III. Financial Sector
41. The recent annual Monetary and Credit Policy Statements in April, as well as mid-term reviews in October, have focused on structural measures to strengthen the financial system and to improve the functioning of the various segments of financial markets. The main objectives of these measures have been five-fold: (a) to increase operational effectiveness of monetary policy by broadening and deepening money market and bond market, especially the government securities market; (b) to redefine the regulatory role of the Reserve Bank; an attempt has been made to reduce RBIs direct role in fixing interest rates, margins and credit allocations, while simultaneously strengthening its role in the development of financial markets and the management of overall liquidity in the system; (c) to strengthen prudential and supervisory norms, while at the same time providing banks and financial institutions maximum autonomy in operational matters; (d) to improve the credit delivery system, particularly for agriculture, exports, services, small-scale industries, self-help groups and micro-credit institutions; and (e) to develop the technological and institutional infrastructure for an efficient financial sector.
42. While there has been substantial progress in achieving some of these objectives, the pace of progress has been relatively slow in certain areas. Thus, for example, considerable success has been achieved in redefining the role of the Reserve Bank in financial markets and in actively associating financial experts and intermediaries in policy formulation and its implementation. Substantial progress has also been made in the area of deregulation and providing much greater autonomy to banks in operational matters. Money market is functioning reasonably satisfactorily with substantial volume of transactions, although it still continues to be dominated by a few operators. The secondary market for government securities has been strengthened with the emergence of a large number of Primary Dealers (PDs) as active participants. Technological infrastructure in the form of Indian Financial Network (INFINET) has been put in place, and preparatory work for Real Time Gross Settlement System (RTGS) and Centralised Data Base Management has been completed. However, so far, very little progress has been made in making the secondary market for securities and bonds sufficiently liquid and accessible to individuals and small investors. Prudential and supervisory norms have been strengthened, but there is considerable scope for further improvement in risk management and internal control procedures of banks and other institutions. The NPA levels remain unduly high, and there is still a long way to go in making the loan recovery/settlement procedures timely and efficient. A large number of measures have been introduced to make the credit delivery system less cumbersome and hassle free, but progress on the ground is slow.
43. In this years policy also, it is proposed to review the present position and carry forward the direction of financial reforms initiated in recent years, keeping in view the actual experience in implementation and other relevant developments.
replacing Interim Liquidity
44. Pursuant to the recommendations of the Narasimham Committee Report on Banking Reforms (Narasimham Committee II), it was decided in principle, to introduce a LiquidityAdjustment Facility (LAF) operated through repo and reverse repos in order to set a corridor for money market interest rates. To begin with, in April 1999, an Interim Liquidity Adjustment Facility (ILAF) was introduced pending further upgradation in technology and legal/procedural changes to facilitate electronic transfer and settlement.
45. The ILAF was operated through a combination of repo, export credit refinance, collateralised lending facilities and OMO. ILAF provided a mechanism for injection and absorption of liquidity available to banks and PDs to overcome mismatches in supply and demand from time to time. The fortnightly average utilisation of CLF/ACLF and export credit refinance facilities by banks ranged between Rs.3,180 crore and Rs.10,122 crore during the year 1999-2000. Liquidity support availed of by PDs was in the range of Rs.814 crore and Rs.7,406 crore during the above period.
46. The ILAF has served its purpose as a transitional measure for providing reasonable access to liquid funds at set rates of interest. In view of the experience gained in operating the interim scheme last year, an Internal Group was set up by RBI to consider further steps to be taken. Following the recommendation of the Internal Group, it has now been decided to proceed with the implementation of a full-fledged LAF. The new scheme will be introduced progressively in convenient stages in order to ensure smooth transition.· In the first stage, with effect from June 5, 2000, the Additional CLF and level II support to PDs will be replaced by variable rate repo auctions with same day settlement. In the second stage, the effective date for which will be decided in consultation with banks and PDs, CLF and level I liquidity support will also be replaced by variable rate repo auctions. Some minimum liquidity support to PDs will be continued but at interest rate linked to variable rate in the daily repos auctions as determined by RBI from time to time. With full computerisation of Public Debt Office (PDO) and introduction of RTGS expected to be in place by the end of the current year, in the third stage, repo operations through electronic transfers will be introduced. In the final stage, it will be possible to operate LAF at different timings of the same day.
47. In the proposed LAF, the quantum of adjustment as also the rates would be flexible, responding immediately to the needs of the system. At the same time, funds made available by the RBI through this facility would meet primarily the day-to-day liquidity mismatches in the system and not the normal financing requirements of eligible institutions. It is expected that the LAF would also help the short-term money market interest rates to move within a corridor and impart greater stability, facilitating emergence of a short-term rupee yield curve. Both the time-table and the scope of proposed changes are, however, subject to review in the light of actual experience.
48. There will be no change in the export credit refinance scheme. This will continue as before and as such banks will be entitled to automatic access for export refinance as per present policy. Ideally, it would also be desirable for export credit refinance to be subsumed in the LAF for effectiveness of monetary policy. However, under the present circumstances, given certain domestic rigidities in the interest rate structure and the desirability of giving maximum support to exporters, there is a case for the scheme of export credit refinance to continue for some more time. It would be possible to do away with sector-specific refinance, like export credit refinance facility, when domestic interest rates in nominal and real terms converge with international rates on a sustainable basis.
49. In an effort to carry forward the reforms towards widening and deepening of the financial markets, the following measures are being introduced for further development of the markets :
(a) Money Market
Forward Rate Agreements and Interest Rate Swaps were formally introduced in 1999. The guidelines had indicated that the rate on any domestic money or debt market instrument can be used as the benchmark. In order to provide more flexibility for pricing of rupee interest rate derivatives and to facilitate some integration between money and foreign exchange markets, the use of interest rates implied in the foreign exchange forward market as a benchmark would be permitted in addition to the existing domestic money and debt market rates. At present, the minimum maturity for Certificates of Deposit (CDs) is 3 months. To bring it on par with other instruments such as CP and term deposits, the minimum maturity of CDs is being reduced to 15 days. Incidentally, the minimum period of transferability for CDs has already been reduced to 15 days. It was indicated in the Mid-Term Review of October 1999 that permission given to non-bank entities for routing their transactions in call/notice money market through PDs will be withdrawn by end-June 2000. It has been decided that the facility to non-bank entities for routing transactions through PDs would be further extended up to end-December 2000 and simultaneously steps will be initiated to extend repo facility to such entities through Subsidiary General Ledger (SGL) II
Accounts. It was
indicated in the Mid-Term Review' of October 1998 that, in line with the suggestion
of the Narasimham Committee II, the Reserve Bank ultimately aims to move towards a pure
inter-bank (including PDs) call/notice money market.Subsequent to the amendment of the
Securities Contracts (Regulation) Act (SCRA)1956, the repo market has been widened to
cover all such non-bank entities holdingboth current and SGL Accounts with RBI, Mumbai,
including mutual funds. Theseentities can now borrow as well as lend in the repo market.
Hence, it is proposed toreview and evolve a time bound programme of withdrawing permission
to theseentities for lending in the call/notice money market, coinciding with development
of repo market. To keep pace with several developments in financial markets, the
currentguidelines for issue of CPs were reviewed by an Internal Group. It has been decided
to modify the guidelines in the light of Groups recommendations. The modified
draftguidelines would cover aspects such as, greater flexibility to the issuers to raise
CP through introduction of an automatic route for CP issuance, broadening the
investor-base,simplification of procedures for issuing CP, permission to issue CP in
dematerialised form and standardisation of documentation procedures. These 14
measures are expected to provide more liquidity and depth to the product. A draft ofthe revised guidelines would be circulated separately and final guidelines would beissued after consultation with market participants. As per the RBI Act 1934, CRR is to be maintained on an average daily basis during a reporting fortnight by all scheduled banks. This system provides manoeuvrability to banks to adjust their cash reserves on a daily basis depending upon intra-fortnight variations in cash flows. For the computation of CRR to be maintained during the fortnight, a lagged reserve system has been introduced effective fortnight beginning November 6,1999 whereby banks have to maintain CRR on the netdemand and time liabilities (NDTL) of the second preceding fortnight. With this,banks are able to assess their exact liability positions and the corresponding reserve requirements. With a view to providing further flexibility to banks and enabling them to choose an optimum strategy of holding reserves depending upon their intra-periodcash flows, it has been decided to reduce the requirement of a minimum of 85per cent of the CRR balances to be maintained to 65 per cent with effect from the fortnight beginning May 6, 2000. This is expected to result in smoother adjustment ofliquidity between surplus and deficit units and enable better cash management by banks.
(i) Amendments to
Securities Contracts (Regulation) Act, 1956
50. In terms of notification issued under Section 16 of the Securities Contracts (Regulation) Act, 1956 and under the amended Section 29A of the Act, Government of India has delegated regulatory powers to RBI to regulate dealings in Government securities, money market securities, gold related securities and securities derived from these securities as also ready forward contracts in debt securities, vide notification dated March 1, 2000. Consequent upon the delegation of powers by the Government and as part of development of the repo market, State Government securities have been made eligible for undertaking repos. RBI has also widened the scope of participation in the repo market to all the entities having SGL and Current Account with RBI, Mumbai, thus increasing the number of eligible non-bank participants to 64 from the earlier 35. These measures are expected to give a fillip to the repo market besides enabling better cash and asset-liability management by non-bank institutions.
(ii) Special Facility
for Securities Settlement
51. RBI operates the government securities settlement system for those having SGL Accounts in the Public Debt Office through Delivery versus Payment. Under this system, trades are settled on a gross "trade by trade" basis with irrevocable final settlement taking place simultaneously for securities and funds after ensuring that there is sufficient funds in buyers account and sufficient securities in sellers account. In view of increased volumes in transactions, it is proposed to introduce a scheme for automatic invocation by the SGL Account holder of undrawn refinance/liquidity support from RBI for facilitating smooth securities settlement. The facility will be available only to banks and PDs, subject to adequate safeguards. Detailed guidelines will be issued separately.
(iii) Sale of
Securities Allotted in Primary Issues on the same day
52. In terms of the guidelines issued by RBI, no sale deal should be entered into without actually having the securities in the investment portfolio at the time of sale. This procedure is inhibiting entities which get allotments in primary issues from selling securities allotted, on the same day. Hence, it has been decided to remove such restriction and allow such entities to sell the securities after they have been allotted to them, thus enabling sale, settlement and transfer on the same day.
(iv) Payments for
53. At present auctions in respect of 14 and 91 day Treasury Bills are normally held on Fridays and payments in respect of allotments made on Saturdays. Considering the request from the market participants, the day of payment has been changed from Saturday to the next working day in respect of both 14 and 91 day Treasury Bills. This will be reviewed after six months.
(v) Operations of
54.Under the existing scheme, the liquidity support to PDs is linked to their bidding commitments and secondary market operations and are provided at level I at the Bank Rate and at level II at 2 per cent above the Bank Rate. As level II will be discontinued with the introduction of LAF, a detailed review of liquidity support to PDs will be made and modifications will be introduced in consultation with PDs.
55. The minimum bidding commitment by PDs cover more than 100 per cent of the auction issue of Treasury Bills and the PDs are not required to take devolvement. OMO window for Treasury Bills with exclusive access to PDs has also been opened. In view of these developments, the commission payment to PDs for auction Treasury Bills is being withdrawn.
56. Currently, the capital adequacy requirements for PDs for credit risk are based on the same norms as applicable to NBFCs. For market risk, separate requirements have been given in the "Guidelines for the PDs in the Government Securities Market". As these do not still adequately address the risks being faced by the PDs in the market, comprehensive capital charges on the portfolio risks are considered essential. Taking into account the principles for capital adequacy for market risk evolved by regulatory bodies such as the International Organisation of Securities Commissions (IOSCO) and the Bank for International Settlements (BIS), fresh guidelines for capital adequacy standards for PDs are being evolved, which will be finalised in consultation with PDs.
(c) Debt Securities
57. A mention was made in the Mid Term Review of October 1999 about the setting up of a clearing corporation for money and debt securities. This is expected, inter alia, to pave the way for further opening up of the repo market to PSU bonds and bonds of Financial Institutions held in demat form in depositories. A preliminary proposal to set up such a corporation has already been received from the PDs and action to establish such a corporation is being initiated.
into Insurance Business
58. With the passage of the Insurance Regulatory and Development Authority (IRDA) Act, 1999, banks can enter into insurance business. The insurance business does not break-even during the initial years of operation. Banks do not also have adequate actuarial and technical expertise in undertaking insurance business. It is, therefore, necessary to restrict entry only to strong banks in insurance sector on risk participation basis. Consequently, banks having minimum net worth of Rs.500 crore, and satisfying other criteria in regard to capital adequacy, profitability, etc., will be allowed to undertake insurance business through joint venture on risk participation basis. RBI will consider banks equity contribution in the joint venture up to 50 per cent. However, higher equity contribution by a promoter bank may be allowed initially, on a highly selective basis, pending divestment of the equity in excess of 50 per cent within the period prescribed under the amended insurance statutes. Banks which do not satisfy the above criteria will be allowed on a without risk participation basis up to 10 per cent of their net worth or Rs.50 crore, whichever is lower, as strategic investors. There will, however, be no bar on any bank or its subsidiary taking up distribution of insurance products on fee basis as an agent of insurance company. Banks will be required to obtain prior approval of RBI for entering into the insurance area. Detailed guidelines are in Annexure II.
Interest Rate Policy
With progressive deregulation of interest rates, banks now have considerable flexibility to decide their deposit and lending rate structures and manage their assets and liabilities efficiently. Banks are now free to offer a fixed rate or a floating rate on deposits of any maturity of 15 days and above. On the lending side, banks are free to prescribe their own lending rates including the Prime Lending Rate (PLR). Further, banks have been given the freedom to offer tenor-linked PLRs and fixed rate loans. Certain specified categories of advances have been freed from the norms of PLR. After consultation with banks, with the objective of providing more operational flexibility and eliminating rigidities, the following measures are being introduced:
(a) Review of PLR norms
60. Banks have been provided the freedom to operate different PLRs for different maturities. It is observed that some banks are declaring a stand alone PLR in addition to tenor linked PLRs. Banks which have moved over to declaration of tenor-linked PLRs should always indicate the specific tenor for which the declared PLRs is applicable.
(ii) Fixed Rate Loans
61. Currently, banks are permitted to offer fixed interest rates only when the loan is for project finance purposes. The restriction on fixed rate term loans being extended only for project loan is now being withdrawn. Banks will henceforth have the freedom to offer all loans on fixed or floating rates. However, banks will have to ensure that the PLR stipulations as applicable are complied with. The nature of alignment with PLR will have to be made explicit at the time of sanction of the loan. However, for small loans up to Rs.2 lakh, the stipulation of not exceeding PLR (of relevant maturity) will be applicable.
(b) FCNR (B) Deposits: Greater Flexibility of Operations
62. At present, in the case of FCNR (B) deposits offered by banks, swap rates as on the last working day of the preceding week form the base for fixing the ceiling rates for the interest rates that are effective the following week. In order to make the market more "online", banks at their discretion will have the option to choose the current swap rates while offering FCNR (B) deposits. This will provide banks with the freedom to refer to the swap rates quoted on any online screen based information system.
63. Presently, banks are free to offer fixed/floating rates on NRE/FCNR(B) deposits. It has been decided that banks would be permitted as in the case of domestic term deposits, to offer differential rates of interest on NRE deposits on size group basis. In the case of FCNR(B) deposits where the interest rates offered are subject to a ceiling rate, the differential rates on size group basis would be permitted within the overall ceiling prescribed. This flexibility is expected to help banks to reduce their overall cost of deposits.
Mobilisation by all-India Financial
64. As per existing stipulations, all-India Financial Institutions (FIs) are allowed to borrow in the term money market, through CDs, term deposits and Inter-corporate Deposits (ICDs) within the umbrella limit equal to their net owned funds. The interest rate on term deposits offered by financial institutions is subject to a ceiling of 'not exceeding 14.0 per cent per annum' and furthermore financial institutions have to ensure that the interest rates offered by them do not exceed the rates offered by SBI for comparable maturities. As financial institutions are free to decide interest rates on all other instruments, it has been decided that they may be given flexibility in the matter of fixing interest rates also on term deposits. This will facilitate FIs using these instruments in a flexible manner for ALM.
65. With progressive deregulation, FIs have been raising resources from the market by issuing bonds as well as through money market instruments subject to RBI regulation. FIs are permitted to issue bonds with maturity of 5 years and above without prior RBI permission but with simple registration with RBI provided the bonds are "plain vanilla" (i.e., without special features like options, etc.) and the interest rate on such bonds is not more than 200 basis points above the yield on Government of India securities of comparable residual maturity at the time of issuing bonds. All other bond issues have to be referred to the RBI for prior approval. Based on a review of regulatory experience, it has been decided to modify the guidelines and provide more freedom and flexibility to FIs in raising resources through bond issues, subject to overall limits fixed in terms of net owned funds. A draft proposal will be circulated among the FIs, and guidelines will be issued after further consultation with FIs.
Liberalisation of Export Credit Refinance Facility
6. The facility of export credit refinance to banks enable them to fund a part of their export credit without any resource constraint, particularly when the level of export credit expands and liquidity conditions are relatively tight. At present, scheduled commercial banks are provided export credit refinance to the extent of 100 per cent of the increase in outstanding export credit eligible for refinance over the level of such credit as on February 16, 1996. Representations have been received from some institutions that the manner in which the export credit refinance limit is fixed under the existing scheme precludes the use of Export Bill Rediscounting Schemes by banks, which is of benefit to exporters. It is proposed to liberalise the scheme by introducing the following modification:
67. The scheme will come into force effective fortnight beginning May 6, 2000. With the revised scheme, banks will have the benefit of rediscounting export bills with institutions like EXIM Bank, without sustaining reduction in refinance limits from RBI. In the proposed scheme, it has also been ensured that the export credit refinance limit already available to a particular bank is maintained. Operating instructions are being issued separately.
Post-award Clearance of Project Proposals
68. At present, Authorised Dealers can consider for post-award clearance in respect of supply contract on deferred payment terms, turnkey projects or construction contract if the value of such contract is Rs.25 crore or less. In the case of contract of value exceeding Rs.25 crore (but within Rs.100 crore or where the Authorised Dealer is unable to grant clearance for any reason), Exim Bank may grant post-award clearance. It has now been decided that the above value limits for clearance for post-award proposals for ADs should be raised from Rs.25 crore to Rs.50 crore and that for Exim Bank from Rs.100 crore to Rs.200 crore.
Gold Deposit Scheme - Allowing Banks
69. At present, specific deployment avenues have been outlined for the gold mobilised under the Gold Deposit Scheme. In order to provide more deployment avenues within the country and at the same time to exploit the synergy between the lending expertise of a few banks with the vast branch net work of the others, banks are being permitted to deploy the gold mobilised under the Gold Deposit Scheme by lending it to other nominated bank for similar use.
(a) Risk Management Systems in Banks
70. The Reserve Bank had issued in October 1999, comprehensive guidelines to banks to enable them to put in place appropriate risk management systems, covering credit risk, market risk, and operational risk. In order to control the magnitude of overall risks faced by banks, they were advised to lay down, in the Loan Policy approved by their Boards, prudential norms among others, on exposure to single borrower, group of borrowers, industry specific exposure, exposure to sensitive sectors, etc. A review by RBI of the action taken by banks shows that most of the banks are well advanced in setting up a system for an appropriate assessment of risks associated with different types of assets. This process needs to be further accelerated.
71. In this connection, an issue which has received some attention is the appropriate role of banks in providing financial support to individuals as well as to corporates and market intermediaries against the security of shares/debentures/bonds. RBI has already issued some guidelines for advances against shares/units/debentures and PSU bonds, to individuals, stock brokers and corporates. However, some grey areas remain where there is need for removal of any ambiguities so that policy of banks for supporting the development of capital markets is transparent and known to all concerned, including investors. In order to further develop the operating guidelines for bank financing of equities, it is proposed to refer the matter to the Standing Technical Committee on Co-ordination between RBI and SEBI. The Committee will review the status and make suitable recommendations, after appropriate consultations with banks and market participants. The Committee will consider, inter alia, the desirability of having an aggregate exposure ceiling for advances against security of shares as well as issues relating to fixing prudent level of margins on all advances (i.e., advances to individuals, corporates, brokers and others) against shares and Initial Public Offers (IPOs). A transparent and stable system of bank financing, which can be sustained during periods of "ups" as well as "downs" in equity prices, would contribute to healthy development of financial markets, while at the same time minimising risks for banks.
(b) Capital Adequacy Norms for Banks Subsidiaries
72. At present, the balance sheets of subsidiaries of banks are neither consolidated with that of the parent bank nor have any uniform capital adequacy norm been prescribed for subsidiaries. The Basel Committee has proposed that the new capital adequacy framework should be extended to include, on a fully consolidated basis, holding companies that are parents of banking groups. On prudential considerations, in India also, it is necessary to adopt best practices in line with international standards, while duly reflecting local conditions. To achieve this objective, to begin with, banks are advised to voluntarily build-in the risk weighted components of their subsidiaries into their own balance sheet on notional basis. This should be at par with the risk weights applicable to banks own assets. Banks should also earmark additional capital in their books over a period of time so as to obviate the possibility of impairment to their net worth when switch over to unified balance sheet for the group as a whole is adopted after some time. The additional capital required may be provided in the banks books in phases beginning from the year ending March 2001.
(c) New Capital Adequacy Framework
73. In June 1999, the Basel Committee on Banking Supervision had released a consultative paper on 'A New Capital Adequacy Framework' for comments by interested parties by March 31, 2000. The new framework aims at further strengthening the soundness and stability of the financial system and is designed to better align regulatory capital with underlying risks faced by banks. The framework also provides for explicit capital charge for other risks, viz., operational risk and interest rate risk in the banking book for banks where interest rate risks are significantly above average. In view of the widespread implications of the new Framework, an internal Working Group was constituted in the RBI to examine its impact and applicability, likely problems in implementation and the time span within which the Framework could be adapted to suit Indian conditions. RBI has finalised and forwarded its comments on the new Framework to the Basel Committee. These comments are available on the RBIs web-site to generate wider discussion among banks, financial institutions and academia. The adoption of the new Framework, when it comes into force, will have important implications for emerging market economies and will call for structural changes in the current regulatory and supervisory standards. Capital adequacy, in relation to risk profile, calls for adoption of sophisticated tools for management of risks. Banks would, therefore, have to pay even greater attention to Risk Management Systems, and selection and training of personnel. The existing accounting and disclosures standards would also need to be improved further to fall in line with the international best practices.
(d) Monitoring adherence to International
74. Recent international discussions on building up a sound financial architecture have emphasised the need for evolving codes and standards based on recognised best practices in areas such as monetary and financial policies, fiscal, financial, accounting, corporate governance and payment and settlement systems. In order to monitor developments in this regard and to consider various aspects relevant to India, the Reserve Bank has constituted in association with the Government of India a Standing Committee on International Financial Standards and Codes. The Committee would aim at identifying and monitoring developments in global standards and codes being evolved in the context of the international developments and consider the applicability of these standards and codes to Indian financial system, and chalk out a road map for aligning Indias standards and practices with international best practices.
75. The Standing Committee has set up non-official Advisory Groups in ten major subject areas with outside eminent experts in concerned fields. The Groups have undertaken a review of standards and the feasibility of the compliance and the time frame, given the prevailing legal and institutional practices in India. The Standing Committee would undertake a periodic review of the status and progress in this regard and make available its reports alongwith the Reports of the Advisory Groups to all concerned organisations in public and private sector for review and comments.
(e) Move towards Risk Based Supervision of Banks
76. The recent years have witnessed a gradual shift towards deregulation, reinforced by introduction of prudential norms and adoption of international supervisory best practices. Considering the complexities of banking business and emerging product innovations with complex risk profiles, there is a growing acceptance that a Risk Based Supervision (RBS) approach would be more efficient than the traditional transaction-based approach. The risk based supervision approach entails the monitoring of banks by allocating supervisory resources and focusing supervisory attention according to the risk profile of each institution. The instruments of risk based supervision will be by way of enhancements of the supervisory tools traditionally used, viz., off-site monitoring and on-site examination supplemented by a market intelligence mechanism. In this regard, the Reserve Bank would be engaging services of reputed international consultants to draw on other countries' experiences and to develop an overall plan for moving towards RBS, which would incorporate international best supervisory practices suited for Indian conditions.
(f) Non-Performing Advances (NPAs) of Banks
77. The level of NPAs of public sector banks has been a cause for concern. The Government of India and Reserve Bank of India have initiated a number of measures for expeditious recovery of the accumulated stock of NPAs but the progress of recovery has been slow. The measures include setting up of more Debt Recovery Tribunals (DRTs), strengthening the infrastructure of DRTs, amendment to the Recovery of Debts Due to Banks & Financial Institutions Act as well as setting up of Settlement Advisory Committees (SACs) for compromise settlement of chronic NPAs of small sector. The guidelines on Settlement Advisory Committees were aimed at reducing the stock of NPAs by encouraging the banks to go in for compromise settlement in a transparent manner. Banks will have to more aggressively pursue the recourse to DRTs as well as compromise settlement through the SACs since the operation of SACs is scheduled to lapse on September 30, 2000.
(g) Banks non-SLR Investments
78. A study undertaken by RBI on the non-SLR investment portfolio of banks has caused some concern, as substantial portion of such investments composed of privately placed unquoted securities. With a view to ensuring that such non-SLR investments are made on sound prudential considerations, with more transparency and guarding against potential risks, draft guidelines for banks non-SLR investments have been evolved in consultation with banks and financial institutions. These guidelines were circulated among banks and financial institutions on April 4, 2000. The draft guidelines was also put on the RBI website for comments from the general public. Guidelines would be revised duly taking into account the comments and suggestions from banks, financial institutions and others. The revised guidelines will be recirculated before they are finalised.
79. Banks and financial institutions have been entrusted with providing credit on reasonable terms to certain sectors, viz., agriculture, micro-credit institutions, small scale industries and housing. In order to enhance the flow of credit to these sectors various steps have been undertaken by the RBI.
80. The Micro-credit Special Cell which was set up in the RBI pursuant to the Monetary and Credit Policy announcement in April 1999 submitted its report in January 2000. Meanwhile, the Task Force on Supportive Policy and Regulatory Framework for Micro finance, set up by NABARD, had also submitted its report. A circular letter was issued to banks on February 18, 2000 for main-streaming micro-credit. Banks have been advised that micro- credit extended by them to individual borrowers either directly or through any intermediary would be reckoned as part of their priority sector lending. Banks have been given freedom to prescribe their own lending norms keeping in view the ground realities and devise appropriate loan and savings products in this regard. Priority should be accorded to this sector in preparation of credit plans by banks. Banks have also been advised that micro-credit should form an integral part of their corporate credit plan and should be reviewed at the highest level every quarter. A revised reporting system for monitoring micro-credit disbursals on a half-yearly basis has been put in place. In view of its potential in alleviation of poverty, banks have to make all out efforts at provision of micro-credit.
(b) Self Help Groups
81. As announced in the Budget Speech for the year 2000-2001, NABARD and SIDBI are expected to cover an additional 1 lakh Self Help Groups (SHGs) during the current year. To give a further boost to this programme, a micro finance Development Fund is proposed to be created at NABARD with a start up contribution of Rs.100 crore from concerned institutions. This fund will provide start up funds to micro finance institutions and infrastructure support for training and systems management and data building. Special emphasis will be placed on promotion of micro enterprises in rural areas set up by vulnerable sections including women, SC/STs and other backward classes. Banks have been advised to continue their efforts at forging linkages with SHGs in their respective service areas either on their own initiative or by enlisting support of NGOs in the field, so that the national goal set out in the Budget announcement is met.
82. Following the Report of the Gupta Committee on Agricultural credit, a number of measures have been taken to improve credit delivery system for agriculture, such as, greater flexibility and discretion to the lending banks in matters of collateral, margin, security, dispensation of "no dues certificates", delegation of sufficient powers to branch managers, introduction of composite cash credit to cover the farmers production requirements, introduction of new loan procedures, cash disbursement of loans and simplification of procedures for loan agreements. The following further measures are now being taken:
(d) Drought Relief
Some parts of the country have been affected by severe drought. These drought affected areas have to be provided maximum support, as per RBI guidelines, for conversion of short-term production loans into medium-term loans, reschedulement/postponement of existing term loan instalments, providing additional need-based crop loans/working capital and consumption loans and relaxation in security and margin norms. RBI has instructed its Regional Offices to remain in close contact with the State Government authorities and local banks so that expeditious action is taken to provide relief. RBI has also advised the convenor banks of State Level Bankers Committee (SLBC) to convene the meeting of SLBC to take stock of the situation and initiate immediate steps for providing relief.
(e) Budget follow up the SSI Sector
84. Following the announcements made by the recent Union Budget in respect of the SSI sector, the following action has been taken :
Circular letters have been issued to banks in respect of the above measures.
(f) Setting up of a Credit Information Bureau
85. RBI had set up a Working Group to explore the possibilities for setting up a Credit Information Bureau in India. The Working Group submitted its Report in November, 1999. The Bureau is expected to expedite credit and investment decisions by banks and financial institutions as also curb growth of fresh NPAs through better institutional mechanism. The State Bank of India has entered into an MoU with HDFC to set up a Credit Information Bureau and the modalities for setting up of the Bureau in regard to ownership and equity participation, management structure, security standards, rights and liabilities of the Bureau, etc., are currently being worked out. The banks and financial institutions are advised to make the necessary in-house arrangement for gathering and collection of such information in one place for transmitting it to the Bureau.
86. The Deposit Insurance and Credit Guarantee Corporation (DICGC) is at present engaged in the revamping of the system of deposit insurance in pursuance of the recommendations of the Advisory Group on Reforms in Deposit Insurance in India. The DICGC has, in consultation with the Reserve Bank of India, already examined most of the recommendations. A new law, in supercession of the existing enactment, is required to be enacted to implement the recommendations and the task of preparation of the new draft law has been taken up. The relevant proposals in this respect will be forwarded in due course to the Government for consideration.
Non-Banking Financial Companies (NBFCs)
87. After the passage of the amendment to the RBI Act on March 23, 1997, the RBI received 37,392 applications for grant of certificate of registration. Of these, 26,769 NBFCs had net owned fund (NOF) below Rs.25 lakh till the end of 1999 and, therefore, did not fulfill the primary criteria of having a minimum NOF of Rs.25 lakh, under the RBI Act. These NBFCs were given three years time to reach the minimum NOF of Rs.25 lakh. As on April 1, 2000, as many as 7,636 NBFCs have reported to have stepped up their NOF to Rs.25 lakh or more thus becoming primarily eligible for Certificate of Registration. In addition, the Bank has received 2,651 applications for extension of time. The remaining NBFCs have neither reported having attained the minimum NOF of Rs.25 lakh, nor sought extension of time. As per the provision in the Act/NBFC Directions, all the remaining NBFCs with NOF of less than Rs.25 lakh are not entitled to accept fresh public deposits. These NBFCs are advised to strictly adhere to the provisions of the Statute, RBI regulations and continue to repay the matured deposits as per the contracted terms.
88. Considering the heterogeneous size and geographical spread of the NBFCs, RBI is keen to promote the concept of self regulatory organisation particularly for smaller NBFCs, and further improve the disclosure requirements in order to instill confidence about their functioning. The Reserve Bank also proposes to extend to the NBFCs the guidelines on Asset Liability Management and Risk Management after getting the views of the industry. The RBI is also considering guidelines for NBFCs for their entry/participation in insurance business. Further, the RBI is reviewing the regulatory structure and procedures for fixing of interest rates on deposits of different types of non-banking companies.
Approach to Universal Banking
89. The Narasimham Committee II suggested that Development Financial Institutions (DFIs) should convert ultimately into either commercial banks or non-bank finance companies. The Khan Working Group held the view that DFIs should be allowed to become banks at the earliest. The RBI released a Discussion Paper (DP) in January 1999 for wider public debate. The feedback on the discussion paper indicated that while universal banking is desirable from the point of view of efficiency of resource use, there is need for caution in moving towards such a system by banks and DFIs. Major areas requiring attention are the status of financial sector reforms, the state of preparedness of concerned institutions, the evolution of regulatory-regime and above all a viable transition path for institutions which are desirous of moving in the direction of universal banking. It is proposed to adopt the following broad approach for considering proposals in this area:
High Power Committee on
90. A High Power Committee (HPC) was constituted in May 1999 under the Chairmanship of Shri K.Madhava Rao, to review the performance of Urban Co-operative Banks (UCBs) and suggest necessary measures to strengthen this sector. The terms of reference included reviewing of existing bank and branch licensing policies, application of capital adequacy norms and bringing in suitable legislative amendments for effective functioning of the UCBs. The HPC submitted its recommendations to RBI on November 30, 1999. The Report of the HPC has been made available for public debate, and the recommendations are presently under consideration of RBI in consultation with Government.
91. The Reserve Bank has been playing a central role in the reform of the payment and settlement system in the country. Much progress has been made in consolidating the existing payment systems, developing new technologically advanced modes of payment and moving towards the ultimate objective of linking various payment and settlement systems into an efficient and integrated system that will function in an on-line real time environment.
92. With the ultimate goal of designing and developing a multiple deferred/discrete net settlement system and RTGS, facilitating efficient funds management, house-keeping and customer service, the Reserve Bank has taken a number of steps to improve the infrastructure. These include :
The major items in the Action Plan for 2000-2001 are :
Regulations Review Authority
93. The experience in the last one year with Regulations Review Authority (RRA) for reviewing Reserve Bank's rules, regulations and reporting systems based on the suggestions received from general public at large, users of services of the Bank and market participants has been satisfactory. After a review of the progress so far, the Reserve Bank has since extended the term of RRA for a further period of one year from April 1, 2000. The RRA has received 200 applications which contained more than 350 suggestions pertaining to the entire gamut of operations of the Bank. Implementation of several suggestions not only paved the way for streamlining several existing procedures and improving customer service, but also helped in reviewing and streamlining Banks reporting systems. A notable achievement of RRA has been the compilation of Master circulars, subject-wise, in Manual form by merging a large number of circulars issued over many years on specific subjects. Such master circulars cover important operational areas of compliance by banks and institutions. This work is being further pursued.
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