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Click here to return to main page of Annual Policy Statement 2006-07



Part II. Annual Statement on Developmental and Regulatory Policies for the Year 2006-07


Institutional Developments

Payment and Settlement Systems

191. The Reserve Bank has taken a number of initiatives in order to put in place a safe, secure, efficient and integrated real time payment and settlement system. The progress made in specific areas and further initiatives in this regard are detailed below:

(a) Information Systems Security and Audit

192. Periodical information systems (IS) audit assumes importance in view of large scale dependence of banks on information technology (IT) based systems for day-to-day processing of transactions. The scope of such audit not only covers concluded transactions, but also failed and potentially risky transactions, apart from studying the systems and procedures. Banks are encouraged to ensure compliance with the findings of such IS audit on a time bound basis in order to maintain robustness of the IT system.

(b) Centralised Public Accounts System

193. A new Centralised Public Accounts Department System (CPADS) software is being put in place by the Reserve Bank to facilitate processing requirements of the Government accounts maintained with it. The system will be operational by the end of 2006 and is expected to process transactions for the Central and State Governments efficiently.

(c) National Payments Corporation of India

194. As indicated in the Mid-term Review of October 2005, the proposed new organisation for retail payment systems named ‘National Payments Corporation of India’ (NPCI) is being constituted under Section 25 of the Companies Act, 1956. The NPCI would take over the MICR cheque processing centres (CPCs) as well as the operation of retail electronic payment systems. The NPCI would focus on creating a nation-wide payments system with secured connectivity. The NPCI is expected to commence operations in the second half of 2006-07.

(d) Electronic Payment Products: Status and Proposed Action

195. The coverage of Real Time Gross Settlement (RTGS) system has increased significantly. By April 13, 2006 RTGS connectivity was available in 19,301 bank branches as against a target of 15,000 branches by end-March 2006. By end-June 2006, 20,000 branches are proposed to be covered.

196. The National Electronic Funds Transfer (NEFT) system for electronic transfer of funds was operationalised on November 21, 2005. The NEFT (Extended) system would be implemented in a phased manner in order to facilitate non-networked branches of banks to transfer funds electronically. Under this system, non-networked branches could access NEFT-enabled branches of banks for transfer of funds. NEFT (Extended) would work on a T+1 basis and banks should ensure wide rural coverage of the system to enable their customers to avail the benefits of electronic funds transfers.

197. The pilot project for Cheque Truncation system, which aims at enhancing efficiency in the retail cheque clearing sector, is expected to be implemented in New Delhi by end-December 2006.

198. As indicated in the Mid-term Review of October 2005, the proposed National Settlement System (NSS) which aims at settling clearing positions of various clearing houses centrally would be introduced by end-December 2006.

199. The Reserve Bank has waived processing fees on banks for both electronic clearing service (ECS) and electronic fund transfer (EFT) transactions up to March 31, 2006 with a view to promoting electronic transactions. Furthermore, no processing fees are levied by the Reserve Bank for RTGS and NEFT transactions and this waiver was valid up to March 31, 2006. Although there has been a substantial increase in volume of electronic transactions, the Reserve Bank would continue with the waiver of processing fees on banks in order to further promote electronic transactions system, till the retail operations are taken over by the NPCI. Waiver of processing fees for RTGS transactions would continue up to March 31, 2007.

Urban Co-operative Banks

(a) Vision Document for UCBs

200. As envisaged in the draft Vision Document for UCBs, the Reserve Bank has signed Memoranda of Understanding (MoUs) with four State Governments, viz., Andhra Pradesh, Gujarat, Karnataka and Madhya Pradesh with a view to facilitating the development of the UCB sector. The Reserve Bank has also constituted Task Forces for Urban Co-operative Banks (TAFCUBs) in these States in order to provide for a structured arrangement for co-ordination and consultation as well as professionalisation of management of UCBs. The TAFCUBs have so far considered the financial position of the UCBs and made various recommendations on the future course of action. Based on the recommendations, the Reserve Bank has granted licence to four unlicenced banks in Gujarat and Andhra Pradesh. Based on the positive experience of the TAFCUBs, it is proposed:

• to widen the scope of TAFCUBs to cover the scheduled UCBs registered in the State concerned and set up a similar forum for regulatory co-ordination in respect of scheduled UCBs registered under the Multi-State Cooperative Societies Act.

(b) Regulatory Framework

201. The Reserve Bank has given effect to the two-tiered regulatory structure by permitting the UCBs with deposit base of less than Rs.100 crore and having branches within a single district to adopt 180 days delinquency norm for NPA classification till March 2007. These banks are also eligible for partial exemption (not exceeding 15 per cent) from the prescribed SLR of 25 per cent to the extent of funds invested in interest-bearing deposits of public sector banks. Consequently, these banks can obviate market risks associated with investment in government securities. Based on the representations received, UCBs have been given modified guidelines for valuation of securities transferred from AFS category to HTM category.

(c) Augmenting Capital of UCBs

202. Share capital and retained earnings constitute the owned funds of co-operative banks. Share capital can be withdrawn by members after the minimum lock-in period and does not have the permanence of equity. Co-operative banks are also not allowed to issue shares at a premium.

In order to explore various options for raising regulatory capital, it is proposed:

• to constitute a Working Group comprising representatives of the Reserve Bank, State Governments and the UCB sector to examine the issues involved and identify alternate instruments/avenues for augmenting the capital funds of urban co-operative banks.

(d) Consolidation in the UCB Sector

203. The Reserve Bank had issued guidelines on merger/amalgamation in UCB sector in February 2005 with a view to facilitating emergence of strong entities and providing an avenue for non-disruptive exit of unviable entities. Further, relaxations in this regard were announced in the Mid-term Review of October 2005. The Reserve Bank has given ‘no objection certificate’ for 13 merger proposals since then, of which four have already taken effect. The remaining proposals are under various stages of consideration/ operationalisation by the Registrars of Co-operative Societies of the respective States. The Reserve Bank has received seven more proposals that are under examination.

(e) Delivery of Services to UCB Customers

204. The Reserve Bank has issued instructions permitting UCBs in States where MoUs have been signed and those registered under the Multi-State Co-operative Societies Act to offer mutual fund products, as agents, to their customers subject to certain conditions. It is further proposed:

• to allow well managed scheduled and non-scheduled UCBs to open select off-site/on-site ATMs, based on the recommendation of the TAFCUBs.

(f) Settlement of Depositors’ Claims

205. In respect of UCBs whose licences are cancelled, the preparation, submission and settlement of claims and recoveries from assets for distribution are delayed due to the involvement of several agencies and stages in the process of liquidation. In order to ensure appropriate co-ordination between agencies and to expedite the process of settlement of claims and recovery of dues in those UCBs whose licences are cancelled, it is proposed:

• to set up a sub-committee of the TAFCUB to review the progress made by the liquidator in settlement of claims, recovery of dues and repayment to DICGC and other creditors including depositors.

Non-banking Financial Companies

Support to NBFCs Catering to SMEs and Agri-based Services

206. As indicated in the Annual Policy Statement of April 2005, the Reserve Bank is examining the issue of smooth flow of bank finance to NBFCs in order to develop NBFCs into a financially strong sector with improved skill and technology. In view of the increased need to support financing of the SME sector and agri-related activities and taking into account the critical role NBFCs play as an instrument of credit delivery, the SIDBI and the NABARD have agreed to evolve a viable credit dispensation arrangement to provide resource support to NBFCs catering to the needs of these sectors. These institutions would also evolve appropriate mechanisms, in consultation with NBFCs, to address their needs in this regard and provide support in terms of their capacity building to develop expertise for financing these sectors.

Currency Management - Star Series for Currency Notes

207. Currently, all fresh banknote packets issued by the Reserve Bank contain one hundred serially numbered banknotes. In a serially numbered packet, banknotes with any defect detected at the printing stage are replaced at the presses by banknotes carrying the same number in order to maintain the sequence. As part of the Reserve Bank’s ongoing efforts to benchmark its procedures against international best practices, as also for greater efficiency and cost effectiveness, it is proposed to adopt the STAR series numbering system for replacement of defectively printed banknotes. A ‘star series’ banknote will have an additional character, viz., a star symbol * in the number panel and will be similar in every other respect to a normal bank note and would be legal tender. Any new note packet carrying a star series note will have a band on which it will be indicated that the packet contains a star note(s). The packet will contain one hundred notes, though not in serial order. To begin with, star series notes would be issued in lower denominations, i.e., Rs.10, Rs.20 and Rs.50 in the Mahatma Gandhi series. Wide publicity through issue of press advertisements is being undertaken and banks are urged to keep their branches well informed so as to guide their customers.


Click Here For Highlights of Annual Policy Statement for the Year 2006-07




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