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
VI. Institutional Developments
Payment and Settlement Systems
(a) Final Guidelines for Prepaid Payment Instruments in India
151. The enactment of the Payment and Settlement Systems Act, 2007 has brought the payment systems involved in the issuance of prepaid payment instruments under the regulatory jurisdiction of the Reserve Bank. The Reserve Bank had earlier placed the draft guidelines for issuance/operation of such instruments in public domain for wider dissemination and feedback. Taking into account the comments received from various entities within and outside the country, it is now proposed:
• to permit SCBs which comply with the eligibility criteria to issue all categories of prepaid payment instruments;
• eligible non-bank entities, including NBFCs, will be permitted to issue semi-closed instruments, which can be used to purchase all types of goods and services at an identified network of establishments.
The operating guidelines in this regard are being issued separately.
(b) Consolidation of Information Technology Systems: Data Centres
152. The Reserve Bank has set up data centres which were made operational in the second half of 2008. The state-of-the-art data centres provide for a high level of availability of information technology (IT) systems and ensure optimum business continuity management. The critical payment and settlement systems of the Reserve Bank are now operated using the systems at the data centres. Adequate disaster recovery drills are conducted at periodic intervals. While all participating member banks have been able to ensure full participation in these drills by operating from their disaster recovery (DR) sites, there are a few banks which have not been able to meet this objective. In view of the critical importance of such drills and in order to achieve overall systemic efficiency:
• banks are urged to ensure full compliance of these requirements.
(c) Adequacy of the Fallback Arrangements for Managed IT Systems
153. Currently, a number of banks have resorted to the retention of service providers to manage their IT-based operational requirements. It has, therefore, become imperative that banks have adequate plans/systems in place so as to manage risks arising out of such outsourcing arrangements. These risks arise on account of excessive dependence by the system on a single entity (concentration risk), inadequate systems (operational risks) as also on account of failure of these service providers. The Reserve Bank has already issued comprehensive outsourcing guidelines in November 2006. The risk management aspects detailed therein are of particular relevance to a technology service provider. Hence, it is proposed that:
• banks should undertake a comprehensive review of all such outsourced arrangements including on-site inspections of critical service providers and ensure that adequate fallback arrangements are put in place.
(d) Network Based Operations: RBI Supported Systems"
154. The Reserve Bank has taken steps to make the application systems [NDS, real time gross settlement (RTGS), centralised funds management system (CFMS) and structured financial messaging solution (SFMS)] provided by it to operate in an network based environment using the Multi Protocol Label Switching (MPLS). The MPLS approach by using a meshed network topology provides increased redundancies vis-a-vis a point to point connectivity at cheaper costs without impacting the security aspects. Accordingly:
• banks are advised to migrate to the MPLS system on a time bound basis.
(e) Recent Developments
(i) Electronic Payment Systems
155. The coverage of bank branches under the electronic payment network, viz., the RTGS and the National Electronic Funds Transfer (NEFT) has increased significantly. While the NEFT network has increased to 54,200 branches at end-March 2009, the RTGS network has increased to 55,000 branches. The RTGS handles, on an average, 80,000 transactions per day, with a peak of 1,28,295 transactions processed as on March 30, 2009.
(ii) National Electronic Clearing Service
156. The volume of transactions through national electronic clearing service (NECS), introduced in September 2008, is also increasing. With a view to moving towards the centralised NECS system, the electronic clearing service (ECS) (credit) in Mumbai has been merged with the NECS. As such no separate local ECS clearing is operative in Mumbai.
(iii) National Financial Switch
157. The national financial switch (NFS) membership/volume is steadily on the increase. As on March 31, 2009 the NFS network covered a total of 38,714 automated teller machines (ATMs) of 34 banks. On an average, a daily volume of 8,90,180 transactions (of which 2,56,156 transactions pertained to balance enquiry and 6,34,024 pertained to cash withdrawal) were routed through the NFS in March 2009 as against a daily volume of 2,67,598 transactions in March 2008. Furthermore, on an average, the daily value settled through the NFS was around Rs.45 crore in March 2009 as against Rs.26 crore in March 2008. Since April 1, 2009 customers have the facility of using ATM of any bank for cash withdrawal, free of cost, thereby making ATMs national payment outlets rather than bank-specific outlets. This measure has seen a surge in transactions in the NFS network with a peak of 1.1 million transactions on a single day on April 11, 2009.
(iv) Mobile Payments
158. As indicated in the Mid-Term Review of October 2008, the operative guidelines for mobile payments were issued on October 8, 2008. So far, 19 banks have obtained permission from the Reserve Bank to provide mobile payment facilities to their customers.
(v) Rationalisation of Charges for Payment Systems
159. The Reserve Bank has rationalised various charges for payment systems. Accordingly, service charges levied for transfer of funds under outward RTGS transactions shall not exceed Rs.25 for transactions of Rs.1 lakh and up to Rs.5 lakh, and Rs.50 for transactions of Rs.5 lakh and above. Similarly, for outward NEFT transactions, service charges levied shall not exceed Rs.5 for transfer of funds up to Rs.1 lakh and Rs.25 for transactions of Rs.1 lakh and above.
160. The Reserve Bank has also prescribed maximum charges which could be levied for collection of outstation cheques under which the service charges would not exceed Rs.50 for cheque value up to Rs.10,000. A maximum charge of Rs.100 would be levied for cheque value of Rs.10,000 – Rs.100,000. The service charge would not exceed Rs.150 of cheque value Rs.100,001 and above.
(vi) Cheque Truncation System
161. The cheque truncation system (CTS) pilot project was operationalised in Delhi in February 2008 and more than 90 per cent of the cheque volume of Delhi clearing house is now processed through the CTS. The Reserve Bank continues to take steps towards extending the CTS across the country and accordingly, it has been decided to set up the CTS in Chennai.
(f) The Payment and Settlement Systems Act, 2007
162. As indicated in the Mid-Term Review of October 2008, the process of issuing authorisation to persons to operate various payment systems has commenced following the notification of the Payment and Settlement Systems Act, 2007 in August 2008. In terms of the Act, all payment system providers/operators including credit card issuing companies and entities engaged in money transfer activity would require authorisation.
Urban Co-operative Banks
(a) Area of Operations of UCBs
163. In order to facilitate the growth of well-functioning urban co-operative banks (UCBs) in States, which enter into Memorandum of Understanding (MoU), it is proposed:
• to permit extension of area of operation of Tier II UCBs in Grade I to the entire State of registration with the prior approval of the Reserve Bank.
(b) Review of Regulatory and Supervisory Framework: UCBs
164. UCBs are presently on Basel I capital framework with surrogate (additional risk-weight) capital charge on market risks. The Advisory Panel on Financial Regulation and Supervision to the Committee on Financial Sector Assessment (Chairman: Dr. Rakesh Mohan and Co-Chairman: Shri Ashok Chawla), which looked into the present regulatory and supervisory framework for UCBs, has observed that it would be premature for full migration of UCBs to Basel II at this juncture. However, it recommended assigning duration based capital charge for market risk for scheduled UCBs that are systemically important and comparable in size to medium-sized commercial banks. Furthermore, the Panelrecommended: (i) a review of the existing internal control systems, risk management systems, asset liability management (ALM) and disclosure norms for UCBs; and (ii) the issue of appropriate guidelines. Accordingly, it is proposed:
• to review the existing instructions and issue appropriate guidelines to UCBs on internal controls, risk management systems, ALM and disclosure norms;
• to apply capital charge for market risks in respect of large-sized and systemically important UCBs with effect from April 1, 2010.
(c) Vision Document for UCBs
165. The Vision Document for UCBs envisaged signing of MoU with the State and Central Governments for harmonisation of dual regulation and supervision of UCBs and setting up of Task Force on Urban Co-operative Banks (TAFCUB) for identification of viable UCBs for their rehabilitation and non-viable UCBs for their non-disruptive exit. Subsequent to the release of the Vision Document in public domain in March 2005, the Reserve Bank has entered into MoUs with 25 State Governments (nine entered during April 2008 to March 2009). As of date, 99 per cent of UCBs and 99 per cent of deposits of the UCB sector are covered under MoU arrangements. The number of UCBs in Grade III and IV, signifying various degrees of sickness, has since declined to 496 as on March 31, 2008 from 725 as on March 31, 2005. Till March 31, 2009 licences had been cancelled or rejected in respect of 85 banks and 31 unlicensed banks in MoU States have been issued banking licences. Since the recommencement of new branch authorisation, 232 licences have been issued for opening of branches by UCBs in MoU States. The initiatives for voluntary mergers and amalgamations of weak UCBs for bringing consolidation in the sector were also carried forward and new policy guidelines on mergers were announced. Sixty-eight mergers between healthy and weak banks have been effected so far. In view of the improved financial condition and enhanced regulatory and supervisory jurisdiction of the Reserve Bank, additional business opportunities were opened up for well-functioning multi-state UCBs and UCBs in MoU States.
(d) Information Technology Support to UCBs
166. Based on the recommendations of the Working Group which looked into ways of supporting IT initiatives of the UCBs, IDRBT is being asked to facilitate UCBs availing of Core Banking Platform on an Application Service Provider (ASP) model. With this, the UCBs will be able to put in place cost-effective, modern technology so as to render better customer service and sound regulatory compliance.
Non-Banking Financial Companies
(a) CRAR for NBFCs-ND-SI
167. The Mid-Term Review of October 2008 had indicated that the CRAR for NBFCs-ND-SI would be raised from 10 per cent to 12 per cent by March 31, 2009 and further to 15 per cent by March 31, 2010. Taking into account the difficulty in raising equity capital in the current economic environment, it has been decided:
• to defer the implementation of CRAR of 12 per cent to March 31, 2010 and of 15 per cent to March 31, 2011.
(b) Time-frame for Realisation of Assets by Securitisation Companies/Reconstruction Companies
168. In terms of the extant guidelines, securitisation companies (SCs)/ reconstruction companies (RCs) are required to realise the financial assets within a specified time-frame, which shall not in any case exceed five years from the date of acquisition of financial assets. Requests for extending the time frame in this regard are being examined. As an interim measure, it is proposed:
• to give an extension of two more years for realisation of the assets in respect of the security receipts (SRs) issued by SCs/RCs which have completed five years.
(c) Repossession of Vehicles by NBFCs
169. The issue of repossession of vehicles in the event of non-payment of interest and/or principal of loans given by NBFCs has recently come into focus, and some courts have also ruled in this regard. The Reserve Bank has already advised NBFCs to put in place a Fair Practices Code with the approval of their boards which, inter alia, covers recovery of loans. The issue has been discussed with the industry participants and in view of certain queries raised, it is further clarified that:
• NBFCs must have a built-in re-possession clause in the contract/loan agreement with the borrower which must be legally enforceable. To ensure transparency, the terms and conditions of the contract/loan agreement should contain detailed provisions in this regard.
A circular to NBFCs to this effect is being issued separately.
(d) Special Liquidity Facility for Eligible NBFCs-ND-SI
170. The Central Government had announced an arrangement for providing liquidity support to eligible NBFCs-ND-SI for meeting the temporary liquidity mismatches through the Industrial Development Bank of India Stressed Asset Stabilisation Fund (IDBI SASF) Trust, which has been notified as special purpose vehicle for undertaking this operation. The facility is meant exclusively for meeting the temporary liquidity mismatches of the NBFCs and not for asset growth.
171. The facility was available for eligible paper issued by NBFCs up to March 31, 2009 with an overall ceiling of Rs.20,000 crore, which was subsequently extended for eligible paper for a further period of three months till June 30, 2009. The facility has been availed to the extent of Rs.750 crore till date.
Second Quarter Review
172. The next review of the Annual Statement on Developmental and Regulatory Policies will be undertaken as part of the second quarter review of monetary policy on October 27, 2009.
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