DBOD.No. BP.BC.103/21.01.002/99
October 31, 1998
Kartika 9, 1920 (Saka)
All Commercial Banks
(excluding RRBs)
Dear Sir,
Monetary and credit policy measures
Please refer to Governor's letter
No. MPD. BC. 181/07.01.279/98-99 dated October 30, 1998, enclosing a copy of
the statement on "Mid-Term Review of Monetary and Credit Policy for 1998-99".
The guidelines in regard to the Policy changes indicated therein, are given
below:
Strengthening of Prudential Norms
1. Capital Adequacy :
(i) Enhancement of Capital Adequacy
Ratio :
In terms of Circular DBOD. No. BP.
BC. 117/21.01.002/92 dated April 22, 1992, banks are required to maintain a
minimum Capital to Risk Asset Ratio (CRAR) of 8 per cent. In line with the international
best practices, it has been decided that the minimum Capital to Risk Asset Ratio
for banks should be enhanced from the existing 8 per cent to 9 per cent with
effect from the year ending March 31, 2000.
2. Risk Weights on Government
and other approved securities
(a) In terms
of Circular DBOD. BP. BC. 117/21.01.002/92 dated April 22, 1992, investments
in Government and other Approved securities carry zero risk-weight for calculation
of CRAR. Consistent with the recommendations of Narasimham Committee on Banking
Sector Reforms and in order to provide for the market risk in valuation of such
securities due to fluctuations in prices, the risk weight for Government and
other Approved securities is being introduced. Accordingly, investments in government
and other approved securities should be assigned a
risk weight of 2.5 per cent for market risk, with effect from the year ending
March 31, 2000. The balance of 2.5 per cent to reach the norm of 5 per cent,
as recommended by the Narasimham Committee, will be announced at a later date.
(b) It has been further decided
that a risk weight of 20 per cent on investments in the Government guaranteed
securities of Government undertakings which do not form part of the approved
market borrowing programme should be introduced from the financial year 2000-2001.
In order to provide sufficient time to comply with this provision, banks are
permitted to account for the risk weight on the outstanding stock of such securities
in the portfolio of banks as on March 31, 2000 in two phases of 10 per cent
each in 2001-2002 and 2002-2003.
(c) Presently, while investments
in the bonds/securities of some of the Public Financial Institutions (PFIs)
carry zero risk-weight due to their status as 'Approved Securities', under the
special Statutes governing them, investments in bonds/debentures of certain
other PFIs carry 100 per cent risk-weight as the relevant Act/Statute does not
confer the status of an 'Approved Security'. With a view to removing this anomaly,
as indicated in the Governor's Circular, the risk weights on investments in
bonds/debentures of PFIs are being given uniform risk weight of 20 per cent
with immediate effect. The list of PFIs is given in Annexure I.
(d) The risk weights on calculation
of CRAR would stand modified as under :
Sr. No.
Nature of Asset Risk-weight
(%)
Existing
Revised
1. Investments in 0 2.5
Government Securities
2. Investments in other 0
2.5
Approved Securities
guaranteed by Central/
State Government
3. Investments in other 0
2.5
securities where payment
of interest and repayment
of principal are guaran-
teed by Central Government
4. Investments in other 0
2.5
securities where payment
of interest and repayment
of principal are guaran-
teed by State Governments
(In case of a default in
interest/principal by State
Government, banks should
assign 100 per cent risk
weight on investments in
securities of the concerned State
Government)
5. Investments in other
0 20
Approved securities where
payment of interest and
repayment of principal
are not guaranteed by
Central/State Government
6. Investments in Govern- 0
20
ment Guaranteed Securi-
ties of Govt. under- taking which
do not form
part of the approved
market borrowing
programme.
7. Balances in current
20 20
account with other
banks
8. Claims on banks and 20
20
Public Financial
Institutions (as per
list attached)
9. Investments in bonds 100
20
issued by other banks/
PFIs (as per list
attached)
10. Investments in securities 100
20
which are guaranteed by
banks or PFIs (as per
list attached) as to
payment of interest and
repayment of principal
11. Investments in subordi- 100
100
nated debt in the form of Tier 2
Capital Bonds
issued by other banks/
PFIs
12. All other investments 100
100
3. Risk weight for Government
guaranted advances
In terms of circular DBOD. No. BP.
BC. 117/21.01.002-92 dated April 22, 1992, loans and advances guaranteed by
Government of India and State Governments carry zero risk weight. However, in
cases in which the guarantee has been invoked and the concerned State Government
has remained in default as on March 31, 2000, a risk weight of 20 per cent on
such advances should be assigned. State Governments who continue to be in default
in respect of such invoked guarantees even after March 31, 2001, a risk weight
of 100 per cent should be assigned.
4. Foreign exchange/Gold open
positions
In terms of our Exchange Contrl
Department AD (MA Series) Circular No. 25 dated October 6, 1995, capital requirement
for market risk on open foreign currency exposure has been prescribed at 5 per
cent of the position limit approved by the Reserve Bank. It has been decided
that foreign exchange open position limit should carry 100 per cent risk weight
with effect from March 31, 1999.
In terms of our Circular No. DBOD.
IBS. BC. 18/23.67.001/97-98 dated March 4, 1998, banks keeping open position
in gold should also maintain Tier I Capital to the extent of 5 per cent of the
open position limit. It has been decided that open position limit in gold should
also carry 100 per cent risk weight with effect from March 31, 1999.
As per the existing practice, CRAR
is calculated separately for open position limits in foreign exchange and gold
and deducted from Tier-I Capital. it is advised that risk weights both in respect
of foreign exchange and gold open position limits should be added to the other
risk weighted assets for calculation of CRAR.
5. Provisioning Norms
(a) Reduction in the time frame
for sub-standard assets
In terms of our Circular No. DBOD.
BP. BC. 129/21.04.043/92 dated April 27, 1992, an asset is required to be treated
as sub-standard if it has been classified as NPA for a period not exceeding
two years. With a view to moving closer to international practices in regard
to provisioning norms, it has been decided that an asset should be classified
as doubtful, if it has remained in the sub-standard category for 18 months instead
of 24 months, as at present, by March 31, 2001. Banks are permitted to achieve
these norm for additional provisioning, in phases, as under :
As on March 31, 2001: Provisioning of not less than 50 per cent
on the assets which have become doubtful on account of the new norm.
As on March 31, 2002: Balance of the provisions not made during
the previous year, in addition to the provisions needed, as on March 31, 2002.
(b) Asset Classification and
Provisioning Norm in respect of Government Guaranteed Advances
Presently, State Government guaranteed
advances in respect of which guarantee has been invoked are treated as standard
assets for provisioning purposes though income on such asset is not permitted
to be taken to Profit and Loss Account. Some banks have represented that a few
State Governments are delaying in honouring their commitments under the guaranteed
advances after the guarantee has been invoked. In order to strengthen the banks'
efforts to recover such dues expeditiously as well as to discourage such practices
by the concerned State Governments, it has been decided, as a prudent measure,
to introduce provisioning norm in respect of advances guaranteed
by State Governments where guarantee has been invoked and has remained
in default for more than two quarters. This measure would be effective in respect
of advances sanctioned against State Government guarantee with effect from april
1, 2000. As regards provisioning requirement for advances guaranteed by State
Governments which stood invoked as on March 31, 2000, necessary provision should
be made during the financial years ending March 31, 2000 to March 31, 2003 with
a minimum of 25 per cent each year.
As indicated in the Governor's letter,
it has been decided in consultation with Government of India, to implement a
number of recommendations made by the Committee on Banking Sector Reforms (Chairman:
Shri M. Narasimham). These are given in the Annexure II.
9. The banks are advised to bring this circular to
the notice of their Board of Directors and intimate to us their plan of implementation
as also the impact of the prudential measures by March 31, 1999.
Yours faithfully,
(A. Ghosh)
Chief General Manager
ANNEXURE I
List of All-India Financial Institutions whose bonds/debentures would qualify
for 20 per cent risk weight for Capital Adequacy Ratio
1. Industrial Credit and Investment
Corporation of India Ltd.,
2. Industrial Finance Corporation
of India Ltd.,
3. Industrial Development Bank of
India.
4. Industrial Investment Bank of
India Ltd.,
5. Tourism Finance Corporation of
India Ltd.
6. Risk Capital and Technology Finance
Corporation Ltd.
7. Technology Development and Information
Company of India Ltd.
8. Power Finance Corporation Ltd.
9. National Housing Bank.
10. Small Industries Development
Bank of India.
11. Rural Electrification Corporation
Ltd.
12. Indian Railways Finance Corporation
Ltd.
13. National Bank for Agriculture
and Rural Development.
14. Export Import Bank of India.
15. Infrastructure Development Finance
Co. Ltd.
Recommendations
i) Banks and Financial Institutions
should avoid the pratice of evergreening. (Para No. 3.22)
iii) To enable banks in difficulties
to issue bonds for Tier II capital, Government will need to guarantee these
instruments which would then make them eligible for SLR investment. (Para
No. 3.29)
iv) There is a need for disclosure
in a phased manner of the maturity pattern of assets and liabilities, foreign
currency assets and liabilities, movements in provision account and NPAs.
(Para Nv) Concentration ratios need to be indicated in respect of bank's
exposure to any particular industrial sector as also to sectors sensitive
to asset price fluctuations such as stock market and real estate. These
exposure norms need to be carefully monitored. (Para No. 3.40)
vi) Banks should bring out revised
operational manuals and update them regularly. (Para No. 4.3)
vii) Banks to pay special attention
to reporting and checking by the back offices of trading transactions. (Para
No. 4.8)
ix) Banks to review the changing
training needs. (Para 4.32)
o. 3.38)
Decisions taken
The Reserve Bank reiterates
that banks and financial institutions should adhere to the prudential
norms on asset classification, provisioning, etc., and avoid the practice
of "evergreening".
The banks are advised to take
effective steps for reduction of NPAs and also put in place risk management
systems and practices to prevent re-emergence of fresh NPAs.
Public Sector Banks are encouraged
to raise their Tier II capital. Government guarantee to these instruments
does not seem appropriate.
Banks have already been advised
to put in place a formal Asset-Liability Management (ALM) system with
effect from april 1, 1999. Instructions on further disclosures will be
issued in due course.
Arrangements should be put
in place for regular updating. Compliance has to be reported to RBI by
April 30, 1999.
While the system is already
in place, banks are required to monitor this vigorously to strengthen
their internal control systems. Detailed guidelines on risk management
systems will be issued to further strengthen the internal control systems.
Banks should ensure a loan
review mechanism for larger advances soon after its sanction and continuously
monitor the weaknesses developing in teh accounts for initiating corrective
measures in time.
More focus needs to be given
on Credit Management, Treasury Management, Derivative Products, LM system
and Risks Management, Payment and Settlement Systems and Information Technology.