RBI's Annual Monetary Policy Statement for the Year 2012-13 -17th April 2012
IV. Regulatory and Supervisory Measures for Commercial Banks
Strengthening the Resilience of the Banking Sector
Implementation of Basel III Capital Regulations
90. As indicated in the SQR of October 2011, the Reserve Bank prepared the draft guidelines on Basel III – Implementation of Capital Regulations in India, which were placed on its website in December 2011, for comments/suggestions from various stakeholders. The draft guidelines provide for a roadmap for smooth implementation of Basel III capital regulations in terms of the transitional arrangements (phase-in) of capital ratios and grandfathering (phase-out) of ineligible capital instruments. The Reserve Bank is also in the process of estimating, on the basis of data collected from banks, the likely impact of the proposed Basel III norms on banks’ capital position and leverage. The estimation exercise, as also the comments/suggestions from various stakeholders, will form the basis for finalising the guidelines on capital regulations. It is proposed:
to issue the final guidelines on the implementation of Basel III capital regulations by end-April 2012.
Implementation of Liquidity Risk Management and Basel III Framework on Liquidity Standards
91. Based on the documents Principles for Sound Liquidity Risk Management and Supervision as well as Basel III: International Framework for Liquidity Risk Measurement, Standards and Monitoring published by the Basel Committee on Banking Supervision (BCBS) in September 2008 and December 2010 respectively, the Reserve Bank prepared draft guidelines on Liquidity Risk Management and Basel III Framework on Liquidity Standards, which were placed on its website in February 2012 for comments and feedback.
92. The draft guidelines consolidate the various instructions/guidance on liquidity risk management that the Reserve Bank has issued from time to time in the past, and where appropriate, harmonises and enhances these instructions/guidance in line with the BCBS’s Principles for Sound Liquidity Risk Management and Supervision. They include enhanced guidance on liquidity risk governance, measurement, monitoring and the reporting to the Reserve Bank on liquidity positions. The draft guidelines also cover two minimum global regulatory standards, viz., liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) as set out in the Basel III rules text.
93. While the enhanced liquidity risk management measures are to be implemented by banks immediately after finalisation of the draft guidelines, the Basel III regulatory standards, viz., LCR and NSFR, will be binding on banks from January 1, 2015 and January 1, 2018, respectively. Till then, banks will have to comply with Basel III guidelines on a best effort basis. This will prepare banks for transition to the Basel III requirements. It is proposed:
to issue the final guidelines on liquidity risk management and Basel III framework on liquidity standards by end-May 2012, after taking into account the suggestions/ feedback received.
Bank Finance to NBFCs Predominantly Engaged in Lending against Gold
94. NBFCs that are predominantly engaged in lending against collateral of gold jewellery have recorded significant growth in recent years, both in terms of their balance sheet size and physical presence. Certain prudential measures have been taken on account of regulatory concerns, given the rapid pace of their business growth and the nature of their business model which has inherent concentration risk. The measures include a loan-to-value (LTV) ratio not exceeding 60 per cent for loans against collateral of gold jewellery and a minimum Tier 1 capital of 12 per cent by April 1, 2014. It has also been stipulated that NBFCs should not grant any advance against bullion/primary gold and gold coins.
95. The rapid expansion of such NBFCs has led to their increased dependence on public funds, including bank finance. To supplement the prudential measures mentioned above, it is proposed that:
banks should reduce their regulatory exposure ceiling in a single NBFC, having gold loans to the extent of 50 per cent or more of its total financial assets, from the existing 10 per cent to 7.5 per cent of bank’s capital funds. However, exposure ceiling may go up by 5 per cent, i.e., up to 12.5 per cent of bank’s capital funds if the additional exposure is on account of funds on-lent by NBFCs to the infrastructure sector; and
banks should have an internal sub-limit on their aggregate exposure to all such NBFCs, having gold loans to the extent of 50 per cent or more of their total financial assets, taken together.
96. Detailed guidelines in this regard will be issued separately.
Lending by NBFCs against Gold: Constitution of a Working Group
97. There has been significant increase in loans by NBFCs against gold in the recent period. There are also complaints against some NBFCs that they are not scrupulously following proper documentation process and know your customer (KYC) norms, among others, in order to quickly dispose off the cases relating to gold loans. Gold imports have also increased sharply, raising macroeconomic concerns. To undertake a detailed study of all these aspects, a Working Group (Convener: Shri K. U. B. Rao) has been constituted. The major terms of reference of the Group include: (i) to assess the trends in demand for gold loans and to study how it has influenced gold imports; (ii) to analyse the implication of gold imports for external and financial stability; (iii) to study the trends in gold price and to examine whether NBFCs extending gold loans have any role in influencing the gold price; (iv) to examine the sources of funds of NBFCs for gold loans, especially their borrowings from the banking system; and (v) to examine the current practices of NBFCs involved in lending against the collateral of gold. The Working Group is expected to submit the report by end-July 2012.
Implementation of KYC/AML Guidelines
98. Risk categorisation of customers as also compilation, periodic updation of customer profiles and monitoring and closure of alerts in accounts by banks are very important for effective implementation of KYC, anti-money laundering (AML) and combating of financing of terrorism (CFT) measures apart from helping their business development. It is, however, observed that there are laxities in effective implementation of the Reserve Bank’s guidelines on KYC/AML measures. Any weakness in the KYC/AML process would leave banks vulnerable to operational risk. Banks should, therefore, ensure compliance with the regulatory guidelines on KYC/AML in both letter and spirit. Accordingly, it is proposed:
to mandate banks to complete the process of risk categorisation and compiling/updating profiles of all of their existing customers in a time-bound manner, and in any case not later than end-March 2013.
99. Detailed guidelines in this regard will be issued separately.
NPA Management – Requirement of a Strong Mechanism and Granular Data
100. The asset quality of banks is one of the most important indicators of their financial health. It also reflects the efficacy of banks’ credit risk management and the recovery environment. It is important that the signs of distress in all stressed accounts are detected early and those which are viable are also extended restructuring facilities expeditiously to preserve their economic value. During annual financial inspection (AFIs), it has been observed that the restructuring facilities are not readily extended to small accounts. To improve the banks’ ability to manage their non-performing assets (NPAs) and restructured accounts in an effective manner and considering that almost all branches of banks have been fully computerised, it is proposed:
to mandate banks to put in place a robust mechanism for early detection of signs of distress, and measures, including prompt restructuring in the case of all viable accounts wherever required, with a view to preserving the economic value of such accounts; and
to mandate banks to have proper system generated segment–wise data on their NPA accounts, write-offs, compromise settlements, recovery and restructured accounts.
101. Detailed guidelines in this regard will be issued separately.
Strengthening the Regulatory Framework for Unclaimed Deposits
102. Banks were advised from time to time to strengthen their machinery and play an active role in finding the whereabouts of the account holders of unclaimed deposits or whose accounts have remained inoperative. Despite such instructions, banks have not been pro-active in tracing customers linked with unclaimed deposits/inoperative accounts. Also, the need to identify the owners of these unclaimed deposits/inoperative accounts is closely linked to KYC due diligence. It is, therefore, imperative to further strengthen the regulatory framework for inoperative accounts and unclaimed deposits. Accordingly, it is proposed:
to mandate banks to have a board approved policy on classification of unclaimed deposits; grievance redressal mechanism for quick resolution of complaints; record keeping; and periodic review of such accounts.
103. Detailed guidelines in this regard will be issued separately.
Fixed Interest Rate Products
104. Banks have the freedom to offer all categories of loans on a fixed or floating interest rate basis, subject to conformity with their asset liability management (ALM) frameworks. They also have the freedom to offer floating rate on domestic term deposits clearly linked to a market determined external anchor rate, in addition to fixed rate deposits. It is observed that while interest rates on deposits are predominantly fixed, most of the retail loan products, especially home loans, have been sanctioned on a floating interest rate basis, thereby exposing the borrowers to uncertain interest rate movements. On the other hand, banks have the wherewithal to manage such interest rate risk. In order to examine the issue, it is proposed:
to set up a Working Group to assess the feasibility of introducing more long-term fixed interest rate loan products by banks.
Bank Resolution Mechanism: Strengthening Regulatory Framework
105. The Financial Stability Board (FSB) has proposed a set of twelve core elements, viz., ‘the key attributes’, as essential components that would allow the resolution authorities to resolve financial institutions in an orderly manner without severe systemic disruption and without exposing taxpayers to loss, while maintaining continuity of vital economic functions of the non-viable firms through absorption of losses by the shareholders and unsecured and uninsured creditors. The ‘key attributes’ call for an effective ‘resolution regime’ to be in place in all jurisdictions (member countries) that provides the resolution authority with a broad range of powers/tools and options to resolve a firm that is no longer viable and has no reasonable prospect of becoming so.
106. In order to examine the current gaps, vis-à-vis the ‘key attributes’, in the Indian resolution regime for the banking system in particular and to suggest the nature and extent of the legislative and regulatory changes needed to address such gaps, an internal Working Group (Chairman: Shri B. Mahapatra) on resolution regime was constituted in March 2012.
Guidelines on Securitisation
107. With a view to developing an orderly and healthy securitisation market and ensuring greater alignment of the interests of the originators and the investors, it was considered necessary to prescribe a minimum lock-in-period and minimum retention criteria for securitised loans originated and purchased by banks and NBFCs. Accordingly, a discussion paper and draft guidelines on securitisation transactions were issued in April 2010 for public comments. After considering the feedback received and international developments during the intervening period, revised draft guidelines were issued for public comments in September 2011. Taking into account comments received from various stakeholders, it is proposed:
to issue the final guidelines on securitisation by end-April 2012.
108. Pursuant to the announcement in the SQR of October 2011, a discussion paper on Introduction of Dynamic Loan Loss Provisioning Framework for Banks in India was placed on the Reserve Bank’s website in March 2012, soliciting views/comments from banks and other stakeholders. The guidelines on dynamic provisioning would be finalised after taking into consideration the views/comments on the discussion paper.
109. It was announced in the SQR of October 2011 that the Reserve Bank was in the process of issuing the final guidelines on compensation based on the FSB’s Principles on Sound Compensation Practices. Taking into account feedback/comments received, final guidelines on compensation were issued to all private sector banks and foreign banks in India in January 2012. The guidelines cover effective governance of compensation, alignment of compensation with prudent risk-taking, and disclosures. These guidelines supersede the Reserve Bank’s extant guidelines relating to compensation. The policy will come into effect from the financial year 2012-13.
Working Group on Pricing of Credit
110. As indicated in the SQR of October 2011, a Working Group on Pricing of Credit (Chairman: Shri Anand Sinha) was constituted in January 2012 to review the current practice regarding pricing of floating rate loan products in India vis-à-vis the international practices. The Group will also study the methodology of determination of credit spreads and its components and suggest measures for appropriate pricing of floating rate loan products to improve transparency in pricing and loan documentations. The Working Group, which is required to submit its report by end-July 2012, held its first meeting in February 2012.
Working Group on Restructuring of Advances by Banks
111. As indicated in the SQR of October 2011, a Working Group (Chairman: Shri B. Mahapatra) was constituted in January 2012 to review the existing prudential guidelines on restructuring of advances by banks/financial institutions and suggest revisions taking into account the best international practices and accounting standards. The Group has representation from select banks, the IBA, the Government of India, corporate debt restructuring cell and regulatory/supervisory departments of the Reserve Bank. The Group is expected to submit its report by end-July 2012.
Supervisory Policies, Procedures and Processes: A Comprehensive Review
112. A High Level Steering Committee (Chairman: Dr. K. C. Chakrabarty) was set up by the Reserve Bank to review the existing supervisory processes in respect of commercial banks in India. A Technical Committee, comprising officers from the Reserve Bank and representatives from a few banks, has also been constituted to aid and assist the Steering Committee. The Committee, among others, has taken up the work with regard to (i) moving supervisory approach from examining the past performance through capital adequacy, asset quality, management, earning, liquidity and system and control (CAMELS) model to predicting the path and passage of risks; (ii) preparing the supervisory apparatus to focus not just on regulatory compliance and solvency of a bank but also on finding out riskiness of a bank, its business preparedness to adopt risk lines irrespective of the size and delineate the impact of a failure; (iii) prescribing necessary ingredients for adapting risk based business conduct with indicative time lines; and (iv) devising rating methods which also capture fair, transparent and non-discriminatory pricing to customers. The Committee is expected to submit its report by end-July 2012.
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