Monetary
and Credit Policy Measures
In the light of the macro-economic and monetary policy
developments reviewed in the previous sections, it is proposed to
make the following changes in policy :
- The Cash Reserve Ratio (CRR)
maintained by the scheduled commercial banks is being reduced
by one percentage point from the present level of 10 per cent
to 9 per cent in two instalments, the first, effective the
fortnight beginning November 6, 1999 and the next, effective
the fortnight beginning November 20, 1999. This will increase
the lendable resources of banks by Rs.7,000 crore. In order to
improve the cash management by banks, as a measure of
simplification, it has been decided to introduce a lag of two
weeks in the maintenance of stipulated CRR by banks. This
change in the procedure for calculation of reserve maintenance
will be effective from the fortnight beginning November 6,
1999.
- The interest rate
surcharge of 30 per cent on import finance, which has been in
force since January 1998, is being withdrawn with immediate
effect. This will reduce the financing cost of imports for
industry.
- At present, banks are
required to charge a minimum rate of 20 per cent interest on
overdue export bills. This stipulation is also being withdrawn
with immediate effect, and banks will henceforth have the
freedom to decide the appropriate rate of interest on overdue
export bills. However, the present procedures for ensuring
that there is no deliberate attempt to delay repatriation of
export receipts will remain in force.
- In line with the policy of
minimising the country's short-term external borrowing
liabilities, the minimum maturity for FCNR(B) deposits is
being raised to one year from six months. Banks, however, will
continue to have the freedom to offer floating rate deposits
(with a maturity of one year or more, and interest reset
period of six months). At the same time, the requirement by
banks to maintain an incremental CRR of 10 per cent on
increase in liabilities under FCNR(B) Scheme (over the level
prevailing as on April 11, 1997) is being withdrawn, with
effect from the fortnight beginning November 6, 1999. This
will increase the lendable resources of banks by Rs.1,061
crore.
As emphasised
in the earlier Policy Statements, it is reiterated that the above
measures, including the level of the CRR to be maintained by
banks, are subject to change from time to time.
In the last
few years, following the Reports of high level Committees (such as
the Narasimham Committee) and various technical groups and working
groups, the Reserve Bank has announced a number of measures for
the development and reform of the financial sector, including
money and debt markets. An attempt is made here to review the
development in respect of certain measures announced in April 1999
with a view to bring about modifications where necessary. Interim
Liquidity Adjustment Facility (ILAF)
This
facility, announced in the April Statement, has provided a
mechanism for injection and absorption of liquidity available with
banks from time to time. The ILAF is operated through a
combination of repo, export credit refinance, collateralised
lending facilities and open market operations. The experience in
operating this facility in the last six months has generally been
satisfactory and substantial use has been made of export credit
refinance and collateralised lending facilities under this scheme
in order to overcome mismatches in the supply and demand for
liquid funds. The fortnightly average utilisation under this
facility including export credit refinance has ranged between
Rs.4,119 crore and Rs.7,697 crore during April-October 1999.
Primary dealers also availed of liquidity support in the range of
Rs.1,293 crore and Rs.7,406 crore during the same period. In the
light of the feedback received from the market participants, in
the first week of this month, the scheme was made more flexible by
removing the requirement of `cooling period' (after the use of
this facility by banks for two blocks of two weeks each). The
operation of this facility will be kept under constant review and
further refined in consultation with participants.
Money Market
An important
step announced in April 1999 in the direction of development of
the money market was the introduction of rupee derivative products
(Forward Rate Agreements/Interest Rate Swaps). The guidelines
issued in this respect have been widely welcomed by the market
participants and at present the notional principal amount of
outstanding of FRAs/IRS is around Rs.1,700 crore. It is expected
that the volumes in the market will pick up over time, once banks
and institutions complete the documentation formalities.
The April
statement announced certain facilities for enabling non-bank
participants to deploy their short-term resources in the repo
market and for development of Money Market Mutual Funds (MMMFs).
After a review of the working of the measures announced in April,
the following modifications/measures are being introduced in the
operation of various money market schemes :
i. It was indicated in the April 1999 policy statement that the
permission given to non-bank entities to lend in the call/notice
money market by routing their call/notice money market operations
through primary dealers will be available only upto end-December
1999. On a review, it has been decided to extend this facility
upto end-June 2000.
ii. Money Market Mutual Funds (MMMFs) which exclusively invest in
money market instruments are governed by the MMMF guidelines
issued by the Reserve Bank of India. On a review, it is felt that
from the angle of a consistent policy with regard to investor
protection, it would be desirable to bring the MMMFs under the
umbrella of SEBI Regulations, like other Mutual Funds.
Accordingly, henceforth, MMMFs will come within the purview of
SEBI Regulations. Once SEBI Regulatory framework for MMMFs is in
place, RBI would withdraw its guidelines and advise
banks/financial institutions that in future, MMMFs would be
governed by SEBI regulations. However, banks and financial
institutions desirous of setting up MMMFs will have to seek
necessary clearance from RBI for undertaking this additional
activity before approaching SEBI for registration.
iii. At present, Money Market Mutual Funds (MMMFs) can be set up
either departmentally in the form of a Money Market Deposit
Account (MMDA), or as a separate entity, viz., a 'Trust'. For
operational convenience, it has been decided to henceforth allow
MMMFs to be set up as a separate entity in the form of a 'Trust'
only. As the banks to whom 'in-principle' approvals were already
given have not so far operationalised MMDAs, RBI proposes to
withdraw the permission already granted after consulting them.
iv. It has been decided to permit scheduled commercial banks to
offer 'cheque writing' facility to Gilt Funds and to those Liquid
Income schemes of mutual funds which predominantly invest in money
market instruments (not less than 80 per cent of their corpus)
subject to the same safeguards prescribed for Money Market Mutual
Funds. Operating guidelines to banks are being issued separately.
v. With a view to providing further flexibility in the use of FRAs/IRS,
it has been decided to permit mutual funds, in addition to
corporates, to undertake FRAs/IRS with banks, primary dealers and
financial institutions for the purpose of hedging their own
balance sheet risks. Mutual funds cannot, however, undertake
market making in FRAs/IRS.
vi. With a view to facilitating flow of information and
transparency in the functioning of money markets, Reserve Bank
proposes to work out in consultation with market participants,
modalities of releasing on a daily basis, data on volume and rates
in call money market as well as some other relevant data. This
will enable market participants to gauge liquidity conditions more
effectively and contribute to smooth functioning of the short-term
markets, in particular the call/notice money market.
Government
Securities Market :
On the basis of announcements made in the April policy, the
following measures have been taken with the objective of improving
depth and liquidity in the government securities market :
- Price based auction of
government dated securities.
- Auction of 182 day
Treasury Bills.
- A calendar of Treasury
Bills issuance.
- Availment of ways and
means advances by State Governments against collateral of
Treasury Bills, in addition to Government of India dated
securities.
- Minimum bidding commitment
of Primary Dealers (PDs) to cover 100 per cent of notified
amounts in Treasury Bills auctions.
- Underwriting of dated
securities issues by PDs upto 100 per cent of the notified
amounts.
- Entry of non-banking
entities in the two way repos market.
These
measures have generally been received well by the market
participants and are working satisfactorily. The following action
is in progress to further strengthen the development of the
market:
- In regard to developing
the retail market segment, a Working Group is being
constituted to analyse all related aspects of retailing
government securities and make recommendations for improving
the retail segment of the market.
- An Internal Working Group
has been constituted to go into various aspects relating to
two-way operations by RBI in the Treasury Bills market.
- Arrangements relating to
clearing corporation are under consideration which will pave
the way for opening the repo market to PSU bonds and bonds of
FIs held in demat form in depositories and traded in
recognised stock exchanges with essential safeguards. As a
part of this, detailed guidelines to widen further the number
of participants in the repos market through exchange traded
repos with adequate safeguards to manage risks will also be
finalised.
- It has been decided to
publicise gilt instruments through informative pamphlets.
- It has been decided to
advise PDs that they should have self-imposed reasonable
leverage ratios with the consent of their Board of Directors.
Review of
Norms Relating to Prime Lending Rates
Currently, loans upto Rs.2 lakh carry the prescription of 'not
exceeding PLR' and on loans above Rs.2 lakh, the PLR is the
minimum lending rate. A set of measures was announced in the April
Statement to provide more operational flexibility to banks in the
applicability of PLR. Keeping in view the suggestions received
from banks and other market participants, the existing PLR norms
have been further reviewed and it has been decided that banks will
be given the freedom to charge interest rates without reference to
PLR, in respect of the following categories :
- Loans covered by
refinancing schemes of term lending institutions.
- Lending to intermediary
agencies.
- Discounting of bills.
- Advances/Overdraft against
domestic/NRE/FCNR(B) deposits.
The present
position and the proposed changes are indicated in the Annexure I.
Prudential
Norms
In order to strengthen the financial system, an important priority
in the past few years has been to introduce appropriate norms in
respect of capital adequacy, income recognition and provisioning.
An attempt has also been made to move towards full disclosure,
transparency and effective supervision of banking operations in
line with international best practices. It is expected that
effective implementation of measures in these areas would help in
not only strengthening the financial sector but also providing
support to the growth of the real economy. As further steps in
these directions, the following measures are being notified:
i. In the Mid-term Statement on Monetary and Credit Policy for
1998-99, a risk weight of 2.5 per cent was introduced for the risk
arising out of market price variations for investments in
government and other approved securities, with effect from the
year ending March 31, 2000. In view of the growing share of
investments in the assets of banks, the risk weight of 2.5 per
cent is being extended to cover all investments including
securities outside the SLR. This, however, will take effect from
the year ending March 31, 2001.
ii. As of now, a bank's exposure to an individual borrower is
subject to a prudential ceiling of 25 per cent of the bank's
capital funds. The In-House Working Group constituted by the
Reserve Bank in 1998 to review the present exposure norms, had
recommended moving closer to the international standard of 15 per
cent, in phases. Accordingly, it has been decided to lower the
exposure ceiling in respect of an individual borrower from the
present level of 25 per cent to 20 per cent of the bank's capital
funds effective April 1, 2000. Where the existing level of
exposure as on October 31, 1999, is more than 20 per cent, banks
would be expected to reduce the exposure to 20 per cent of capital
funds over a two year period (i.e., by end October, 2001).
Valuation of Investments in Approved Securities
It was
announced as part of the April Statement that with effect from the
year ending March 31, 2000, banks will have to classify a minimum
of 75 per cent of their investments in Government and other
approved securities as `Current Investments'. An `Informal Group
on Valuation of Banks' Investments Portfolio', set up by the
Reserve Bank, has recently studied all aspects relating to
valuation of investments in the light of international practices
and has recommended that banks may classify their investments into
three categories viz., `Held for Trading', `Available for Sale'
and `Permanent'. The Group has suggested norms for classification
as also changes in accounting procedures. The Group has also
recommended for discontinuation of the RBI's practice of
prescribing year end YTMs for valuation purposes. The summary of
Group's recommendations is provided in Annexure II. The Group's
report will be circulated among banks for comments and also placed
before the Board for Financial Supervision for advice. Thereafter,
a final decision will be taken on the procedure for valuation of
investments with effect from April 1, 2000.
Credit
Delivery
Banks and financial institutions have been entrusted with special
responsibilities for providing credit on reasonable terms to
certain sectors, particularly, agriculture, exports, micro-credit
institutions, small-scale industries and housing. In addition to
improving the terms and volume of assistance to these sectors, an
important priority is to improve and simplify procedures, reduce
documentation requirements and decentralise decision making to
branch levels. Surveys have shown that simplification and
decentralisation of credit delivery mechanisms are just as
important in improving access to credit as preferential interest
rates or policy directives. The Reserve Bank has held review
meetings with the Chief Executives of banks to ensure that
simplified procedures are actually being implemented at the ground
level. It is proposed to hold such review meetings at regular
intervals, and to encourage banks to set up internal systems to
ensure effective implementation of simplified procedures.
Another area
where banks and financial institutions can play an important role
is that of infrastructure financing. After extensive consultation,
RBI introduced in April, 1999 new guidelines to accelerate credit
disbursement in infrastructure. These guidelines addressed
important aspects relating to the financing of infrastructure
projects, such as, the criteria for financing, the types of
financing, the appraisal, the regulatory compliance/ concerns, the
administrative arrangements and the inter-institutional
guarantees, among others. Financing of infrastructure projects is
characterised by large capital costs, long gestation period and
high leverage ratios. In order to facilitate free flow of credit
to infrastructure projects, several policy measures have already
been effected by RBI. The stipulation regarding the ceiling on the
quantum of term loans which can be granted by banks for a single
project (Rs.1,000 crore for power projects and Rs.500 crore for
other projects) has been dispensed with; banks can now sanction
term loans to infrastructure projects within the overall ceiling
of the prudential exposure norms. Subject to certain safeguards,
banks are also permitted to exceed the group exposure norm of 50
per cent, to the extent of 10 per cent, provided the additional
exposure is for the purpose of financing infrastructure projects.
It is proposed to review the operation of these new guidelines
after one year of operation (i.e., May, 2000), and make such
changes as may be required to promote further financing of
infrastructure.
In order to
facilitate co-ordination and resolution of issues relating to
projects assisted jointly by banks and development financial
institutions, a Standing Co-ordination Committee has now been set
up by the Industrial Development Bank of India. It is expected
that this Committee will help in improving co-ordination and
reducing delays in providing credit to infrastructure and other
sectors.
Housing
Finance
Banks have an important role to play in providing credit to the
housing sector in consonance with the National Housing Policy.
From time to time, new measures have been announced to increase
the flow of bank finance to this sector. At present, banks are
required to allocate towards housing finance to the extent of 3
per cent of incremental deposits. With a view to providing more
flexibility to banks to increase the flow of credit, directly and
indirectly through intermediary agencies including Housing and
Urban Development Corporation and National Housing Bank, some
changes in the norms for determining the housing finance
allocation by banks are being introduced. Details are provided in
Annexure III.
Micro
Credit As indicated in the April Policy Statement, Micro
Credit Institutions and Self Help Groups (SHGs) are important
vehicles for generation of income and delivery of credit to self
employed persons, particularly women, in rural and semi-urban
areas. Banks have since been advised to include flow of micro
credit in their corporate strategy/plan and to review the progress
on a quarterly basis. As announced in the April statement, RBI has
set up a special Micro Credit Cell to review the ground realities
and in consultation with NABARD and reputed micro-credit
institutions, suggest measures to remove any remaining policy and
procedural bottlenecks for "mainstreaming micro credit".
The objective is to accelerate the flow of bank credit to micro
finance institutions without jeopardising their decentralised,
voluntary and non-bureaucratic character. The Cell is expected to
complete its field work, and submit findings, within a year. A
high level Task Force on Supportive Policy and Regulatory
Framework for Micro Finance set up by NABARD has also recently
submitted its report to NABARD. The recommendations made by the
Task Force are being processed by NABARD in consultation with RBI
and Government as appropriate. Non-Banking Financial Companies
(NBFCs)
RBI has
instituted a comprehensive regulatory and supervisory framework
for the NBFC sector in January 1998, pursuant to the amendments
effected to the Reserve Bank of India Act, 1934. As part of the
consultative process, RBI has constituted an Informal Advisory
Group consisting of representatives of the NBFC sector. While
helping orderly growth of this important sector, steps are also
being taken to increase investors' awareness of their own
responsibility in regard to investments made by them. Considering
the large number of NBFCs functioning, their geographical
distribution and their diversified activities, RBI has been keen
to promote the concept of self regulatory organisation among
NBFCs, particularly for smaller NBFCs, and discussions with
industry are continuing. A Committee constituted by the Bank to
suggest formats of balance sheet with adequate disclosures has
also submitted its report. The Reserve Bank proposes to introduce
these formats and disclosure norms as recommended by the Committee
after getting the views of the industry and the Department of
Company Affairs of the Government of India.
The
registration process for larger NBFCs envisaged under the Act is
now more or less complete. Of 10,486 applications of NBFCs which
were prima facie eligible, registration has been granted to 7,855
NBFCs, out of which 624 NBFCs have been permitted to accept public
deposits. Further, applications of 1,167 companies have been
rejected for registration as on August 31, 1999. In addition, as
many as 26,904 companies with Net Owned Funds (NOF) below Rs.25
lakh have been given time under the RBI Act upto January 8, 2000
to achieve the minimum level of Rs.25 lakh. All NBFCs in this
category should strictly adhere to the above time limit. RBI may
not in the normal course, grant extension of time to those NBFCs
which have not attained the prescribed minimum NOF of Rs.25 lakh
by the stipulated date and accordingly their applications may not
be considered for registration.
The following
further measures in respect of NBFC sector are being notified with
immediate effect :
i. The borrowings from mutual funds presently come within the
purview of public deposits as described in the Direction on
Acceptance of Public Deposits. It has been decided that borrowings
from mutual funds would be excluded from the definition of public
deposits.
ii. NBFCs should give public notice of 3 months in leading
newspapers before they decide to close a branch or before
effecting sale or transfer of ownership.
Deposit
Insurance
India is a pioneer in introducing deposit insurance. However,
subsequent developments in the financial sector as a whole have
resulted in a review of deposit insurance systems in many
countries. The approaches include private insurance,
differentiated premia, voluntary insurance, separation of
insurance from regulatory/supervisory bodies, extending insurance
to non-banks, etc. A Working Group was constituted in the RBI to
review the role of deposit insurance in India. The Group conducted
a detailed survey of the nature of deposit insurance in India with
regard to instruments, institutions and regulatory framework,
including a review of the international experience in this regard.
The Group has recommended changes in the existing system in regard
to deposit coverage, institutions to be brought within the ambit
of deposit insurance, regulatory systems to be put in place,
risk-based premium, the parameters relevant for assessment of risk
and ownership and capital of deposit insurance agency. The Report
is being released for wider public discussion.
Regulations
Review Authority (RRA)
In April 1999, the RBI had set up a Regulations Review Authority (RRA)
with a view to reviewing any procedural regulation or requirement
of RBI which was not considered necessary or relevant by banks,
market participants, foreign investors, NRIs, Indian citizens and
experts. Since its inception, RRA has so far received 150
applications covering more than 200 suggestions relating to
various operational areas of the Bank. Of this, nearly 50 per
cent, covering about 115 suggestions have been disposed of and the
remaining are at various stages of processing. Some of the
procedural suggestions accepted for implementation are (i) doing
away with the requirement of sample test checking of freshly
printed MICR cheques, (ii) freedom to banks in fixation of service
charges, (iii) displaying of information on NBFCs registered, (iv)
changes in the structure of MMMFs, (v) arrangements for greater
dissemination of information to public, and (vi) procedure for
quicker dissemination on FIIs' investment limits. The RRA has also
set up a number of technical groups with membership from both
within and outside the Bank, to review and recommend changes in
the current practices pertaining to regulation, documentation and
reporting.
Year 2000
(Y2K) Preparations
The Reserve Bank has been closely monitoring the Year 2000 (Y2K)
readiness in the financial sector so that business continuity is
assured. The MICR cheque clearing systems at the Reserve Bank have
been replaced by the state of the art Y2K compliant systems. The
systems are already in operation in Mumbai, Chennai and Delhi and
will soon go on stream in Calcutta and thus become fully
operational in the metropolitan cities. All the 103 commercial
banks and their 40 subsidiaries have confirmed Y2K readiness as at
the end of August, 1999. Besides, all the Issue Offices of the
Reserve Bank and currency chests at commercially important cities
have been asked to store adequate quantities of cash in order to
meet any sudden increase in demand. In line with the international
practices, all banks shall remain closed for public transactions
on January 1, 2000.
To enable the
banking system to tide over the century date change liquidity
needs, a contingency plan has been put in place including the
following measures :
Special Liquidity Support
With a view to enabling the banks to meet any unanticipated
additional demand for liquidity in the context of the century date
change, it has been decided to introduce a 'Special Liquidity
Support' for the period December 1, 1999 to January 31, 2000.
Under the 'Special Liquidity Support', banks will be eligible to
avail of liquidity under Section 17(4)(a) of the Reserve Bank of
India Act, 1934 to the extent of their excess holdings of dated
Government of India Securities/Treasury Bills over the Statutory
Liquidity Ratio (SLR) required to be maintained. The rate of
interest on this facility will be 2.5 percentage points over the
Bank Rate. This facility will be in addition to the collateralised
lending facility (CLF and ACLF) and export credit refinance
facility provided to all scheduled commercial banks, at present.
Banks not holding significantly higher amounts of Government of
India securities beyond that indicated by the required SLR are
encouraged to have standby arrangement for liquidity support with
those banks which are eligible for Special Liquidity Support.
Detailed operating guidelines will be issued separately.
Flexibility
in the treatment of CRR
Normally, banks maintain minimum cash in their own vaults since it
is an idle asset, without the benefit of earning any interest. In
the context of date change at the turn of the century, in order to
meet any additional demand for bank notes as a contingency, banks
may have to keep larger vault cash for meeting their business
transactions. At present, such cash in hand with the bank though
an eligible asset for SLR, is not counted for CRR requirements. To
facilitate banks to tide over the contingency during the
millennium change, it has been decided to treat cash in hand
maintained by the banks for compliance of CRR for a limited period
of two months commencing from December 1,1999 to January 31,2000.
It is clarified here that the cash in hand which will be counted
for CRR purposes, during the above period cannot be treated as
eligible asset for SLR purposes simultaneously.
As already
indicated, for operational convenience, the maintenance of CRR by
banks is being lagged by two weeks. As such, for maintaining CRR
during the fortnight beginning January 1, 2000, the NDTL base
would be December 17, 1999. With the leverage of two weeks
available, banks should not have any problem in complying with the
CRR requirement around the century date change. Nevertheless, any
bank that expects a special problem in meeting its CRR obligations
at the end of the year can approach the RBI for appropriate
relaxation/assistance. Contingency Funding Line
from Head
Offices Abroad
Some banks have desired to put in place a contingency funding line
from their head offices abroad to meet liquidity problems if any,
arising during the century date change. As per the extant
stipulations, repayments of borrowings from abroad by banks (i.e.,
authorised dealers), is allowed only if they have no outstanding
borrowings either from the RBI or other bank/financial institution
in India and are clear of all money market borrowings for a period
of at least four weeks before the repayment. It has been decided
to temporarily permit foreign banks to bring in Head Office funds
and repatriate such funds during the period of two months from
December 1, 1999 to January 31, 2000 without the above
restriction.
Reserve Bank of India,
Mumbai,
October 29, 1999. |