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Click here to return to main page of Annual Policy Statement 2008-09

Part II. Annual Statement on Developmental and Regulatory Policies for the Year 2008-09

IV. Institutional Developments

Payment and Settlement Systems

(a) Payment and Settlement Systems Act, 2007

196. The Payment and Settlement Systems Bill was passed by the Parliament and became an Act known as 'Payment and Settlement Systems Act, 2007' after receiving the assent of the President on the December 20, 2007. The Act empowers the Reserve Bank to regulate and supervise the payment and settlement systems in the country; gives it authority to permit the setting up/continuance of such systems and to call for information/data and issue directions from/to payment system providers. The Act defines a payment system and gives legal recognition to multilateral netting and settlement finality. Accordingly, the Reserve Bank has placed the draft regulations under the Payment and Settlement Systems Act, 2007 on its website inviting public comments to be received latest by May 15, 2008. The regulations will be finalised in consultation with the Government of India.

(b) IT-based Financial Inclusion Products and Services

197. Information Technology (IT) has enhanced the scope of financial inclusion with low cost technology by reaching out to hitherto unexplored sectors of the economy. The usage of card-based products for multiple applications is cost-effective and holds potential for large-scale deployment. With a wide range of IT-based products such as smart cards, hand held devices and secured message transfers, there is an imperative need to ensure that these instruments blend seamlessly with the existing operative systems at the bank level. Accordingly, banks are urged to ensure that security of banking transactions is adequately addressed while using such products.

(c) Real Time Gross Settlement (RTGS): Compliance with the Core Principles

198. The RTGS system implemented by the Reserve Bank has been in operation for nearly four years. The system has also stabilised over the years and has been witnessing increased coverage in terms of bank branches and transaction volume. The Bank for International Settlements (BIS) has published a set of Core Principles in 2001 which are in the nature of standards to measure the efficiency of the systemically important payment systems and the Reserve Bank has been assessing the compliance of the Indian RTGS system with these principles on annual basis. As per the latest review, the system is fully compliant with six core principles, broadly compliant with three, and one principle is not applicable for the Indian RTGS system. Out of the four responsibilities of the central bank under the core principles, full compliance has been achieved in respect of two core principles, broad compliance with one and one responsibility is not applicable in the Indian context.

(d) Electronic Payment Products: Status

199. The coverage of the RTGS system has increased significantly. By March 31, 2008 RTGS connectivity was available in more than 43,500 bank branches. The Reserve Bank continues to improve the quality of services through the RTGS.

200. The launch of the pilot project for Cheque Truncation System, which aims at enhancing efficiency in the retail cheque clearing section, has become operational from February 1, 2008 in 10 banks.

201. 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. So far, CFTS has been implemented at 16 centres.

202. The Electronic Clearing Service (ECS), which facilitates bulk payments, is currently available at 68 centres. The Mid-Term Review of October 2007 had proposed 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 in consultation with banks. Software development and testing has been completed for the first phase covering the existing ECS centres and the testing report has been approved for implementation.

203. Considering that the potential for a shift from paper-based system to electronic system is large, the processing charges for ECS / EFT / NEFT were waived up to March 31, 2008. The Reserve Bank, in its role as promoter and facilitator of electronic funds transfer would like to continue this approach for one more year. Accordingly, the processing charges for all electronic payment products, viz., ECS, EFT, NEFT and RTGS are waived for another year i.e., up to March 31, 2009.

(e) Regulatory Guidelines: Mobile Payments

204. The reach of mobile phones has been increasing at a rapid pace in India. There were about 231 million mobile phone connections in the country at the end of December 2007. The rapid expansion of this mode of communication has thrown up a new payment delivery channel for banks. Many countries in the world have adopted this mode of delivery to successfully spread the reach of the banking facility to the remote parts of their respective countries. This channel facilitates small value payments to merchants, utility service providers and the like and money transfers at a low cost.

205. The Reserve Bank is in the process of formulating the regulatory guidelines for mobile payments systems in India and is in discussion with banks, service providers and industry bodies for this purpose. The draft guidelines will be placed on the Reserve Bank's website by June 15, 2008.

(f) Electronic Based Social Security Payments

206. The report of the Committee (Chairman: Dr.R.B.Barman), set up by the Reserve Bank to examine matters relating to electronic based payments by the Central and State Governments under various social welfare schemes like social security pension payment, National Rural Employment Guarantee Scheme (NREGS) and insurance scheme for persons living below the poverty line, has been placed on the Reserve Bank's website.

(g) Migration from Paper Based Payment Systems to Electronic Payment Systems: Mandating

207. The Reserve Bank has been continuously taking initiatives to migrate from paper-based payment to electronic payment systems by creating the appropriate technological infrastructure. In this context, an Internal Group was constituted to examine various issues connected with the use of electronic payment systems. Based on the Group's report, an approach paper was placed on the Reserve Bank's website inviting comments/suggestions from the public. On the basis of the feedback, effective from April 1, 2008 all payment transactions of Rs. one crore and above in the money, Government securities and foreign exchange markets and the regulated entities (banks, PDs and NBFCs) have been made mandatory to be routed through the electronic payment mechanism.

(h) Eligibility Criteria for Access to Payment Systems

208. 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 was placed on the Reserve Bank's website for public comments. Final guidelines in this connection have been made effective from January 1, 2008 and banks have been advised to implement these guidelines.

Urban Cooperative Banks

(a) Creation of Umbrella Organisation and Revival Fund for Urban Cooperative Banks: Setting up of a Working Group

209. The Working Group (Chairman: Shri N.S.Vishwanathan), constituted to explore various options and alternate instruments/avenues for raising of regulatory capital funds of urban cooperative banks (UCBs), observed that creating a legal framework for facilitating the emergence of umbrella organisation(s) like those prevalent in other parts of the world appears to be the only long-term solution for raising of capital in the UCB sector. There have also been requests from the sector for creation of a revival/liquidity support fund. Accordingly, it is proposed:

to constitute a Working Group comprising representatives of the Reserve Bank, Central/State Governments and the UCB sector to suggest measures, including the appropriate regulatory and supervisory framework, to facilitate emergence of umbrella organisation(s) for the UCB sector in the respective States.

(b) Opening of On-site ATMs by UCBs: Liberalisation

210. At present, UCBs are allowed to open on-site ATMs subject to certain eligibility norms, including minimum deposit criterion of Rs.100 crore. With a view to liberalising this facility, it is proposed:

to dispense with the extant eligibility norms for opening on-site ATMs for well-managed and financially sound UCBs in the States that have signed MoUs with the Reserve Bank and those registered under the Multi-State Cooperative Societies Act, 2002.

(c) Branch Licensing Norms: Liberalisation

211. As proposed in the Annual Policy Statement of April 2007, well-managed and financially sound UCBs in States that have signed MoUs with the Reserve Bank and those registered under the Multi-State Cooperative Societies Act, 2002 were permitted to open branches and extension counters subject to fulfilling certain eligibility criteria. With a view to liberalising and rationalising the branch licensing norms for such UCBs, it is proposed:

to consider approvals for branch expansion, including off-site ATMs, based on annual business plans, subject to maintenance of minimum CRAR of 10 per cent on a continuing basis and other regulatory comfort.

(d) Insurance Business by UCBs: Liberalisation of Norms

212. At present, UCBs registered in States that have signed MoUs with the Reserve Bank or registered under the Multi-State Cooperative Societies Act, 2002 with a minimum net worth of Rs.10 crore are permitted to undertake insurance business as corporate agents without risk participation, subject to certain conditions. Taking into consideration the representations from UCBs, it is proposed:

to dispense with the minimum net worth criterion for undertaking such insurance business provided other criteria as prescribed from time to time are met.

(e) Individual Housing Loan: Enhancement of Limit

213. As per extant norms, UCBs can grant housing loans to individuals up to a maximum of Rs.25 lakh. Based on the representations made by UCBs, it is proposed:

to increase the extant limit on individual housing loans from Rs.25 lakh to a maximum of Rs.50 lakh in respect of Tier-II UCBs, subject to certain conditions.

(f) Information Technology Support to UCBs

214. As proposed in the Mid-Term Review of October 2007 and in pursuance of commitments made under the Memoranda of Understanding (MoUs) signed with various State Governments and the Central Government, a Working Group (Chairman: Shri R.Gandhi) was constituted comprising representatives of the Reserve Bank, State Governments and the UCBs to examine various areas where IT support could be provided by the Reserve Bank. The Group submitted its report on April 17, 2008 which is under consideration.

Non-Banking Financial Companies

Financial Regulation of Systemically Important NBFCs: Review of Prudential Regulations

215. In 2006, regulatory guidelines covering the prudential norms for systemically important NBFCs and banks' relationship with them were put in place. The Reserve Bank has been monitoring the functioning of systemically important NBFCs and banks' exposure to them.

216. It is observed that many systemically important non-deposit taking NBFCs are highly leveraged and use short-term sources to fund their activities. In the light of international developments and increasing bank exposure to these systemically important NBFCs, it has now been decided to review the regulations in respect of capital adequacy, liquidity and disclosure norms. Revised instructions will be issued by May 31, 2008.

Committee on Financial Sector Assessment: Developments

217. The Mid-Term Review of October 2007 had outlined the progress made by the Committee on Financial Sector Assessment (CFSA) (Chairman: Dr.Rakesh Mohan; Co-Chairman: Dr.D.Subbarao). Since then, the four Advisory Panels constituted by the Committee covering Financial Stability Assessment and Stress Testing, assessment of relevant international standards and codes as applicable to Financial Regulation and Supervision, Institutions and Market Structure and Transparency Standards have prepared their draft reports and these reports have been sent to external peer reviewers in relevant subject areas. The comments from the peer reviewers on five out of eleven reports have already been received. Two external experts have also been undertaking an overarching review of all draft reports. The peer reviews are expected to be completed by May 2008 and the CFSA has proposed a two-day seminar in Mumbai for closer interaction with peer reviewers. The reports of the CFSA as also those of Advisory Panels are expected to be finalised by end-June 2008 and will be placed thereafter on the Reserve Bank's website.

Mid-term Review

218. A review of the Annual Statement on Developmental and Regulatory Policies will be undertaken on October 24, 2008.

Click Here For Highlights of Annual Policy Statement for the Year 2008-09

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