Fourth Bi-Monthly Monetary Policy Statement, 2014-15 By Dr. Raghuram G. Rajan, Governor, RBI - September 30, 2014 - Full Text

I. Monetary Policy Framework

II. Banking and Financial Structure

16. The approach to strengthening the financial structure has been multi-pronged, comprising:

an expansion of participation and competition in the financial system;

building counter-cyclical capital and liquidity buffers compliant with Basel III standards; and

refining and enhancing the efficacy of the regulatory and supervisory framework.

17. Turning to expanding the banking space, draft guidelines on Small Banks and Payments Banks as differentiated or restricted banks were placed on the Reserve Bank’s website on July 17, 2014. Based on the feedback received:

final guidelines on licensing of these banks will be issued by end-November 2014.

18. With regard to non-banking financial companies(NBFCs):

changes in the regulatory framework for NBFCs will be introduced by end-October 2014 covering prudential regulations on core capital, asset classification and provisioning norms, regulation on deposit acceptance, corporate governance and consumer protection measures.

With these changes coming into force, the Reserve Bank will recommence registering new NBFCs.

19. Pursuant to the guidelines issued on the liquidity coverage ratio (LCR) in June 2014 which permitted banks to reckon government securities to the extent allowed by the Reserve Bank under its marginal standing facility as Level 1 High Quality Liquid Assets (HQLA) under the LCR, banks will be allowed to:

include government securities held by them up to another 5 per cent of their NDTL within the mandatory SLR requirement as level 1 HQLA in order to facilitate their meeting the LCR requirement while retaining the prudential aspect of the statutory liquidity ratio (SLR). This additional liquidity up to 5 per cent of NDTL will be available, in addition to the MSF, through a special facility and at a rate higher than the MSF rate as decided by the Reserve Bank taking into account the market conditions; and

such government securities reckoned for the LCR should be valued at an amount no greater than their current market value as HQLAs are required to be taken at their market value for the purpose of computing the LCR.

Detailed guidelines will be issued by mid-November 2014.

20. To carry forward regulatory and supervisory initiatives,

final guidelines for monitoring tools for intra-day liquidity management will be issued in October 2014, consistent with the quantitative tools finalised by the Basel Committee on Banking Supervision (BCBS);

revised guidelines on a leverage ratio (LR) framework and attendant disclosure requirements, drawing on the BCBS’s January 2014 paper, will also be issued by end-October 2014 so as to enable public disclosure of the LR by January 1, 2015; and

a discussion paper will be issued by end-November on large exposures and convergence of exposure limits applicable in India with those of the BCBS which come into effect from January 1, 2019.

21. An Early Warning System (EWS) is being put in place to track banks’ critical financial parameters. Deviations from pre-defined benchmarks would trigger more granular oversight in the form of enhanced off-site monitoring, focused discussions, on-site examination and punitive action, if warranted.

22. Along with early detection mechanisms for frauds, a Central Fraud Registry is also proposed to be created simultaneously as a searchable centralised database for use by banks.

23. Guidelines for declaring borrowers as “non-co-operative” will be put out by end-October 2014.

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