non-official experts, have since made significant progress in firming up their views in various subject areas. As of now, the reports/part of reports in respect of the following subjects have already been received by the Standing Committee: (i) Transparency of Monetary and Financial Policies (Final), (ii) Payment and Settlement System, (iii) Insurance Regulation, (iv) Banking Supervision (Part I), (v) Accounting and Auditing, (vi) Bankruptcy Laws (Interim) and (vii) Corporate Governance. The remaining reports on three subjects, viz., Data Dissemination, Fiscal Transparency and Securities Market Regulation are expected by May 2001. All the reports of the Advisory Groups have been put on the RBI website for debate and discussion. These reports are also being printed for wider dissemination. The Standing Committee also plans to help the Groups in organising Seminars/Workshops to enhance awareness and concretise views on the recommendations and seek comments/feedback from both private and public sector organisations, international institutions and experts. The work of the Standing Committee and non-official advisory groups in this important area has been commended internationally.

Regulations Review Authority

145. The Regulations Review Authority (RRA), which was constituted on April 1, 1999 for reviewing the Reserve Bank’s rules, regulations and reporting system based on the suggestions received from general public at large, market participants and other users of services of RBI, has ceased its operations from March 31, 2001 on expiry of its term. During two years of its operations, RRA received a number of suggestions, many of which were implemented. This helped in removal of redundancies in the reporting system, simplification of rules and internal procedures in various functional areas within RBI and also brought about some improvement in operational efficiency in commercial banks which enabled better customer service. An important outcome of RRA’s initiative was the arrangement for preparation of master circulars in many regulatory areas, incorporating RBI’s instructions/ guidelines at one place.

146. Though the RRA has ceased its operations, in view of the favourable response to the Scheme, RBI has decided to make the review exercise an integral part of its internal system and accordingly, has put in place an alternate mechanism under the charge of an Executive Director for dealing with such applications from April 1, 2001. This will help RBI to further simplify procedures, reduce paper work and improve customer service, on an on-going basis.