Mid-Term Review of the Annual Policy Statement for 2006-07, RBI Credit Policy: Banknet India

Newsletter

Daily Rates

Daily News

Book Store

Home

Conferences

Technology

Finance

Main Page of Mid-Term Review of the Annual Policy Statement for 2006-07 click here

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

IV. Institutional Developments

Payment and Settlement Systems

142. The Reserve Bank continues to strengthen the framework for payment and settlement systems and harness the full potential of information technology (IT) to improve operational efficiency. During 2006-07 so far, the focus has been on security of IT systems, financial inclusion and development of electronic payment products.

(a) Information Systems Security and Audit: Security of IT-based Delivery Channels

143. The Annual Policy Statement of April 2006 encouraged banks to ensure compliance with the findings of information systems audit on a time-bound basis in order to maintain robustness of IT systems. There have been, however, a few instances of fraudulent attempts to extract customer information by tampering with IT-based delivery channels of banks. Banks are urged to ensure that adequate and appropriate systems such as enhanced security measures and customer education are put in place in order to prevent such malpractices.

(b) IT-Facilitated Financial Inclusion

144. The Reserve Bank has been advocating the need for financial inclusion which involves the provision of banking services to all segments of the society. Some of the challenges which need to be addressed for increasing the scope and coverage of financial inclusion include lack of adequate infrastructure in rural areas, higher transaction costs and low volumes of transactions. Recognising that IT-enabled services have the potential for effectively addressing these issues, the Reserve Bank has initiated action in this direction in the north-east region, to begin with. The Institute for Development and Research in Banking Technology (IDRBT) is providing technological solutions to increase the extent of banking facilities in this region. Banks are urged to harmonise their IT-based initiatives to ensure that the objective of greater financial inclusion is achieved.

(c) Electronic Payment Products: Status and Proposed Action

145. The coverage of the RTGS system has increased significantly. By October 23, 2006 RTGS connectivity was available in 24,425 branches as against a target of 20,000 branches set for end-June, 2006. The number of monthly transactions of the system has exceeded 300,000. The Reserve Bank is committed to improving the quality of service and further increasing the number of customer transactions through the RTGS on a priority basis.

146. The national electronic funds transfer (NEFT) system for electronic transfer of funds, which was operationalised on November 1, 2005 is now available at 9,096 branches. The Reserve Bank is currently engaged in informing the public about the benefits of the system in order to ensure increased rural coverage.

147. 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.

148. It was indicated in the Annual Policy Statement of April, 2006 that the National Settlement System (NSS) which aims at settling clearing positions of various clearing houses centrally would be introduced by end-December, 2006. Accordingly, to begin with, integration of the Integrated Accounting System (IAS) with the RTGS was initiated to facilitate settlement of various CCIL-operated clearings (inter-bank Government securities, inter-bank forex, CBLO and National Financial Switch) through Multilateral Net Settlement Batch (MNSB) mode in the RTGS in Mumbai. On stabilisation of MNSB in Mumbai, settlements at other centres under the NSS would be taken up in a phased manner.

Urban Co-operative Banks

(a) Vision Document for UCBs

149. Pursuant to the draft vision document for Urban Co-operative Banks (UCBs), the Reserve Bank has been entering into Memoranda of Understanding (MoU) with State Governments with a view to putting in place a structured arrangement for co-ordination between the State Government and the Reserve Bank to address the problem of dual control. The Reserve Bank has signed MoU with four State Governments, namely, Uttaranchal, Rajasthan, Chhattisgarh and Goa in addition to the earlier MoU signed with four State Governments, viz., Andhra Pradesh, Gujarat, Karnataka and Madhya Pradesh. Task Forces for Urban Co-operative Banks (TAFCUBs) in these States have been constituted by the Reserve Bank and consultative processes are in operation.

(b) Conversion of Extension Counters into Full-Fledged Branches

150. In view of the regulatory co-ordination brought about through signing MoU with State Governments and based on the positive experience of the TAFCUBs, it is proposed:

• to allow financially sound UCBs registered in States that have signed MoU with the Reserve Bank and those registered under the Multi-State Co-operative Societies Act, 2002 to convert existing extension counters into full-fledged branches subject to certain conditions. Guidelines in this regard would be issued separately.

(c) Innovative Options for Augmenting Capital of UCBs

151. As indicated in the Annual Policy Statement of April, 2006 a Working Group (Chairman: Shri N.S. Vishwanathan) comprising representatives of the Reserve Bank, State Governments and the UCB sector was constituted to explore various options for raising regulatory capital funds of UCBs and identify alternate instruments/avenues for augmenting the capital funds. The Group has since submitted its report which would be placed in the public domain for feedback.

(d) Fair Practices Codes for Lenders

152. UCBs play an important role in meeting the credit needs of small and medium enterprises and retail traders. They also cater to housing loan requirements predominantly under the priority sector. The UCBs are also eligible institutions for applicability of SARFAESI Act. In this context, it is important for UCBs to draw up and implement a Fair Practices Code for Lenders with a view to putting in place a fair and transparent mechanism for sanction, disbursal and recovery of loans. Accordingly, it is proposed that:

• the Reserve Bank, taking into consideration the State specific environment and needs, would place a model draft Fair Practices Code for consideration of TAFCUBs set up in the States that have signed MoUs for deliberation and adoption.

Non-banking Financial Companies

153. Non-banking financial companies (NBFCs) play a critical role as an instrument of credit delivery, particularly in the small scale and retail sectors. The Reserve Bank has been continuously emphasising on developing NBFCs into financially strong entities with skill levels necessary to cater to the needs of the common people. In order to strengthen the NBFC sector by diversifying their area of business, it is proposed to allow NBFCs:

• to issue co-branded credit cards with banks without risk sharing; and

• to market and distribute mutual fund products as agents of mutual funds.

Non-banking Financial Companies: Classification

154. A request had been received from the representatives of the NBFC sector to provide a separate classification for NBFCs engaged in financing tangible assets. Companies engaged in financing real/physical assets supporting economic activity such as automobiles, general purpose industrial machinery and the like would generally correspond to the classification as asset financing companies. Accordingly, it is proposed to re-group them as asset financing companies. Detailed operational instructions in this regard would be issued separately.

Committee on Financial Sector Assessment

155. The World Bank and the IMF have jointly brought out a Handbook on Financial Sector Assessment in September, 2005 on the basis of their experience in the conduct of the Financial Sector Assessment Programme (FSAP) in member countries. The Handbook is designed for use in financial sector assessments and intended to serve as a reference book on the techniques of such assessments. India has been a forerunner in comprehensive self-assessment of various international financial standards and codes, besides being one of the earliest member countries participating voluntarily in the FSAP.

156. In this context, the Reserve Bank had released a Synthesis Report on Financial Sector Assessment in May, 2002 and a progress report on the assessment in December, 2004. Consistent with this approach, the Government of India, in consultation with the Reserve Bank, has constituted a Committee on Financial Sector Assessment to undertake a self-assessment of financial sector stability and development using the Handbook as the base. The Committee is chaired by Dr. Rakesh Mohan, Deputy Governor, Reserve Bank of India, with Shri Ashok Jha, Secretary, Economic Affairs, Ministry of Finance, Government of India as Co-Chairman. The Committee would report the progress to the Government of India/Reserve Bank within a period of six months. The Reserve Bank would provide the secretariat to the Committee.