DBOD.No.BL.BC.105/22.01.03/98

November 11, 1998
Kartika 20, 1920 (Saka)

All Commercial Banks

Dear Sir,

Acquisition of accommodation on lease/rental basis by commercial banks for their use (i.e. for office and residence of staff)

The norms and procedures laid down by Reserve Bank of India (RBI) for acquisition of accommodation on lease/rental basis by commercial banks for their use (i.e. for office and for residence of staff) have been in operation for a number of years and have enabled banks to focus on evolving a proper system for examining proposals for securing premises and making a realistic assessment of the attendant terms and conditions. As the procedures have now stabilised, on a review, it has been decided that the norms and procedures to be followed should be henceforth left to be determined by the banks themselves. Accordingly, it has been decided to delegate to banks powers relating to hiring of premises, rentals, deposit, loans to the premises owners, etc.

2. In view of the position stated above, we advise as under :

i) Boards of Directors of the banks should lay down policy and formulate detailed operational guidelines covering all areas in respect of acquiring premises on lease/rental basis for their use including delegation of powers at various levels. The guidelines should prescribe norms separately in respect of metropolitan, urban, semi-urban and rural areas. The guidelines should ensure that the contractual obligations are complied with and the decisions taken for hiring/de-hiring of premises are non-discriminatory. While delegating powers banks may ensure that decisions for surrender or shifting of premises other than at rural centres are taken at Central Office level by a Committee of senior executives.

ii) The banks' Boards may also determine the rate of interest on Quarterly rests on premises loans. For this purpose the Boards should lay down a separate policy in respect of loans granted to landlords who provide to them premises on lease/rental basis.

3. In order to ensure that genuine grievances of the landlords are dealt with expeditiously keeping in view all relevant factors, banks may evolve a suitable machinery for dealing with such grievances.

4. Public Sector banks are advised that negotiated contracts in respect of rentals (including taxes etc. and deposits of Rs. 25 lakhs and above in respect of premises taken by banks on lease/rental basis will continue to be reported to Central ureau of Investigation as per extant Government instructions {cf. Ministry of Finance, Banking Department letter No. 30/22/Vig/75 dated 25 August 1975}). This requirement is not applicable to banks in the private sector.

5. This Circular may please be placed before the Board of Directors for information and necessary action. the Guidelines may be formulated at the earliest.

6. A copy of the Report of the Working Group constituted for the purpose of reviewing the policy on hiring and de-hiring the bank premises is enclosed for your guidance.

7. Please acknowledge receipt.

Yours faithfully,

(Radhe Shyam)

Addl. Chief General Manager

 

group to review policy on hiring/de-hiring of bank premises

A Group to review the policy on hiring/de-hiring of bank premises was constituted by Government with the following Members:

1) Shri D.R.S. Chaudhary,

Joint Secretary, Banking Division

... Chairman

2) Shri D.T. Pai, Executive Director

Union Bank of India ... Member

3) Smt. Shyamala Gopinath, ACGM,

Reserve Bank of India ... Member

The Group looked into all guidelines issued by Reserve Bank of India relating to hiring of premises, advances to landlords, rental deposits and allied matters. It also took note of the common complaints/grievances generally received from landlords in the matter of rentals and surrender of premises. The Group also met with Secretary, Indian Banks' Association and officials of a few public sector banks and a new private sector bank.

2. The genesis to RBI intervention in the area of hiring of premises and issuing guidelines was to avoid unhealthy competition among banks while conducting negotiations for acquisition of premises on lease/rental basis for their use and to bring about greater uniformity on terms offered. The guidelines issued by Reserve Bank of India are applicable to public sector banks and private sector commercial Banks. This was supplemented by India Banks' Association bringing out a Check-list on hiring and leasing of premi3. The guidelines issued by RBI cover the following major areas:

i) Advances to Landlords

ii) Rental ceilings

iii) Taxes and Service charges

iv) Period of lease

v) Deposit free of interest

vi) Reporting of transactions to CBI

vii) Surrender and shifting of premises.

4. The guidelines issued by RBI have built-in flexibility as any deviation from the norms prescribed can be approved by the Committee of the Board. The guidelines do not require any approval of RBI and no reporting requirements have been prescribed.

5. However, while banks have by and large streamlined the procedures and systems for hiring/de-hiring of premises, Government has been receiving complaints from a number of individuals against public sector banks regarding renewal of lease agreement and vacation of premises by the banks. The problems can be categorised as under:

i) Enhancement in the rent on expiry of lease

ii) Compensation to landlord of increase in taxes during the currency of the lease

iii) Delay in renewing lease agreements

iv) Measurement of area

v) Registration of Lease Deed

vi) Surrender of premises

6. The RBI guidelines have served a useful purpose particularly at the time when the Banks were opening a large number of branches every year in accordance with its branch licensing policy. These guidelines helped in bringing about uniformity in terms of sanction, reducing costs, resisting unreasonable demands made by landlords and undesirable practices. In fact, during the interaction the Group had with the public sector banks, they were in favour of continuation of some of the guidelines, particularly those relating to the period of lease, advance rent being limited to six months' rent, quantum of loans and recovery within lease period.

7. The Group is of the view that the situation has now changed. Banks have themselves streamlined procedures. Banks are also experiencing operational difficulties in adhering to the limits prescribed by RBI in regard to loans and rental ceilings in the changing scenario, resulting in increasing references to the Management Committee. The deviations do not involve any major decision making and has instead resulted in increase in burden on the Management Committee and also delay in decision making.

Summary of Recommendations

8. The Group took stock of all relevant factors including RBI's present policy to move away from micro-management and give full freedom to the banks to decide on operational issues. In the view of the Group hiring/de-hiring of premises is purely a managerial fuction best left to the Boards of the Banks, it is recommended that :-

a) Boards of banks should lay down their own policy in this regard with detailed operational guidelines. List of areas covered by guidelines issued by RBI and Recommendations of the Group regarding these guidelines are given in Annexure I.

b) Any deviation from norms laid down by the Board should be approved by Management Committee.

c) It will be advisable if all proposals on hiring of premises are examined by an Internal Committee of the bank's executives and their recommendations are submitted to the delegated authority.

9. It has also to be recognised that banks being commercial organisations have to take commercial aspects into account while deciding increases in rents or surrender of premises. Keeping in view the sensitivities involved in these matters, the Group recommends that surrender of premises in urban/metropolitan areas should invariably be examined by an Internal Committee of Executives who will send their recommendations to the Management Committee.

10. The areas covering normal grievances of landlords are given in the Annexure-2.

In order to ensure that requests from landlords are dealt with expeditiously, keeping in view all relevant factors banks have to evolve suitable machinery for dealing with the genuine grievances.

11. The Group also noted that as per existing instructions  Public Sector Banks are required to report to Central Bureau of Investigations [CBI] all negotiated contracts relating to premises involving amounts of Rs.25 lakhs and over. The Group recommends that these instructions may be withdrawn as CBI itself gets information on such matters as and when situation so warrants.

Yours faithfully

(D.R.S. Chaudhary)

(D.T. Pai)

(S. Gopinath)