First Bi-monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G. Rajan, Governor, RBI - 1st April 2014
Revised regulations under Foreign Exchange Management Act (FEMA) for a simplified foreign portfolio investor (FPI) regime have been notified in March 2014. The Reserve Bank also proposes to simplify the know-your-customer (KYC) procedures for opening bank accounts by FPIs. The Reserve Bank has also been rationalising and expanding limits for FPI investments in debt markets. To encourage longer maturity flows, investment limits in Treasury Bills were capped at US$ 5.5 billion in April 2013, even while the limit for long-term investors was increased by US$ 5 billion in June 2013. As a further step towards encouraging longer-term flows, investments by FPIs in G-Secs shall henceforth be permitted only in dated securities of residual maturity of one year and above, and existing investment in Treasury Bills will be allowed to taper off on maturity/sale. The overall limit for FPI investment in G-Secs will, however, remain unchanged at US$ 30 billion, so the investment limits vacated at the shorter end will be available at longer maturities. As regards foreign direct investment (FDI), it has been decided to withdraw all the existing guidelines relating to valuation in case of any acquisition/sale of shares and accordingly, such transactions will henceforth be based on acceptable market practices. Operating guidelines will be notified separately.
A comprehensive IT-based system namely, Export Data Processing and Monitoring System (EDPMS) for effective monitoring, easier tracking and reconciliation of export transactions was launched in February 2014. The data will be shared among the stakeholders/agencies involved, and will allow more timely and detailed information on exports as well as prevention of export-related fraud.
On financial inclusion, the fourth pillar, the recommendations of the Mor Committee on accelerating the flow of credit to those at the bottom of the pyramid and enlargement of catchment area of the Business Correspondents (BCs), including through possible inclusion of new entities as BCs, are under examination. To overcome the challenge of cash management of BCs which is impeding the scaling up of the BC model, the Reserve Bank will collate best practices and issue a fresh set of guidelines to commercial banks.
The Reserve Bank has released a concept paper on Trade Receivables and Credit Exchange for micro, small and medium enterprises (MSMEs) in March 2014 on its website for public feedback. The model outlined in the paper envisages a credit exchange with both primary and secondary market segments that will help address problems faced by the MSME segment on delayed payments and dependency on their corporate buyers. After receiving feedback, the Reserve Bank will work towards implementation.
With a view to ensuring fair and transparent credit pricing and to give a fillip to the flow of credit to micro and small enterprises (MSEs) borrowers, it would be desirable for SCBs to provide differential interest rates for MSEs and other borrowers whose loans are covered under the credit guarantee scheme. SCBs are encouraged to undertake a review of their loan policy governing extension of credit facilities to the MSE sector and should consider using Board approved credit scoring models in their evaluation of the loan proposals of MSE borrowers.
Measures have been taken to expand banking services to the financially excluded sections of society with the appropriate application of technology. The GIRO Advisory Group (GAG) has recommended a tiered structure approach for a centralised bill payment system that will enable inter-operability viz., (a) Bharat Bill Payment System (BBPS) and (b) Bharat Bill Payment Operating Units (BBPOUs). The recommendations of the GAG report are under examination. A Technical Committee (Chairman: Shri B. Sambamurthy) set up to examine the challenges being faced by banks in taking mobile banking forward for achieving financial inclusion submitted its report in January 2014. This was placed in the public domain for feedback. The recommendations of the Committee will be examined closely, and plans for the way forward will be discussed with stakeholders.
Consumer protection is an integral aspect of financial inclusion. The Reserve Bank proposes to frame comprehensive consumer protection regulations based on domestic experience and global best practices. In the interest of their consumers, banks should consider allowing their borrowers the possibility of prepaying floating rate term loans without any penalty. Banks should also not take undue advantage of customer difficulty or inattention. Instead of levying penal charges for non-maintenance of minimum balance in ordinary savings bank accounts, banks should limit services available on such accounts to those available to Basic Savings Bank Deposit Accounts and restore the services when the balances improve to the minimum required level. Banks should not levy penal charges for non-maintenance of minimum balances in any inoperative account. Banks should also limit the liability of customers in electronic banking transactions in cases where banks are not able to prove customer negligence.
Under the fifth pillar, on improving the system's ability to deal with corporate distress and financial institution distress by strengthening real and financial restructuring as well as debt recovery, the Reserve Bank issued a framework for revitalising distressed assets in the economy in January 2014. The framework lays down guidelines for early recognition of financial distress, steps for prompt resolution and fair recovery for lenders. It envisages centralised reporting and dissemination of information on large credits, early formation of lenders' forums and incentives for lenders and borrowers to agree on resolution and disincentives for both in the event of failure to act in a timely way. Improvements in the current restructuring process such as an independent evaluation of large value restructuring with a focus on viability and fair sharing of gains and losses between promoters and creditors have been mandated. Finally, a more liberal regulatory treatment of distressed asset sales, particularly to asset reconstruction companies, has been provided. The framework will be fully effective from today.
Following the announcement in the Second Quarter Review of October 30, 2013, a Working Group (Chairmen: Dr. Arvind Mayaram and Shri Anand Sinha) on a Resolution Regime for Financial Institutions was constituted, which submitted its report in January 2014. The Group has, inter alia, recommended the setting up of a single Financial Resolution Authority (FRA), an early supervisory intervention mechanism in the form of prompt corrective action (PCA) framework for all financial institutions and a separate comprehensive legal framework providing necessary powers and tools for orderly resolution of all financial institutions irrespective of ownership. The Group's report will be disseminated for comments.
An overhaul of the extant regulatory framework for non-banking financial companies (NBFCs) is underway to align it with several important developments which have taken place in the financial sector. It is, therefore, proposed to keep in abeyance, subject to certain exceptions, issue of Certificate of Registration (CoR) for conducting NBFC business, except in the public interest, till an appropriate regulatory framework is put in place for the NBFC sector. Detailed notification will be issued separately.
Going forward, this five-pillar approach will continue to guide the design and calibration of developmental measures. With competition in the banking sector set to increase, financial markets will play a complementary role, allowing banks to trade their long term assets and match the maturity profile of assets and liabilities. Simultaneously, the Reserve Bank will strive to increase the reach of financial services to everyone, however remote or small, by using technology, new products, and new entities to link people up to the formal financial system. Priority sector lending will become an effective vehicle to promote greater financial access. Concomitantly, the Reserve Bank will take steps for early recognition and resolution of distress with a focus on putting real assets back to work in their best use.
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