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Banking > Policies> Mid-Term Review of Credit Policy 2000-01

III Financial Sector Reforms and Monetary Policy Measures

I Mid-Term Review of Macro-economic and Monetary Developments in 2000-01

II.Stance of Monetary Policy for the second half of 2000-01

38. The recent annual Monetary and Credit Policy Statements as well as Mid-Term Reviews have focussed on structural measures to strengthen the financial system and to improve the functioning of the various segments of financial markets. As pointed out in the April policy statement, the main objectives of these measures have been five-fold: (a) to increase operational effectiveness of monetary policy by broadening and deepening various segments of the market; (b) to redefine the regulatory role of the Reserve Bank in order to make it more efficient and purposive; (c) to strengthen the prudential and supervisory norms; (d) to improve the credit delivery system; and (e) to develop the technological and institutional infrastructure of the financial sector.

39. To meet the above objectives, a number of measures have been initiated in various areas. In the following paragraphs, an attempt is made to review briefly the progress made so far in respect of these initiatives and to modify some of them, where necessary. As far as possible, changes proposed, have been decided after extensive consultations with experts and market participants. Suggestions made by commentators in media as well as specialised journals have also been taken into account, wherever appropriate.

40. It is not proposed to make any change in some of the important monetary measures, such as the Bank Rate, the CRR or the LAF. As emphasised in earlier Policy statements, changes in respect of Bank Rate, CRR and the Repo Rates (under LAF) will be made as and when necessary, and will not necessarily be linked to half-yearly policy statements.

Development of Money Market

41. As part of April 2000 policy statement, certain measures were announced to facilitate the development of the Forward Rate Agreements/ Interest Rate Swaps (FRAs/IRS) and Certificates of Deposit (CDs). Similarly, the policy stance relating to call/notice money market and Commercial Paper (CP) had also been indicated. After a review of the developments, the following measures are being introduced :

(a) Permission to non-banks to lend in the call money market

Following the recommendations of Narasimham Committee II, the Reserve Bank has taken several steps to widen the participation in repo market such as, (i) permission to non-bank participants maintaining current and SGL accounts with RBI, Mumbai to undertake both repo and reverse repo; (ii) reduction in minimum maturity for repo transactions to 1 day; (iii) state government securities being made eligible for undertaking repos; and (iv) opening of its purchase window to impart liquidity to government securities whenever situation warrants. In the context of improving the efficacy of the LAF and to make the money market more efficient and enable the development of a short-term rupee yield curve, as recommended by the Committee, it is necessary to move towards the objective of pure inter-bank call money market as early as possible. However, considering the fact that the repo market is yet to be broad-based in terms of instruments and participants and acquire enough depth, it has been decided to extend the permission granted to select corporates, which have been given specific permission to route call money transactions through Primary Dealers (PDs) which is available now upto December 2000 for a further period of six months, i.e., upto June 2001.

In addition to select corporates which have been permitted to route call money transactions through PDs, there are several non-bank institutions such as Financial Institutions and Mutual Funds which are currently permitted to lend directly in the call/notice money market. In order to make necessary transitional provisions, in respect of these institutions also, before the call money market is confined only to banks/PDs, it has been decided to constitute a Group to suggest a smooth phasing out by a planned reduction in their access to call/notice money market. This Group will also include representatives of non-bank institutions.

(b) Guidelines for issue of Commercial Paper (CP)

It was indicated in the April policy statement that the current guidelines for issue of CP would be modified in the light of recommendations made by an Internal Group. Accordingly, a draft of the revised guidelines as also the Report of the Internal Group were circulated in July 2000. Taking into account the suggestions received from the participants, the guidelines have now been finalised. A summary of the guidelines is in Annexure I. Full Text is being issued separately.

The new guidelines are expected to provide considerable flexibility to participants and add depth and vibrancy to the CP market while at the same time ensuring prudential safeguards and transparency. In particular, the guidelines will enable companies in the services sector to more easily meet their short-term working capital needs. At the same time banks and FIs will have the flexibility to fix working capital limits duly taking into account the resource pattern of companies' finances including CPs.

(c) Transfer of Certificates of Deposit (CDs)

At present, while the minimum maturity period for CDs is fixed at 15 days, there is also a restriction that CDs issued by banks and financial institutions cannot be transferred or transacted in the secondary market before 15/30 days from the date of issue. With a view to providing flexibility and depth to the secondary market, it is proposed to withdraw the restriction on transferability period for CDs issued by both banks and financial institutions.

(d) Rating Requirement for Term Deposits Raised by Financial Institutions

At present, mobilisation of term deposits by select all-India financial institutions, which are governed by the Reserve Bank of India guidelines, do not require any rating. In order to improve the functional efficiency of the market, it is proposed to make rating mandatory for the term deposits accepted by all-India financial institutions with effect from November 1, 2000.

Development of Government Securities Market

42. Important developments in respect of the measures announced in the April policy statement are :

It was 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. Detailed guidelines for implementation of the facility has since been issued.
With a view to facilitating sale of securities allotted in primary issues on the same day, it was proposed to allow the entities which get allotments in primary issues to sell the allotted securities on the same day. Relevant instructions have been issued.
The day of payment in respect of 14 and 91 day Treasury Bills was changed from Saturday to the next working day pending a review after six months. Since the system has been working smoothly, it has been decided to continue with the change of day of payment from Saturday to the next working day.
A detailed review of liquidity support to PDs has been undertaken and modifications introduced in the scheme in consultation with them. Further, the commission payment to PDs for auction Treasury Bills has since been withdrawn. A note containing the proposed capital adequacy standards for PDs was circulated and suggestions received from them have been examined and incorporated in the guidelines. Revised guidelines are being separately issued to the PDs.
State Bank of India as the chief promoter has constituted a Core Group, which is working on a Report for setting up a Clearing Corporation for money, debt and foreign exchange markets. The Core Group is presently engaged in having presentations from different entities with expertise for setting up the proposed Clearing Corporation and it would come out with its recommendations shortly.

43. It is now proposed to introduce some further measures for development of government securities market :

(a) Guidelines for Constituents' SGL Accounts

Currently, SGL Account holders are provided the facility to maintain a second SGL Account called Constituents' SGL Account in the books of Reserve Bank of India to enable them to hold government securities on behalf of their constituents. With a view to encouraging investors to hold securities in scrip-less form and to ensure that entities holding securities in custody employ practices and procedures so that the constituents' securities are appropriately accounted and kept safe, it has been decided to frame a set of guidelines governing the maintenance of the Constituents' SGL Accounts. The guidelines are being issued separately.

(b) Order-driven Screen-based trading in Government Securities

Reserve Bank of India has decided, in principle, to move over in due course to order-driven screen-based trading in government securities on the stock exchange. Reserve Bank of India would specify the date for switchover to order-driven screen-based system in consultation with SEBI. As and when the date is specified, it will be applicable to all Stock Exchanges on which banks and FIs can operate.

Prudential Measures

44. With a view to strengthening the financial position of banks prudential norms on income recognition, asset classification and provisioning have been implemented in a phased manner commencing from the accounting year 1992-93. The basic principles of these norms were income recognition based on record of recovery, classification of assets on the basis of uniform and objective criteria and provisioning based on chances of recovery and period for which the assets remain as non-performing asset (NPA). Further, over these years emphasis has also been made to move towards adopting the international best practices in these areas. Keeping in view the wide-ranging and rapid changes taking place in the financial sector, following further measures are being introduced :

(a) General Provisions on Standard Assets as Tier 2 Capital

The Narasimham Committee on Banking Sector Reforms had observed that our standards with regard to asset classification in banks were liberal and needed to be revised to fall in line with the international best practices. In this connection, the Committee had recommended for a general provision of 1 per cent on standard assets, which RBI should consider introducing in a phased manner. Accordingly, as a part of tightening the prudential norms, banks were advised in October 1998 to make a general provision on standard assets of a minimum of 25 basis points from the year ended March 31, 2000. The guidelines were partially modified on April 24, 2000 stipulating that the provision should be made on a global portfolio basis and not on domestic advances, the general provision on standard assets will not be eligible for inclusion in Tier 2 Capital, etc. In view of the international best practices followed in this regard, it is proposed to include the general provision on standard assets in Tier 2 Capital. Necessary instructions will be issued separately.

(b) Categorisation and Valuation of Banks' Investment Portfolio

As mentioned in the Mid-Term Review of Monetary and Credit Policy for 1999-2000, the Report of the Informal Group on Valuation of Banks' Investment Portfolio was circulated among banks and discussed with the Institute of Chartered Accountants of India and the Indian Banks Association. The guidelines have now been finalised keeping in view the comments and suggestions received from them. The revised guidelines are in consonance with the best international practices on categorisation and valuation of investments and are effective from the half-year ended September 30, 2000.

A summary of the revised guidelines on categorisation and valuation of banks' investments is in Annexure II. Detailed operational instructions are being issued separately.

(c) Annexing Balance Sheets of Subsidiaries to Parent Bank's Balance Sheet

Banks are required to voluntarily build-in risk weighted components of their subsidiaries into their own balance sheet on notional basis and earmark additional capital in their books, in stages, beginning from the year ending March 2001. However, at present, public sector banks are not required to annex the balance sheets of their subsidiaries to their balance sheet. In order to bring more transparency to the balance sheets of public sector banks and as a further step towards consolidated supervision and to provide additional disclosures, it has been decided that public sector banks should also annex the balance sheets of their subsidiaries to their balance sheet beginning from the year ending March 31, 2001.

(d) Non-Performing Asset – "Past Due" Concept

Taking into account the existing legal framework, production and payment cycles, business practices, geographical spread and agrarian nature of the economy and problems involved in payment and settlement systems, the concept of "past due" was incorporated into the two quarter delinquency norm on income recognition, asset classification and provisioning introduced in April 1992. However, the "past due" concept (grace period of 30 days) is not applicable in case of cash credit / overdraft accounts and bills purchased and discounted, which are classified as non-performing when such accounts remain out of order or overdue for a period of more than 180 days. Advances granted for agricultural purposes are, however, treated as NPA only if interest and/or instalment of principal remains unpaid, after it has become past due, for two harvest seasons but for a period not exceeding two half years. Due to the improvements in the payment and settlement systems, recovery climate, upgradation of technology in the banking sector, etc., the concept of "past due" is not considered relevant any more. The "past due" concept is therefore, being dispensed with. This will be made effective from March 31, 2001.

(e) Move towards Risk Based Supervision

As part of the April policy statement, it was announced that the Reserve Bank would be engaging the services of reputed international consultants to develop an overall plan for moving towards Risk Based Supervision (RBS) incorporating international supervisory best practices. Accordingly, the Department for International Development of the UK consented to fund RBS project and appointed an international consultant. They commenced their activity in July 2000. The consultants completed Phase 1 of the project by conducting a review and evaluation of current supervisory and regulatory framework, policies, guidelines, instructions, tools, techniques, systems, available IT infrastructure and various internal and external linkages. They have submitted the Draft Report consisting of their recommendations and findings. The thrust of the Phase 1 recommendations is on enhancements to the regulation and supervision framework leading to increased effectiveness of overall supervision through greater focus on risk as well as a realignment of the inspection process to fall in line with a more risk-based approach. Their recommendations cover vital areas such as data management, supervisory process, inspections, feedback to banks, external audit, etc. During Phase 2 of the project, the Consultants are expected to work out the practical and operational aspects of the above recommendations and suggest a new risk based supervisory framework including the sequencing of the different stages and a time frame for implementation.

(f) Discussion Paper on Prompt Corrective Action

To guard against regulatory forbearance and to ensure that regulatory intervention is consistent across institutions and in keeping with the extent of problem, a framework for Prompt Corrective Action (PCA) has been prepared with various trigger points for prompt responses by the supervisors. The framework provides certain mandatory and discretionary action points for the supervisors. The schedule of corrective actions has been worked out based on three parameters, i.e., Capital to Risk-Weighted Assets Ratio (CRAR), Net NPAs and Return on Assets (ROA) which represent the three important parameters of capital adequacy, asset quality and profitability. When a bank's performance activates these trigger points, a certain set of mandatory/ discretionary actions will follow. These action points are proposed to pre-empt any deterioration in the soundness of banks. The PCA has been put on the web site ( ) for wide discussion, debate, and comments. The scheme will be finalised in the light of comments and suggestions received from experts and market participants. (g) Macro-Prudential Indicators (MPIs)

The health and stability of financial systems have traditionally been measured by Macro-economic indicators (MEIs). Financial sector supervisors have been using their own set of Micro-prudential Indicators based on CAMELS framework. Following the East Asian Crisis, the interest in micro-prudential indicators has increased and it has been postulated that Aggregated Micro-prudential Indicators (AMPIs) coupled with MEIs would be better macro-level indicators of health and stability of financial systems. The macro-prudential Indicators (MPIs), comprise of AMPIs and MEIs. A half-yearly Financial Stability review using MPI data would be initially prepared for internal circulation. (h) Credit Exposures to Individual/Group Borrowers

It was announced in the Mid-Term Review of Monetary and Credit Policy of October 1999 to reduce the exposure ceiling in respect of individual borrower from 25 per cent to 20 per cent of capital funds effective April 1, 2000 and where the (then) existing level of exposure was more than 20 per cent, banks should reduce the level to 20 per cent over a two year period ending October, 2001.
A review of current practices regarding credit exposure limits vis-à-vis international best practices shows that there are certain issues which require further consideration. The first relates to the concept of 'capital funds'; second relates to the scope of the measurement of credit exposure, in particular, the coverage of non-fund and other off-balance sheet exposures; and the third relates to the level of exposure limit itself. Taking into account the complexities involved, it has been decided to prepare a detailed Discussion Paper on the subject which would inter alia address issues relating to current practices in India vis-à-vis international best practices and the possible alternative approaches with pros and cons and other relevant aspects. The Discussion Paper which is expected to be finalised by December 2000, will be circulated among banks. Based on the comments and suggestions on the issues, and followed by an interaction with banks, RBI will take a final view on the approach that should be adopted with a view to making it effective from March end 2002.

Bank Financing of Equities and Investments in Shares

45. The Standing Technical Committee, comprising officials of RBI and SEBI, which was requested to develop operating guidelines for a transparent and stable system of bank financing of equities and investments in shares, submitted its report in August 2000. This report was released for public comments by RBI. On the basis of the comments received from experts and other market participants on the proposals made by the Committee as well as the views expressed by banks in the meeting taken by RBI with the Chief Executives of major banks in September 2000, draft guidelines were prepared by RBI and circulated once again, among select banks, and also placed on the RBI website for comments from banks, financial institutions and other market participants. Based on the feedback received from banks and other market participants, the guidelines on bank financing of equities and investment in shares have now been finalised. These are given in Annexure III.

46. These guidelines are expected to enable the Boards of banks to frame suitable operational guidelines for each bank, taking into account their individual risk profiles, and provide for investments by banks in the equity market on a more stable and long-term basis subject to appropriate prudential considerations. The RBI-SEBI Technical Committee will review the actual working of these new guidelines after six months in consultation with select banks. If any changes in operational procedures and/or overall framework are required, the Committee's recommendations will be widely circulated and discussed with all concerned.

Review of Exchange Earners Foreign Currency A/cs (EEFC) Facility

47. Since August 14, 2000, banks are permitted to credit 35 per cent of the inward remittances in the EEFC accounts of Export oriented units, units in Export Processing Zone, Software Technology Park or Electronic Hardware Technology Park and 25 per cent of inward remittances in respect of others. Prior to this, the respective entitlements were 70 per cent and 50 per cent. On a review, in order to facilitate quick export-related payments and reduce transaction costs, it has been decided to restore fully the earlier entitlements to 70 per cent and 50 per cent, respectively. Payments which can be made from these accounts will also remain the same as before.

48. As balances in the accounts are meant to be used by the account holders for their current account trade transactions and other permitted payments, the EEFC accounts (including existing accounts) will henceforth be held in the form of current accounts. The cheque-issuing facility against these accounts will continue to be available for convenience of exporters. No credit facilities, either fund based or non-fund based, will be provided by banks against the EEFC balances.

Credit Delivery Mechanisms

49. Credit delivery mechanisms have been strengthened by improving and simplifying procedures and reducing documentation and enhancing decentralised decision making such that the targeted sector viz., agriculture, exports, macro-credit institutions and small scale industries are able to access credit without undue hassles. As a further step in this direction the following measures are being taken :

(a) Charging of Penal Interest: Deregulation

In terms of the current instructions, banks have been advised about the overall penal/additional interest to be charged by banks which should not exceed 2 per cent over and above the rate of interest applicable/normally charged to the respective borrowers. It may be mentioned that since issue of the above instructions, interest rates on loans and deposits have been substantially deregulated and banks' Boards have been empowered to formulate policy on lending rates taking into account their cost of fund, the underlying credit risk, etc. Since the Boards have been empowered to decide the Prime Lending Rate (PLR) as also the spread over PLR, it is felt that the decision on penal interest that should be levied for reasons such as default in repayment, non-submission of financial statements, etc., should also be left to the Boards of each bank. This would also give further operational autonomy to the banks. It has, therefore, been decided that banks may formulate transparent policy for charging penal interest rates, with the approval of their Boards. The policy should be governed by well accepted principles of transparency, fairness, incentive to service the debt and due regard to genuine difficulties of customers.

(b) Margins on Credit for Free sale Sugar: Deregulation

Prescription of margins under selective credit control are at present in vogue only in respect of sugar. Effective October 22, 1997, for unreleased stocks of sugar with sugar mills, which contain both the levy and free sale components, separate margins have been stipulated. The minimum margin for levy stock is prescribed as 10 per cent, while free sale sugar is subject to a margin of 15 per cent. There is no margin on the buffer stock. On a review of market conditions and with a view to providing the flexibility to banks in prescribing margins, it has been decided to withdraw the existing prescriptions under selective credit control on free sale sugar. Margins in respect of free sale sugar will be decided by the banks based on their commercial judgement. The prescribed margins of 10 per cent in respect of levy stock and zero margin in respect of buffer stocks will continue without change.

(c) Review of Consortium

arrangement for Food Credit At present, food credit is disbursed under a single window consortium led by SBI. However, the consortium arrangement is regulated by the Reserve Bank in respect of fixing sanctions of limits for the procurement of foodgrains by the state governments and the FCI, the percentage share among the members of the consortium and the interest rate chargeable on food credit. In the context of the present policy of providing more flexibility and operational freedom to banks as well as government and other enterprises, it has been decided to undertake a review of these arrangements. A Committee representing banks, RBI, Government and FCI will be constituted for the purpose.

(d) Export Credit

As mentioned in Part I, in response to the request to exporters to send their suggestions, RBI has received a number of suggestions from export organisations and exporters mainly of a procedural nature for further improvement in the credit delivery system. These suggestions have been examined by the Bankers' Group and RBI, and banks are being requested to implement the recommendations of the Group.

(e) Review of recommendations of the Bills Discounting Group

A Working Group on Bills Discounting by Banks was constituted under the Chairmanship of Shri K.R. Ramamoorthy, to examine inter alia the possibility of extending bills discounting facility to services sector especially industries such as information technology, software services, travel and tourism, etc. In view of the services sector transforming the economic profile of the country and is poised to register tremendous growth and contribute significantly to the overall economy, the Group undertook a detailed scrutiny of the key issues involved in bill financing and examined the possibility of strengthening the existing bill discounting mechanism and extending its scope to services sector. The Group has made several recommendations duly taking into account the Indian context in respect of bill financing, Banker's Acceptance, Bill financing - services sector and challenges of e-commerce that may be thrown up in the financial sector of the country. The Working Group has submitted its report to the Reserve Bank of India recently. The full text of the Report has already been placed on the RBI website ( ), for wider debate and discussion. Based on the feedback and in consultation with market participants, RBI will evolve suitable guidelines for implementation.

(f) Kisan Credit Cards

Pursuant to the budget announcement a model scheme for issue of Kisan Credit Card to farmer borrowers was formulated in 1998 and all banks were advised to implement it. The scheme was primarily formulated for catering to the short-term credit requirements of the farmers. All public sector banks have been advised to set monthly targets within the yearly target fixed for the bank and draw action plan for achieving the overall target.

(g) Implementation of Swarnjayanti Gram Swarozgar Yojana (SGSY)

The year 1999-2000 was the first year of implementation of SGSY. The scheme was launched with effect from April 1, 1999 and detailed guidelines were issued to banks by the Reserve Bank for speedy implementation of the scheme. Public sector banks were also advised to organise special workshops to discuss the scheme and its implementation. Banks are advised to monitor the progress of the scheme periodically and put in earnest efforts for its success. (h) Self Help Groups (SHGs)

The Finance Minister made an announcement in the Budget Speech about the special emphasis laid on the promotion of micro enterprises in rural areas set up by vulnerable sectors including women, scheduled castes, scheduled tribes and other backward classes. In 1999-2000, the credit-linkage as also loan disbursements by banks to SHGs were more than twice the cumulative performance upto the end of the previous year under the NABARD programme. A coverage of additional one lakh SHGs by NABARD and SIDBI during the year 2000-01 has been announced. Banks are advised to provide maximum support to SHGs as per RBI circular dated March 3, 2000.

(i) Small Scale Industries (SSI)

The Finance Minister in his Budget Speech on February 29, 2000 announced that the public sector banks should accelerate their programme of opening SSI branches to ensure that every district and SSI clusters within districts are served by at least one such branch. The Lead Banks of the districts have been advised to take steps for operationalising these branches in their respective districts either by opening new branches or by converting the existing branches. The convenor bank of SLBC in each state has been asked to monitor the progress in the respective states. The public sector banks have also been advised to complete the process of opening/operationalising SSI branches by December 31, 2000.

Non-Banking Financial Companies (NBFCs)

50. Of 37,212 NBFCs which applied for registration, the Bank has so far approved registration to 702 deposit taking companies permitting them to accept public deposits and also granted registration to 9,857 NBFCs in the category of non-public deposit taking companies. Since the expiry of time period for attaining the minimum stipulated level of Net Owned Fund (NOF) of Rs.25 lakhs on January 10, 2000, Bank has received applications from as many as 8,027 NBFCs reporting attainment of NOF of Rs.25 lakhs and 2,207 NBFCs for extension of time. The Bank is at present engaged in processing applications of such NBFCs as had the NOF below Rs.25 lakhs as on January 10, 2000. It has already been announced that the extension of time would be considered on merits of each NBFC. The Bank has also taken a number of steps like prohibition from acceptance of public deposits, launching of prosecution proceedings, filing of winding up petitions against delinquent companies besides rejection of 15,727 applications which did not fulfil the necessary criteria for registration.

(a) Regulatory Norms for NBFCs

Reserve Bank is working out the modalities in consultation with the associations of NBFCs, for formation of a Self Regulatory Organisation of NBFCs. Draft guidelines for asset liability management and formats of separate balance sheet for NBFCs have been circulated among the members of Informal Advisory Group on NBFCs for the views of industry. Further steps would be taken to put in place the disclosure norms and guidelines for risk management for NBFCs.

(b) Working Group on Asset Securitisation

With a view to laying down the road map for development of asset securitisation in the Indian financial system, the Working Group on asset securitisation appointed by the Reserve Bank submitted its Report in December 1999. Various recommendations of the Working Group have been grouped into short-term, medium-term and long-term with definite time frame in each category. The major recommendations pertain to changes in the legal framework relating to various statutes, tax-neutrality for securitisation transactions, rationalisation of stamp duty and reduction in registration charges, appropriate accounting policies and prudential norms, standardisation of documents, development of specialised financial intermediaries, etc. Reserve Bank has set up an Implementation Committee for suggesting the framework for giving effect to the above recommendations.

Technology Upgradation

51. The Reserve Bank has been playing an important role in the setting up of an effective and efficient payment and settlement system in the country. Much progress has been made in consolidating the existing payment system, developing 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 online real time environment. Towards this end, the following measures are introduced :

(a) Preparation of a "Payment System Vision Document"

This document will detail the payment system agenda proposed to be followed for the next 2/3 years. The Vision Document will focus on the implementation of the systemically important payment system applications having an impact on large value inter-bank funds transfers. It would detail the extensive use of INFINET for information flow and funds movements. It would also detail the need for integration of the IT plans of the banks with INFINET.

(b) Working Group on Internet Banking

The Bank has established an internal Group on Internet Banking. The tasks set out for the Group are to : identify the risks to the organization and the banking system; suggest an appropriate supervisory and legal framework; suggest measures for adoption of the international best practices; recommend adequate security systems in conformity with international standards; and suggest a clearing and settlement arrangement for electronic banking and electronic money transfers. Commercial banks are invited to send their suggestions for consideration by the Working Group.

(c) Use of Imaging Technology for reducing Clearing Reconciliation Differences

In the four metros where MICR operations are being handled by the Bank, the Reserve Bank is all set to introduce Greyscale Imaging Technology which will be a value added service to the members of the Clearing House. The advantages of imaging are manifold. Primarily, it will aid in the creation of a record of the cheques that have been passed through the reader sorters. This will aid in the reconciliation process. Importantly, imaging parameters can be set to find out suspect instruments.

(d) Imaging to serve as pre-cursor for Cheque Truncation

Cheque truncation will enable retention of the paper payment instruments at the Presenting Bank level itself, with only the image of the instrument travelling over the network. This will to a large extent reduce the time lags in the collection of instruments especially inner-city cheques. However, for cheque truncation to take place, amendments to the Negotiable Instruments Act have to be carried out to obviate the need for physically presenting instruments to the paying banker. The Task Force on Legal Issues set up by the National Payments Council is looking into the need for amendments to various Acts as also the need for framing new legislation for the regulation of multiple electronic payments.

Legal Reforms

52. With the rapid advancements in information and communication technologies, the financial system is undergoing a continuous process of change. For central banks to keep pace with these developments, it is important that they have sufficient flexibility in appropriately reorienting the operative, regulatory and supervisory frameworks. In his budget speech in February 2000, the Union Finance Minister has also underscored the need for according greater flexibility in the conduct of monetary policy. The Reserve Bank of India is working on proposals for amendments to the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949 in this regard.

International Financial Standards and Codes

53. As mentioned in the April policy statement, a Standing Committee on International Financial Standards and Codes was set up to identify and monitor the 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 the Indian financial system and chalk out a road map for aligning India's standards and practices with international best practices. Advisory Groups in ten major subject areas were set up in the beginning of this year to assist the Standing Committee. Of these ten Advisory Groups, the Advisory Group on "Transparency in Monetary and Financial Policies" submitted its Report in September 2000. The Group has examined issues related to the clarity of roles and responsibilities including transparency in monetary policy formulation and implementation in detail. The Advisory Groups on "Payment and Settlement System", "Banking Supervision" and "Insurance Regulation" have also submitted the first part of their Report. The Report on "Payment and Settlement System" deals with issues pertaining to the inter-bank payment and settlement system covering Core Principle and Central Bank responsibilities. The Report on "Banking Supervision" has taken an exhaustive account and given recommendations pertaining to 4 major areas in banking regulation, viz., corporate governance in banks, transparency practices in Indian banking, supervision of cross-border banking and internal rating practices adopted by banks. The Report on "Insurance Regulation" mainly deals with the various provisions relating to licensing of insurance companies in the light of standards set by the International Association of Insurance Supervisors (IAIS) and the Twenty Insurance Guidelines issued by OECD. The Reports of the Advisory Groups are available on Bank's Website (

54. Report of the Advisory Group on "Accounting and Auditing" has discussed issues regarding transparency practices in accounting and auditing, the status of compliance with international accounting standards in India and also various issues pertaining to adoption of US-GAAP. The Group is likely to submit its Report by November 2000. 55. The remaining five Advisory Groups namely Advisory Group on "Corporate Governance", "Data Dissemination", "Bankruptcy Laws", "Fiscal Transparency" and "Securities Market Regulation" have made considerable progress and it is expected that the Advisory Groups would be finalising their Reports by end November 2000.

Regulations Review Authority

56. The Reserve Bank would like to take this opportunity to express its appreciation to bankers, experts, market participants and members of the public who have sent their suggestions to the Regulations Review Authority (RRA) set up by the Bank in April 1999. The RRA has completed one and half year of its operation and has reviewed several of Reserve Bank's rules, regulations and reporting systems on the basis of suggestions received by it. During this period, RRA received 235 applications which contained more than 400 suggestions, pertaining to various functional areas of the Bank. A few important developments during the current year (April-September, 2000) as a result of implementation of the suggestions were (a) putting in place in the Bank, a comprehensive and effective information transmittal system in electronic form for the benefit of seekers of information from the Bank, (b) revision in Bank's instructions relating to nomination facility, etc., for the benefit of investors in Relief Bonds, (c) increase in the limit of same day credit of local/outstation instruments sent for collection by banks from Rs.5,000 to Rs.7,500, (d) streamlining the procedure for prompt payment of interest to scheduled commercial banks on their CRR balances and (e) relaxation in the prescribed eligibility criteria for opening and maintaining Non-Resident External Rupee Accounts by the District Central Co-operative Banks.

57. Out of several Master Circulars being prepared on important areas of compliance by banks and institutions, under the aegis of RRA, one circular on Exposure Norms has already been issued to banks and others are in various stages of finalisation.

58. The RRA will formally cease to operate on March 31, 2001. However, various departments of the Reserve Bank will continue with their efforts to further simplify procedures, reduce paper work and improve service. Suggestions from bankers and others will be welcome.

Click here to read AnnexureI for :
Summary of Guidelines for Issue of Commercial Paper (CP)

Click here to read AnnexureII for:
Summary of Guidelines on Categorisation & Valuation of Banks'Investments

Click here to read AnnexureIII for:
Guidelines on Bank Financing of Equities and Investments in Shares

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