During 2016-17, the Indian banking sector had to cope with the concerns about deteriorating asset quality, on
the one hand, and a sharp decline in credit growth, on the other, while supporting the government in its initiatives
to further reach out to the public and in promoting digitalisation of the modes of payments in the economy. The
branch authorisation policy was revised to harmonise the treatment of different forms of bank presence for the
purpose of opening banking outlets in under-served areas. Empowered by requisite legislative provisions put in
place by the government, the Reserve Bank focused on strengthening the institutional framework to address asset
quality concerns by improving the recovery process and the early response mechanism. Having gained experience
with the licensing of small finance and payments banks, the Reserve Bank explored the scope of introducing more
differentiated banks such as ‘wholesale and long-term finance banks’ and also examined the regulatory challenges
posed by innovations by Fin Tech entities in the financial landscape. Apart from focusing on the supervision of
financial conglomerates and early response to asset quality deterioration, the Reserve Bank formalised a framework
for taking enforcement action against banks for non-compliance with guidelines and instructions issued by it. For
ensuring timely and effective redressal of customer grievances in non-banking financial companies (NBFCs), the
Reserve Bank proposes to formulate an appropriate Ombudsman Scheme for NBFCs.
VI.1 The banking sector continued to grapple
with the challenge of rising non-performing
assets (NPAs) during 2016-17. In view of the
mounting stress on asset quality, the banking
sector’s performance in terms of profitability and
return on assets came under pressure in 2016-
17. To deal with stressed assets, the existing
regulations were revised in consultation with the
stakeholders. Subsequent to promulgation of the
Banking Regulation (Amendment) Ordinance,
the Reserve Bank has taken several steps to
expedite the process of resolution of certain large
value stressed accounts. The market perception
of this Ordinance seems to be positive for banks
with relatively high level of non-performing assets
(NPAs) and for firms with greater capacity to meet
their interest obligations (Box VI.1). Further, in
order to bring in greater transparency, banks were
mandated to make suitable disclosures in the
Notes to Accounts to Annual Financial Statements
for 2016-17 and onward with regard to divergences in asset classification and provisioning from the
Reserve Bank’s supervisory assessment.
VI.2 Keeping in view the entry of differentiated
banks and their role in financial inclusion, the branch
authorisation policy was revised to harmonise the
treatment of different forms of a bank’s presence
for the purpose of opening banking outlets in
under-served areas. Licenses were issued to
more players in the banking sector and some small
finance banks (SFBs) and payments banks (PBs)
began operations during the year. The Reserve
Bank also explored the scope for operations of
other types of differentiated banks to cater to the
sector-specific financing needs of the economy.
Box VI.1
Market Reaction to the NPA Ordinance*
The President approved the Banking Regulation
(Amendment) Ordinance, 2017, on May 5, 2017. This
ordinance empowers the Reserve Bank to direct banking
companies to initiate insolvency proceedings in respect
of corporate borrowers in default, under the provisions of
the Insolvency and Bankruptcy Code, 2016 (IBC). It also
enables the Reserve Bank to constitute committees to
advise banking companies on resolution of stressed assets.
Following this, the Reserve Bank released a detailed
action plan to implement the Ordinance on May 22, 2017.
An Internal Advisory Committee (IAC) constituted by the
Reserve Bank held its first meeting on June 12, 2017. The
IAC recommended that all accounts with an outstanding
amount greater than ₹50 billion, and with more than 60 per
cent classified as non-performing by banks as on March 31,
2016 be resolved using the new IBC. Using these criteria, 12
accounts aggregating to around 25 per cent of the current
gross NPAs were referred to the National Company Law
Tribunal (NCLT), a statutory body responsible for judging
insolvency proceedings under the new IBC law1.
Against this backdrop, the following two events are
analysed viz., (i) the manner in which the market perceived
the passage of the Ordinance empowering the Reserve
Bank, and (ii) the reaction of stakeholders to the news of
identification of default accounts.
With regard to the first event, the event date is defined as
the date on which the Ordinance was approved (May 5,
2017). The event window around which the market response
is analysed starts nine trading days before the event date
and ends nine trading days after the event date. However,
one week prior to the approval of Ordinance, the Finance
Minister hinted at empowering the Reserve Bank to address
the problem of non-performing assets (NPAs) in the Indian
banking system. Since, it was likely that the stock market
might have reacted prior to the actual event date, hence the
principal empirical analysis here is based on the response
of the stock market from five trading days prior to the event
till the event date.
The response of the market is analysed by computing
abnormal returns (ARs), which are defined as the difference
between realised returns and expected returns. Expected
returns are estimated by using the market model wherein
for each company or bank, its stock returns are regressed
on market returns separately over the estimation window
starting 250 days prior to the event window and ending 30
days before the announcement date. The equation used for
estimation is given below.

The analysis focuses on the 36 scheduled commercial
banks for which stock market data are available. Those
banks that have a non-performing asset to advances ratio
(NPAR) above the sample median value for NPAR for all
banks in 2015-16 are classified as stressed banks. The
remaining are classified as non-stressed banks.2 While a
greater proportion of public sector banks are classified as
stressed, almost all private sector banks are classified as
non-stressed banks. The firm sample is divided into three
sets on the basis of interest coverage ratio (ICR) in 2015-16:
(i) low quality (ICR < 1), (ii) intermediate quality (1 ≤ ICR ≤ 2), and (iii) high quality (ICR ≥ 2).3
The event study analysis for all firms and associated
banks is structured as follows: (i) comparison of stressed banks and non-stressed banks, (ii) comparison of low
quality, intermediate quality, and high quality firms, and
(iii) comparison of low and high quality firms, segregated
on whether their lead banks are stressed or non-stressed
banks.4
The second event study uses June 12, 2017 - the date of
the IAC’s first meeting - as the event date. It examines stock
price reactions of the twelve firms that were referred to NCLT
for resolution, and the lead banks of these firms. To study the
relative market perception of these firms, all exchange listed
firms in the same industry as the defaulter firms are used as
control firms.5 For the bank analysis, the thirty-six banks in
the sample are divided into those that are the lead banks of
any of these twelve defaulter firms and the remaining banks.
Results and Inference
Figure 1 displays the market response to the President's
approval of the Banking Amendment Ordinance. Abnormal
returns of stressed banks increased sharply following the Finance Minister’s announcement (dashed red line at -5
in Chart 1, Panel A). This pattern continues till the event
date which is the passage of the Ordinance. In contrast,
non-stressed banks witnessed a more modest increase
in abnormal returns. Strikingly, abnormal returns between
stressed and non-stressed banks widened to almost 5 per
cent indicating that markets perceived the amendment
would help stressed banks in resolving their NPA problem.
Panel B shows that low and intermediate quality firms
performed worse than high quality firms. Overall, these
results indicate that the recent amendment to the existing
Banking Regulation Act is perceived by the market as being
more positive for stressed banks, but negative for low and
intermediate quality firms.
The remaining panels in Chart 1 further explore which firms
are driving these results, based on whether the firm’s lead
bank is classified as stressed or non-stressed. Panel C
and Panel D examine the market reaction of low and high
quality firms, separating firms that are related to stressed banks vis-à-vis non-stressed banks. Low quality firms linked
to stressed banks performed worse than low quality firms
linked to non-stressed banks. In contrast, high quality firms
linked to stressed banks performed better than high quality
firms linked to non-stressed banks at least in the days
immediately following the event date. It appears that the
market lost confidence in low quality firms linked to stressed
banks but high quality firms linked to stressed banks are
seen in a positive light. One possible explanation is that high
quality firms linked to stressed banks benefit from a balance
sheet clean-up of stressed banks. The market may also be
reflecting long term benefits to high quality firms possibly
through the reallocation of resources away from low quality
firms (Hsieh and Klenow, 2009 and Kulkarni, 2017).

The second event study focuses on the date of the IAC’s
first meeting on June 12, 2017 when defaulter accounts
were identified. Chart 2 displays the response of the market
to the announcement in reference to defaulter accounts.
Panel A shows that defaulter firms realised a decline in
abnormal stock returns relative to other firms belonging to
the same industry as the defaulter firm. The identification
of these firms by the Reserve Bank was a clear indication of their poor financial health, and it is evident that market
stakeholders lost confidence in these firms. Panel B displays
how the market responded to the lead banks of defaulter
firms relative to other banks. In general, the abnormal
returns increased for both the sets of banks immediately
after the event.

In summary, both event studies point to a positive market
reaction for banks but a negative market reaction for
distressed firms. Thus, based on the market reaction, the
Ordinance is good news for stressed banks as well as high
quality borrowers. It has the potential to increase efficiency
of capital allocation in the Indian economy with significant
positive spillover effects on healthy firms and to rejuvenate
the banking sector.
References:
1. Hsieh, C. and Klenow, P. (2009). “Misallocation and
manufacturing TFP in China and India.” The Quarterly
Journal of Economics, 1124(4), 1403-1448.
2. Kulkarni N. (2017). “Creditor rights and allocative
distortions: Evidence from India.” CAFRAL Working
Paper. |
VI.3 The Reserve Bank continued the process
of harmonising the regulatory framework for
cooperative banks and NBFCs with that of
commercial banks. Apart from strengthening
cooperative banks through mergers and licensing,
there was also a move towards reducing the tiers in the cooperative structure with a view to bringing
down the cost of borrowings for final borrowers.
Keeping in view the greater role envisaged
for asset reconstruction companies (ARCs) in
resolving stressed assets, regulatory norms for
them were revised.
VI.4 With the entry of new forms of differentiated
banks, the Reserve Bank began the process of developing a suitable framework for supervising
payment banks and small finance banks. The
Reserve Bank also identified a revised set of 11
financial conglomerates (FCs) for monitoring
purposes. The Reserve Bank formalised a
framework for taking enforcement action against
banks for non-compliance with guidelines and
instructions issued by it.
FINANCIAL STABILITY UNIT (FSU)
VI.5 FSU is responsible for analysing the risks
to financial stability, undertaking macro-prudential
surveillance through systemic stress tests and
other tools, and disseminating information relating
to the status of and challenges to financial
stability through the bi-annual Financial Stability
Report (FSR). FSU also acts as secretariat to
the sub-committee of the Financial Stability and
Development Council (FSDC), a coordination
council of regulators for maintaining financial
stability and monitoring macro-prudential
regulation in the country.
Agenda for 2016-17: Implementation Status
VI.6 As planned, FSR was published in
December 2016 along with the Report on Trend
and Progress of Banking in India (RTP) and in June
2017. Towards strengthening the stress testing
framework, a methodology for estimating sectoral
probability of defaults to model the dynamics of
risk weighted assets was developed and its output
is being assessed.
VI.7 FSU is coordinating the macro-level stress
testing exercise of all commercial banks as part
of the Financial Sector Assessment Programme
(FSAP) conducted jointly by the International
Monetary Fund (IMF) and the World Bank.
The Unit carried out stress tests based on the
scenarios agreed upon under FSAP so as to
broaden the scenario-based stress test analysis.
The key emerging sectoral vulnerabilities of banks
have also been analysed.
VI.8 The FSDC sub-committee held two
meetings in 2016-17 and reviewed various issues
including establishing a statutory financial data
management centre, developing corporate bond
market, minimum assured return scheme under
the National Pension System (NPS), regulation of
spot exchanges, setting up of computer emergency response team for the financial sector (CERT-Fin),
roadmap for the National Centre for Financial
Education, single pension regulator for the
pension sector in India, extant macro-prudential
framework in India, and framework for identification
of systemically important financial institutions
(SIFIs). The status of the recommendations of
the financial stability board (FSB) peer review of
India and the progress of FSAP 2017 were also
discussed by the sub-committee.
VI.9 Inter-Regulatory Technical Group (IRTG),
a sub-group of the FSDC sub-committee held
one meeting during the year and discussed the
implementation of the recommendations of Legal
Entity Identifier (LEI) working group.
Agenda for 2017-18
VI.10 In the year ahead, FSU will continue to
conduct macro-prudential surveillance, publish the
bi-annual FSR and conduct meetings of the FSDC
sub-committee. The feasibility of expanding the
contagion (network) analysis to urban cooperative
banks will also be examined.
REGULATION OF FINANCIAL
INTERMEDIARIES
Commercial Banks: Department of Banking
Regulation (DBR)
VI.11 DBR is the nodal department for regulation
of commercial banks. The regulatory measures
focus on ensuring a healthy and competitive
banking system in the country to promote financial
stability, and cost effective and inclusive banking
services.
Agenda for 2016-17: Implementation Status
Financial Stress and Reinforcements
VI.12 During 2016-17, the Reserve Bank further
strengthened the regulatory framework for dealing
with stressed assets, inter alia, by revising its guidelines on the resolution of stressed assets;
viz., the strategic debt restructuring (SDR) scheme,
the scheme for sustainable structuring of stressed
assets (S4A), flexible structuring of existing long
term project loans to infrastructure and core
industries; and guidelines for projects under
implementation. Keeping in view the critical role of
the bankruptcy and insolvency regime in shaping
the business environment as well as resolution of
debtors in distress, the government enacted the
Insolvency and Bankruptcy Code, 2016 in May
2016. This single law will override multiple and
overlapping laws and adjudicating forums dealing
with financial failures and insolvency of companies
and individuals in India (Box VI.2).
Box VI.2
The Insolvency and Bankruptcy Code, 2016
The Insolvency and Bankruptcy Code (IBC), 2016
consolidates and amends the laws relating to reorganisation
and insolvency resolution of corporate persons (excluding
financial service providers), partnership firms and individuals
in a time bound manner for maximising the value of assets
of such entities. Some of the key aspects of the IBC are set
out below.
1. IBC lays down a resolution process that is time bound
(180 days) and is undertaken by professionals. It
creates an institutional mechanism for the insolvency
resolution process for businesses either by coming up
with a viable survival mechanism or by ensuring their
prompt liquidation.
2. IBC’s institutional infrastructure comprises four pillars,
viz., insolvency professionals, information utilities,
adjudicating authorities and the Insolvency and
Bankruptcy Board of India (IBBI).
3. While insolvency resolution for companies will be
adjudicated by the National Company Law Tribunal
(NCLT), the same for firms and individuals will be
adjudicated by the Debt Recovery Tribunals (DRTs).
The IBBI is the apex body for promoting transparency
and governance in IBC’s administration.
4. Where a corporate debtor has defaulted in paying
a debt, the corporate insolvency resolution process may be initiated by a financial creditor, an operational
creditor or the corporate debtor itself.
5. A default-based test for entry into the insolvency
resolution process permits early intervention when the
corporate debtor shows early signs of financial distress.
6. On the distribution of proceeds from the sale of assets,
first priority is accorded to the costs of insolvency
resolution and liquidation, and second to the secured
debt together with workmen’s dues for the preceding
24 months. Central and state governments' dues are
ranked lower in priority.
By providing an effective legal framework for timely
resolution of insolvency and bankruptcy, IBC will support
the development of credit and corporate bond markets,
strengthen debt recovery, encourage entrepreneurship,
improve ease of doing business and facilitate more
investments. The code proposes a paradigm shift from
the existing ‘debtor in possession’ to a ‘creditor in control’
regime. Moreover, the priority accorded to secured creditors
is advantageous for entities such as banks.
IBC’s success hinges to a great extent on the efficient
functioning of information utilities. An adequate number of
insolvency professionals will also be needed to handle the
large number of cases. More benches of NCLT may also
have to be set up as the volume of references increases. |
VI.13 With a view to further strengthening banks’
ability to resolve their stressed assets effectively
and to enhance transparency in the entire
process, the Reserve Bank issued guidelines on
sale of stressed assets by banks on September
1, 2016. The guidelines require banks to identify
and list internally, at least once a year, the
specific financial assets identified for sale to other
institutions, including securitisation companies
(SCs)/reconstruction companies (RCs).
Branch Authorisation Policy
VI.14 The Reserve Bank issued final guidelines
on May 18, 2017, clarifying on what constitutes a
‘banking outlet’ and harmonising the treatment of
different forms of bank presence for the purpose of opening banking outlets in under-served areas
(Box VI.3).
Box VI.3
Rationalisation of Branch Authorisation
The first bi-monthly monetary policy statement 2016-17
announced on April 5, 2016 proposed to redefine branches
and permissible methods of outreach, keeping in mind the
various attributes of banks and the types of services that
are sought to be provided. Accordingly, based on the report
of an internal working group and public comments on the
report, final guidelines clarifying what is a ‘banking outlet’
and harmonising the treatment of different forms of bank
presence for the purpose of opening outlets in under-served
areas were issued on May 18, 2017 as under:
Banking outlet: A banking outlet includes a branch as well
as business correspondent (BC) outlet, among others.
For a domestic scheduled commercial bank (DSCB), a
small finance bank (SFB) and a payment bank (PB), it is
a fixed point service delivery unit, manned by either bank’s
staff or its BC where services of acceptance of deposits,
encashment of cheques/ cash withdrawal or lending of
money are provided for a minimum of four hours per day
for at least five days a week. If it provides services for less
number of hours per day and days in a week, it is considered
a part-time banking outlet.
Unbanked rural centre (URC): It is a rural (Tier 5 and 6)
centre that does not have a core banking solution (CBS)
enabled banking outlet of an SCB, a PB, an SFB or an RRB
nor a branch of a local area bank or a licensed co-operative
bank for carrying out customer based banking transactions.
Thus, the role of technological advances in banking services
is recognised as against the earlier definition based on a
brick and mortar structure.
Conditions for opening banking outlets: At least 25 per cent
of banking outlets opened during a financial year must be
opened in unbanked rural centres. Pro-rata benefit for part-time
banking outlets will also be extended. The opening of a
banking outlet/part-time banking outlet in a Tier 3 to 6 centre
of north-eastern states, Sikkim and left wing extremism
affected districts, notified by the Government of India, will be
considered as equivalent to opening a banking outlet/part-time
banking outlet in a URC. A bank opening a brick and
mortar branch in a rural (Tier 5 and 6) centre which – owing to
the presence of a BC outlet of another bank – is not defined
as a URC, will also be eligible for the same incentive. Similar
treatment will be given for opening a banking outlet in a rural
centre which is served only by a banking outlet of a PB.
Micro Finance Institution (MFI) structure of SFBs: Towards
preserving the advantages of the MFI/NBFC structure of
SFBs to promote financial inclusion, they have been allowed
three years from the commencement date, to align their
banking network with the extant guidelines. Till such time, the
existing structure may continue and the existing branches
will be treated as banking outlets though not immediately
reckoning for the 25 per cent norm. Nevertheless, during this
period of three years, the 25 per cent norm will be applicable
for all the banking outlets opened or converted from the
existing MFI branches in a year.
Role of board of directors: Financial inclusion being the
overarching objective of the revised framework and given the
operational flexibility being provided to banks, the boards of
banks have been accorded overall responsibility to ensure
that all the guidelines are complied with, in letter and spirit. |
Diversification of Lending Base
VI.15 Towards aligning the exposure norms for
Indian banks with the Basel Committee of Banking
Supervision (BCBS) standards and to further
diversify the banks’ lending base, on December 1,
2016, the Reserve Bank issued final guidelines on
large exposures framework (LEF), effective April
1, 2019. The exposure limits will consider a bank’s
exposure to all its counterparties and groups of
connected counterparties.
VI.16 To encourage funding from sources other
than bank credit for the corporate sector, the
Reserve Bank, in August 2016, issued guidelines
on enhancing credit supply for large borrowers
through market mechanism, effective April 1, 2017.
VI.17 Scheduled commercial banks (SCBs) were
advised that housing finance companies (HFCs)
will be risk weighted in a manner similar to that of
corporates to bring uniformity in the application of
risk weights among banks on their exposures.
VI.18 Banks were allowed to invest in Real Estate
Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) within the overall ceiling
of 20 per cent of net worth for direct investment
in convertible bonds/ debentures, units of equity-oriented
mutual funds and exposures to venture
capital funds.
Capital and Risk Management
VI.19 With a view to developing the market
for rupee-denominated bonds overseas and
providing an additional avenue for raising capital,
banks were permitted to issue rupee-denominated
perpetual debt instruments (PDI) overseas as part
of additional tier (AT)-1 capital and debt capital
instruments as part of Tier 2 capital.
VI.20 The guidelines on capital requirements
for banks’ exposures to central counterparties,
issued on November 10, 2016 and effective from
April 1, 2018, specified the credit risk treatment
for exposures to central counterparties arising from over the counter derivatives transactions,
exchange traded derivatives transactions,
securities financing transactions and long
settlement transactions. The Reserve Bank also
issued guidelines for computing exposure for
counterparty credit risk arising from derivatives
transactions.
VI.21 In line with the revised BCBS framework on
interest rate risk in the banking book, the Reserve
Bank issued draft guidelines on governance,
measurement and management of interest rate
risk in banking book on February 2, 2017 for
feedback/comments.
VI.22 In April 2015, the Reserve Bank had
formulated a scheme for setting up of IFSC banking
units (IBUs) by banks in International Financial
Services Centres (IFSCs). The instructions under
the scheme were modified in light of the feedback
from stakeholders (Box VI.4).
Box VI.4
Modifications in Permissible Activities of IFSC Banking Units (IBUs)
The scheme for setting up of IFSC banking units aims at
enabling banks to undertake activities largely akin to those
carried out by overseas branches of Indian banks. Certain
activities are, however, not allowed in view of the fact that
IBUs are functioning from the Indian soil and the legal and
regulatory framework is still governed by domestic laws
and there is no separate financial sector regulator for IFSC.
Nevertheless, IBUs were allowed progressively to undertake
more activities as recently as in April 2017 as summarised
below:
1. IBUs may undertake derivative transactions including
structured products that the banks operating in India
have been allowed. However, IBUs shall obtain the
Reserve Bank’s prior approval for offering any other
derivatives products.
2. Fixed deposits accepted by IBUs from non-banks
cannot be repaid prematurely within the first year.
However, fixed deposits accepted as collateral from
non-banks for availing credit facilities from IBUs or
deposited as margin in favour of an exchange, can be
adjusted prematurely in the event of a margin call or a
default in repayment.
3. An IBU can be a trading member of an exchange in
the IFSC for trading in the interest rate and currency
derivatives segments that banks operating in India have
been allowed to undertake.
4. An IBU can become a professional clearing member of
the exchange in the IFSC for clearing and settlement in
any derivatives segment.
5. IBUs are allowed to extend the facilities of bank
guarantees and short term loans to IFSC stock broking/
commodity broking entities.
6. Any financial institution or a branch of a financial
institution including an IBU operating in IFSC can
maintain special non-resident rupee (SNRR) accounts
with a bank (authorised dealer) in the domestic sector
for meeting its administrative expenses in Indian
rupee. These accounts must be funded only by foreign
currency remittances through a channel appropriate for
international remittances which will be subject to extant
FEMA regulations.
A Task Force (Chairman: Minister of State for Finance) is
monitoring the progress in the development of IFSCs. The
Reserve Bank is a member of the task force. |
VI.23 After a review of the criteria for determining
customer liability in unauthorised electronic
banking transactions, the final guidelines on
customer protection – limiting liabilities of
customers – have been issued.
VI.24 A regulatory framework making elements
of Basel III standards selectively applicable to the
All India Financial Institutions (AIFIs) is being put
in place.
VI.25 An Aadhaar enabled one time pin (OTP)
based e-KYC process was allowed in December
2016 for on-boarding of customers subject
to certain conditions. The Reserve Bank also
prescribed a customer due diligence procedure
for opening accounts of judicial persons such as
the government or its departments, societies, universities and local bodies like village
panchayats.
VI.26 The Reserve Bank issued directions to
scheduled commercial banks (excluding RRBs)
to comply with Indian Accounting Standards (Ind
AS) for financial statements beginning April 1,
2018 onwards, with comparatives for the periods
ending March 31, 2018 or thereafter. Banks were
also advised to submit proforma Ind AS financial
statements for the half year ended September
30, 2016. The Reserve Bank is in the process of
finalising the draft guidelines on key aspects of
expected credit loss (ECL) under Ind AS to ensure
minimum standards as also consistency in the
application of the standards to the extent possible
(Box VI.5).
Box VI.5
Implementation of Ind AS - Guidance on the Expected Credit Loss Framework
The implementation of Ind AS will mark a major shift from
the current accounting framework followed by banks in India
which is based on a melange of accounting standards and
regulatory guidelines, especially in certain key areas such
as classification and measurement of financial instruments,
and impairment of financial assets.
Recent developments in the banking system underscore
the continued importance of adequate provisioning,
commensurate with the increase in credit risk. Applying
an incurred loss provisioning framework can result in
impairments that are recognised after the loss event has
occurred, when the probability of default is close to 100
per cent. Provisions are not made as credit risk increases
significantly (although short of default) even where bank
management has information about stress/future likely
losses.
Ind AS 109 expresses the view that delinquency is a lagging
indicator of significant increase in credit risk. Banks are,
therefore, expected to have credit risk assessment and
measurement processes in place to ensure that credit risk
increases are detected ahead of exposures becoming past
due or delinquent, for timely transfer to lifetime expected credit losses. The standard differentiates between the three
stages of credit risk:
-
The financial assets in Stage 1 are those with no
significant increase in credit risk since initial recognition,
or financial instruments that have low credit risk at the
reporting date. For these assets, 12-month expected
credit losses (ECLs) are recognised in profit or loss.
-
The financial instruments in Stage 2 are those which
have experienced a significant increase in credit risk
since initial recognition, but with no objective evidence
of impairment. For such assets, lifetime ECLs are
recognised. This accounting treatment is based on
the rationale that an economic loss arises when ECLs
significantly exceed initial expectations. By recognising
lifetime ECLs following a significant increase in credit
risk, this economic loss is reflected in the financial
statements.
The financial instruments in Stage 3 comprise those for
which objective evidence indicates impairment at the
reporting date. These are typically non-performing loans
where the bank considers that the borrower is unlikely to pay the existing debt. Lifetime ECLs are recognised
for these exposures.
The estimated overall impact of Ind AS on regulatory
capital is likely to be adverse mainly due to the impairment
requirements under it. In view of the capital constraints
already faced by many banks, particularly public sector
banks, the Reserve Bank believes that it may be appropriate
to introduce transitional arrangements for the impact of
accounting changes on regulatory capital. The primary
objective of a transitional arrangement is to avoid a 'capital shock’, by giving banks time to rebuild their capital resources
following a potentially significant negative impact arising
from the introduction of ECL accounting.
The Reserve Bank is also considering the introduction of
‘regulatory floor’ for provisioning in the regulatory capital
calculation, i.e., when a bank makes lower accounting
provisions than the standardised regulatory floor amounts,
the shortfall would be deducted from the bank’s common
equity tier (CET)1 capital, which would incentivise robust
provisioning. |
VI.27 A discussion paper on wholesale and long-term
finance banks was released in April 2017.
It explores the scope of setting up more such
differentiated banks in a backdrop of in-principle
approvals and licenses issued to set up payments
banks and small finance banks (Box VI.6).
VI.28 Considering payments banks and small
finance banks’ differentiated nature of business
and their focus on financial inclusion, separate operating guidelines for these banks were issued
in October 2016. The guidelines elaborate
upon the areas of prudential regulations, risk
management, ownership and control regulations,
corporate governance, and banking operations to
be adhered to by these banks.
Box VI.6
Discussion Paper on Wholesale and Long-Term Finance Banks
The proposed differentiated banks – wholesale and long-term
finance (WLTF) banks – are expected to focus primarily
on lending to infrastructure sector and small, medium
and corporate businesses. They can mobilise liquidity for
banks and financial institutions directly originating priority
sector assets, through the securitisation of such assets
and actively dealing in them as market makers. They may
also act as market-makers in securities such as corporate
bonds, credit derivatives, warehouse receipts and take-out
financing. These banks can provide refinance to lending
institutions and may be present in capital markets in the
form of aggregators. The primary sources of funds for these
banks could be a combination of wholesale and long term
deposits (above a large threshold), debt/equity capital raised
from primary market issues or private placement, and term
borrowings from banks and other financial institutions.
Financial structures in some countries support banks
concentrating on wholesale and long-term financing. Some
of these institutions in the public sector, which began as part of the government-backed development policy, have begun
their transition towards privatisation.
The stipulations for WLTF banks, expected to be different
from universal banks, are mooted as: (i) higher initial
minimum capital of ₹10 billion, (ii) negligible lending
exposure to the retail sector, no savings accounts, and a
higher threshold for term deposits of above ₹100 million, (iii)
exemption from Statutory Liquidity Ratio (SLR) requirements
and some relaxation in the prudential norms on liquidity risk,
and (iv) exemption from a mandatory rural presence and
priority sector lending requirements.
The issues for discussion posed by the discussion paper
are: (i) whether there is a need for licensing WLTF banks
when their proposed activities are currently allowed for
universal banks, (ii) whether the time is opportune for
this, (iii) what will be the net impact of such players on the
financial system, and (iv) whether the proposed regulatory
framework is appropriate. |
VI.29 As part of the efforts to promote financial
inclusion through a greater focus on small credit
and payment/remittance facilities, the Reserve Bank issued licenses to eight SFBs and six PBs
during the year taking the number of licensees to
10 in case of SFBs and seven in case of PBs. Eight
SFBs and four PBs have commenced operations.
VI.30 The Depositors' Education and Awareness
(DEA) Fund, started in February 2014, had
accumulated a corpus of ₹124 billion at end-
March, 2017, and a total of 2,145 banks were
registered for transfer of unclaimed amounts to
the DEA Fund.
VI.31 The fields of specialisation for the directors
on the boards of commercial banks (excluding
RRBs) were broadened in May 2017 to include
(i) information technology, (ii) payment and
settlement systems, (iii) human resources, (iv) risk
management, and (v) business management to
bring in persons with professional knowledge and
experience in these fields to the banks’ boards.
VI.32 An inter-regulatory working group
(Chairman: Shri Sudarshan Sen, Executive
Director) was set up in July 2016 with members
drawn from the Reserve Bank, SEBI, IRDA,
PFRDA, IDRBT, select banks and rating agencies
to examine the granular aspects of Fin Tech,
particularly from the perspective of reorienting the
regulatory framework. The report of the working
group was submitted to the Reserve Bank in
February 2017 for consideration.
Agenda for 2017-18
VI.33 The Reserve Bank will continue to focus
on improving the institutional framework for a
sound banking system in the country, particularly
addressing asset quality issues. Implementation
of Ind AS and the Basel III framework will be the
areas of focus during 2017-18.
VI.34 In the context of Ind AS implementation,
the Bank will issue guidelines on regulatory floors
for asset provisioning. Guidelines on mechanics
of the transitional arrangements will also be
issued.
VI.35 The Reserve Bank will analyse the Ind
AS financial statements submitted by banks for
the quarter ended June 30, 2017 as part of the
regulatory reporting. It will review other extant
instructions in the light of Ind AS implementation.
VI.36 A discussion paper on margin requirements
for non-centrally cleared derivatives was issued
in May 2016. The final guidelines on margin
requirements for non-centrally cleared derivatives
will be issued, after a review of the developments
globally, as also the availability of infrastructure
required for exchange of such margins in India.
VI.37 The revised framework for securitisation,
the minimum capital for market risk and the
guidelines on corporate governance as per Basel
standards shall also be issued.
VI.38 The Basel III norms prescribe two minimum
standards for banks – the liquidity coverage ratio
(LCR) and the net stable funding ratio (NSFR) –
for promoting short-term resilience of banks to
potential liquidity disruptions and resilience over
a longer-term time horizon, respectively. The LCR
guidelines are effective in India since January 1,
2015. The draft guidelines on NSFR were issued
in May 2015. The final guidelines will be issued
during 2017-18.
VI.39 The revised regulatory framework for the
AIFIs, including extension of various elements of
Basel III standards relevant to these institutions,
will be issued after due consultations with
stakeholders.
Cooperative Banks: Department of
Cooperative Bank Regulation (DCBR)
VI.40 The Reserve Bank continues to play
a key role in the revival and strengthening of
the cooperative banking sector by fortifying the
regulatory and supervisory framework. In this
context, DCBR, in charge of prudential regulations
of cooperative banks, took the following initiatives
in 2016-17.
Agenda for 2016-17: Implementation Status
Harmonisation of Regulatory Policies
VI.41 Taking the process of harmonisation of
regulations forward, cooperative banks fulfilling
certain criteria were allowed to issue/ redeem
long term (subordinated) deposits (LTDs) without
the prior approval of the Reserve Bank provided
mandatory disclosure requirements were made.
The guidelines on non-SLR investments by rural
cooperative banks were aligned with those for
urban cooperative banks (UCBs). Guidelines
were issued for deployment of point of sale (POS) terminals and issuance of prepaid instruments by
all cooperative banks.
Revival and Licensing of Unlicensed DCCBs
VI.42 The government launched a scheme for
revival of 23 unlicensed DCCBs (Uttar Pradesh
-16, Maharashtra - 3, Jammu and Kashmir -
3 and West Bengal - 1) in November 2014.
Accordingly, a tripartite agreement in the form
of a memorandum of understanding was signed
between the central government, the concerned
state government and NABARD. With the release
of funds by the government, the concerned state
government and NABARD, banking licenses were
issued to the unlicensed DCCBs in Uttar Pradesh,
Maharashtra and West Bengal, bringing down
the number of unlicensed DCCBs to three by
September 30, 2016. Licensing of the remaining
DCCBs has been taken up with the state of
Jammu & Kashmir. There is also a move towards
reducing the tiers in the cooperative structure
with a view to reducing the cost of borrowings for
final borrowers (Box VI.7).
Box VI.7
Two-tier Rural Cooperative Structure in Jharkhand
The short term cooperative credit structure (STCCS) of
the country primarily meets the crop and working capital
requirements of farmers and rural artisans. The pyramid of
STCCS is primarily 3-tier and is federal in nature within a
state. The apex level is the state cooperative bank (StCB),
at the district level there are district central cooperative
banks (DCCBs) and at the village level, there are primary
agricultural credit societies (PACS). Across India, there are
more than 93,000 PACS having a membership base of 120
million. The structure of STCCS is not uniform across the
states with a 3-tier structure in 16 states and 2-tier structure
in 13 smaller states and union territories where PACS are
directly affiliated to StCBs. There is a mixed structure in
three states – 2-tier in some districts and 3-tier in others.
Notwithstanding the phenomenal outreach and volume
of operations, the financial health of STCCS has been a matter of concern. In a 3-tier credit structure, each tier
adds to cost and margins leading to an escalation in the
cost of borrowings for the ultimate borrowers. The interest
rate structure also varies from one state to another. Since
STCCS deals with relatively larger number of small value
loan accounts as compared with commercial banks and
RRBs, the transaction cost also tends to be high.
The relevance of the three-tier credit structure has been
examined by several committees in the past (notably, those
headed by Professor V. S. Vyas, Shri Jagdish Capoor,
Professor Vaidyanathan and Dr. Prakash Bakshi). The Vyas
Committee argued for the elimination of one of the tiers to
bring down costs for ultimate borrowers. The NABARD Act,
1981 was amended in 2003 to provide for direct refinance
to DCCBs but no concrete action has been initiated towards
reducing tiers in STCCS.
In 2013, the Jharkhand State Cooperative Bank (JStCB)
took a path breaking initiative and approached the Reserve
Bank to approve establishment of a 2-tier rural cooperative
structure in the state to replace the age-old 3-tier structure.
The state proposed to merge all the DCCBs with JStCB.
Considering the merits of the request, ‘in-principle’ approval
was given for the amalgamation of all eight DCCBs with
JStCB in October 2013. However, since the Dhanbad DCCB
went to court against the state’s decision of amalgamation,
the state came up with a revised proposal to amalgamate
seven DCCBs with JStCB. The Reserve Bank accorded
‘in-principle’ approval to the revised proposal in November
2014.
NABARD carried out a snap scrutiny of the amalgamated
entity in March 2017 following an infusion of a ₹500 million
grant by the state that enabled JStCB to achieve CRAR of
more than 9 per cent. It was observed that the amalgamation
of STCCS entailed a stronger structure in terms of
improvements in operational, managerial and governance
efficiency. Consequently, the Reserve Bank conveyed its
final approval to the amalgamation proposal on March 30,
2017 and the state government issued a notification for
amalgamation of seven DCCBs with JStCB on March 31,
2017. The new entity started functioning from April 1, 2017,
ushering an era of 2-tier cooperative credit structure in the
state, barring the pending court case of the Dhanbad DCCB. |
Scheduling, Licensing, Mergers and Voluntary
Conversions
VI.43 During the year, one state cooperative
bank – the Telangana State Cooperative Apex
Bank Ltd. – was included in the second schedule
to the RBI Act, 1934. Five merger proposals
received from UCBs were approved, out of which
two proposals were implemented, two proposals
are under process while one proposal was
withdrawn by the target bank. Further, three UCBs
voluntarily converted themselves into non-banking
institutions under Section 36A (2) of the Banking
Regulation Act, 1949.
Other Developments
VI.44 A scheme of financial assistance to UCBs
for implementing the core banking solution (CBS)
was announced on April 13, 2016 in consultation
with IDRBT/Indian Financial Technology and Allied
Services (IFTAS) (a subsidiary of IDRBT). Under
the scheme, the initial setup cost of ₹0.4 million
is paid by the Reserve Bank to IFTAS. During
the year, 23 UCBs implemented CBS under the
scheme taking the number of CBS-compliant
UCBs to 1,301 out of a total of 1,561 UCBs.
Agenda for 2017-18
VI.45 Further harmonisation of the guidelines for
rural and urban cooperative banks will continue to
be an agenda for 2017-18. The Reserve Bank will
pursue the process of recapitalisation and licensing
of the remaining three DCCBs in Jammu & Kashmir
under the rehabilitation scheme approved by the
government to create an environment where only
licensed rural cooperative banks operate in the
banking space. The supervisory action framework
for UCBs, framed in 2014, will be reviewed with a
view to engaging with the concerned banks at an
early stage for corrective action. Implementation
of CBS under the scheme of financial assistance
to UCBs will be taken forward during the year. The
Reserve Bank will formulate certain standards
and benchmarks for CBS in UCBs in consultation
with IDRBT in order to make it more robust.
Non-Banking Financial Companies (NBFCs):
Department of Non-Banking Regulation
(DNBR)
VI.46 NBFCs play a vital role in providing credit
by complementing commercial banks and also
cater to some niche sectors. DNBR is entrusted with the regulation of the NBFC sector with a
view to providing a conducive environment for
orderly growth of the sector as also protecting the
interests of depositors and customers.
Agenda for 2016-17: Implementation Status
VI.47 During the year, the Reserve Bank issued
guidelines on NBFC-account aggregators (NBFCAAs).
Subsequently, the process of registering
NBFC-AAs has been initiated. The guidelines
to banks for relief measures in areas affected
by natural calamities, were extended mutatis
mutandis to NBFCs.
VI.48 The guidelines on pricing of credit were
issued for NBFC-microfinance institutions (NBFCMFIs)
to ensure that the average interest rate on
loans sanctioned during a quarter does not exceed
the average borrowing cost during the preceding
quarter plus the margin, within the prescribed cap.
Guidelines in respect of disbursal of loans in cash
by NBFCs were amended to align these with the
requirements under the Income Tax Act, 1961.
VI.49 Keeping in view the role of asset
reconstruction companies (ARCs) in resolving
stressed assets as also the recent regulatory
changes governing the sale of stressed assets
by banks to ARCs, the minimum net owned fund
requirement for ARCs was fixed at ₹1 billion
on an on-going basis, effective April 28, 2017
(Box VI.8). In terms of Section 30A, 30B and
30C of the SARFAESI Act, 2002, the Reserve
Bank has designated Adjudicating Authority for
imposing penalty on ARCs for non-compliance
of any direction issued by the Reserve Bank.
Further, the Reserve Bank has designated the
Appellate Authority for deciding on an appeal
filed by the aggrieved party. These guidelines will
come into force after its notification by the central
government.
Box VI.8
Asset Reconstruction Companies: Progress and the Way Forward
During the late 1990s, in view of the rising level of bank
NPAs, the Narasimham Committee II and Andhyarujina
Committee were constituted to examine the scope for
banking sector reforms and the need for changes in the
legal system to resolve NPAs. These committees suggested
a new legislation for securitisation, empowering banks
and financial institutions (FIs) to take possession of the
securities and sell them without the intervention of the court.
Accordingly, the SARFAESI Act (the Act) was enacted in 2002
to provide an enabling environment for resolution of NPAs
and for strengthening the financial sector. It provides three
alternative methods for recovery of NPAs – securitisation,
asset reconstruction and enforcement of security interests. It
envisaged the formation of asset reconstruction companies
(ARCs) under Section 3 of the Act.
ARC’s primary goal is to acquire, manage and recover the
financial assets which have been classified as NPAs by the
banks/FIs. Presently, there are 24 ARCs in the country. The
Reserve Bank has been assigned powers under the Act to regulate and supervise ARCs. An ARC can acquire and
keep the financial asset – NPAs – in its own balance sheet or
transfer it to one or more trust(s) (set up under Section 7 of
the Act) at a price at which the asset was acquired from the
originator (secured lender). Most of the deals are structured
with a 15 per cent upfront payment to the seller banks/
FIs and issue of security receipts (SRs) for the remaining
amount with a defined cash-flow waterfall. Management
fee, a primary source of income for ARCs, has priority
(after netting the expenses) over redemption of SRs. The
trusteeship of such trusts vests with the ARC.
The net owned fund requirement for ARCs was raised from
₹20 million to ₹1 billion effective April 28, 2017 with a view
to attract serious players to the business. Other recent
measures for encouraging the sector include 100 per cent
foreign direct investment (FDI) under the automatic route,
removal of the limit on shareholding by a sponsor, and
inclusion of additional qualified buyers for investments in
SRs. |
VI.50 The NBFC sector has evolved over a
period of time resulting in a variety of categories of
NBFCs. The different categories were envisaged
to promote specific sector/ asset classes and hence different sets of regulatory prescriptions
were put in place. There are NBFCs catering
to asset financing, infrastructure financing,
microfinance, lending, etc. At present, there are
eleven categories of NBFCs – Asset Finance
Company (AFC), Loan Company (LC), Investment
Company (IC), Core Investment Company (CIC),
NBFC-Factor, IDF-NBFC, Infrastructure Finance
Company (IFC), NBFC-MFI, NOFHC, NBFC-AA
and Mortgage Guarantee Company (MGC). In
line with the Reserve Bank’s medium term goal
of moving toward activity-based regulation rather
than entity-based regulation, the rationalisation of
multiple categories of NBFCs into fewer categories
is under way.
Agenda for 2017-18
VI.51 Going forward, the Reserve Bank will
rationalise the NBFCs into fewer categories. The
Bank will oversee the time-bound implementation
of Ind AS, converged with IFRS, by NBFCs.
SUPERVISION OF FINANCIAL
INTERMEDIARIES
Commercial Bank: Department of Banking
Supervision (DBS)
VI.52 DBS supervises all SCBs (excluding
RRBs), local area banks (LABs), payment
banks, small finance banks and AIFIs within the existing legal and regulatory framework, based
on supervisory inputs received through off-site
monitoring and on-site inspections.
Agenda for 2016-17: Implementation Status
VI.53 During 2016-17, all SCBs operating in India
(excluding RRBs and LABs) were brought under
risk based supervision – Supervisory Programme
for Assessment of Risk and Capital (SPARC).
The Reserve Bank also started the process of
developing a suitable framework for supervising
PBs and SFBs. The supervisory process is
being strengthened by incorporating elements
of continuous supervision in off-site monitoring
(Box VI.9).
VI.54 The inter-regulatory forum for monitoring
financial conglomerates (IRF-FC) identified a
revised set of 11 FCs in the Indian financial
sector including five bank-led FCs, four insurance
company-led FCs and two securities company-led
FCs, based on their significant presence in two or
more segments of the financial sector.
Box VI.9
Asset Quality Review (AQR) in Perspective – Lessons Learnt
The Asset Quality Review (AQR), undertaken in 2015-
16 for all major banks together, was aimed at making
banks recognise their asset quality realistically. It provided
valuable insights on asset quality at the individual bank/
system level and ensured uniformity in identification of
non-performing assets (NPAs) at the system level. Further,
the early finalisation and communication of divergences
in provisioning gave banks more time for effecting the
additional provisioning over subsequent quarters. AQR was extensively based on off-site data from the Central
Repository for Information on Large Credits (CRILC).
The exercise clearly brought out the importance of
data analysis for effective supervision. In particular, it
emphasised the importance of collecting relevant data,
ensuring robust data quality and integrity and the use of IT
infrastructure for carrying out an incisive off-site analysis
which, in conjunction with on-site assessment, ensures an
effectively continuous supervisory assessment. |
VI.55 A revised prompt corrective action
(PCA) framework for banks was rolled out for
implementation from 2017-18 based on the
financials of banks for the year ended March 31,
2017. The PCA matrix notified under the revised
framework specifies indicators and risk thresholds under four areas – capital (breach of either CRAR
or common equity tier (CET) 1 ratio), asset quality,
profitability and leverage (Box VI.10).
Box VI.10
Revised Prompt Corrective Action Framework for Banks
The prompt corrective action (PCA) framework for banks
was introduced by the Reserve Bank in December 2002 as
an early intervention mechanism. The sub-committee of the
Financial Stability and Development Council (FSDC-SC) in
its meeting held in December 2014 decided to introduce the
PCA framework for all regulated entities. Subsequently, the
Reserve Bank reviewed the existing PCA framework keeping
in view the recommendations of the working group on
resolution regimes for financial institutions in India (January
2014), the Financial Sector Legislative Reforms Commission
(FSLRC, March 2013) and international best practices. The
Board for Financial Supervision (BFS) decided to implement the provisions of the revised PCA framework with effect from
April 1, 2017, based on the financials for March 31, 2017.
Capital, asset quality and profitability continue to be the
key areas for monitoring under the revised framework.
However, common equity Tier-1(CET 1) ratio will constitute
an additional trigger and leverage will also be monitored.
The revised PCA defines certain risk thresholds, breach of
which would lead to invocation of PCA and invite certain
mandatory and discretionary actions. The PCA framework
will apply to all banks operating in India including small
banks and foreign banks operating through branches or
subsidiaries. |
VI.56 In line with BCBS principles on cross-border
supervisory cooperation, the Reserve
Bank has set up supervisory colleges for Indian
banks with considerable overseas presence,
viz., State Bank of India (SBI), ICICI Bank Ltd.,
Bank of Baroda, Bank of India, Punjab National
Bank and Axis Bank Ltd. The major objectives of
supervisory colleges are to enhance information
exchange and cooperation among supervisors to
improve understanding of the risk profile of the
banking group, thereby facilitating more effective
supervision of the internationally active banks. The
Reserve Bank held meetings of all the supervisory
colleges during 2016-17.
VI.57 With a view to assessing banks’ cyber
security preparedness, the Reserve Bank
mandated a baseline cyber security and
resilience framework and conducted IT/cyber
security examinations/ vulnerability assessments
to evaluate their responses to cyber security
incidents. It also conducted targeted inspections in the wake of certain cyber security incidents of
significant concern. The Reserve Bank conducted
trainings on cyber security with hands-on sessions
for its IT examiners to build skills in cyber security
assessment.
VI.58 In order to improve data quality, a
working group was set up with members from
major public sector, private and foreign banks
to rationalise existing off-site returns. The group
submitted its report in September 2016. The
various recommendations of the group, after
due consideration and approval, are being
implemented in a phased manner.
VI.59 Towards enhancing supervisory focus, the
department conducted some thematic studies
during the year relating to derivatives portfolio
and custodial services offered by foreign banks;
non-credit related facilities and trade finance; and
real estate exposure/housing finance. The studies
were shared with the concerned departments for
policy action.
VI.60 Migration of supervisory returns, other
than off-site monitoring and surveillance
(OSMOS) returns, to the eXtensible business
reporting language (XBRL) reporting platform is under progress. Returns relating to fraud reporting
and monitoring have been migrated to the XBRL
reporting platform.
VI.61 Taking the process of cross-border
supervisory cooperation and exchange of
supervisory information further, the Reserve
Bank signed memoranda of understanding
(MoUs) with seven overseas banking supervisory
authorities during the year, viz., the Central
Bank of Myanmar, the Banking Regulation
and Supervision Agency of Turkey, the Central
Bank of Nigeria, the Bank of Zambia, the Bank
of Guyana, the Bank of Thailand and the Royal
Monetary Authority of Bhutan. Further, a letter
of cooperation was executed with the Czech
National Bank. With this, the Reserve Bank has
signed 40 MoUs, two letters of cooperation and
one statement of cooperation.
VI.62 The Reserve Bank launched a Central
Fraud Registry (CFR), a web-based online
searchable database in January 2016. However,
usage of CFR by banks, especially PSBs, is yet to
pick up on expected lines.
Agenda for 2017-18
VI.63 A joint working group of regulators
constituted by IRF-FC will develop a format and
structure for a data template for capturing systemic
risks arising out of FC activities.
VI.64 As part of capacity building on SPARC, the
Reserve Bank will continue to conduct focused
workshops and orientation sessions for internal and
external stakeholders. Further, specific sessions
for board members and top managements of the
banks as also for other external stakeholders will
be on the agenda for 2017-18.
VI.65 A suitable supervisory framework for
small finance banks and payment banks will be
developed and implemented. Further, in view of
the implementation of Ind AS by banks, its impact
on their quantitative and qualitative reporting
will be reviewed, aligned and integrated with the
supervisory framework.
VI.66 Taking into account concerns arising from
examination of IT risks in banks, thematic studies
and assessments will be undertaken on specific
domains for appropriate policy and supervisory
interventions (Box VI.11). Based on the off-site assessment of the key risk indicators in cyber
security, IT examinations with a risk based
approach will be conducted in 2017-18. The
findings will be factored in the overall assessment
of risks in banks. Assessment of IT risks in other
regulated entities such as major urban cooperative
banks will be covered in a phased manner. A
back office support system (BOSS) has been
established for this. With a view to enabling a more
efficient supervisory assessment of banks, BOSS
will develop standard data templates on major
concern areas under various risk categories.
Box VI.11
Standing Committee on Cyber Security
In the wake of exponential growth of digitalisation in banks,
cyber risks have emerged as a major area of concern.
Conscious of the rising threats to the cyber infrastructure
in its regulated entities, the Reserve Bank has taken a
number of measures, particularly over the last two years.
Based on the recommendations of the Expert Panel on
Cyber Security and Information Technology Examination
(Chairperson: Smt. Meena Hemchandra), guidelines were
issued to banks in June 2016, mandating cyber security
preparedness. Banks’ progress in strengthening their cyber
resilience and response is being monitored. Recognising
the increasing frequency and complexity of cyber security
incidents, the monetary policy statement of February 8, 2017
announced that an Inter-disciplinary Standing Committee will be set up to conduct an ongoing review of the cyber
security landscape and emerging threats.
The remit of the committee, inter alia, includes reviewing the
threats inherent in existing/emerging technology; studying
adoption of various security standards/protocols; interfacing
with stakeholders; and suggesting appropriate policy
interventions to strengthen cyber security and resilience.
The committee was constituted on February 28, 2017
(Chairperson: Smt. Meena Hemchandra, Executive Director).
Members of the committee include experts on cyber security
in the Reserve Bank as well as from outside. The committee
is meeting regularly and, as per its recommendations, sub-groups
have been formed on certain focus areas for an in-depth
examination. |
Cooperative Banks: Department of
Cooperative Bank Supervision (DCBS)
VI.67 DCBS is entrusted with the supervisory
responsibility of primary (urban) cooperative
banks (UCBs) to ensure a safe and well managed
cooperative banking sector. The department
undertakes supervision of these banks on an on-going
basis through periodic on-site inspections
and continuous off-site monitoring.
Agenda for 2016-17: Implementation Status
VI.68 The Reserve Bank began focused
attention on select weak UCBs by way of intensive
hand-holding and periodic training in the identified
areas of weakness. It organised a conference on
‘Building Banks Co-operatively - Professionalise
and Progress’ in Ahmedabad inviting participation
from the state government, other stakeholders and
the top management of the Reserve Bank. During
the year, several training programmes for capacity
building were conducted by regional offices for
CEOs/directors/officials of UCBs and auditors of
UCBs.
Agenda for 2017-18
VI.69 The department will continue to identify
select UCBs for hand-holding and impart focused
training to them for all round improvement in their functioning. In addition, the Department will take
initiatives for capacity building for both supervisors
and supervised entities – UCBs – in the coming
year. In this direction, conferences on cooperative
banking as organised last year will be conducted.
As the development of software package for DCBS
returns has been completed under XBRL-based
reporting platform, the Department will focus on
stabilising the package and ensuring submission
of timely and reliable data through the platform by
all UCBs.
NBFCs: Department of Non-Banking
Supervision (DNBS)
VI.70 DNBS supervises the NBFC sector in
the country, which is a fast growing sector with
significant diversity in terms of size and operational
dimensions. The department supervises more
than 11,500 NBFCs of which 222 are non-deposit
taking systemically important ones.
Agenda for 2016-17: Implementation Status
VI.71 The role of statutory auditors in the
certification process was enhanced by enabling
on-line filing of statutory auditors certificate (SAC).
Further, the Institute of Chartered Accountants of
India (ICAI) agreed to digitally authenticate the
returns of small NBFCs on the XBRL platform,
which will be operationalised soon. The Reserve
Bank focused on improving adherence to the fair
practices code by NBFCs through levy of penalties.
The Bank is in the final stages of incorporating
risk factors in the existing CAMELS model of
inspection of NBFCs. The project for automation
of all regulatory approvals of NBFCs has been
initiated and this will be operationalised in 2017-
18. The Reserve Bank also operationalised a
formal PCA framework for NBFCs.
Agenda for 2017-18
VI.72 The department will put in place a
supervisory rating system for ARCs. The Sachet portal on NBFCs will be refurbished by improving
readability and functionalities (Box VI.12). A
detailed standard operating procedure for noncompliant
and/or inactive small NBFCs will also
be operationalised.
Box VI.12
Sachet Portal
The Reserve Bank launched a mobile friendly portal
Sachet (sachet.rbi.org.in) on August 4, 2016 to help the
public as well as regulators to ensure that only regulated
entities accept deposits from the public. The portal can be
used by the public to share information including through
uploading photographs of advertisements/publicity material,
raise queries on any fund raising/investment schemes that
they come across and lodge and track complaints. The
portal has links to all regulators and the public can easily
access information on lists of regulated entities. The portal
has a section for a closed user group – the state level
coordination committees (SLCCs), inter-regulatory forums
for exchange of information and coordinated action on unauthorised deposit collection and financial activities. It will
help in enhancing coordination among regulators and state
government agencies and will serve as a useful source of
information for early detection and curbing of unauthorised
acceptance of deposits. The portal is designed to place the
entire proceedings of SLCCs on an IT platform. It facilitates
comprehensive MIS with respect to complaints received,
referred to regulators / law enforcement agencies and for
monitoring the progress in redressal of such complaints.
Complaints relating to unauthorised deposit collection and
financial activities that have been lodged in Sachet have
been taken up expeditiously with respective regulators for
resolution. |
Enforcement Department (EFD)
VI.73 Taking note of the changes in the global
and domestic financial sector environment, with a
view to separate the function of identification of
contravention of respective statutes/guidelines
and directives by the regulated entities from
imposition of punitive action and to make this
process endogenous, formal and structured, a
separate Enforcement Department was created within the Reserve Bank with effect from April 3,
2017 (Box VI.13).
Box VI.13
Supervisory Enforcement Framework
An effective system of banking supervision, inter alia,
depends on effective enforcement of supervisory policies
which, in turn, needs a unified and well-articulated
supervisory enforcement policy and institutional
framework. Taking cognisance of such a need, the
Board for Financial Supervision approved a Supervisory
Enforcement Framework for action against non-compliant
banks. Following a subsequent announcement in the 6th bi-monthly monetary policy statement of February 2017, a
separate Enforcement Department was established in April
2017.
Over time, the framework is expected to make the Reserve
Bank’s enforcement actions more transparent, predictable,
standardised, consistent and timely, leading to improvement
in the banks’ overall compliance with the regulatory
framework. |
VI.74 The core function of the department is to
enforce regulations with the objective of ensuring
financial system stability and promoting public
interest and consumer protection. The department
will, inter alia, (i) develop a sound policy framework
for enforcement consistent with international best
practices; (ii) identify actionable violations on
the basis of inspections/supervisory reports and
market intelligence reports received/generated
by it, conduct further investigations/verifications,
if required, on the actionable violations thus
identified and enforce them in an objective, consistent and non-partisan manner; (iii) deal
with the complaints referred to it by the Bank's top
management for possible enforcement action, and
(iv) act as a secretariat to the Executive Directors’
Committee constituted for adjudication.
VI.75 To begin with, the department will focus
on the enforcement of penalty provisions under
the Banking Regulation Act. In the medium-term,
the entire enforcement function of the Reserve
Bank will be migrated to EFD. In 2017-18, the
department will develop a policy framework for
enforcement; put in place detailed protocols for
information sharing with other regulatory and
supervisory departments of the Reserve Bank,
other regulators and the government; create
channels for generating actionable market
intelligence; and initiate enforcement action.
CONSUMER EDUCATION AND PROTECTION
Consumer Education and Protection
Department (CEPD)
VI.76 The Reserve Bank has always recognised
protection of consumers’ interests as a key area
and has accorded high priority to providing safe
and efficient services to the customers of banks.
CEPD is the nodal department in the Bank for
monitoring the function of protection of consumer
interests.
Agenda for 2016-17: Implementation Status
VI.77 The Reserve Bank operationalised the
Charter of Customer Rights in 2014-15 for
strengthening customer protection in banks.
During the year, the Reserve Bank advised the
banks to furnish a certificate in the specified
proforma under the signature of the MD or CEO
certifying that their customer service policy was
fine-tuned to incorporate the principles of the
Charter of Customer Rights. All the banks have
submitted the certificate.
VI.78 The Reserve Bank's Banking Ombudsman
(BO) Scheme – a dispute redressal mechanism
notified under Section 35(A) of the Banking
Regulation Act, 1949 – has been in existence
since 1995. The scheme has been reviewed
periodically and its latest comprehensive
review was undertaken in 2015-16 covering
pecuniary jurisdiction of the BO, compensation
and grounds of complaint and rationalisation of
certain clauses of the scheme. The scheme was
amended accordingly. The government, during the
year, conveyed its concurrence to the amended
Banking Ombudsman Scheme. The amended
scheme came into effect from July 1, 2017. The
Reserve Bank also opened and operationalised
five new offices of the BO in Dehradun, Jammu,
Ranchi, Raipur and an additional office in New
Delhi. At present, the total number of BO offices
has reached 20.
VI.79 The Reserve Bank in consultation with
the Indian Banks' Association (IBA) reviewed the
forms commonly used by customers in banks
and suggested standardisation of these forms.
Accordingly, IBA released modified and user
friendly specimens of ten commonly used forms
during the year to banks for implementation.
VI.80 Aspects and modalities of setting up
of an Ombudsman Scheme (OBS) for NBFCs
were examined and discussed with concerned
regulatory and supervisory departments
(Box VI.14).
Box VI.14
The Ombudsman Scheme for Non-Banking Financial Companies
A pressing need has been felt for setting up a cost effective,
expeditious and easily accessible alternative dispute
resolution mechanism in the form of the ombudsman
scheme (OBS) for customers of NBFCs.
As compared to banks, the NBFCs are relatively larger in
number and vary substantially in terms of their activities and
size. These aspects need to be weighed carefully before
setting up an OBS for the NBFCs.
NBFCs are regulated under Chapter III-B of the RBI Act,
1934. Section 45 L of the RBI Act empowers the Reserve
Bank to, inter alia, give directions to Financial Institutions.
The OBS for NBFCs is proposed to be operationalised by
the Reserve Bank under Section 45 L of the RBI Act.
The proposed scheme will initially cover all deposit taking
NBFCs and those with customer interface and an asset
size of ₹1 billion and above. However, asset reconstruction
companies, infrastructure finance companies, infrastructure
debt funds, core investment companies, and NBFC factors
will not be covered under the scheme for the time being. The
coverage of the OBS may be reviewed over time, based on
experience.
Complaints relating to non-adherence to the Fair Practices
Code, infringement of customer rights, deficiencies in
services, use of coercive measures, mis-selling, violation
of regulatory guidelines, non-repayment/delayed repayment
of deposits and/or interest are some of the categories of
complaints that will be covered under the scheme. |
Agenda for 2017-18
VI.81 The Reserve Bank will formulate an
appropriate OBS for NBFCs and operationalise
it by establishing the offices of the ombudsman
for NBFCs at select centres. It will also conduct
surveys on: (i) charges levied by banks for basic
banking services; (ii) KYC compliance; and
(iii) mis-selling by banks. With a view to creating awareness about fictitious offers of money, the
Reserve Bank will undertake advertisement and
publicity campaigns through print and electronic
media during 2017-18.
VI.82 All the public sector banks and select
private and foreign banks had appointed Internal
Ombudsman (IO) in 2015-16 to examine the
grievances that are not resolved by the respective
bank’s internal grievance redressal mechanism.
During 2017-18, the Reserve Bank will conduct a
review of the IO scheme to make it more effective.
VI.83 The Reserve Bank also redresses the
complaints received against regulated entities from
their customers through Consumer Education and
Protection Cells (CEPCs) set up in every office
of the Bank. Customers can also approach the
offices of the BOs to lodge their complaints against
banks on the grounds of complaints listed in the
revised BO scheme. During 2017-18, the Reserve
Bank will deploy a complaint management system
(CMS) to streamline the processing of complaints
(Box VI.15).
Box VI.15
Complaint Management System
The Reserve Bank has initiated the work for setting up
a complaint management system (CMS) with a view to
harnessing the benefits of information technology (IT)
for managing the increasing volume of complaints being
received by it.
The web-based CMS will replace the existing complaint
tracking system (CTS) which has served for over a decade.
CMS will help the Reserve Bank not only to manage the
complaints more efficiently but also provide a robust
management information system. CMS will also integrate
the grievance redressal mechanism in the Bank by bringing the offices of Banking Ombudsman, as well as CEPCs and
banks on the CMS platform for facilitating better coordination
and effectiveness. The new system will also facilitate data
analytics and will help to study the patterns of complaints
and, where feasible, pre-empt complaints by addressing
the root causes. It will also support the efforts to proactively
pursue the complaint-prone areas in banking services to
bring about a qualitative change in the resolution process.
CMS will also help to monitor the performance of the
regulated entities in the area of management and redressal
of complaints. |
Deposit Insurance and Credit Guarantee
Corporation (DICGC)
VI.84 Deposit insurance contributes to the
stability of the financial system and protects
depositors’ interests. In India, DICGC – a wholly-owned
subsidiary of the Reserve Bank – provides
insurance cover to deposits in all commercial
banks including LABs, payment banks, small
finance banks, RRBs and cooperative banks. With
the present limit of ₹0.1 million, the number of fully
protected accounts (1,737 million) as on March
31, 2017 constituted 92.1 per cent of the total
number of accounts (1,885 million) as against the
international benchmark of 80 per cent. In terms
of amount, the total insured deposits at ₹30.5
trillion at end-March 2017 constituted 29.5 per
cent of the assessable deposits at ₹103.5 trillion
as compared with the international benchmark of
20-30 per cent.
VI.85 The Corporation builds its Deposit
Insurance Fund (DIF) through transfer of surplus,
that is, excess of income (mainly comprising
premia received from the insured banks, coupon
income from investments and cash recovery out of
assets of failed banks) over expenditure (payment
of depositors’ claims and related expenses) net
of taxes. DIF stood at ₹701.5 billion as on March
31, 2017, yielding a higher reserve ratio (DIF to
insured deposits) of 2.3 per cent vis-à-vis 2.1 per
cent at end-March 2016. During 2016-17, the
corporation sanctioned total claims of ₹0.6 billion
as against ₹0.5 billion during the preceding year.
VI.86 The Corporation has improved the quality
of information disseminated through its website by
updating FAQs and guidelines for liquidators. It has
also published a primer on deposit insurances and
placed on the website. With a view to accelerating
the resolution of outstanding issues, DICGC
held several meetings with liquidators and also
requested chief secretaries of states to expedite the appointment of liquidators. The Corporation will
continue to focus on adherence to core principles
on effective deposit insurance systems in
2017-18.
Resolution Corporation
VI.87 The Financial Resolution and Deposit
Insurance Bill, 2017, which was introduced in the
Lok Sabha on August 10, 2017, prescribes setting
up of a Resolution Corporation (RC) to ensure
observance of the Financial Stability Board’s
Key Attributes on resolution of financial firms by
addressing the gaps in the current resolution
mechanism in India in terms of legal framework,
resolution tools, liquidation, coverage of entities,
cross-border cooperation and the oversight
framework. The proposed RC will subsume DICGC
which at present performs the ‘pay box’ function,
that is, reimbursement of insured amounts to the
depositors of failed banks. DICGC also participates
in merger schemes approved by the Reserve Bank
involving payment to the depositors of transferee
bank. RC is being established for protection of
consumers of specified service providers and of
public funds for ensuring stability and resilience of
the financial system.
National Housing Bank (NHB)
VI.88 The primary function of NHB – the apex
institution for housing finance – is to register,
regulate and supervise housing finance
companies (HFCs). It also provides refinance
to HFCs, SCBs, RRBs and cooperative sector
institutions for housing loans and directly lends
(project finance) to borrowers in the public and
private sectors for extending financial support to
the housing programmes for the unserved and
under-served segments of the population. The
entire capital of ₹14.5 billion of NHB is subscribed
by the Reserve Bank.
VI.89 As on June 30, 2017, 85 HFCs were
registered with NHB, out of which 18 HFCs were eligible for accepting public deposits. Out of the
total disbursement made under refinance (₹226.8
billion) in 2016-17 (July-June), 20.1 per cent
(₹45.6 billion) was made under the Rural Housing
Fund (RHF) and 9.8 per cent (₹22.3 billion) was
made under the Urban Housing Fund (UHF). As a
nodal agency for implementing the Credit Linked
Subsidy Scheme (CLSS) under the ‘Housing for
All by 2022’ mission of the government, NHB
had released total subsidy claim (net of refunds)
under Pradhan Mantri Awas Yojana (PMAY) CLSS
(including economically weaker section (EWS)/
low income group (LIG) Old, EWS/LIG New and
middle income group (MIG)) amounting to ₹7.5
billion to 96 primary lending institutions till June
30, 2017, benefitting 39,629 households.
VI.90 It had also disbursed ₹459 million for
helping renovation of 1,111 dwelling units through
primary lending institutions under the Refinance
Assistance for Flood Affected Areas of Tamil Nadu
upto June 30, 2017.
VI.91 NHB managed the Credit Risk Guarantee
Fund Trust for Low Income Housing with the
objective of providing guarantees with respect to
low-income housing loans. As at end-June 2017,
79 PLIs had signed MoUs with the trust under the
scheme. As on June 30, 2017, the trust has issued
guarantee cover for 1,972 loan accounts of 14
member lending institutions (MLIs) involving total
loan amount of ₹561 million provided to EWS/LIG
households and guarantee cover of ₹476 million
to 14 institutions.
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