DBOD.No.Dir.BC. 36/13.03.00/98

April 29, 1998

Vaisakha 9, 1920 (Saka)

The Chairmen of all Commercial Banks

(excluding Regional Rural Banks)

Dear Sir,

MONETARY and Credit policy measures

Please refer to Governor's letter No. MPD. BC.175/07.01.279/97-98 dated April 29, 1998 enclosing the statement on "Monetary and Credit Policy for the First Half of 1998-99". The consequent changes in policy measures are detailed below:

1. Deposit Rates

   (a)   Minimum period of maturity of domestic term deposits

 In terms of Circular DBOD. No. Dir. BC. 90/13.01.01/96 dated July 1, 1996 the minimum period of domestic term deposits was reduced from 46 days to 30 days. It has now been decided to further reduce the minimum period of maturity of domestic term deposits from 30 days to 15 days.

(b) Premature withdrawal of domestic term deposits/NRE deposits

As per our Circular DBOD. No. Dir. BC. 22/13.01.05/97 dated March 15, 1997, banks are required to allow premature withdrawal of term deposits and pay interest at the rate applicable to the period for which the deposit had remained with the bank or at a contracted rate, whichever is lower, less one per cent penalty for the premature withdrawal. It has now been decided to permit banks to determine their own penal interest rates for premature withdrawal of domestic term deposits and NRE term deposits. This relaxation will apply to fresh deposits and renewal of existing deposits. Banks shall however, ensure that the depositors are made aware of the applicable penal rate along with the deposit rate.

(c) Interest rates on domestic term deposits

It has been decided to permit banks at their discretion to offer differential rates of interest on domestic term deposits of the same maturity, subject to the following conditions:

(i) The permission to offer varying rates of interest for deposits of the same maturity will apply to domestic term deposits of Rs. 15 lakhs and above. Banks may therefore offer same rate of interest or differential rates of interest for deposits of Rs. 15 lakhs and above of the same maturity. For deposits below Rs. 15 lakhs the same rate will apply for deposits of the same maturity.

(ii) Banks should disclose in advance the schedule of interest rates payable on deposits including deposits on which differential interest will be paid. Interest rates paid by the bank should be as per the schedule and not be subject to negotiation between the depositor and the bank.

(iii) The Boards of banks should lay down a policy in this regard.

Banks should announce the effective date of change in the policy at the earliest.

(d) Foreign Currency Non Resident Accounts (Banks) Scheme [(FCNR(B)]

In terms of RBI Circular DBOD. No. Dir. BC. 140/13.01.09/97 dated October 21, 1997 interest shall be paid in respect of deposits of one year and above, within the ceiling of Swap rates for the respective currency/maturity. On deposits of six months and above but less than one year and floating rate deposits, interest shall be paid within the ceiling of LIBOR for the respective currency/maturity. In order to encourage mobilisation of long term deposits, it has been decided that the interest rate ceiling on FCNR(B) deposits of one year and above be increased by 50 basis points. On deposits of six months and above but less than one year and floating rate deposits, the interest rate ceiling will be reduced by 25 basis points.

(e) Renewal of overdue FCNR(B) and NRE deposits

As per existing instructions in case of overdue FCNR/NRE deposits where the overdue period exceeds 14 days, the banks are required to pay simple interest as specified in the directive DBOD. NO. DIR. BC. 9 and 11/C.347(I)-88 dated July 29, 1988. It has now been decided to permit the banks to fix their own interest rates on overdue FCNR(B) and NRE deposits subject to these deposits being renewed.

The effective dates of changes in interest rates on domestic term deposits, FCNR(B) and NRE deposits shall be announced by banks as early as possible.

2. Lending Rates

(i) Interest rate on credit limits upto Rs. 2.00 lakh

In terms of instructions contained in our Circular DBOD. No. Dir. BC. 124/13.07.01/97-98 dated October 21, 1997, interest rate on credit limits upto Rs. 25,000/- was prescribed at 12 per cent. For credit limits of over Rs.

25,000/- and upto Rs. 2 lakh the rate was not to exceed 13.5 percent per annum. In order to remove the disincentive to the flow of credit towards small borrowers of Rs. 2 lakh, and below, it has now been decided that interest on credit limits of Rs. 2 lakh and below shall not exceed the Prime Lending Rate which is available to the best borrowers of the concerned bank.

(ii) Advances against domestic/NRE term deposits
As per instructions in RBI Circular DBOD. No. Dir. BC. 109/13.01.09/95 dated September 29, 1995 read with Circular DBOD. No. Dir. BC. 98/13.01.04/96 dated July 4, 1996, interest rate chargeable on loans and advances granted against domestic/NRE term deposits upto Rs. 2 lakh is two percentage points above deposit rates and for advances over

Rs. 2 lakh the interest rate chargeable is not less than bank's own PLR. It has now been decided that advances against domestic/NRE deposits to the depositor, should be at an interest rate equal to PLR or less.

The effective date of changes mentioned above shall be announced by banks as early as possible.

Amending Directives DBOD. Nos. Dir. BC. 33, 34 & 35/13.03.00/98 dated April 29, 1998 enumerating the above changes are enclosed.

3. Loans and advances against shares and debentures

In terms of instructions contained in circular DBOD. No. Dir. BC. 116/13.07.05/96 dated September 6, 1996, banks were permitted to grant loans and advances to individuals against shares/debentures upto a ceiling of

Rs. 10 lakh per borrower and were also required to maintain a minimum margin of 50 per cent for advances against shares. It has now been decided to increase the ceiling of

Rs. 10 lakh to Rs. 20 lakh per individual borrower, if the advances are secured by shares and debentures held in dematerialised form. The minimum margin prescription against dematerialised shares also stands reduced to 25 per cent.

4. Money Market

(i) Certificates of Deposits (CDs)

As per our Circular DBOD. No. BP. BC. 109/21.03.063/96 dated August 8, 1996 the minimum lock-in-period for CDs was reduced from 46 days to 30 days. It has now been decided that the minimum lock-in-period for CDs be reduced from 30 days to 15 days.

(ii) Money Market Mutual Funds (MMMFs)

In terms of Circular DBOD. No. FSC. BC. 95/24.01.013/96 dated July 3, 1996, the minimum lock-in-period for units of MMMFs was reduced to 30 days from 46 days. It has now been decided to further reduce the minimum lock-in-period from 30 days to 15 days. All other operative guidelines relating to the Scheme remain unchanged.

5. Valuation of banks' investments in approved securities

In terms of instructions contained in Circular DBOD. No. BP. BC. 31/21.04.048/97 dated April 10, 1997, the ratio of 'Current' and 'Permanent' investments in approved securities during 1997-98 was prescribed at 60:40. Consistent with the measures to adopt prudent accounting standards and to continue to move towards "Mark to Market" valuation of investment portfolio, it has been decided that banks shall classify a minimum of 70 percent of the investments in approved securities as 'current' for the year ending March 31, 1999. It is intended to increase the ratio of current investments in approved securities progressively in line with international best practice, to 100 per cent in next three years.

6. Penal Rate of Interest on the shortfall in the maintenance of CRR/SLR

With the reduction brought about in the Bank Rate by one percentage point i.e. from "10 percent per annum to 9..00 percent per annum" with effect from the close of business today (29th April 1998), the Penal Rate of Interest charged on the amount of shortfalls in the maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio will stand revised with effect from the close of business today (29th April 1998).

Yours faithfully

(A. Ghosh)

Chief General Manager