Introduction
The Annual Policy for 2013-14 is formulated in an environment
of incipient signs of stabilisation in the global economy and prospects
of a turnaround,
albeit modest, in the domestic economy.
2. In the advanced economies (AEs), near-term risks have
receded, aided by improving financial conditions and supportive
macroeconomic policies. But this improvement is yet to fully transmit
to economic activity which remains sluggish. Policy implementation
risks and uncertainty about outcomes continue to threaten the prospects
of a sustained recovery. Emerging and developing economies (EDEs) are
in the process of a multi-speed recovery. However, weak external demand
and domestic bottlenecks continue to restrain investment in some of
the major emerging economies. Inflation risks appear contained,
reflecting negative output gaps and the recent softening of
international crude and food prices.
3. Domestically, growth slowed much more than anticipated, with
both manufacturing and services activity hamstrung by supply
bottlenecks and sluggish external demand. Most lead indicators suggest a
slow recovery through 2013-14. Inflation eased significantly in Q4 of
2012-13 although upside pressures remain, both at wholesale and retail
levels, stemming from elevated food inflation and ongoing administered
fuel price revisions. The main risks to the outlook are the still high
twin deficits accentuated by the vulnerability to sudden stop and
reversal of capital flows, inhibited investment sentiment and
tightening supply constraints, particularly in the food and
infrastructure sectors.
4. This Statement, set in the above global and domestic
context, should be read and understood together with the detailed
review in
Macroeconomic and Monetary Developments released yesterday by the Reserve Bank.
5. This Statement is organised in two parts. Part A covers Monetary Policy and is divided into four Sections:
Section I provides an overview of global and domestic macroeconomic developments;
Section II sets out the outlook and projections for growth, inflation and monetary aggregates;
Section III explains the stance of monetary policy; and
Section IV
specifies the monetary measures. Part B covers developmental and
regulatory policies and is organised into five sections: Financial
Stability (
Section I); Financial Markets (
Section II); Credit Delivery and Financial Inclusion (
Section III); Regulatory and Supervisory Measures (
Section IV) and Institutional Developments (
Section V).
Part A. Monetary Policy
I. The State of the Economy
Global Economy
6. Global economic activity remains subdued amidst signs of
diverging growth paths across major economies. In the US, a slow
recovery is taking hold, driven by improvements in the housing sector
and employment conditions. However, the pace of recovery remains
vulnerable to the adverse impact of the budget sequestration which will
gradually gain pace in the months ahead. Japan’s economy stopped
contracting in Q4 of 2012. There has been some improvement in consumer
confidence on account of monetary and fiscal stimulus along with a
pick-up in external demand on the back of a weakening yen. In the euro
area, recessionary conditions, characterised by deterioration in
industrial production, weak exports and low domestic demand, continued
into Q1 of 2013. High unemployment, fiscal drag and hesitant progress
on financial sector repair have eroded consumer confidence.
7. Growth in several EDEs rebounded from the moderation in 2012
as domestic demand rose on a turnaround in the inventory cycle and
some pick-up in investment. Among BRICS countries, growth accelerated
in Brazil and South Africa, while it persisted below trend in China,
Russia and India.
8. Inflation has remained benign in the AEs in the absence of
demand pressures, and inflation expectations remain well-anchored. The
EDEs, on the other hand, present a mixed picture. While inflation has
picked up in Brazil, Russia and Turkey, it has eased in China, Korea,
Thailand and Chile.
9. Reflecting a pessimistic demand outlook, crude oil prices
eased in March-April 2013 from the elevated levels prevailing through
2012. Non-energy commodity prices have been easing through Q1 of 2013
on softening metal prices and decline in food prices.
Domestic Economy
10. With output expansion of only 4.5 per cent in Q3 of
2012-13, the lowest in 15 quarters, cumulative GDP growth for the
period April-December 2012 declined to 5.0 per cent from 6.6 per cent a
year ago. This was mainly due to the protracted weakness in industrial
activity aggravated by domestic supply bottlenecks, and slowdown in the
services sector reflecting weak external demand. The Central
Statistics Office (CSO)’s advance estimate of GDP growth for 2012-13 of
5.0 per cent implies that the economy would have expanded by 4.7 per
cent in Q4.
11. The growth of industrial production slid to 0.6 per cent in
February 2013 from 2.4 per cent a month ago, mainly due to contraction
in mining and electricity generation and slowing growth in
manufacturing. Consequently, on a cumulative basis, growth in industrial
production decelerated to 0.9 per cent during 2012-13 (April-February)
from 3.5 per cent in the corresponding period of the previous year.
The Reserve Bank’s order books, inventories
and capacity utilisation survey (OBICUS) suggests that capacity utilisation remained flat.
Rabi production, particularly of pulses, is expected to be better than a year ago. However, it may not fully offset the decline in
kharif output. Consequently, the second advance estimates of crop production
(kharif and
rabi) for
2012-13 indicate a decline of 3.5 per cent in relation to the final
estimates of the previous year. The composite purchasing managers’ index
(PMI), which encompasses manufacturing and services, fell to a
17-month low in March 2013. Thus, most recent indicators suggest that
growth in Q4 of 2012-13 would have remained low.
12. On the demand side, the persisting decline in capital goods
production during April 2012 – February 2013 reflects depressed
investment conditions. The moderation in corporate sales and weakening
consumer confidence suggest that the slowdown could be spreading to
consumption spending.
13. Headline inflation, as measured by the wholesale price
index (WPI), moderated to an average of 7.3 per cent in 2012-13 from
8.9 per cent in the previous year. The easing was particularly
significant in Q4 of 2012-13, with the year-end inflation recording at
6.0 per cent. Notwithstanding the moderation in overall inflation,
elevated food price inflation was a source of upside pressure through
the year owing to the unusual spike in vegetable prices in April 2012
followed by rise in cereal prices on account of the delayed monsoon and
the sharp increase in the minimum support price (MSP) for paddy. Fuel
inflation averaged in double digits during 2012-13, largely reflecting
upward revisions in administered prices and the pass-through of high
international crude prices to freely priced items. Non-food
manufactured products inflation ruled above the comfort level in the
first half of 2012-13 but declined in the second half to come down to
3.5 per cent by March, reflecting easing of input price pressures and
erosion of pricing power.
14. Largely driven by food inflation, retail inflation, as
measured by the new combined (rural and urban) consumer price index
(CPI) (Base: 2010=100), averaged 10.2 per cent during 2012-13. Even
after excluding food and fuel groups, CPI inflation remained sticky,
averaging 8.7 per cent. Other CPIs also posted double digit inflation.
15. Significantly, inflation expectations polled by the Reserve
Bank’s urban households’ survey, showed slight moderation in Q4 of
2012-13, even as they remained in double digits, reflecting high food
prices. Wage inflation in rural areas, which rose by an average of close
to 20 per cent over the period April 2009 to October 2012, declined
modestly to 17.4 per cent in January 2013. House price inflation, as
measured by the Reserve Bank’s quarterly house price index, continued
to rise on a y-o-y basis.
16. An analysis of corporate performance during Q3 of 2012-13,
based on a common sample of 2,473 non-government non-financial
companies, indicates that growth of sales as well as profits
decelerated significantly. Early results of corporate performance in Q4
indicate continuing moderation in sales though profit margins increased
slightly.
17. Money supply (M
3) growth was around 14.0 per
cent during Q1 of 2012-13 but decelerated thereafter to 11.2 per cent
by end-December as time deposit growth slowed down. There was some pick
up in deposit mobilisation in Q4, taking deposit growth to 14.3 per
cent by end-March. Consequently, M
3 growth reached 13.3 per cent by end-March 2013, slightly above the revised indicative trajectory of 13.0 per cent.
18. Non-food credit growth decelerated from 18.2 per cent at
the beginning of 2012-13 and remained close to 16.0 per cent for the
major part of the year. By March 2013, non-food credit growth dropped
to 14.0 per cent, lower than the indicative projection of 16.0 per cent,
reflecting some risk aversion and muted demand. While the Reserve
Bank’s credit conditions survey showed easing of overall credit
conditions, there was some tightening for sectors such as metals,
construction, infrastructure, commercial real estate, chemicals and
finance in Q4 of 2012-13.
19. The total flow of resources to the commercial sector from banks, non-banks and external sources was higher at
`12.8 trillion in 2012-13 as compared with
`11.6
trillion in the previous year. This increase was accounted for by
higher non-SLR investment by scheduled commercial banks (SCBs), increase
in credit flow from NBFCs, gross private placement and public issues
by non-financial entities, and higher recourse to short-term credit
from abroad and external commercial borrowings.
20. In consonance with the cuts in the policy repo rate and the
cash reserve ratio (CRR) during 2012-13, the modal term deposit rate
declined by 11 basis points (bps) and the modal base rate by 50 bps.
While the decline in the term deposit rate occurred mostly during the
first half, the modal base rate softened by 50 bps to 10.25 per cent in
two steps of 25 bps each during Q1 and Q4 of 2012-13. During Q4, 39
banks reduced their base rates in the range of 5-75 bps. The weighted
average lending rate of banks declined by 36 bps to 12.17 per cent
during 2012-13 (up to February).
21. Liquidity remained under pressure throughout the year
because of persistently high government cash balances with the Reserve
Bank and elevated incremental credit to deposit ratio for much of the
year. The net average liquidity injection under the daily liquidity
adjustment facility (LAF), at
`730 billion during the first half of the year, increased significantly to
`1,012
billion during the second half. In order to alleviate liquidity
pressures, the Reserve Bank lowered the CRR of SCBs cumulatively by 75
bps on three occasions and the statutory liquidity ratio (SLR) by 100
bps during the year. Additionally, the Reserve Bank injected liquidity
to the tune of
`1,546 billion through open
market operation (OMO) purchase auctions. The net injection of
liquidity under the LAF, which peaked at
`1,808 billion on March 28, 2013 reflecting the year-end demand, reversed sharply to
`842 billion by end-April 2013.
22. The revised estimates (RE) of central government finances
for 2012-13 show that the gross fiscal deficit-GDP ratio at 5.2 per
cent was around the budgeted level and within the target set out in the
revised roadmap. Budget estimates (BE) for 2013-14 place the gross
fiscal deficit-GDP ratio at 4.8 per cent. The envisaged correction is
expected to be achieved through a reduction of 0.6 percentage points in
the revenue deficit-GDP ratio.
23. On the back of the policy rate reduction and the
announcement of a slew of reform measures by the Government and a firm
commitment to fiscal consolidation, the 10-year benchmark yield eased
from 8.79 per cent on April 3, 2012 to 7.79 per cent on April 30, 2013.
24. The current account deficit (CAD) came in at an all-time
high of 6.7 per cent of GDP in Q3 of 2012-13. There are indications
that it may have narrowed in Q4. The narrowing was largely on account
of the trade deficit declining, with exports returning to positive
growth after contracting in the first three quarters and non-oil
non-gold imports and gold imports declining. Even as the CAD expanded,
the surge in capital inflows in the second half of the year ensured
that it could be fully financed.
II. Domestic Outlook and Projections
Growth
25. For GDP growth during 2012-13, the CSO’s advance estimate of
5.0 per cent is lower than the Reserve Bank’s baseline projection of
5.5 per cent set out in the Third Quarter Review (TQR) of January 2013,
reflecting slower than expected growth in both industry and services.
26. During 2013-14, economic activity is expected to show only a
modest improvement over last year, with a pick-up likely only in the
second half of the year. Conditional upon a normal monsoon,
agricultural growth could return to trend levels. The outlook for
industrial activity remains subdued, with the pipeline of new
investment drying up and existing projects stalled by bottlenecks and
implementation gaps. With global growth unlikely to improve
significantly from 2012, growth in services and exports may remain
sluggish. Accordingly, the baseline GDP growth for 2013-14 is projected
at 5.7 per cent (
Chart 1).
Inflation
27. By March 2013, WPI inflation at 6.0 per cent turned out to
be lower than the Reserve Bank’s indicative projection of 6.8 per cent,
mainly due to a sharp deceleration in non-food manufactured products
inflation in the second half of the year. The global inflation outlook
for the current year appears more benign compared to last year on
expectations of some softening of crude oil and food prices.
Accordingly, imported inflation is likely to be lower provided the
exchange rate remains broadly stable. Indicators of corporate
performance, industrial outlook and PMIs are pointing to a declining
pricing power. On the other hand, food inflation is likely to be a
source of upside pressure because of persisting supply imbalances. Also,
the timing and magnitude of administered price revisions, particularly
of electricity and coal, will impact the evolution of the trajectory
of inflation in 2013-14.
28. Keeping in view the domestic demand-supply balance, the
outlook for global commodity prices and the forecast of a normal
monsoon, WPI inflation is expected to be range-bound around 5.5 per cent
during 2013-14, with some edging down in the first half on account of
past policy actions, although there could be some increase in the
second half, largely reflecting base effects (
Chart 2).
29. It is critical to consolidate and build upon the recent
gains in containing inflation. Accordingly, the Reserve Bank will
endeavour to condition the evolution of inflation to a level of 5.0 per
cent by March 2014, using all instruments at its command.
30. It is important to re-emphasise that although the most
recent episode of high and persistent inflation played out over the
past three years, during the 2000s as a whole, inflation averaged
around 5.4 and 5.8 per cent, in terms of WPI and CPI, respectively, down
from its earlier trend rate of about 7.5 per cent. Given this record
and the empirical evidence on the threshold level of inflation that is
conducive for sustained growth, the objective is to contain headline
WPI inflation at around 5.0 per cent in the short-term, and 3.0 per
cent over the medium-term, consistent with India’s broader integration
into the global economy.
Monetary Aggregates
31. Consistent with the above growth projections and the Reserve Bank’s inflation tolerance threshold, M
3
growth for 2013-14 is projected at 13.0 per cent for policy purposes.
Consequently, aggregate deposits of SCBs are projected to grow by 14.0
per cent. Keeping in view the resource requirements of the private
sector, the growth in non-food credit of SCBs is projected at 15.0 per
cent. As always, these numbers are indicative projections and not
targets. The conduct of monetary policy would be guided by the
evolution of monetary aggregates along these indicative trajectories.
Risk Factors
32. The macroeconomic outlook for 2013-14 is subject to a number of risks as indicated below.
i) By far the biggest risk to the economy stems from the CAD
which, last year, was historically the highest and well above the
sustainable level of 2.5 per cent of GDP as estimated by the Reserve
Bank. Admittedly, the fiscal deficit is programmed to decline, but even
factoring that in, it is still high. Large fiscal deficits can
potentially spill over into the CAD and undermine its sustainability
even further. A large CAD, appreciably above the sustainable level year
after year, will put pressure on servicing of external liabilities.
ii) Even as the large CAD is a risk by itself, its financing
exposes the economy to the risk of sudden stop and reversal of capital
flows. Although the CAD could be financed last year because of easy
liquidity conditions in the global system, the global liquidity
situation could quickly alter for EDEs, including India, for two
reasons. First, the outlook for AEs remains uncertain, and even if there
may be no event shocks, there could well be process shocks which could
result in capital outflows from EDEs. Second, with quantitative easing
(QE), AE central banks are in uncharted territory with considerable
uncertainty about the trajectory of recovery and the calibration of QE.
Should global liquidity conditions rapidly tighten, India could
potentially face a problem of sudden stop and reversal of capital flows
jeopardising our macro-financial stability.
iii) Sustained revival of growth is not possible without a
revival of investment. But investment sentiment remains inhibited owing
to subdued business confidence and dented business profitability. Both
borrowers and lenders have become risk averse. Borrowers have become
risk averse because of governance concerns, delays in approvals and
tighter credit conditions. For lenders, risk aversion stems from the
erosion of asset quality, deteriorating cash flow situation of borrowers
eroding their credit worthiness and heightened risk premiums.
iv) Looking ahead, the effectiveness of monetary policy in
bringing down inflation pressures and anchoring inflation expectations
could be undermined by supply constraints in the economy, particularly
in the food and infrastructure sectors. Food price pressures, upward
revisions in the MSPs and rapid wage increases are leading to a
wage-price spiral. Without policy efforts to unlock the tightening
supply constraints and bring enduring improvements in productivity and
competitiveness, growth could weaken even further and inflationary
strains could re-emerge.
33. The Reserve Bank began exiting from the crisis driven
expansionary policy in October 2009. Between January 2010 and October
2011, the Reserve Bank cumulatively raised the CRR by 100 bps and the
policy repo rate 13 times by a total of 375 bps, with the monetary
policy stance biased towards containing inflation and anchoring
inflation expectations.
34. In view of slowdown in growth, especially investment
activity, and some moderation in inflation, the Reserve Bank paused in
December 2011. It indicated that no further tightening might be required
and that future actions would be towards lowering the rates. In
January 2012, the Reserve Bank signaled a shift in the policy stance
towards addressing increasing risks to growth by reversing the
tightening cycle. The CRR was reduced cumulatively by 125 bps during
January-March 2012 to prepare liquidity conditions for a front-loaded
50 bps reduction in the policy repo rate in April.
35. Through much of 2012-13, the Reserve Bank persevered with
efforts to ease credit and liquidity conditions through a 100 bps
reduction in the SLR in August 2012, a cumulative 75 bps reduction in
the CRR and 50 bps reduction in the repo rate during September
2012-March 2013.
36. Cumulatively, during the full year 2012-13, the policy repo
rate was reduced by 100 basis points, the SLR by 100 bps and the CRR
by 75 basis points, supported by liquidity injections through OMOs of
the order of
`1.5 trillion. After reducing
the policy repo rate by 25 bps in its Mid-Quarter Review (MQR) of March
2013, the Reserve Bank noted that in view of the policy easing already
effected, the sluggish ebbing of inflation and widening CAD, the
headroom for further monetary easing was quite limited.
37. Against the backdrop of global and domestic macroeconomic
conditions, outlook and risks, the policy stance for 2013-14 has been
guided by the following considerations:
38. First, growth has decelerated continuously and steeply,
more than halving from 9.2 per cent in Q4 of 2010-11 to 4.5 per cent in
Q3 of 2012-13. The Reserve Bank’s current assessment is that activity
will remain subdued during the first half of this year with a modest
pick-up, subject to appropriate conditions ensuing, in the second half
of 2013-14.
39. Second, although headline WPI inflation has eased by March
2013 to come close to the Reserve Bank’s tolerance threshold, it is
important to note that food price pressures persist and supply
constraints are endemic, which could lead to a generalisation of
inflation and strains on the balance of payments.
40. Against this backdrop, the stance of monetary policy is intended to:
• continue to address the accentuated risks to growth;
• guard against the risks of inflation pressures re-emerging and
adversely impacting inflation expectations, even as corrections in
administered prices release suppressed inflation; and
• appropriately manage liquidity to ensure adequate credit flow to the productive sectors of the economy.
41. On the basis of the current assessment and in line with
policy stance outlined in Section III, the Reserve Bank announces the
following policy measures.
Repo Rate
42. It has been decided to:
• reduce the policy repo rate under the liquidity adjustment
facility (LAF) by 25 basis points from 7.5 per cent to 7.25 per cent
with immediate effect.
Reverse Repo Rate
43. The reverse repo rate under the LAF, determined with a
spread of 100 basis points below the repo rate, stands adjusted to 6.25
per cent with immediate effect.
Marginal Standing Facility Rate
44. The Marginal Standing Facility (MSF) rate, determined with a
spread of 100 basis points above the repo rate, stands adjusted to
8.25 per cent with immediate effect.
Bank Rate
45. The Bank Rate stands adjusted to 8.25 per cent with immediate effect.
Cash Reserve Ratio
46. The cash reserve ratio (CRR) of scheduled banks has been
retained at 4.0 per cent of their net demand and time liabilities
(NDTL).
Guidance
47. The policy action undertaken in this review carries forward
the measures put in place since January 2012 towards supporting growth
in the face of gradual moderation of headline inflation. Recent
monetary policy action, by itself, cannot revive growth. It needs to be
supplemented by efforts towards easing the supply bottlenecks,
improving governance and stepping up public investment, alongside
continuing commitment to fiscal consolidation. With upside risks to
inflation still significant in the near term in view of sectoral demand
supply imbalances, ongoing correction in administered prices and
pressures stemming from MSP increases, monetary policy cannot afford to
lower its guard against the possibility of resurgence of inflation
pressures. Monetary policy will also have to remain alert to the risks
on account of the CAD and its financing, which could warrant a swift
reversal of the policy stance. Overall, the balance of risks stemming
from the Reserve Bank’s assessment of the growth-inflation dynamic
yields little space for further monetary easing. The Reserve Bank will
endeavour to actively manage liquidity to reinforce monetary
transmission, consistent with the growth-inflation balance.
Mid-Quarter Review of Monetary Policy 2013-14
48. The next mid-quarter review of Monetary Policy for 2013-14
will be announced through a press release on Monday, June 17, 2013.
First Quarter Review of Monetary Policy 2013-14
49. The First Quarter Review of Monetary Policy for 2013-14 is scheduled on Tuesday, July 30, 2013.
Part B. Developmental and Regulatory Policies
50. This part of the Statement reviews the progress on various
developmental and regulatory policy measures announced by the Reserve
Bank in recent policy statements and also sets out fresh measures.
51. Near-term risks to global financial stability are retreating
as the probability associated with tail events has reduced, rekindling
risk appetite as reflected in sharp rallies in financial markets. In
AEs, funding conditions have improved, but credit conditions remain
stressed on concerns about debt overhangs and the persisting fragility
of balance sheets. For EDEs, potential spillovers from unconventional
policies in AEs remain significant, especially mispricing of credit
risk, a rise in liquidity risk, and excessive capital flows entailing
increased debt and foreign exchange exposure in response to low
borrowing costs. In addition to safeguarding domestic financial
stability, these economies also face the challenge of creating
conducive financing conditions for accelerating growth with stability.
52. Internationally, efforts towards strengthening the global
financial regulatory architecture remain incomplete and delayed,
increasing vulnerability and uncertainty. Decisive and well-coordinated
actions are needed to progress resolutely on restructuring weak
segments of the financial system, building up capital and liquidity
buffers and forward looking provisioning, developing a robust framework
for systemically important entities, enhancing disclosures to improve
market discipline, establishing effective resolution regimes including
cross-border resolution agreements, extending the regulatory perimeter
to unregulated entities, and convergence of accounting norms.
53. In this challenging and uncertain international environment,
ongoing structural reforms seek to make the Indian banking system more
efficient, resilient, and socially more relevant. The emphasis has
been on strengthening balance sheets and governance frameworks in a
non-disruptive manner, sequenced into fortifying and refining the
prudential framework in line with Basel III, but adapted to
country-specific requirements. A key area of focus has been managing
systemic risks in the time dimension through countercyclical policies
employing time varying sectoral risk weights and provisioning as also
cross-sectionally in terms of interconnectedness and common exposures.
The triad of financial inclusion, financial literacy and consumer
protection have been recognised as intertwining threads in the pursuit
of financial stability. As regards non-bank financial entities, the
initial focus on depositor protection has broadened into a more
comprehensive framework aimed at mitigating systemic risks. The
development of financial markets, products and processes continues to
be pursued within the broader context of financial stability, balancing
innovations with the containment of excesses in tune with the maturing
of the financial system and the needs of the real economy.
54. Against this backdrop, the Statement on Developmental and
Regulatory Policies for 2013-14 assesses the progress made on past
policy announcements and sets out the policy initiatives in key areas
which include strengthening of financial market infrastructure;
improving credit flow to productive sectors, including agriculture;
implementation of a dynamic provisioning regime for banks; designing of
a framework for monitoring liquidity risk; finalisation of guidelines
for licensing of new banks in the private sector; reviewing the banking
structure in India; regulation of wealth management activities;
customer service initiatives; expansion of payment system
infrastructure and mitigation of concentration risk in the system;
streamlining the system of distribution of banknotes and coins; and
improving the mechanism for detection and reporting of counterfeit
banknotes.
Assessment of Financial Stability
55. The sixth Financial Stability Report (FSR), released in
December 2012, observed that the overall macroeconomic risks in the
Indian financial system had increased since the assessment made in June
2012. Apart from risks to global growth and financial stability,
domestic factors such as decline in growth coupled with relatively high
inflation, fall in domestic saving, and particularly household
financial saving, were found to have increased risks to macroeconomic
stability. In addition, the high CAD along with weakening external
sector parameters, the stressed fiscal situation, and increasing
corporate leverage, especially external commercial borrowings with
unhedged exposures were identified as other challenges to macroeconomic
stability. For the banking sector, concerns relating to tight liquidity
conditions and deteriorating asset quality remain, though the sector
has remained resilient to credit, market, and liquidity risks and
capable of withstanding macroeconomic shocks, given the comfortable
capital to risk-weighted assets ratio (CRAR) for the system as a whole.
The inter-linkages among diverse sectors of the financial system were,
however, found to be strong with risk of contagion in case of a
failure of an institution in the core remaining high. Mutual funds and
insurance companies were identified as a potential source of liquidity
contagion, being lenders in the financial system.
Sub-Committee of the Financial Stability and Development Council – Recent Initiatives
56. Under the aegis of the Sub-Committee of the Financial
Stability and Development Council (FSDC), a Memorandum of Understanding
(MoU) was signed by the financial sector regulators (Reserve Bank of
India, Securities and Exchange Board of India, Insurance Regulatory and
Development Authority and Pension Fund Regulatory and Development
Authority) on March 8, 2013 with a view to forging greater cooperation
in the field of supervision. The MoU envisages cooperation in the field
of consolidated supervision and monitoring of financial groups
identified as financial conglomerates.
57. The Sub-Committee of the FSDC approved the National Strategy
for Financial Education (NSFE). The NSFE entails provision of
financial education for all Indians so as to understand the need and
use of saving, the advantages of using the formal financial sector and
various options to convert saving into investment, protection through
insurance and a realistic recognition of the attributes of these
options. The NSFE has been revised, incorporating the feedback received
from public consultations and from a global peer review.
Working Group on Government Securities and Interest Rate Derivatives Markets
58. As stated in the SQR of October 2012, the Report of the
Working Group on Government Securities (g-secs) and Interest Rate
Derivatives Markets (Chairman: Shri R. Gandhi) was finalised in August
2012. Some of the recommendations such as reducing the time gap between
dissemination of the results of primary auctions on the newswires and
the auction system; truncating the time window for bidding in the
primary auction; changing the settlement cycle of primary auctions in
Treasury Bills (T-Bills) from T+2 to T+1; conduct of primary auctions
in g-secs as a mix of both uniform-price and multiple-price formats;
re-issuances of existing securities in state development loans;
standardising interest rate swap (IRS) contracts to facilitate
centralised clearing and settlement of these contracts; and migration
of secondary market reporting of over-the-counter (OTC) trades in
g-secs (outright and repo) from Public Debt Office-Negotiated Dealing
System (PDO-NDS) to Negotiated Dealing System-Order Matching (NDS-OM)
and Clearcorp Repo Order Matching System (CROMS), respectively, have
already been implemented. Further, the Government of India has
announced the introduction of inflation-indexed bonds for retail
investors in the Union Budget 2013-14. As will be indicated later in
this Section, the dispensation regarding held to maturity (HTM) has
also been reviewed.
59. Other recommendations including consolidation of the
Government of India’s public debt; introduction of cash settled 10-year
interest rate futures (IRF); introduction of single bond futures; and
simplification of operational procedures for seamless movement of
securities from SGL form to demat form and
vice versa are being examined in consultation with all stakeholders.
Fixed Interest Rate Products
60. As indicated in the SQR, the draft report of the Committee
to assess the feasibility of introduction of long-term fixed interest
rate loan products by banks (Chairman: Shri K.K. Vohra) was placed on
the Reserve Bank’s website inviting views/suggestions from the
public/stakeholders. Taking into account the feedback received, the
final report was put out on the Reserve Bank’s website in January 2013.
Banks may consider implementing these recommendations so that retail
customers are not adversely impacted by undue interest rate risk
arising out of changes in economic cycles and policy rates.
Participation of Foreign Institutional Investors in Currency Derivatives
61. The Finance Minister, in his budget speech for 2013-14, had
announced that Foreign Institutional Investors (FIIs) will be
permitted to participate in the currency derivatives segment of
exchanges to the extent of their rupee-denominated exposure in the
country. In line with the above announcement, it is proposed to:
• allow FIIs to hedge their currency risk by using exchange traded currency futures in the domestic exchanges.
Draft guidelines will be issued by end-July 2013.
Dissemination of Market Liquidity Indicators
62. Since the introduction of the NDS-OM in 2005, there has
been a significant improvement in liquidity and turnover in the
secondary market for g-secs. In order to enhance transparency and enable
better data dissemination in respect of liquidity, the Clearing
Corporation of India Ltd. (CCIL) would henceforth disseminate market
liquidity indicators on its website at regular monthly intervals. To
start with, bid-ask spreads, number of trades, order book size, impact
cost, turnover ratio and number of securities traded would be
disseminated on the CCIL website. Further refinements would be carried
out based on experience.
Financial Market Infrastructure
Technical Committee on Services/Facilities for Exporters
63. In order to examine various issues relating to exports such
as the availability of credit, transaction costs, insurance, factoring
and other procedural aspects in the dealings of exporters with banks
and financial institutions, a Technical Committee on
Services/Facilities to Exporters (Chairman: Shri G. Padmanabhan) was
constituted on February 13, 2013. The Committee submitted its report on
April 29, 2013. The recommendations are under examination. The report
will be placed on the Reserve Bank’s website shortly.
Export Reporting and Follow-up
64. As stated in the SQR, a Working Group (Chairperson: Smt.
Rashmi Fauzdar) was constituted to identify gaps in the current export
reporting and follow-up procedure, including large number of unmatched
export transactions between customs and bank reporting, and to
recommend suitable re-engineering of the system. The recommendations of
the Working Group are under implementation. With the envisaged
architecture expected to be put in place by end-September 2013,
Authorised Dealers (ADs) would be required to regularly update the
status of documents evidencing exports and receipt of export proceeds
for the transactions pertaining to them in the Reserve Bank’s data
base, ensuring effective follow-up of large value transactions/
transactions of serious nature and improvement in the monitoring of
export transactions.
III. Credit Delivery and Financial Inclusion
Priority Sector Guidelines
65. In the light of feedback received from
stakeholders regarding enhancement in certain loan limits for being
eligible to be classified as priority sector advances
within the broad contours of the priority sector architecture, it is proposed to:
• increase the loan limit for micro and small enterprises
(MSEs) in the services sector, as defined in the Micro, Small and
Medium Enterprises Development (MSMED) Act 2006, from
`20 million to
`50 million per borrower;
• increase the loan limit from
`10 million to
`50
million per borrower for bank loans to dealers/sellers of fertilisers,
pesticides, seeds, cattle feed, poultry feed, agricultural implements
and other inputs which are classified as indirect finance to
agriculture; and
• raise the limit on pledge loans (including against warehouse receipts) from the current limit of
`2.5 million to
`5
million for classification as direct agriculture loans in the case of
individual farmers and as indirect agriculture loans in the case of
corporates, partnership firms and institutions engaged in agriculture
and allied activities.
Guidelines are being issued separately.
Micro and Small Enterprises
66. In view of the concerns emerging from the deceleration in
credit growth to the MSE sector, an Indian Banking Association
(IBA)-led Sub-Committee (Chairman: Shri K.R. Kamath) was set up to
suggest a structured mechanism to be put in place by banks to monitor
the entire gamut of credit related issues pertaining to the sector. The
Committee has since submitted its report and based on its
recommendations, it has been decided that banks need to:
• strengthen their existing systems of monitoring credit growth
to the sector and put in place a system-driven comprehensive
performance management information system (MIS) at every supervisory
level (branch, region, zone, head office) which should be critically
evaluated on a regular basis;
• put in place a system of e-tracking of MSE loan applications
and monitor the loan application disposal process in banks, giving
branch-wise, region-wise, zone-wise and State-wise positions. A format
for the purpose will be provided to banks as recommended by the
Sub-Committee. The position in this regard may be displayed by banks on
their websites; and
• monitor timely rehabilitation of sick MSE units. A format for
the purpose will be provided to banks as recommended by the
Sub-Committee. The progress in rehabilitation of sick MSE units should
be available on the website of banks.
Detailed guidelines are being issued separately.
Financial Inclusion
Direct Benefit Transfer
67. With a view to facilitating Direct Benefit Transfer (DBT)
for the delivery of social welfare benefits by direct credit to the
bank accounts of beneficiaries, it is proposed to advise banks to:
• open accounts for all eligible individuals in camp mode with the support of local government authorities;
• seed the existing accounts or the new accounts opened with Aadhaar numbers; and
• put in place an effective mechanism to monitor and review the progress in the implementation of DBT.
Guidelines are being issued separately.
Financial Inclusion Plan 2013-16
68. The implementation of the Financial Inclusion Plan (FIP)
2010-13, introduced for the first time in April 2010, has led to the
establishment of banking outlets in more than 2 lakh villages. In order
to take financial inclusion to the next stage of providing universal
coverage and facilitating Electronic Benefit Transfer (EBT), banks have
been advised to draw up the next FIP for the period 2013-16. The FIPs
submitted by banks would be discussed in detail with the Reserve Bank.
Banks are, therefore, advised to:
• disaggregate the FIPs to the controlling office and branch level.
Financial Literacy Material
69. In order to link the financially excluded segment with
the banking system, a model for conduct of literacy camps by banks has
been designed, detailing the operational modalities to culminate in
effective financial access to the excluded. Further, to ensure
consistency in the financial literacy material reaching the target
audience in a simple and lucid manner, the Reserve Bank has prepared
comprehensive financial literacy material consisting of a Financial
Literacy Guide, a Financial Diary and a set of 16 Financial Literacy
Posters. Banks are, therefore, advised to:
• use the model of financial literacy camps as a tool to achieve the targets set under their FIPs;
• use the financial literacy material as a standard curriculum in the literacy camps; and
• be innovative in devising suitable communication channels so that the messages reach the target audience effectively.
Lead Bank Scheme - Metropolitan Areas
70. At present, the Lead Bank Scheme (LBS) is applicable to all
districts in the country, excluding districts in metropolitan areas.
However, the challenge of financial exclusion is widespread in
metropolitan areas also, especially amongst the disadvantaged and
low-income groups. With the objective of providing an institutional
mechanism for coordination between government authorities and banks,
facilitating doorstep banking to the excluded segment of urban poor,
and to implement DBT, it has been decided to:
• bring all districts in metropolitan areas under the fold of the LBS.
Rural Cooperatives: Streamlining of Short Term Cooperative Credit Structure
71. As announced in the SQR, the Reserve Bank constituted
an Expert Committee (Chairman: Dr. Prakash Bakshi) to undertake an
in-depth analysis of the Short-Term Cooperative Credit Structure
(STCCS). The Committee submitted its report in January 2013 and made 25
recommendations towards strengthening of the rural cooperative credit
architecture.
72. An Implementation Committee (Chairman: Shri V.
Ramakrishna Rao) comprising members from the National Bank for
Agriculture and Rural Development (NABARD) and the Reserve Bank has been
formed to ensure effective and expeditious implementation of the
recommendations of the Expert Committee, wherever applicable. Progress
in this regard will be reported in the SQR of October 2013.
Customer Service
Implementation of the Damodaran Committee Report
73. As mentioned in the Monetary Policy Statement of April
2012, a sub-group of the IBA was constituted to examine implementation
of some of the recommendations of the Damodaran Committee. These
include benchmarking of service charges for basic banking services,
charges for non-home
branch transactions, zero liability for Automated Teller Machine
(ATM)/Point-of-Sale (PoS)/Internet Banking Transactions, and placing
the onus on banks to prove customer negligence and discrimination in
interest rates offered to old and new borrowers under the floating
interest rate regime. The IBA has been advised to draw up a strategic
roadmap for implementation of these recommendations, increase customer
awareness and ensure that the recommendations of the Committee result
in optimisation of desired outcomes.
Recommendations of Damodaran Committee – Uniformity in Intersol Charges
74. With the introduction of Core Banking Solution (CBS), it is
expected that customers of banks would be treated uniformly at any
sales or service delivery point. It is observed, however, that some
banks are discriminating against their own customers on the basis of one
branch being designated as the ‘home branch’ where charges are not
levied for products/services and other branches being referred to as
‘non-home’ branches where charges are levied for the same
products/services. This practice is contrary to the spirit of the
Reserve Bank’s guidelines on reasonableness of bank charges. With a
view to ensuring that bank customers are treated fairly and reasonably
without any discrimination and in a transparent manner at all branches
of banks/service delivery locations, banks are advised to:
• follow a uniform, fair and transparent pricing policy and not
discriminate between their customers at home branch and non-home
branches.
Detailed guidelines will be issued by end-June 2013.
Banking Ombudsman Scheme
75. As stated in the SQR of October 2012, the Reserve Bank
constituted a Working Group to review, update, and revise the Banking
Ombudsman Scheme, 2006 (Chairperson: Smt. Suma Varma) in the light of
the recommendations and suggestions of the Committee on Customer Service
in Banks and the Rajya Sabha Committee on Subordinate Legislation. The
Working Group submitted its report in January 2013, which is
under examination.
IV. Regulatory and Supervisory Measures
Implementation of Basel III Capital Regulation
76. The Reserve Bank’s guidelines on Basel III capital
regulation have been implemented from April 1, 2013 with the exception
of Credit Valuation Adjustment (CVA) risk capital charge for OTC
derivatives. Pending resolution of certain issues related to
introduction of mandatory forex forward guaranteed settlement through a
central counterparty, the implementation of CVA risk capital charge
has been deferred to January 1, 2014.
77. As announced in the SQR, draft guidelines were issued on:
(i) composition of capital disclosure requirements; and (ii) capital
requirements for banks’ exposures to central counterparties. It is
proposed to:
• issue the final guidelines on composition of capital disclosure requirements by end-May 2013; and
• issue the final guidelines on capital requirements for banks’ exposures to central counterparties by end-June 2013.
Guidelines on Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools under Basel III
78. The Basel III Framework on Liquidity Standards includes
Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR) and
liquidity risk monitoring tools. The Reserve Bank had issued draft
guidelines on Liquidity Risk Management and Basel III Framework on
Liquidity Standards in February 2012. After taking into account the
feedback received from stakeholders, the guidelines on Liquidity Risk
Management were issued in November 2012. These included enhanced
guidance on liquidity risk governance, and measurement, monitoring and
reporting to the Reserve Bank on liquidity positions. The Basel III
liquidity standards were subject to an observation period/revision by
the Basel Committee with a view to addressing any unintended
consequences that the standards may have for financial markets, credit
extension and economic growth. The Reserve Bank indicated in the
guidelines on liquidity risk management issued in November 2012 that
the guidelines on Basel III liquidity standards will be issued once the
Basel Committee finalises the relevant framework. The Basel Committee
has issued
Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools
in January 2013 and is in the process of finalising the NSFR and
disclosure requirements. The LCR is to be implemented from January 1,
2015 and the NSFR from January 1, 2018. The Reserve Bank will issue the
final guidelines on Basel III liquidity standards and liquidity risk
monitoring tools, taking into account the revisions by the Basel
Committee.
Implementation of Dynamic Provisioning Regime for Banks in India
79. The Reserve Bank had placed a discussion paper on
Introduction of Dynamic Loan Loss Provisioning Framework for Banks in India on
its website in March 2012, soliciting views/comments. The
comments/views received by the Reserve Bank from stakeholders are under
examination and various parameters of the proposed dynamic provisioning
are being re-calibrated, based on new and updated data obtained from
banks. It is proposed to:
• issue the final guidelines on dynamic provisioning
framework and its implementation in a phased manner by end-June 2013.
Final Guidelines on Management of Intra-Group Transactions and Exposures
80. The draft guidelines on Management of Intra-Group
Transactions and Exposures (ITEs) were issued in August 2012. The draft
guidelines prescribed prudential exposure limits on the intra-group
exposure of banks along with measures to ensure that banks maintain an
arm’s length relationship in their dealings with group entities and
meet minimum requirements with respect to group risk management and
group-wide oversight. The measures are aimed at ensuring that banks
engage in ITEs in a safe and sound manner for containing concentration
and contagion risk arising out of ITEs. The comments/feedback on the
draft guidelines have been received from various stakeholders and are
under examination. It is proposed to:
• issue final guidelines on management of ITEs by end-June 2013.
Prudential Guidelines on Restructuring of Advances by Banks/Financial Institutions
81. It was announced in the SQR that the recommendations of the
Working Group (Chairman: Shri B. Mahapatra) to review the existing
prudential guidelines on restructuring of advances by banks/financial
institutions as also the comments/suggestions received in this regard
were under examination and the draft guidelines would be issued by end-
January 2013. Accordingly, the draft guidelines were issued on January
31, 2013 for comments till February 28, 2013. Taking into account the
comments received, it has been decided to:
• issue the prudential guidelines on restructuring of advances by banks/financial institutions by end-May 2013.
Commercial Real Estate - Residential Housing: Prudential Norms
82. In September 2009, the Reserve Bank had issued guidelines
on classification of certain exposures as Commercial Real Estate (CRE)
exposures. CRE exposures are sensitive in view of their inherent price
volatilities. Therefore, these exposures generally attract higher risk
weights and higher provisioning requirements. However, it has been
generally observed that the residential housing complex sector under
the CRE poses lower risk than the other components of CRE sector.
Accordingly, it is proposed to:
• carve out a sub-sector of ‘CRE-Residential Housing’ within
the CRE sector with appropriate prudential regulatory norms on risk
weights and provisioning.
Detailed guidelines will be issued by end-June 2013.
Guidelines on Reset of Credit Enhancement in Securitisation
83. The Reserve Bank issued draft guidelines on ‘Revisions to
the Guidelines on Securitisation Transactions’ in May 2012. The
guidelines introduced norms on minimum holding period, minimum
retention ratio, loan origination standards and standards of due
diligence with regard to securitisation transactions to ensure orderly
growth of the Indian securitisation market. While the extant guidelines
do not permit reset of credit enhancements during the life of the
securities issued by the special purpose vehicle, it was indicated in
May 2012 that guidelines on resetting of credit enhancement would be
issued separately. Accordingly, it is proposed to:
• issue the final guidelines on reset of credit enhancement in securitisation by end-June 2013.
SLR Holdings under Held to Maturity Category
84. In terms of extant instructions issued in September 2004,
banks are permitted to exceed the limit of 25 per cent of total
investments under HTM category, provided the excess comprises only of
SLR securities and the total SLR securities held in the HTM category is
not more than 25 per cent of their demand and time liabilities (DTL)
as on the last Friday of the second preceding fortnight. This
relaxation was allowed taking into account the requirement of
maintenance of SLR of 25 per cent of DTL under Section 24 of the
Banking Regulation Act, 1949 at that time. The SLR requirement has
since been brought down to 23 per cent of DTL. Accordingly, it is
proposed that:
• banks may exceed the present limit of 25 per cent of total investments under the HTM category provided:
(a) the excess comprises only of SLR securities; and
(b) the total SLR securities held in the HTM category is not
more than 23 per cent of their DTL as on the last Friday of the second
preceding fortnight,
i.e., in alignment with the current SLR requirement.
This realignment from 25 per cent to 23 per cent, in line with
the recommendations of the Working Group on Government Securities and
Interest Rate Derivatives Markets, would be effected by way of
reduction of at least 50 bps every quarter, beginning with the quarter
ending June 2013.
Detailed guidelines will be issued separately.
Banking Structure in India
85. The guidelines on Licensing of New Banks in the Private
Sector issued in February 2013 indicated that the Reserve Bank would
prepare a policy discussion paper on the banking structure in India
within two months, keeping in view the recommendations of the Committee
on Banking Sector Reforms, 1998 (Chairman: Shri M. Narasimham), the
Committee on Financial Sector Reforms, 2008 (Chairman: Shri Raghuram
Rajan), and other viewpoints. The discussion paper would cover issues
such as consolidation of large-sized banks with a view to having a few
global banks, desirability and practicality of having small, localised
banks as preferred vehicles for financial inclusion, the need for
having investment banks through differentiated licensing regime for
domestic and foreign banks instead of granting of universal banking
licence, policy regarding presence of foreign banks in India,
conversion of urban cooperative banks into commercial banks, and
periodicity of licensing new banks, whether in blocks or on tap. It is,
therefore, proposed to:
• issue the discussion paper on the banking structure in India for comments by end-June 2013.
Provision of Wealth Management Services and Marketing and Distribution of Third Party Financial Products
86. The Reserve Bank recently undertook investigations in the
light of reported allegations that certain banks were involved in
structuring transactions to aid tax evasion and fraudulent transfer of
funds. The investigations revealed the need for better regulatory
compliance by banks. It is proposed to issue guidelines which would
include,
inter alia, the following:
(a) Wealth Management
87. Wealth management services (WMS) generally include referral
services, investment advisory services (IAS) and portfolio management
services (PMS). In India, banks with well-developed branch network have
access to a large customer base. Banks offering wealth management
services are exposed to reputational risks on account of mis-selling of
products, conflict of interest, lack of knowledge and clarity about
products and frauds. It is, therefore, proposed to:
• issue draft guidelines on wealth management services offered by banks by end-June 2013.
(b) Marketing and Distribution of Third Party Financial Products
88. As per extant instructions, banks are allowed to market
insurance and mutual fund products as agents of other entities on
non-risk participation basis. It has been observed that in some cases,
banks did not have clear segregation of duties of marketing personnel
from other branch functions, and bank employees were directly receiving
incentives from third parties such as insurance, mutual fund and other
entities for selling their products. Such practices may lead to
mis-selling and distortion of the staff incentive structure. It is,
therefore, proposed to advise banks to:
• ensure segregation of the marketing function from the approval/transactional process at bank branches;
• ensure that its employees do not receive cash/non-cash
incentives directly from insurance companies, mutual funds and other
third party product providers; and
• have a board approved policy to avoid mis-selling and
conflict of interest in marketing and distribution of own or third
party financial products.
Detailed guidelines will be issued by end-June 2013.
(c) Know Your Customer (KYC) Norms/Anti-Money Laundering (AML) Standards/Combating Financing of Terrorism (CFT)
89. During the investigations referred to above, it was
observed that banks are not carrying out customer due diligence as
required under KYC/AML/CFT guidelines while marketing and distributing
third party products as agents. Some banks are also not filing Cash
Transaction Reports (CTRs) or Suspicious Transaction Reports (STRs) in
such cases, wherever required. In this context, it is proposed to
advise banks to:
• carry out customer due diligence as required under extant
KYC/AML/CFT guidelines wherever third party products are sold as agents
as a measure of abundant precaution, even though KYC/AML/CFT
regulations are also applicable to the principal,
i.e., the third party vendor of the products;
• maintain details of third party products sold and related
records for a period and in the manner as prescribed in the KYC/AML/CFT
guidelines; and
• file CTRs and STRs wherever required, under the extant
KYC/AML/CFT guidelines while marketing and distributing third party
products as agents.
Detailed guidelines will be issued by end-June 2013.
Frequently Asked Questions on KYC/AML/CFT
90. In order to educate the general public as also banks, the
Reserve Bank has been placing on its website Frequently Asked Questions
(FAQs) on KYC/AML/CFT. The existing FAQs on KYC/AML/CFT guidelines
were placed on the website in May 2011. Since then, a number of new
developments have taken place in this area including simplification of
KYC norms for further enhancing financial inclusion. With a view to
facilitating understanding of KYC/AML/CFT requirements and compliance
thereof in a hassle-free manner by banks and the general public for
promoting financial inclusion, it is proposed to:
• replace the existing FAQs on KYC/AML/CFT with a comprehensive set of questions and answers by end-June 2013.
Pricing of Retail Loans
91. The Reserve Bank has observed wide variations in the rate
of interest charged to retail borrowers by banks even when the loan was
sanctioned on the same day. In terms of extant instructions, all
categories of loans (with certain specified exemptions) are to be linked
to the Base Rate from July 2010. It is expected that the final rate of
interest charged to the borrower will include product and customer
specific charges and will be reasonable and transparent. However, the
very wide variation in rates of interest charged by banks on retail
loans to different borrowers on the same day cannot possibly be
attributed to customers’ risk profiles. Such a practice may be
reflective of opaqueness in the system.
92. Credit management in a bank is essentially an internal
management function and banks are expected to prepare a well-defined
loan policy approved by their boards, laying down,
inter alia,
the factors taken into consideration for deciding interest rates.
However, keeping in view the findings in this regard, banks are advised
to have management oversight on such practicesand also frame policies
that ensure pricing of loans, especially retail loans, is transparent,
realistic, and related to the risk perception of the borrowers.
Depositor Education and Awareness Fund
93. Pursuant to the enactment of The Banking Laws (Amendment)
Act, 2012, Section 26A has been inserted in the Banking Regulation Act,
1949 which,
inter alia, empowers the Reserve Bank to
establish a Depositor Education and Awareness Fund (DEAF). DEAF will be
credited with the amount to the credit of any account in India with a
banking company which has not been operated upon for a period of ten
years or any deposit or any amount remaining unclaimed for more than
ten years within a period of three months from the expiry of ten years.
DEAF shall be utilised for promotion of depositors’ interest and for
such other purposes considered necessary for the promotion of
depositors’ interests as specified by the Reserve Bank from time to
time. However, the provisions of Section 26A do not prevent a depositor
from claiming his/her deposit or operating his/her account or deposit
after the expiry of the period of ten years and the banking company
should pay the deposit amount and claim refund of such amount from
DEAF. In view of the above, it is proposed to:
• finalise the modalities for setting up of DEAF by end-September 2013.
Dissemination of Credit Information
94. It was stated in the SQR that credit institutions should
furnish timely and accurate credit information on their borrowers and
make extensive use of available credit information as a part of their
credit appraisal processes.
95. Accordingly, a Committee (Chairman: Shri Aditya Puri)
consisting of representatives from Credit Information Companies and
Credit Institutions has been constituted to examine the available
formats for furnishing of credit information by Credit Institutions to
the Credit Information Companies in respect of different sectors. The
Committee would also suggest best practices for the guidance of Credit
Institutions in respect of usage of credit information as a part of
their credit appraisal process. The Committee will submit its report by
end-September 2013.
Annual Branch Expansion Plan
96. At present, domestic scheduled commercial banks (SCBs) are
required to allocate at least 25 per cent of the total number of
branches proposed to be opened during a year in unbanked rural (Tier 5
and Tier 6) centres while preparing their Annual Branch Expansion Plan
(ABEP). Branch expansion in rural areas is essential to address the
existing asymmetries in achieving financial inclusion. To facilitate
speedier branch expansion in unbanked rural centres for ensuring
seamless roll out of the DBT Scheme of the Government of India, banks
are advised to:
• front-load the opening of branches in unbanked rural centres
over a 3 year cycle co-terminus with the FIP. Credit will be given for
branches opened in unbanked rural centres in excess of 25 per cent in a
year which will be carried forward to the subsequent year of the FIP.
Detailed guidelines will be issued by end-June 2013.
Import of Gold
97. The Working Group on Gold (Chairman: Shri K.U.B. Rao) had
recommended aligning gold import regulations with the rest of imports
with a view to reducing gold imports by creating a level playing field
between gold imports and other imports. Currently, banks authorised by
the Reserve Bank are permitted to import gold on: (i) consignment
basis; (ii) unfixed price basis; and (iii) loan basis. Gold is also
imported directly by export oriented units (EOUs) / units in Special
Economic Zones (SEZs) in the gems and jewellery sector and nominated
agencies / banks using letters of credit (LCs). The bulk of the gold
imported by nominated banks is, however, on consignment basis whereby
the nominated banks do not have to fund these stocks. With a view to
reducing the demand for gold for domestic use, it is proposed to:
• restrict the import of gold on consignment basis by banks only to meet the genuine needs of exporters of gold jewellery.
Detailed guidelines will be issued by end-May 2013.
Lending Against Gold
98. As per extant instructions, banks are currently permitted
to grant advances against gold ornaments and other jewellery and
against specially minted gold coins sold by banks. However, no advances
can be granted by banks for purchase of gold in any form, including
primary gold, gold bullion, gold jewellery, gold coins, units of gold
exchange traded funds and units of gold mutual funds. While there may
not be any objection to grant of advances against specially minted gold
coins sold by banks, there is a risk that some of these coins would be
weighing much more, thereby circumventing the Reserve Bank’s
guidelines regarding restrictions on grant of advance against gold
bullion. Accordingly, it is proposed to:
• restrict the facility of advances against the security of gold coins per customer to gold coins weighing up to 50 gms.
Detailed guidelines will be issued by end-May 2013.
Unhedged Foreign Currency Exposure
99. In terms of extant instructions, banks should put in place a
proper mechanism to rigorously evaluate the risks arising out of
unhedged foreign currency exposure of corporates and price them in the
credit risk premium, while also considering stipulating a limit on the
unhedged positions of corporates on the basis of banks’ board-approved
policy. These measures are of utmost importance since unhedged forex
exposures of borrowers is a source of risk not only to them but also to
the financing banks and the financial system, especially in times of
currency volatility. The above measures need to be strengthened by
requiring the corporates to put in place a risk management policy for
their unhedged forex exposures. These measures have not yet been
adequately put in place. In view of this and in order to address the
risks on account of unhedged forex exposure of corporates, it is
proposed to:
• increase the risk weight and provisioning requirement on
banks’ exposures to corporates on account of the corporates’ unhedged
forex exposure positions.
Detailed guidelines will be issued by end-June 2013.
V. Institutional Developments
Non-Banking Financial Companies
Dealing in Gold Loans
100. On February 6, 2013, the Reserve Bank placed on its
website the final Report of the Working Group on Gold (Chairman: Shri
K.U.B. Rao). The Working Group has made a number of recommendations
pertaining to the non-banking financial companies (NBFCs)involved in
lending against the collateral of gold. These include loan to value
ratio, branch expansion, and review of Fair Practices Code provisions
with regard to auction and transparency in loan terms. The
recommendations are being examined by the Reserve Bank and it is
proposed to:
• issue guidelines to NBFCs by end-May 2013.
Sharing of Information Technology Resources by Banks
101. With increased use of information technology (IT)
infrastructure by banks, there is a need to examine the issue of shared
IT resources in order to optimise costs while maintaining the desired
levels of efficiency and security. The feasibility of such shared
resources by the banking sector needs to be explored wherever possible,
taking into account security issues, data integrity and
confidentiality. After making an assessment of various issues, it is
proposed to advise banks in this regard by end-August 2013.
Business Continuity Plan, Vulnerability Assessment and Penetration Testing of Information Systems by banks
102. As stated in the Monetary Policy Statement of April
2012, banks were advised to put in place appropriate Information
Security (IS) framework and IT governance structures to enable,
inter alia,
better alignment between IT and business. In order for banks to
secure their ISs, ensure their continuity, and check their robustness,
they are required to put in place appropriate business continuity plans
(BCPs) and test them periodically. These ISs should be subjected to
vulnerability assessment and penetration testing. Policies governing
the above need to be approved at the board level. Suitable guidelines
in this regard will be issued to banks by end-June 2013.
Payment and Settlement Systems
White Label Point of Sale
103. In order to increase the reach of Point of Sale (POS)
infrastructure to rural areas and promote electronic payments, it is
proposed to:
• prepare a discussion paper on White Label POS and place it in the public domain for comments.
Expansion of Payment Infrastructure
104. In order to achieve a truly inter-operable and integrated
payment system, it is necessary that the payment systems operated by
non-banks are also connected to existing inter-bank card payment
systems as envisaged in the document entitled ‘Payment Systems in India:
Vision 2012-15’. Accordingly, it is proposed to:
• issue draft guidelines/access policy for allowing non-bank
authorised entities to be part of the payment system infrastructure.
Concentration Risk in Payment System Infrastructure
105. Exclusivity or near monopolistic positions of any one or
two stakeholders in the payment space is seen as a risk which needs to
be addressed. This was highlighted in the ‘Payment Systems in India:
Vision 2012-15’. Accordingly, it is proposed to:
• prepare a discussion paper examining the measures to be
taken to mitigate and eliminate concentration risk in payment system
infrastructure.
Alternate Payments: Committee for Implementation of GIRO Based Payment System
106. Following the announcement in the SQR, a Committee for
Implementation of GIRO based Payment System (Chairman: Shri G.
Padmanabhan) was constituted in January 2013. The Committee has
submitted its report on April 29, 2013. The report is under
examination.
Uniform Routing Code and Account Number Structure
107. As announced in the SQR, a Technical Committee (Chairman:
Shri Vijay Chugh) comprising various stakeholders was constituted to
examine the feasibility of a uniform routing code and uniform account
number across banks. The Committee has since submitted its report and
its recommendations are being examined by the Reserve Bank.
Working Group to Study Feasibility of Aadhaar as Additional Factor of Authentication for Card Present Transactions
108. Following one of the recommendations of the Working Group
on securing card present transactions (Chairperson: Ms. Gowri
Mukherjee), a Working Group (Chairman: Shri Pulak Kumar Sinha) has been
constituted in March 2013 to study the feasibility of Aadhaar as an
additional factor for authentication of card present transactions and
other related issues. The Working Group is expected to submit its
report by end-June 2013.
Currency Management
Distribution of Banknotes and Coins – Review of Incentives and Penalties
109. In pursuance of the announcement made in the Monetary
Policy Statement of April 2012, a roadmap for making available services
relating to distribution of banknotes and coins to members of the
public by identified branches of banks for improved customer service is
being worked out.
Detailed guidelines are being issued by end-June 2013.
Distribution of Banknotes and Coins – Alternative Avenues
110. With a view to effectively meeting the growing demand for
banknotes and coins in the country, there is a need for identification
of alternative avenues for their distribution by banks. For this
purpose, banks may explore the possibility of offering these services
through Business Correspondents (BC) and consider engaging the services
of Cash in Transit (CIT) entities for the purpose of distribution of
banknotes and coins, thereby addressing the last mile connectivity
issues.
Detailed guidelines will be issued by end-June 2013.
Improving Currency Distribution in Districts – Identification of Lead Banks
111. With a view to ensuring that banks have a more pronounced
stake in the distribution of banknotes and coins and also to facilitate
their uninterrupted supply in places other than metropolitan and urban
centres, it is proposed to formulate a scheme on the lines of the Lead
Bank Scheme and to allot specific areas (districts/States) to
individual banks. The identified Lead Bank will be responsible for
ensuring that the genuine needs of people for clean notes and coins are
appropriately met through proper coordination with the Currency Chests
and Small Coin Depots situated in that area.
Detailed guidelines will be issued by end-June 2013.
Detection and Reporting of Counterfeit Banknotes
112. The Department-related Parliament Standing Committee
(DPSC) on Ministry of Home Affairs in its 161st Report has recommended
that efforts by the Reserve Bank to constantly upgrade security
features in high value currency notes and strengthen mechanisms for
detection of counterfeit notes should be made more effective in
eradicating the menace of counterfeit notes.
113. While incorporating new security features/new designs in
the banknotes to stay ahead of counterfeiters is an ongoing process,
the process of incorporation of better and improved security features
has since been initiated by the Government of India in consultation
with the Reserve Bank and other stakeholders.
114. Furthermore, as a step towards strengthening the mechanism
for detection of counterfeit notes, the Reserve Bank has advised banks
in May 2012 to re-align their cash management to ensure that cash
receipts in denomination of
`100 and above
are not put into re-circulation without being machine-processed for
authenticity. Banks were also advised in November 2012 that wherever
counterfeit notes are detected but not impounded and reported, it will
be construed as wilful involvement of the bank concerned in circulating
counterfeit notes and may attract penal measures.
115. In view of the recommendation of the DPSC for addressing
the menace of counterfeit notes, it has now been decided that in order
to encourage banks to report counterfeit notes detected by them, a
scheme of incentives for banks will be introduced. Simultaneously, the
existing penalty for non-detection and non-reporting of counterfeit
notes by banks is being revisited.
Detailed guidelines will be issued by end-June 2013.
Second Quarter Review
116. The next review of the developmental and regulatory
policies will be undertaken as part of the Second Quarter Review of
Monetary Policy on Tuesday, October 29, 2013.
