RBI's Annual Monetary Policy Statement for the Year 2012-13 -17th April 2012
III. Credit Delivery and Financial Inclusion
Financial Inclusion Plan for Banks
67. It was indicated in the Monetary Policy Statement of May 2011 that all public and private sector banks had prepared and submitted their board approved three-year financial inclusion plans (FIPs). These contained self-set targets in respect of opening of rural brick and mortar branches; deployment of business correspondents (BCs); coverage of unbanked villages with population above 2,000 as also other unbanked villages with population below 2,000 through branches/BCs/other modes; opening of no-frills accounts; kisan credit cards (KCCs) and general credit cards (GCCs) issued; and other specific products designed by them to cater to the financially excluded segments.
68. A brief analysis of the progress made under FIPs of banks shows that penetration of banks in rural areas has increased manifold. As against 21,475 brick and mortar branches of these banks in rural areas as in early March 2010, banks are now providing banking services in rural areas through 1,38,502 outlets comprising 24,085 rural branches, 1,11,948 BC outlets and 2,469 outlets through other modes. No-frills accounts have increased to around 99 million with an outstanding balance of above Rs 87 billion with the addition of about 50 million new no-frills accounts since April 2010.
69. Going forward, the focus will be more on the number and value of transactions in no-frills accounts and credit disbursed through information and communication technology (ICT) based BC outlets. For the purpose, banks have been advised that FIPs prepared by their head offices are disaggregated at respective controlling offices and further at branch levels. They were also advised to put in place a mechanism to monitor the progress at these levels periodically.
Roadmap for Provision of Banking Services in Villages with Population below 2,000
70. In pursuance of the announcement made in the Monetary Policy Statement of April 2010, the roadmap to provide banking services in every village with a population above 2,000 was finalised by state level bankers’ committees (SLBCs). Under the roadmap, 74,414 villages with population above 2,000 were identified as unbanked, which were allocated to various banks, including regional rural banks (RRBs) for providing banking services by March 2012. Banks have covered 74,199 (99.7 per cent) of these unbanked villages. Now the challenge is to cover all the unbanked villages of the country. Accordingly, it is proposed:
to mandate SLBCs to prepare a roadmap covering all unbanked villages of population less than 2,000 and notionally allot these villages to banks for providing banking services in a time-bound manner.
71. Detailed guidelines in this regard will be issued separately.
72. While all the efforts made for financial inclusion have expanded the access to banking services, it is also important that quality services are provided through newly set up ICT based BC delivery model. It is, therefore, necessary to have an intermediate brick and mortar structure between the present base branch and BC locations so as to provide support to about 8-10 BC units at a reasonable distance of 3-4 kilometres. This could be in the form of a low cost simple brick and mortar structure consisting of minimum infrastructure such as a core banking solution (CBS) terminal linked to a pass book printer and a safe for cash retention for operating larger customer transactions. This will lead to efficiency in cash management, documentation, redressal of customer grievances and close supervision of BC operations. These BC outlets will be treated as bank branches only when managed by full time authorised employees of banks, in which case they will be subject to regulatory reporting.
Redefining the Priority Sector
73. As indicated in the SQR of October 2011, the Reserve Bank had constituted a Committee (Chairman: Shri M. V. Nair) to re-examine the existing classification and suggest revised guidelines with regard to priority sector lending classification and related issues. The Committee submitted its report in February 2012. It made the following major recommendations: (i) the existing target of the domestic scheduled commercial banks for lending to the priority sector be retained; (ii) the sector ‘agriculture and allied activities’ be a composite sector within priority sector; (iii) a sub-target for small and marginal farmers within agriculture and allied activities be segregated; (iv) a sub-target for micro enterprises under the micro and small enterprises (MSE) category be stipulated; (v) the priority sector target for foreign banks be increased to 40 per cent of adjusted net bank credit (ANBC) or credit equivalent of off-balance sheet exposure (CEOBE), whichever is higher with sub-targets of 15 per cent for exports and 15 per cent for the MSE sector; (vi) non-tradable priority sector lending certificates (PSLCs) be allowed on a pilot basis; (vii) bank loans to non-bank financial intermediaries for on-lending to specified segments be allowed to be reckoned for classification under priority sector, up to a maximum of 5 per cent of ANBC or CEOBE, whichever is higher; and (viii) the present system of report-based reporting may be improved through data-based reporting. The report has been placed on the Reserve Bank’s website for inviting comments/suggestions. The Reserve Bank will take a view on the recommendations in the light of feedback received.
Licensing of Co-operatives
74. The Committee on Financial Sector Assessment (Chairman: Dr. Rakesh Mohan and Co-Chairman: Shri Ashok Chawla) had recommended that rural co-operative banks, which failed to obtain a licence by end-March 2012, should not be allowed to operate. The Reserve Bank, along with the National Bank for Agriculture and Rural Development (NABARD) implemented a roadmap for issuing licences to unlicensed state co-operative banks (StCBs) and district central co-operative banks (DCCBs) in a non-disruptive manner, to ensure the completion of licensing work by end-March 2012. After considering the NABARD’s recommendations for issuance of licences based on inspection/quick scrutiny, one out of 31 StCBs and 41 out of 371 DCCBs were found to be unable to meet the licensing criteria by end-March 2012. In this regard, suitable action will be initiated in due course.
Streamlining of Short-Term Co-operative Credit Structure
75. After recapitalisation of the three-tier short-term co-operative credit structure (STCCS), 41 DCCBs having high level of financial impairment as of end-March 2012 were unable to meet the licensing criteria. In order to examine issues of structural constraints and explore strengthening of the rural co-operative credit architecture with appropriate institutions and instruments of credit to fulfil credit needs, it is proposed:
to constitute a Working Group to review the STCCS, which will undertake an in-depth analysis of the STCCS and examine various alternatives with a view to reducing the cost of credit, including feasibility of setting up of a two-tier STCCS as against the existing three-tier structure.
Urban Co-operative Banks
Exposure of UCBs to Housing, Real Estate and Commercial Real Estate
76. At present, UCBs are permitted to assume aggregate exposure on real estate, commercial real estate and housing loans up to a maximum of 10 per cent of their total assets with an additional limit of 5 per cent of their total assets for housing loans up to Rs 1.5 million. In order to facilitate enhanced priority sector lending, it is decided:
to permit UCBs to utilise the additional limit of 5 per cent of their total assets for granting housing loans up to Rs 2.5 million, which is covered under the priority sector.
77. Detailed guidelines in this regard will be issued separately.
Licences for Setting up New Urban Co-operative Banks
78. As announced in the Monetary Policy Statement of April 2010, an Expert Committee (Chairman: Shri Y. H. Malegam) was constituted in October 2010 for studying the advisability of granting licences for setting up new UCBs. The Committee was also mandated to look into the feasibility of an umbrella organisation for the UCB sector. The Committee submitted its report in August 2011. The report was placed in public domain in September 2011 for comments and suggestions from stakeholders. In the light of the feedback received, it is proposed:
to issue the guidelines on licensing for setting up new UCBs by end-June 2012.
Implementation of the Damodaran Committee Report
79. It was announced in the SQR of October 2011 to implement the recommendations of the Committee on Customer Service in Banks (Chairman: Shri M. Damodaran), on which a broad consensus had emerged, as also the action points which were identified by the Indian Banks’ Association (IBA) and the Banking Codes and Standards Board of India (BCSBI) in the Annual Conference of Banking Ombudsmen held in September 2011. Further, it was indicated that the matter would be pursued with the stakeholders in respect of remaining recommendations of the Damodaran Committee.
80. The Damodaran Committee had made a total of 232 recommendations. Of these, 107 recommendations have since been implemented and the IBA has issued operating guidelines to the member banks in this regard. There are another 19 recommendations that are under the accepted category where appropriate guidelines are expected to be issued by the IBA shortly. The Reserve Bank held discussions with the IBA, the BCSBI, the Institute for Development & Research in Banking Technology (IDRBT) and the National Payment Corporation of India (NPCI) to work out the modalities for taking forward the implementation task of the remaining recommendations made by the Damodaran Committee. The IBA has now constituted a sub-group to examine the implementation of the remaining recommendations after studying the relevant international standards and best practices.
Home Loans on a Floating Interest Rate Basis – Abolition of Foreclosure Charges/Prepayment Penalty
81. The Damodaran Committee had observed that foreclosure charges levied by banks on prepayment of home loans were resented upon by home loan borrowers across the board, especially since banks were found to be hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario. As such, foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source.
82. It is felt that the removal of foreclosure charges/prepayment penalty on home loans will lead to a reduction in the discrimination between existing and new borrowers and the competition among banks will result in finer pricing of home loans with the floating rate. Though many banks have, in the recent past, voluntarily abolished the pre-payment penalties on their floating rate home loans, there is a need for ensuring uniformity across the banking system in this regard. Accordingly, it is proposed:
not to permit banks to levy foreclosure charges/pre-payment penalties on home loans on a floating interest rate basis.
83. Detailed guidelines in this regard will be issued separately.
Variation in Interest Rates on Deposits to be Minimal
84. The Reserve Bank has stipulated, inter alia, that banks should not discriminate in the matter of interest rate paid on deposits, except in respect of fixed deposit schemes specifically meant for resident Indian senior citizens and single term deposits of Rs 1.5 million and above. However, it is observed that there are wide variations in banks’ retail and bulk deposits rates, making it unfair to retail depositors. Further, banks are offering significantly different rates on deposits with very little difference in maturities. This suggests inadequate liquidity management system and inadequate pricing methodologies. It is, therefore, advised that:
banks should have a board approved transparent policy on pricing of liabilities and they should also ensure that variation in interest rates on single term deposits of Rs 1.5 million and above and other term deposits is minimal.
85. Detailed guidelines in this regard will be issued separately.
Unique Customer Identification Code for Banks’ Customers in India
86. Availability of a unique customer identification code (UCIC) will help banks to identify a customer, track the facilities availed, monitor financial transactions in various accounts, improve risk profiling, take a holistic view of customer profile and smoothen banking operations for the customer. While some of the Indian banks have already developed UCIC, there is no unique number to identify a single customer across the organisation in many banks. In this regard, the Government of India has already initiated some measures as a working group constituted by them has proposed the introduction of unique identifiers for customers across different banks and financial institutions. While such a system for the entire financial system is desirable, it is likely to take quite some time for a complete roll out. As a first step, banks are advised:
to initiate steps to allot UCIC number to all their customers while entering into any new relationships in the case of all individual customers to begin with. Similarly, existing individual customers may also be allotted unique customer identification code by end-April 2013.
87. Detailed guidelines in this regard will be issued separately.
Access to Banking Services - Basic Bank Deposit Account
88. Financial inclusion has been high on the agenda of the Reserve Bank. With a view to providing fillip to this concept, banks were advised, in November 2005, to make available a basic banking ‘no-frills’ account with either ‘nil’ or very low minimum balance as well as charges that would make such accounts accessible to vast sections of the population. The nomenclature of the account in this manner has tended to signify that these accounts are opened more with a view to indicating achievement of numerical targets under the financial inclusion plans. On a review, it has been decided to modify the guidelines on opening of basic banking ‘no-frills’ accounts with a view to doing away with the stigma associated with the nomenclature and making the basic banking facilities available in a more uniform manner across the banking system. Accordingly, it is proposed that:
banks should offer a ‘basic savings bank deposit account’ with certain minimum common facilities and without the requirement of minimum balance to all their customers.
89. Detailed guidelines in this regard will be issued separately.
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