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Annual Policy Statement for the Year 2009-10 click here

Annual Policy Statement for the Year 2009-10- 21st April 2009

Part II. Annual Statement on Developmental and Regulatory Policies for the Year 2009-10

V. Prudential Measures

a) Further Relaxations in the Branch Authorisation Policy

137. The current branch authorisation policy requires banks to have a medium term plan in respect of branch expansion. The request for opening of off-site ATMs was also required to be a part of such plans. On a review, it is proposed:

• to allow scheduled commercial banks (SCBs) to set up offsite ATMs without prior approval subject to reporting.

138. With respect to branch authorisation policy, it is proposed:

• to constitute a Group to review the extant framework of branch authorisation policy with a view to providing greater flexibility, enhanced penetration and competitive efficiency consistent with financial stability.

(b) Presence of Foreign Banks in India: Review

139. In February 2005, the Government of India and the Reserve Bank released the ‘Roadmap for Presence of Foreign Banks in India’ laying out a two-track and gradualist approach aimed at increasing the efficiency and stability of the banking sector in India. One track was the consolidation of the domestic banking system, both in private and public sectors, and the second track was the gradual enhancement of the presence of foreign banks in a synchronised manner. The roadmap was divided into two phases, the first phase spanning the period March 2005 - March 2009, and the second phase beginning April 2009 after a review of the experience gained in the first phase.

140. In view of the current global financial market turmoil, there are uncertainties surrounding the financial strength of banks around the world. Further, the regulatory and supervisory policies at national and international levels are under review. In view of this, it is considered advisable, for the time being, to continue with the current policy and procedures governing the presence of foreign banks in India. The proposed review will be taken up after due consultation with the stakeholders once there is greater clarity regarding stability, recovery of the global financial system, and a shared understanding on the regulatory and supervisory architecture around the world.

(c) Mitigating Procyclicality: Use of Floating Provisions

141. The G-20 Working Group on Enhancing Sound Regulation and Strengthening Transparency has recommended, as a part of measures to mitigate procyclicality, that capital buffers above minimum requirements and loan loss provisions should be built up in good times in order to enhance the ability of the regulated financial institutions to withstand large shocks. This would require modification in the Reserve Bank’s circular of June 22, 2006. The Reserve Bank has been encouraging banks to build floating provisions as a buffer for the possible stress on asset quality later. It is proposed:

• to issue further detailed guidelines on mitigating procyclicality later this year after FSB, BCBS and Committee on Global Financial System (CGFS) finalise their recommendations in this regard.

(d) Credit Rating Agencies

142. In India, all credit rating agencies are registered with the SEBI. The Reserve Bank has accorded accreditation to four SEBI registered credit rating agencies for the limited purpose of using their ratings for assigning risk weights within the framework of the Basel II Accord. Since the Indian banking system has migrated to the Basel II framework, there is a need to review the performance of the credit rating agencies for continuation of the accreditation, especially by looking at the latest data relating to cumulative default rate and transition matrix of the rating agencies. Accordingly:

• the Reserve Bank will liaise with SEBI on the issue of rating agencies’ adherence to Code of Conduct Fundamentals of the International Organisation Securities Commissions (IOSCO).

(e) Liquidity Risk

143. In terms of the asset liability management, liquidity of banks in India is tracked through traditional maturity or cash flow mismatches. The Reserve Bank has examined the issue of banks establishing a more robust liquidity risk management framework that is well integrated into the bank-wide risk management process by adopting global liquidity planning. In this context, banks will be required to integrate their various foreign currency assets and liabilities positions from their branch operations in India with the rupee asset liability position. Accordingly, it is proposed:

• to prepare a draft circular detailing the modalities for adopting the integrated liquidity risk management system as also the guidance note on ‘Liquidity Risk Management’ based on Basel Committee’s ‘Principles for Sound Liquidity Risk Management and Supervision’ brought out in September 2008 as well as other international best practices which would be placed on the Reserve Bank’s website by June 15, 2009.

(f) Financial Inclusion: Relaxing Eligibility Criteria for Banking Correspondents

144. With the objective of achieving greater financial inclusion and increasing the outreach of the banking sector, banks were permitted, to use the services of NGOs/MFIs set up as societies, trusts, Section 25 companies, post offices, co-operative societies and more recently retired bank employees, ex-servicemen and retired government employees as banking correspondents (BCs). Scaling up the BC model is a challenge. It is, therefore, proposed:

• to constitute a Working Group to examine the experience to date of the business correspondent (BC) model and suggest measures, to enlarge the category of persons that can act as BCs, keeping in view the regulatory and supervisory framework and consumer protection issues.

• to increase the maximum distance criterion for the operation of the BC for rural, semi-urban and urban areas from the existing 15 kms. to 30 kms.

(g) Risk Weights for Exposure to Central Counterparties

145. A central counterparty (CCP) is an entity that interposes itself between counterparties to contracts traded within one or more financial markets, becoming the legal counterparty such that it is the buyer to every seller and the seller to every buyer. The CCIL has been acting as a CCP for banks in various segments of the financial market. Similarly, contracts like interest rate futures and currency futures, which are traded on the stock exchanges, are also settled through the clearing houses attached to these exchanges.

146. Banks settling trades through CCIL/stock exchanges have two types of exposures to these CCPs. First, on account of the on-balance sheet and off-balance sheet transactions undertaken through the CCP; and second, the exposure on account of deposits/collateral kept with the CCPs to meet the margin requirements. It has been decided to lay down the norms for capital adequacy treatment of such exposures. Accordingly:

• the exposures on account of derivatives/securities financing transactions trades outstanding against all the CCPs, will be assigned zero exposure value, as it is presumed that the CCPs’ exposures to their counterparties are fully collateralised on a daily basis, thereby providing protection for the central counterparty’s credit risk exposures;

• the margin amounts/collaterals maintained with the CCPs will attract risk weights appropriate to the nature of the CCP. For CCIL, the risk weight will be 20 per cent and for other CCPs, it will be according to the ratings assigned to these entities as per the New Capital Adequacy Framework.

• the above prescription will be subject to review on an on-going basis by the Reserve Bank about the adequacy of margin, quality of collateral and risk management systems of the clearing house/CCP.

(h) Private Pool of Capital

147. It has been observed that Indian banks have recently been engaged in sponsoring and managing private pools of capital such as venture capital funds and infrastructure funds. The G-30 Report on ‘Financial Reform – A Framework for Financial Stability’ released on January 15, 2009, observed that large, systemically important banking institutions should be restricted in undertaking proprietary activities that present particularly high risks and serious conflicts of interest. Sponsorship and management of commingled private pools of capital (that is, hedge and private equity funds in which the banking institutions own capital is commingled with client funds) should ordinarily be prohibited and large proprietary trading should be limited by strict capital and liquidity requirements. Therefore, there is need for banks to have greater awareness of the risks inherent in such activities and limit such exposures commensurate with their risk management and available capital. Keeping in view the reputational risk involved in such activities, the Reserve Bank had mandated maintenance of certain level of economic capital in some of the cases approved in the recent past. It is now proposed:

• to issue a paper on prudential issues in banks’ floating and managing private pools of capital for eliciting public comments which will form the basis for finalising regulatory guidelines by September 30, 2009.

(i) Stress Testing

148. In the Mid-Term Review of October 2008, it was indicated that the Reserve Bank would be upgrading the stress testing guidelines. Subsequently, the BCBS has issued a paper on ‘Principles for Sound Stress Testing Practices and Supervision’ in January 2009 for comments. The paper draws lessons for banks and supervisors emerging from the financial crisis and addresses weaknesses in stress testing, including the specific areas of risk mitigation and risk transfer. In this context, the CFSA has recommended that there is a need for the banks themselves to carry out such periodic stress testing. It is proposed to upgrade the stress testing guidelines once BCBS finalises the paper based on comments received.

(j) Securitisation of Bank Loans

149. The securitisation framework in India is considered to be reasonably prudent and has been able to minimise the incentives that have led to the problems which surfaced in the current crisis. It has come to the Reserve Bank’s notice that some banks have securitised loans immediately after originating or purchasing these from other banks. Banks are also dividing the total loan for one project into different tranches and securitising a few tranches even before the total disbursement is complete, thus passing on the project implementation risk also to the investors. It is, therefore, proposed:

• to prescribe a minimum lock-in-period and minimum retention criteria for securitising the loans originated and purchased by banks.

(k) Certificate of Registration to Credit Information Companies

150. In response to the Reserve Bank’s press release of April 18, 2007 inviting applications for grant of Certificate of Registration from companies desirous of entering into the business of credit information under the Credit Information Companies (Regulation) Act, 2005, 13 applications were received. A High Level Advisory Committee (Chairman: Dr. R.H. Patil) set up by the Reserve Bank screened the applications and recommended the names of four applicants for issue of Certificate of Registration. Accordingly, ‘in principle’ approvals have been issued to these four applicants.

Click Here For Highlights of Annual Policy Statement for the Year 2009-10

Click Here For Macro economic and Monetary Developments : 2008-09

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