Focussed regulation and supervision of the financial system is a key tool for maintenance of financial stability.
Taking this into consideration, the Reserve Bank continued to pay significant attention to pro-active regulation
and supervision. The commercial banking sector presently remains well-capitalised, although reduced profitability,
rising delinquent loans and future capital requirements to comply with Basel III requirements are challenges that
need to be addressed. A slew of regulatory and supervisory initiatives have been undertaken to improve the overall
functioning of the sector. The legal framework governing banks has also been revamped in line with modern
market practices. Reflecting the growing complexity of NBFCs, a new category was created during the year. The
Financial Sector Legislative Reforms Commission has made several recommendations on the legal and regulatory
architecture governing the financial sector. These will need to be carefully examined.
VI.1 Weaknesses in the regulation and supervision of both banks and non-bank financial entities were identified as a prime cause of the global financial meltdown in 2008. The overt
reliance by regulators on market discipline,
including the excessive dependence on credit rating
agencies, led to ‘light touch’ regulation. Financial
innovations were used to shift some financial
practices outside the regulatory perimeter. The
culmination of these actions was the build-up of a
significant amount of risks that ultimately led to a
financial collapse. Taking these lessons into
account, regulators have become more proactive
by instituting regulatory mechanisms that are
macroprudential in scope, forward-looking in nature
and analytical in approach.
VI.2 In India, the Reserve Bank has adopted a
proactive approach to prudential regulation, which
was in place even before the outbreak of the crisis.
Taking into account the lessons learnt during the
crisis, the Reserve Bank has been fine-tuning its
regulatory strategy to ensure that it fosters a stable
financial environment where the credit requirements
of the productive sectors are adequately met
without stifling innovation.
FINANCIAL STABILITY ASSESSMENT
Current Assessment of Risks to Financial Stability
in India
VI.3 Risks to the Indian economy from global
developments remain elevated especially in the
face of domestic vulnerabilities, although the risk
of tail events materalising in the advanced
economies has reduced on the back of policy
action. Newer risks have emerged from prolonged
unconventional monetary policies and speculation
on the exit from such policies, amidst an environment
of uncertain global growth. Financial stability risks
are particularly significant from increasing external
vulnerabilities and the dependence on volatile
capital flows to fund the high CAD. According to the
results of the latest Systemic Risk Survey (Financial
Stability Report , June 2013) domestic
macroeconomic risks and global risks were the most important factors affecting the stability of Indian financial system.
VI.4 The overall risks to the banking sector have
increased during 2012-13, owing to the tight liquidity
conditions, deteriorating asset quality, and reduced
profitability. However, there was marginal
improvement in asset quality and soundness as also some sign of easing in ‘distress dependencies’
among banks in the March 2013 quarter. The macro
stress tests show that the credit quality of
commercial banks is a concern. However, the
comfortable capital adequacy position has provided
resilience to most banks as shown by the various
stress testing exercises.
Working of the FSDC Sub-Committee
VI.5 The Sub-Committee of the Financial
Stability and Development Council (FSDC)
continues to coordinate discussions and actions on
various issues relating to systemic stability and
development of India’s financial sector, under the
guidance of the FSDC. The Committee made
progress in identification of regulatory gaps in areas
like wealth management services and collective
investment schemes, addressing the conflict of interest in distribution of financial products, among
other things. Besides, the Sub-Committee has also
been taking stock of implementation of the G20/
FSB post-crisis reforms. It has also been approving
the FSR since 2011 and since then, the report
reflects the collective views of its members.
VI.6 Based on the IMF Board’s decision in
September 2010, it was decided to include 25
systemically important economies, including India,
under the Financial Stability Assessment
Programme (FSAP) for members with systemically
important financial sectors. As part of this process,
a joint IMF-World Bank team had conducted the
FSAP for India in 2011. Subsequently, the Financial
Sector Stability Assessment for India, the final
report of the FSAP, was released by the IMF in
January 2013 (Box VI.1).
Box VI.1
India: Financial Sector Stability Assessment
The assessment report recognised that the India has made
remarkable progress towards developing a stable financial
system by steady improvements in the legal, regulatory and
supervisory framework. Regulatory and supervisory regime
for banks, insurance, and securities markets was found to be
well developed and largely in compliance with international
standards. It added that the Indian financial system’s
vulnerabilities appeared manageable.
The assessment, however, identified some gaps. The major
issues raised in the Report, authorities’ response and the
progress made in this regard are highlighted below:
Autonomy of regulators: The report suggested enhancing
formal statutory basis for the autonomy of regulators in
carrying out their regulatory and supervisory functions. The
extant position is that financial sector regulators in India
operate within statutory frameworks that aim at balancing the
role of Government in policymaking with autonomy and
independence for regulatory bodies to transparently perform
their functions. Steps are underway to accord a statutory basis
to the pension regulator as well.
Information sharing and coordination amongst regulators:
With regard to the information sharing and co-ordination
among domestic regulatory authorities, several arrangements
have been made at various levels. The FSDC, under the
chairmanship of Finance Minister, serves as an apex forum
for effective regulatory co-ordination. A Sub-Committee of the
FSDC, under the Chairmanship of the Reserve Bank
Governor, provides for the next layer of co-ordination that takes place on a more frequent basis. Under the aegis of the
Sub-Committee of the FSDC, a Memorandum of Understanding
(MoU) was signed by RBI, SEBI, IRDA and PFRDA in March
2013 to forge greater cooperation in the field of consolidated
supervision and monitoring of financial conglomerates.
Information sharing with other jurisdictions: Recognising its
importance, information sharing mechanisms with various
jurisdictions in which Indian banks are operating have been
put in place. Information-sharing MoUs have already been
signed by Reserve Bank with 16 jurisdictions and
correspondence for the same is in progress with another 28
jurisdictions. Besides, Reserve Bank has carried out overseas
inspections of Indian bank branches in five countries covering
almost 60 per cent of total overseas assets of Indian banks,
while inspection is underway in another six jurisdictions
covering another 20 per cent of total overseas assets of Indian
banks. The Reserve Bank has also hosted supervisory
colleges for State Bank of India and ICICI Bank limited.
Likewise, other regulators are also addressing issues relating
to sharing of information at the international level.
Group borrower limits: The report recommended tightening
the definition of large and related party concentration and
gradually reducing exposure limits to make them more
consistent with international practices. However, the
authorities’ view is that this would severely constrain the
availability of bank finance to some of the major corporate
groups and hamper growth.
Nominee on banks’ board: The issue of moral hazard posed
by a nominee director on the banks’ board prompted
suggestion for greater clarity regarding their role. This system,
however, has served India well and ensured more effective
compliance by banks with regulations. Nevertheless, the
matter has been taken up with the Government of India for
amendment of the enabling legal provisions.
Statutory Liquidity Ratio: The assessment recommends that
Statutory Liquidity Ratio (SLR) be gradually reduced in line
with evolving international liquidity requirements. This will
support deeper capital markets, systemic liquidity management
and monetary transmission. The authorities’ perspective on
this is that the SLR, apart from mandating investments in
government securities, has served liquidity, monetary and
financial stability needs. SLR requirement has been brought
down over time. Government market borrowings are at
market-determined interest rates and monetary policy
transmission is not impeded by SLR holdings. The holding of
government bonds could help banks to better cope with
financial stress situations by giving greater access to liquidity.
Securities market regulation: The assessment made certain
recommendations regarding securities market regulation in
India after employing higher standards than IOSCO
principles. In this regard, SEBI has taken several steps to
improve the mutual fund regulation. In August 2013, SEBI
decided to bring under its ambit fraudulent and unfair trade
practices regulations and clamp down on front running
practices.
Auditing and accounting standards: The assessment
suggested improved mechanisms for ensuring better auditing and accounting standards in the securities market. Several
initiatives have been taken recently to strengthen the existing
mechanisms. The government has set up Quality Review
Board (QRB) for reviewing the quality of auditors, while the
SEBI has set up a Qualified Audit Report Review Committee
(QARC). The Companies Bill 2012 as passed by Lok Sabha
contains provisions for establishment of an independent
quasi-judicial agency - the National Financial Reporting
Authority - to oversee the functions of auditors.
Independent Risk Committee in Central Counterparties
(CCPs): Regarding this recommendation in April 2012, SEBI
had decided that CCPs will constitute a risk committee
comprising independent members which shall report to the
Board of the CCP as well as directly to SEBI on relevant
issues.
Early Warning Group: The report suggested strengthening
early warning mechanisms. Recently, an inter-regulatory Early
Warning Group (EWG) for financial markets has been
constituted under the FSDC sub-committee.
Regulation of Insurance Industry: In the Report, the IRDA has
clarified that there is complete oversight over the Life
Insurance Corporation of India (LIC) with regard to both
market conduct and prudential regulations. The issues relating
to inadequacy of reserves in case of non-life insurance
industry have also been addressed with directions to increase
the premium in the Motor-Third Party segment. The
enforcement powers are being strengthened in the proposed
Insurance Laws (Amendment) Bill. Further, the IRDA is also
examining various issues relating to moving towards the riskbased
approach to solvency.
ASSESSMENT OF THE BANKING SECTOR
Core Financial Soundness Indicators (FSIs) of
SCBs
VI.7 The capital position of SCBs remains well
in excess of the regulatory requirements, although
both the CRAR (13.8 per cent) and the core CRAR
(10.3 per cent) are a bit lower than in the previous
year (Table VI.1). Driven by a lacklustre domestic
environment, the asset quality of SCBs deteriorated
further during 2012-13. In terms of magnitude, the
gross NPAs of SCBs increased from 2.9 per cent
in 2011-12 to 3.4 per cent in 2012-13. The higher
provisioning, in turn, meant a lower net profit, which
grew by 12.8 per cent during 2012-13 compared
with 14.6 per cent a year ago. Accordingly, the RoE
and RoA of SCBs also registered declines. The NIM
also declined from 3.1 per cent to 3.0 per cent during the same period. SCBs, however, continue
to hold around a third of their assets in liquid form,
which stood at 28.9 per cent at end-March 2013.
VI.8 Given the drag that NPAs exert on bank
profitability, an attempt was made to ascertain the
magnitude of the impact (Box VI.2).
Sensitivity Analysis
VI.9 A number of single factor sensitivity stress
tests were carried out at the system as well as at
the bank level (for the sample of 60 banks
comprising 99 per cent of total banking sector
assets) to assess their vulnerabilities and resilience
under various scenarios. The resilience of the
commercial banks in respect of credit, interest rate
and liquidity risks were studied through sensitivity
analysis by imparting extreme but plausible shocks.
Table VI.1: Select Financial Indicators |
(Per cent) |
Item |
End- March |
Scheduled Commercial Banks |
Scheduled Urban Co-operative Banks |
All India Financial Institutions |
Primary Dealers |
Non-Banking Financial Companies-D |
NBFCs-ND-SI |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
CRAR |
2012 |
14.2 |
12.8 |
21.0 |
53.8 |
20.4 |
27.5 |
|
2013 |
13.8 |
12.7 |
19.0 |
39.4 |
22.3 |
28.0 |
Core CRAR |
2012 |
10.4 |
N.A. |
N.A. |
N.A. |
16.8 |
24.6 |
|
2013 |
10.3 |
N.A. |
N.A. |
N.A. |
19.0 |
24.3 |
Gross NPAs to Gross Advances |
2012 |
2.9 |
5.2 |
0.4 |
N.A. |
2.7 |
3.1 |
|
2013 |
3.4 |
4.5 |
0.7 |
N.A. |
2.5 |
3.5 |
Net NPAs to Net Advances |
2012 |
1.2 |
0.9 |
0.1 |
N.A. |
0.8 |
1.8 |
|
2013 |
1.5 |
0.8 |
0.2 |
N.A. |
0.8 |
1.6 |
Return on Total Assets |
2012 |
1.1 |
1.0 |
1.0 |
0.8 |
2.8 |
1.8 |
|
2013 |
1.0 |
0.9 |
1.0 |
1.5 |
2.7 |
2.1 |
Return on Equity |
2012 |
13.4 |
N.A. |
9.2 |
4.4 |
16.7 |
7.0 |
|
2013 |
12.8 |
N.A. |
9.6 |
10.1 |
15.4 |
8.6 |
Efficiency (Cost/Income Ratio) |
2012 |
45.3 |
50.6 |
18.1 |
44.1 |
73.3 |
77.7 |
|
2013 |
46.3 |
50.4 |
17.1 |
27.2 |
72.2 |
73.9 |
Interest Spread (per cent) |
2012 |
3.1 |
N.A. |
2.1 |
N.A. |
3.3 |
2.3 |
|
2013 |
3.0 |
N.A. |
2.1 |
N.A. |
3.6 |
5.3 |
Liquid Asset to total assets |
2012 |
28.9 |
N.A. |
N.A. |
N.A. |
16.1 |
4.9 |
|
2013 |
28.9 |
N.A. |
N.A. |
N.A. |
9.1 |
4.8 |
N.A.: Not Available.
Note: 1. Data for 2013 is unaudited and provisional.
2. Data for SCBs covers domestic operations, except for CRAR.
3. Data for CRAR of SCBs excludes Local Area Banks and pertains to Basel II norms.
4. Audited data for NABARD, SIDBI, and EXIM Bank for the year ended March 31, 2012 and audited data for NHB for
June 30, 2012.
5. Audited data for NABARD, SIDBI and EXIM Bank for the year ended March 31, 2013, unaudited data for NHB for the
year ended June 30, 2013.
6. Data on Scheduled UCBs exclude Madhavpura Mercantile Co-operative Bank Ltd.
7. Liquid assets include cash and bank balances and investments in government securities
8. ND-SI = Non deposit Systemically Important (i.e., NBFCs with asset size of `1 billion and above
Source: 1. SCBs: Off-site supervisory returns.
2. AIFIs: OSMOS returns and data received from FIs.
3. UCBs: Off-site surveillance returns. |
The results based on March 2013 data are available
in the Financial Stability Report, June 2013. They indicate that while some banks would fail to
maintain CRAR under stress scenarios for credit risk, at the system level, CRAR would remain above
the required minimum of 9.0 per cent.
Box VI.2
Impact of NPAs on profitability of banks
The quality of assets is an important indicator of banks’
financial health. It also reflects the efficacy of banks’ credit
risk management and the recovery environment. A study of
the asset quality of banks was carried out based on data
submitted by banks, covering their domestic operations,
through off-site returns.
The study indicated that gross non-performing assets, which
declined from `700 billion at end-March 2003 to `500 billion
at end-March 2007, recorded an average growth of 24.7 per
cent during the last six years to reach to `1,839 billion at
end-March 2013. Similarly, net NPAs have recorded an
average growth of 29.0 per cent since March 2007 and
reached `883 billion by end-March 2013. The gross NPA and net NPA ratios have been increasing since March 2008, except
during 2010-11, and reached 3.42 per cent and 1.46 per cent,
respectively, by end-March 2013. The high level of NPAs cost
the banks by way of loss of interest income, besides
provisioning, recovery and litigation costs.
According to the analysis, the loss to banks due to NPAs
has been more than 60 per cent of their net profit since
March 2010. In addition, about 18 per cent of banks’ net
interest income is used for making risk provisions and write-offs
of NPAs. Had the NPAs not been there, banks would
have improved their yield on advances, on an average, by
124 basis points (considering the position since March
2009).
MAJOR DECISIONS TAKEN BY
BOARD FOR FINANCIAL SUPERVISION
VI.10 Constituted in 1994, the Board for Financial
Supervision (BFS) remains the principal guiding
force behind the Reserve Bank’s supervisory
and regulatory initiatives. The BFS currently has
Shri Y.H. Malegam, Ms. Ela Bhatt, Dr. Rajeev Gowda
and Shri Kiran Karnik as Director-members.
VI.11 The BFS had ten meetings during the period
July 2012 to July 2013. The BFS considered, inter
alia, the performance and the financial position of
banks and financial institutions. The entire process
of the inspection cycle for 2011-12 for all banks /
LABs / AIFIs programmed for inspection was
completed and the relevant Annual Financial
Inspection (AFI) memoranda were submitted to the
BFS by April 2013. The format of the inspection
report has been made more risk-focussed and
banks issued with Monitorable Action Plans (MAPs)
with a timeline for completion. This has resulted in
focussed attention on key supervisory concerns.
VI.12 Based on the issues raised during the 2011-
12 inspection cycle, the BFS gave directions on
several issues. Some of the major issues pertain
to accurate reckoning of pension liabilities,
accounting / disclosing commitments/ liabilities
under ASBA, deficiencies in compliance with KYC/
AML guidelines, trading of Indian Rupee overseas,
governance issues relating to private sector banks,
concerns about the increasing number of fraud
cases, misclassification of priority sector loans,
disparity in pricing of loans, etc. Based on the
directions / guidance of the BFS, thematic reviews
were conducted in certain areas such as the KYC/
AML environment in banks, banks’ exposure to real
estate/ housing sector, major frauds above a
threshold, etc. Under directions from the BFS, a
revised compensation structure has been issued
for private and foreign banks.
VI.13 Regarding the supervision of NBFCs, the
BFS dealt with concerns such as the supervisory
rating framework, lending against gold and gold
ornaments, the fair practices code etc. Besides, the
BFS considered various proposals based on
recommendations of the Working Group to study
issues and concerns in the NBFC sector. Inspection
report of NBFC-ND-SIs with asset size of `1 billion
and above were also placed before the BFS.
VI.14 During this period, the BFS also reviewed
49 summaries of inspection reports pertaining to
scheduled urban co-operative banks (UCBs), 40
summaries of financial highlights pertaining to
scheduled UCBs rated between A+ and B- and 11
summaries of financial highlights pertaining to
scheduled UCBs rated between C+ and D. As
regards supervision over UCBs, the BFS approved
the revised graded supervisory action, financial
restructuring of UCBs under directions and made
the rating model for UCBs less complex. In addition,
the BFS reviewed the regulations over rural credit
institutions and approved a proposal to issue
directions to unlicenced DCCBs.
COMMERCIAL BANKS
Regulatory Initiatives
Current Status of Implementation of Basel III
Guidelines
VI.15 The Reserve Bank issued final guidelines
regarding implementation of Basel III capital
regulations on May 2, 2012. These guidelines are
effective from April 1, 2013 with the exception of
Credit Valuation Adjustment (CVA) risk capital
charge for OTC derivatives which will become
effective from January 1, 2014. This has been done
keeping in view the impending introduction of
mandatory forex forward guaranteed settlement
through a central counterparty.
VI.16 Out of the 27 jurisdictions that comprise
Basel Committee on Banking Supervision (BCBS)
25 have issued final Basel III based capital
regulations. Further, Basel III capital rules have become effective in 11 member jurisdictions while
others have issued final rules but have not yet
brought them into force. The remaining two
members have issued draft rules.
Status of Implementation of Basel II Advanced
Approaches in India
VI.17 Currently, scheduled commercial banks are
required to compute capital using simpler
approaches available under the Basel II framework.
The Standardised Approach for Credit Risk, the
Basic Indicator Approach for Operational Risk and
the Standardised Measurement Method for Market
Risk have been implemented for banks in India.
The current status with respect to the implementation
of the advanced approaches is detailed below.
VI.18 With regard to credit risk, the guidelines for
Internal Rating-Based (IRB) approach to credit risk
for regulatory capital calculation were issued in
December 2011, in terms of which banks could
apply to the Reserve Bank for adoption of either
Foundation Internal Rating-Based (FIRB) or
Advanced Internal Rating-Based (AIRB) depending
on their preparedness, between April and June
2012. Fifteen banks desirous of applying for IRB
submitted the letter of intention by June 2012 and
subsequently, fourteen banks submitted the gist of
self-assessment on their preparedness for the
FIRB/AIRB approach by September 2012.
VI.19 Based on the applications received and
subsequent information obtained, a preliminary
study of the status of preparedness of the banks
has been carried out. The applicant banks that are
better prepared may be taken for the parallel run
under the IRB framework.
VI.20 With regard to market risk, banks in India
have been using the Standardised Measurement
Method (SMM) since March 2005. The guidelines
for the advanced Internal Models Approach (IMA)
to market risk assessment for regulatory capital
calculation were issued by Reserve Bank in April
2010. Reserve Bank has already undertaken the
process of validation of market risk models in respect of two banks. These banks have been
suggested to upgrade their market risk management
systems and processes before the migration to IMA
is allowed. Further, two more banks have submitted
their plans for migrating to IMA and Reserve Bank
will be undertaking detailed model validation
exercise in respect of these banks in due course.
VI.21 With respect to operational risk, the Basel
II framework presents three methods to calculate
the capital charge for operational risk along
continuum of increasing sophistication and risk
sensitivity viz. the Basic Indicator Approach (BIA),
the Standardised Approach (TSA)/ Alternative
Standardised Approach (ASA) and Advanced
Measurement Approaches (AMA).
VI.22 The guidelines on implementation of The
Standardised Approach (TSA) and Alternative
Standardised Approach (ASA) for calculating
capital charge for operational risk were issued in
March 2010. TSA is a more advanced method in
comparison to the BIA for determining the capital
required for covering operational risk losses.
Thirteen banks have submitted applications/
intention to migrate to TSA. Currently, while two
banks have been granted permission for migrating
to TSA on a parallel run basis with BIA for calculation
of operational risk capital charge, three banks have
been advised to enhance their operational risk
management framework. Applications of the other
eight banks are at various stages of assessment.
VI.23 The guidelines on implementation of the
AMA were issued in April 2011. Under the AMA,
the regulatory capital requirement will equal the
risk measure generated by the bank’s internal
operational risk measurement system (ORMS),
using quantitative and qualitative criteria.
VI.24 So far, nine banks have conveyed their
intention to apply for AMA, four of which have also
submitted a preliminary self-assessment of their
preparedness for migration to AMA. The Reserve
Bank, after making a preliminary assessment of a
bank’s risk management system and its modeling process, may allow the bank to make a formal
application for migrating to AMA.
Dynamic Provisioning
VI.25 Provisions against loan losses can be
broadly divided into two categories: general and
specific. The present provisioning policy, consisting
of general and specific provisions, has several
limitations. First, the rate of provisions on standard
assets is not based on any scientific analysis.
Second, banks make floating provisions without
any pre-determined rules. Third, the provisioning
framework does not have cycle smoothening
elements built into it. A need was, therefore,
recognised for introducing a comprehensive
provisioning framework that has dynamic and
countercyclical elements.
VI.26 In this regard, a Discussion Paper was
released by Reserve Bank on March 30, 2012 for
public comments. Based on the analysis in the
paper, it was proposed that the dynamic provisioning
framework for loan loss provisions for banks in India
would consist of two components: a) Ex-post
Specific Provisions (SP) made during a year as
required under Reserve Bank guidelines. These
provisions would be debited to the Profit and Loss
account; and b) Dynamic Provisions (DP) equal to
the difference between the expected loss of the
portfolio for one year based on downturn Loss
Given Default (LGD) and the incremental specific
provisions made during the year.1 In short, under
the proposed framework, banks will accumulate
provisioning buffer during the period when the
economy is growing and their credit losses are
lower than the long-run average. The accumulated
buffer would be utilised during the slow /negative
growth phase when the banks’ credit losses
increase.
VI.27 Ideally, calibration of Expected Loss (EL)
should be based on forward-looking through-thecycle
probability of default of various asset classes/
rating classes. Further, it should be based on the
credit history of individual banks and reflect their own
credit risk profile. Banks which have capability to
calibrate their own parameters could be allowed,
with the prior approval of Reserve Bank, to
introduce dynamic provisioning framework based
on their own data set. Those banks, which are not
able to introduce dynamic provisioning based on
their own data set, may use the standardised
calibration carried out by the Reserve Bank. The
final guidelines, containing the final calibration of
EL, are proposed to be issued shortly.
Guidelines on Liquidity Risk Management
VI.28 The Reserve Bank had issued draft
guidelines on Liquidity Risk Management (LRM)
and Basel III framework on liquidity standards in
February 2012 for comments and feedback. After
taking into account the feedback received from
stakeholders, the guidelines on LRM were issued
in November 2012. These included enhanced
guidance on liquidity risk governance, and
measurement, monitoring and reporting to the
Reserve Bank on liquidity positions.
VI.29 The Reserve Bank has indicated in the LRM
guidelines that the guidelines on Basel III liquidity
standards will be issued once the Basel Committee
finalises the relevant framework. The Basel
Committee has issued Basel III: The Liquidity
Coverage Ratio and Liquidity Risk Monitoring Tools
in January 2013 and is in the process of finalising
the Liquidity Coverage Ratio (LCR) disclosure
requirements and Net Stable Funding Ratio
(NSFR). The LCR is to be implemented from
January 1, 2015 and the NSFR from January 1, 2018. The Reserve Bank will issue the final
guidelines on Basel III liquidity standards and
liquidity risk monitoring tools, taking into account
the revisions by the Basel Committee.
Restructuring of Advances by Banks and Financial
Institutions
VI.30 Against the background of an increase in
restructured standard advances, a Working Group
was constituted (Chairman: Shri B. Mahapatra) to
review the prudential guidelines on restructuring of
advances by banks/financial institutions and to
suggest revisions. The report of the Working Group
was submitted in July 2012 and was placed on the
website of the Reserve Bank to invite comments
from the stakeholders (Box VI.3).
VI.31 Draft guidelines on restructuring of advances
were placed on the Reserve Bank website on
January 31, 2013 inviting comments from the
stakeholders by February 28, 2013. Reserve Bank
also issued a circular on the same date, rationalising
the disclosure requirements of ‘restructured
accounts’ as per the recommendation of the
Working Group. The final guidelines have since
been issued on May 30, 2013 taking into account the recommendations of the Working Group and
the feedback from stakeholders.
VI.32 The major changes in the guidelines as a
consequence are the following. (i) regulatory
forbearance regarding asset classification on
restructuring will be withdrawn from April 1, 2015;
(ii) during the interregnum, standard restructured
accounts will attract higher provisioning requirement
of 5 per cent – immediately for fresh cases of
restructuring (flow) with effect from June 1, 2013
and in a phased manner over three years for stock
of standard restructured accounts as at end-May
2013; (iii) asset classification benefit on change of
date of commencement of commercial operations
(DCCO) of infrastructure and non-infrastructure
projects will, however, continue to be available
beyond April 1, 2015 until further review;
(iv) promoters will have to make a sacrifice of 20
per cent of banks’ sacrifice or 2 per cent of the
restructured debt, which is higher, as against the
earlier requirement of 15 per cent of banks’
sacrifice; (v) conversion of debt into preference
shares should be done only as a last resort and
such conversion of debt into equity/ preference
shares should, in any case, be restricted to a cap
(say 10 per cent of the restructured debt); (vi) promoters’ personal guarantee should be
obtained in all cases of restructuring and corporate
guarantee cannot be accepted as a substitute for
personal guarantee; (vii) criteria for upgradation of
a downgraded restructured account, i.e., an
account classified as NPA on restructuring, has
been tightened; and (viii) banks would be required
to incorporate the ‘right to recompense’ clause in
all cases of restructuring.
Box VI.3
Review of prudential guidelines on restructuring of advances by banks and financial institutions –
Major recommendations of the Working Group
The regulatory forbearance available on asset classification
on restructuring presently needs to be withdrawn after two
years.
During the interregnum, provision on standard restructured
accounts which get the asset classification benefit on
restructuring be increased from the present 2 per cent to 5
per cent, in a phased manner in case of existing accounts
(stock) and immediately in case of newly restructured
accounts (flow).
In view of the importance of infrastructure sector, asset
classification benefit on restructuring may however be allowed
for a longer period in cases where restructuring is due to
change in date of commencement of commercial operation
of infrastructure projects.
A cap of, say 10 per cent, to be prescribed on amount of
restructured debt which can be converted into preference/
equity shares.
Reserve Bank may prescribe the broad benchmarks for
viability parameters based on those used by CDR Cell; and
banks may adopt them with suitable adjustments, if any, for
specific sectors.
Compulsory promoters stake in the restructured accounts to
be increased by way of higher sacrifice and personal
guarantee.
Right of recompense may be made mandatory in all cases.
Disclosure requirements to be made comprehensive but to
exclude standard restructured accounts which have shown
consistent satisfactory performance.
Management of Intra-Group Transactions and
Exposures
VI.33 As the capital adequacy framework is not
sufficient to fully mitigate the microprudential risk
of exposures that are larger than a bank’s capital
resources, various prudential exposure limits are
put in place to limit the maximum loss a bank could
face in the event of default of a third party or a group
of such parties. However, a bank’s stability and
solvency can also be jeopardised by parties that
are related to the bank through organic links,
generally termed as group entities. The possibility
that large losses could arise due to Intra-Group
Transactions and Exposures (ITEs) and threaten
the on-going business operations of a banking
group motivates supervisory concern that risk
concentrations within the Group be identified,
monitored and subjected to an adequate
management strategy.
VI.34 The Reserve Bank issued draft guidelines
in August, 2012 for limiting banks’ transactions and
exposures to the group entities. The draft guidelines
had proposed both quantitative limits for the
financial ITEs and prudential measures for the non financial ITEs to ensure that the banks engage in
the ITEs in safe and sound manner.2 These
measures are aimed at ensuring that banks, at all
times, maintain an arm’s length relationship in their
dealings with the Group entities, meet minimum requirements with respect to Group risk management
and group-wide oversight, and adhere to prudential
limits on intra-group exposures. The comments
received on the draft guidelines are being examined
and the final guidelines will be issued shortly.
International Financial Reporting Standards (IFRS)
VI.35 The International Financial Reporting
Standards (IFRS) issued by the International
Accounting Standards Board (IASB) are increasingly
being recognised as a global standard for financial
reporting. At present, they are followed in more than
100 jurisdictions including the European Union,
Canada, Australia, New Zealand and South Korea.
VI.36 The Ministry of Corporate Affairs (MCA),
Government of India (GoI) issued a roadmap in
January 2010 envisaging a phased convergence
from April 1, 2011 for corporates. However, the
implementation date was kept in abeyance pending
the resolution of various issues including those
relating to taxation. Consequently, entities which
were to have migrated to IFRS converged Indian
Accounting Standards (Ind AS) from April 1, 2011
onwards have not done so.
VI.37 In the Indian banking sector, a delayed
convergence schedule of April 1, 2013 was
envisaged in the MCA’s roadmap taking into
account the project of the IASB to replace the
existing standard on financial instrument viz. IAS
39 Financial Instruments: Recognition and
Measurement with a new standard IFRS 9:
Financial Instruments in order to reduce the
complexity in IAS 39 as well as incorporate
lessons learned from the financial crisis. However,
the process has been substantially delayed due
to lack of agreement between the IASB and the
Financial Accounting Standards Board (FASB) of
the US on certain issues with particular reference to impairment. The uncertainty in the finalisation
of IFRS 9 has impeded Indian efforts at
convergence.
Licensing of new banks in the private sector
VI.38 In pursuance of the announcement made
by the Hon’ble Finance Minister in his Budget
Speech for the year 2010-11, the Reserve Bank
had placed draft guidelines on the licensing of new
banks in the private sector on its website on August
29, 2011 for public comments. The final guidelines
were prepared and released on Reserve Bank’s
website on February 22, 2013, consequent to the
amendments to the Banking Regulation Act 1949
in December 2012 (Box VI.4). Subsequently, 26
applications for new bank licenses in the private
sector have been received till the closing date of
July 1, 2013.
Supervisory Initiatives
High Level Steering Committee to Review the
Supervisory Policies, Procedures and Processes
for Commercial Banks
VI.39 One of the main recommendations of the
High-Level Steering Committee (HLSC) to review
of supervisory processes (Chairman: Dr. K. C.
Chakrabarty) was the adoption of a Risk-Based
Approach for supervision of commercial banks from
the supervisory cycle beginning April 2013. In this
connection, the Board for Financial Supervision
(BFS) has recommended migration to Risk Based
Supervision (RBS) in a phased manner for
scheduled commercial banks from 2012-13.
Accordingly, a list of 30 banks has been identified
to be taken up under RBS (Phase I). The selected
banks account for 52 per cent of the total banking
sector assets.
VI.40 To enable banks to gear up to the challenges
of a smooth transition to RBS, the Reserve Bank
has been endeavouring to sensitise the banks on
the changed process of supervision. The Reserve
Bank has also conducted sensitisation programs
for 180 senior officers and 50 top management officials of the banks under RBS. The Reserve Bank
has also initiated the process of collating additional
data from banks from April 2013 to facilitate
finalisation of the RBS framework.
Bilateral Memorandum of Understanding (MoU)
with its Overseas Counterparts for Improved Cross
Border Supervision and Cooperation
VI.41 The earlier informal process of sharing of
information between “Home” and “Host” supervisors
is being formalised though the mechanism of
Memorandum of Understanding (MoU). This
channel is becoming all the more important since
the cross-border operations of Indian banks are
increasing at a rapid pace. However, the FSAP team
(2011) assessed the Reserve Bank as ‘Materially
Non compliant’ in respect of 3 BCPs (out of a total
of 29 BCPs), including BCP 25 (Revised Principle
13) on ‘Home- Host relationships’.
VI.42 Against this backdrop, the Reserve Bank
has executed MoUs with sixteen overseas
supervisors i.e., China Banking Regulatory
Commission (CBRC), Dubai Financial Services
Regulatory Authority (DFSA), South African
Reserve Bank (SARB), Qatar Financial Centre
Regulatory Authority (QFCRA), Qatar Central Bank
(QCB), Central Bank of Bahrain (CBB), Jersey
Financial Services Commission (JFSC), Financial
Services Authority (FSA) UK, Finanstilsynet (FSA
of Norway), Central Bank of Russian Federation
(CBRF), State Bank of Vietnam (SBV), Bank of
Mauritius (BoM), Reserve Bank of Fiji (RBF),
National Bank of Belgium (NBB), BaFin and ACP
and Banque de France. Besides, proposals in
respect of 28 other overseas supervisors are in
various stages of reaching a mutually agreeable
format for a MoU. The MoU provides a formal, yet
legally non-binding, gateway of information between
supervisors.
MoU with financial sector regulators to monitor
Financial Conglomerates
VI.43 One of the mandates assigned to the
Financial Stability Development Council (FSDC) is the macroprudential supervision of large financial
conglomerates. In this context, in terms of FSDC
sub-Committee directions, an institutional structure
for the oversight and monitoring of Financial
Conglomerates (FCs) in the form of an Inter
Regulatory Forum (IRF) modelled around the “lead
regulator” principle has been set up under the aegis
of the sub-Committee of the FSDC. The IRF is
headed by the Deputy Governor, Reserve Bank
(in-Charge of banking supervision) and comprises of senior representatives from the sectoral regulators
(Reserve Bank, SEBI, IRDA and PFRDA).
Box VI.4
Licensing of new banks in private sector
As per the guidelines, entities / groups in the private sector
which are owned and controlled by residents and entities in
public sector shall be eligible to set up a bank. Non-Banking
Financial Companies (NBFCs) shall also be eligible to set up
a bank.
The guidelines set out ‘fit and proper’ criteria for the Promoters/
Promoter Groups. The Promoters/Promoter Groups should
be financially sound with a successful track record of 10 years
and have a past record of sound credentials and integrity. For
this purpose, Reserve Bank may seek feedback from other
regulators and enforcement and investigative agencies.
Promoters/Promoter Groups’ business model and business
culture should not be misaligned with the banking model and
their business should not potentially put the bank and the
banking system at risk on account of group activities such as
those which are speculative in nature or subject to high asset
price volatility.
The new banks in the private sector would be set up through
a wholly-owned Non-Operative Financial Holding Company
(NOFHC). NOFHC shall be wholly-owned by the Promoters/
Promoter Group. NOFHC shall hold the bank as well as all
the other financial services entities, in which the Promoters/
Promoter Group have significant influence or control. The
guidelines stipulate that only the non-financial services
companies/entities and non-operative financial holding
company in the Group and individuals belonging to Promoter
Group will be allowed to hold shares in the NOFHC. Financial
services entities whose shares are held by the NOFHC cannot
be shareholders of the NOFHC. NOFHC will be registered as
an NBFC and comply with the corporate governance
standards and prudential norms set out by Reserve Bank.
The aggregate non-resident shareholding from FDI, NRIs and
FIIs in the new private sector bank shall not exceed 49 per cent of the paid-up voting equity capital for the first 5 years
from the date of licensing of the bank and no non-resident
shareholder will be permitted to hold 5 per cent or more of
the paid-up voting equity capital of the bank for a period of 5
years from the date of commencement of business of the
bank. The non-resident shareholding will be as per the extant
FDI policy, after the expiry of the initial five year period.
The bank as well as the financial entities under the NOFHC
cannot take credit and investment exposure to Promoters/
Promoter Group entities or individuals associated with the
Promoter Group or the NOFHC. Banks promoted by Groups
having 40 per cent or more assets income from non-financial
business will require Reserve Bank’s prior approval for raising
paid-up voting equity capital beyond `10 billion for every block
of `5 billion.
The business plan should be realistic and viable and should
address how the bank proposes to achieve financial inclusion.
The bank shall open at least 25 per cent of its branches in
unbanked rural centres (population up to 9,999 as per the
latest census). The bank shall comply with the priority sector
lending targets and sub-targets as applicable to existing
domestic banks. The bank will operate on the core banking
system and will have a high powered customer grievances
cell to handle complaints.
The eligible applications for the proposed new bank will be
referred to a High Level Advisory Committee to be set up by
Reserve Bank, comprising of eminent persons with experience
in banking, financial sector and other relevant areas.
The High Level Advisory Committee will set up its own
procedures for screening the applications and will submit its
recommendations to Reserve Bank for consideration. The
decision to issue an ‘in-principle’ approval for setting up of a
bank will be taken by Reserve Bank, which would be final.
VI.44 As part of formalising the institutional
mechanism, a MoU for facilitating data/information
sharing and formalising other co-operation
arrangements like coordinated inspection, recovery
and resolution planning etc. has been signed
among the regulators. Based on criteria for
identification of FC and financials of 2011-12, the
IRF for FC monitoring has identified 12 such FCs.
Supervisory College
VI.45 Supervisory Colleges refer to multilateral
working groups of relevant supervisors that are
constituted for the purpose of enhancing effective
consolidated supervision of an international
banking group on an ongoing basis. These are
permanent, although flexible, structures of
coordination that bring together regulatory
authorities involved in the supervision of a banking
group. In practice, the colleges are a mechanism
for the exchange of information between home and
host authorities, for the planning and performance
of key supervisory tasks in a coordinated manner
and also for the preparation and handling of
emergency situations. Thus supervisory college is
a process for regulatory co-operation.
VI.46 With a view to benchmarking the Indian
banking system with the best practices across the
globe and in its capacity as the home country
supervisor, the Reserve Bank has established
supervisory college for two major financial entities
in India – State Bank of India and ICICI Bank Ltd.
- considering their expanse of overseas operations
spreading across several supervisory jurisdictions.
The first meeting of the supervisory college was
held in December 2012. The meeting brought
together a number of host country supervisors/
regulators.3
CUSTOMER SERVICE
Complaints received and disposed
VI.47 The Reserve Bank introduced the Banking
Ombudsman Scheme 2006, as a cost-free, apex
level grievance redressal mechanism for bank
customers. During the year 2012-13, fifteen offices
of the Banking Ombudsman (OBOs) situated
across the country received 70,541 complaints from customers about deficiency in banking services.
There were 4,642 complaints pending at the
beginning of the year. OBOs disposed of 69,705
complaints during the year clocking a disposal rate
of 93 per cent. During the year, 312 awards were
passed by the Banking Ombudsmen.
VI.48 The Deputy Governor in-charge of Customer
Service Department (CSD), who is the Appellate
Authority appointed under the Banking Ombudsman
Scheme 2006 receives appeals against the Award
issued or decision given by the Banking Ombudsman.
During the year 2012-13, the Appellate Authority
received 359 appeals. There were 13 appeals
pending disposal at the beginning of the year. Of
the appeals received, 307 appeals were non-maintainable.
Of the remaining 65 maintainable
appeals, 29 were disposed in favour of customers
and 26 in favour of banks. As on June 30, 2013, 10
maintainable appeals were pending disposal.
VI.49 In addition to the Banking Ombudsman, the
Reserve Bank received 6,226 complaints against
banks pertaining to deficiency in customer services.
All the complaints were disposed of during the year.
VI.50 The Reserve Bank also receives complaints
through Centralised Public Grievances Redressal
and Monitoring System (CPGRAMS) Portal of the
Department of Administrative Reforms and Public
Grievances (DARPG), Government of India. During
the year, 5,251 such complaints were received
through this portal out of which, 4,980 complaints
were disposed as on June 30, 2013.
Position of applications and appeals received
under RTI Act, 2005
VI.51 The Customer Service Department (CSD)
receives applications under RTI Act pertaining
to complaints dealt with by BO offices and also other activities of the department. During the year
2012-13, the CSD handled 689 RTI applications
which were duly disposed. During the year 2012-13,
123 appeals under RTI Act were received of which,
110 were disposed by June 30, 2013.
Damodaran Committee Report
VI.52 Of the 232 recommendations made by the
Damodaran Committee on customer service in
banks, 155 have been implemented. The important
recommendations that have been implemented
include abolition of foreclosure charges on floating
rate home loans, introduction of basic savings bank
deposit account, Unique Identification No. (UID) to
be used as KYC for opening basic bank accounts,
differential merchant discount/ fee for debit cards,
multi-factor authentication for card transactions and
blocking of cards through SMS.
Spreading Awareness about Banking Ombudsman
Scheme
VI.53 The popularity of the Banking Ombudsman
(BO) scheme is evidenced by the large number of
complaints received by the offices of the Banking
Ombudsman. Spreading awareness about this
apex-level grievance redressal mechanism,
especially in rural areas, is the key to empowering
this segment of the population. In this direction, the
Reserve Bank has been organising outreach
programmes focussed on financial inclusion and
financial literacy in rural areas. The offices of the
BO organise awareness campaigns in rural areas
within their jurisdiction. Documentary films, publicity
through local newspapers and radio, setting up
stalls at various melas, fairs and live interactive
programmes on Doordarshan are some of the
measures that were initiated by the Reserve Bank
and the offices of the Banking Ombudsman during
the year.
VI.54 The offices of the Banking Ombudsman also
organise Town Hall Events in tier-II cities in co-ordination
with the leading banks in the area.
Students, bank customers, NGOs, consumers associations and pensioners associations in the
area are involved in these events. The events are
conducted in local languages to ensure wider reach.
The Banking Ombudsman and relevant bank
officials respond to the participants’ queries during
these events.
Working Group for Revision and Updation of the
Banking Ombudsman Scheme 2006
VI.55 An internal Working group for revision and
updation of the Banking Ombudsman Scheme 2006
was constituted by the Reserve Bank in July 2012.
The Working Group was also asked to examine the
implementability of the Banking Ombudsman
Scheme related recommendations of the
Damodaran Committee. The Working Group has
submitted its report and its recommendations are
being examined for implementation.
BANKING CODES AND STANDARDS
BOARD OF INDIA
VI.56 The Banking Codes and Standards Board
of India (BCSBI) is an autonomous and independent
body set up by the Reserve Bank, which sets
minimum standards for banking services in India
for individuals and Micro and Small Enterprises
(MSEs). Banks register themselves with BCSBI as
its member and voluntarily agree to abide by Codes
of Commitment of BCSBI. BCSBI monitors and
assesses the compliance with the codes and
standards. The BCSBI presently has 125 banks as
members.
VI.57 During the year, BCSBI continued its efforts
to increase awareness about the codes by
conducting workshops, Town Hall meets and
customer awareness programmes.
URBAN CO-OPERATIVE BANKS
Declaration of Dividend by UCBs
VI.58 UCBs were advised about the revised
criteria for declaring dividend without the permission
of the Reserve Bank. The criteria included
compliance with prescribed CRAR, net NPAs below 5 per cent of net advance, no default in CRR/SLR
and the bank having made all provisions as per
IRAC norms and statutory provisions. UCBs
complying with all parameters except net NPAs and
desirous of declaring dividend were advised to
approach the respective Regional Office for
permission to declare dividend provided the net
NPAs is less than 10 per cent.
Intra-bank Deposit Accounts Portability and KYC
related advise to UCBs
VI.59 UCBs were advised that once KYC is done
by one branch of the bank, it should be valid for
transfer of the account within the bank as long as
the KYC procedure for the concerned account is
complete. UCBs were also advised to complete the
process of risk categorisation and compiling/
updating profiles of all of their existing customers
in a time-bound manner, and in any case not later
than March 31, 2013.
VI.60 Following the announcement in the
Monetary Policy Statement 2012-13 on April 17,
2012, UCBs have been granted time up to March
31, 2014 for allotting Unique Customer Identification
Code (UCICs) to existing customers.
Know Your Customer (KYC)/ (AML)/ (CFT) /
Simplification
VI.61 The existing KYC norms were reviewed and
simplified. The salient features of the new norms
include the following:
a) Proof of identity and address: If address on
the document submitted as identity proof is
same as that declared by customer, the
document may be accepted as valid proof for
both identity and address.
b) Introduction: Since introduction is not
necessary for opening of accounts under PML
Act and Rules, banks should not insist on an
introduction for opening of accounts.
c) Acceptance of Aadhaar letter for KYC
purposes: If the address provided by account
holder is same as that on the Aadhaar letter, it may be accepted as proof of both identity
and address
d) Acceptance of NREGA Job Card as KYC for
normal accounts: Banks may accept the
NREGA Job Card as an officially valid
document for opening bank accounts without
the limitation applicable to ‘Small Accounts’.
e) Small accounts: Banks were advised to open
small accounts for all persons who so desire,
subject to limitations applicable to ‘Small
Accounts’.
KYC /AML / CFT / Obligations of Banks under
Prevention of Money Laundering Act (PMLA), 2002
– Identification of beneficial owner
VI.62 The Government of India had specified the
procedure for determining beneficial ownership
where the client of bank/ financial institution is a
person other than an individual or a trust. The
procedure as advised by the Government of India
for identifying the beneficial owner was advised to
UCBs.
Financial Restructuring of UCBs
VI.63 UCBs were advised that the Reserve Bank
would, henceforth, consider financial restructuring
proposals submitted by UCBs that involve
conversion of deposits into equity/IPDI, even if the
net worth of the bank does not become positive
after such a conversion, provided that the depositors
voluntarily agree to the conversion.
Financial Inclusion – Access to Banking Services – Basic Saving Bank Deposit Account
VI.64 In supersession of earlier instructions on
financial inclusion, UCBs were advised to offer
‘Basic Saving Bank Deposit Account’ with the
minimum common facilities to their customer at no
charge, subject to compliance with Reserve Bank
instructions on KYC/AML for opening a bank
account. UCBs were also advised to convert the
existing ‘no frill’ accounts of customers into ‘Basic
Saving Bank Deposit’ accounts.
Premature Repayment of Term/Fixed Deposits in
banks with “Either or Survivor” or” Former or
Survivor” mandate – Clarification
VI.65 It was reiterated that in case of term
deposits with ‘Either or Survivor’ or ‘Former or
Survivor’ mandate, UCBs are permitted to allow
premature withdrawal of the term deposits by the
surviving joint depositor on the death of the other,
only if, there is a joint mandate from the joint
depositors to this effect.
Interest Rate on Deposits
VI.66 It was observed that there was wide
variation in the interest rates offered by banks on
single term deposits of `1.5 million and above and
those offered on other deposits (i.e. less than `1.5
million) of corresponding maturities. Further, banks
were offering significantly different rates on deposits
with very little difference in maturities suggesting
inadequate liquidity management systems and
pricing methodologies. UCBs were advised to put
in place a transparent Board-approved policy on
pricing of liabilities and were advised to ensure that
the difference in interest rates on single term
deposit of `1.5 million and other term deposits (i.e.
deposits less than `1.5 million) was minimal for
corresponding maturities.
Setting up Central Electronic Registry under the
Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act
2002
VI.67 In connection with the request from the
Central Registry of Securitisation Asset
Reconstruction and Security Interest Act of India
(CERSAI), UCBs were advised to voluntarily file
records of equitable mortgages created by them
with CERSAI.
Migrating to CTS 2010 Standards – Submission of
Compliance Report
VI.68 UCBs were advised to ensure withdrawal
of non-CTS -2010 Standard cheques within the extended time limit i.e. by March 31, 2013. The date
has been extended to July 31, 2013.
Frauds - Classification and Reporting
VI.69 As part of rationalisation of the process and
procedures, UCBs have been advised to discontinue
the practice of reporting attempted fraud, where
likely loss would have been `2.5 million or higher,
to the Reserve Bank of India. UCBs were also
advised to place information relating to frauds on
a quarterly basis before the Audit Committee of the
Board during the month following the quarter. In
addition, UCBs have been advised to conduct an
annual review of frauds and place a note before
their Board of Directors, for information.
Implementation of Core Banking Solutions (CBS)
by Urban Co-operative Banks (UCBs)
VI.70 UCBs were advised to implement CBS in
all their branches before December 31, 2013 for
better customer service, effective regulatory
reporting and generating MIS reports.
Unsecured Exposure Norms for UCBs
VI.71 In order to promote lending to priority
sectors and to provide impetus to financial inclusion,
UCBs that fulfil certain conditions (such as the
entire loan portfolio of the bank is covered under
priority sector, all sanctioned loans should be of
small value i.e., up to `20,000 in a single account,
their assessed CRAR should be 9 per cent and
their assessed gross NPAs should be less than 10
per cent of gross advances) were permitted to grant
unsecured loans (with or without surety) up to 25
per cent of their total assets, with the prior approval
of the Reserve Bank.
KYC /AML / CFT / Obligations of Banks under
Prevention of Money Laundering Act (PMLA),
2002-Simplifying Norms for Self Help Groups
VI.72 To address the difficulties faced by Self Help
Groups (SHGs) in complying with KYC norms when
opening savings bank accounts and credit linking
their accounts, the norms were simplified and UCBs were advised that (i) KYC verification of all the office
bearers would suffice while opening the savings
bank account of the SHG and (ii) since KYC would
have already been verified when opening the
savings bank account and the account to be used
for credit linkage would continue to be in operation,
separate KYC verification of the members or office
bearers was not necessary.
Bank finance for purchase of gold
VI.73 UCBs were advised that they should not
grant any advance for purchase of gold in any form,
including primary gold, gold bullion, gold jewellery,
gold coins, units of gold Exchange Traded Fund
and units of gold mutual funds.
Ready forward transactions in corporate debt
securities
VI.74 Scheduled UCBs with CRAR of 10 per cent
or more, gross NPAs of less than 5 per cent,
continuous record of profits for last three years and
having in place sound risk management practices
and mandatory concurrent audit of its investment
portfolio were permitted to undertake ready forward
contracts in corporate debt securities with SCBs/
PDs, subject to certain conditions.
Consolidation of UCBs through mergers/
acquisitions
VI.75 As part of the process of strengthening the
sector, a process of consolidation was set in motion through transparent and objective guidelines issued
in February 2005. Another set of guidelines was
issued by the Reserve Bank in January 2009 for
the merger / acquisition of UCBs that have a
negative net worth. Guidelines for transfer of assets
and liabilities of UCBs to commercial banks were
issued in February 2010. Pursuant to the issue of
guidelines on merger, the Reserve Bank received
177 proposals for merger up to March 2013 and
issued 130 NOC/sanctions of which 111 have been
notified for mergers by respective RCS/CRCS
(Table VI.2).
Table VI.2 : Year-wise progress in mergers/
acquisitions as on March 31, 2013 |
Financial year |
Proposals received in the Reserve Bank |
NOCs issued by the Reserve Bank |
Merger effected (Notified by RCS) |
1 |
2 |
3 |
4 |
2005-06 |
24 |
13 |
4 |
2006-07 |
32 |
17 |
16 |
2007-08 |
42 |
26 |
26 |
2008-09 |
16 |
26 |
22 |
2009-10 |
26 |
17 |
13 |
2010-11 |
17 |
15 |
13 |
2011-12 |
10 |
11 |
14 |
2012-13 |
10 |
5 |
3 |
Total |
177 |
130 |
111 |
VI.76 The maximum number of mergers took
place in Maharashtra, followed by Gujarat and
Andhra Pradesh (Table VI.3).
Table VI.3 : State-wise progress in mergers/acquisition of UCBs |
States |
2005-06 |
2006-07 |
2007-08 |
2008-09 |
2009-10 |
2010-11 |
2011-12 |
2012-13 |
Total |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
Maharashtra |
2 |
12 |
14 |
16 |
6 |
7 |
8 |
1 |
66 |
Gujarat |
2 |
2 |
6 |
2 |
2 |
2 |
4 |
1 |
21 |
Andhra Pradesh |
- |
1 |
3 |
1 |
3 |
2 |
1 |
- |
11 |
Karnataka |
- |
- |
2 |
1 |
- |
- |
- |
- |
03 |
Punjab |
- |
1 |
- |
- |
- |
- |
- |
- |
01 |
Uttarakhand |
- |
- |
1 |
1 |
- |
- |
- |
- |
02 |
Chhattisgarh |
- |
- |
- |
1 |
- |
1 |
- |
- |
02 |
Rajasthan |
- |
- |
- |
- |
2 |
- |
1 |
- |
03 |
Madhya Pradesh |
- |
- |
- |
- |
- |
- |
- |
- |
- |
Uttar Pradesh |
- |
- |
- |
- |
- |
1 |
- |
1 |
02 |
Total |
4 |
16 |
26 |
22 |
13 |
13 |
14 |
3 |
111 |
RURAL CO-OPERATIVES
Licensing of Rural Co-operatives Banks
Licensing of State and Central Co-operative Banks-
Present Status
VI.77 The Committee on Financial Sector
Assessment (CFSA) (Chairman: Dr. Rakesh
Mohan) had recommended that no unlicensed
cooperative bank may be allowed to operate in
the cooperative space beyond March 31, 2012.
However, this would need to be attained in a non-disruptive
manner.
VI.78 As there were a large number of cooperative
banks functioning without license [17 out of 31 State
Cooperative Banks (StCBs) and 296 out of 371
District Central Cooperative banks (DCCBs)], the
Reserve Bank relaxed the licensing norms.
Accordingly, only two parameters based on the latest
inspection by NABARD were prescribed for licensing
viz.: (i) CRAR – minimum 4 per cent, and (ii) no
default in CRR/SLR for the past one year (default on
one/two occasions could be overlooked).
VI.79 The relaxed licensing norms helped in
granting licenses to a large number of cooperatives
and as at the end of March 31, 2012, only 43 banks
(one StCB and 42 DCCBs) remained unlicensed.
These banks were issued Directions prohibiting
them from acceptance of fresh (new) deposits and
advised to draw up a Monitorable Action Plan to
achieve the licensing norms by September 30,
2012. Following the infusion of capital by some
State Governments, 17 banks (one StCB and 16
DCCBs) became eligible for license, but the
remaining 26 banks failed to achieve the licensing
norms, even after the extension.
VI.80 Notices were issued on March 7, 2013 to
all 26 unlicensed DCCBs for not complying with the
licensing criteria to show cause as to why the
licence application submitted to the Reserve Bank
to carry on banking business should not be
rejected. In Maharashtra, two DCCBs attained licensing norms after the State Government
released funds and a third DCCB achieved the
licensing norms on its own; licenses were issued
to these three DCCBs in Maharashtra. Thus, as on
date, the number of unlicensed banks remains at
23 in four states (16 in Uttar Pradesh, 3 in
Maharashtra, 3 in Jammu & Kashmir and 1 in West
Bengal).
Developments in Regional Rural Banks
Amalgamation of RRBs
VI.81 The consolidation of RRBs was initiated in
the year 2005. In the first phase of amalgamation
of RRBs which took place between September 2005
and March 2010, RRBs of the same sponsor banks
within a state were amalgamated bringing down
their number to 82 from 196. In the current phase
which started from October 1, 2012, the Government
of India (GoI) plans to mainly amalgamate
geographically contiguous RRBs within a state
under different sponsor banks to have just one RRB
in medium-sized states and 2 or 3 RRBs in large
states. As on date, 36 RRBs have been amalgamated
by the GoI to create 15 new RRBs in 10 states
bringing down their effective number to 61. The
process of scheduling has been initiated in respect
of the newly amalgamated RRBs.
Recapitalisation of RRBs
VI.82 The Central Government had, in September
2009, constituted a committee (Chairman: Dr. K.C.
Chakrabarty) to study the current level of CRAR
of RRBs and to suggest a roadmap for enhancing
the same to 9 per cent by March 31, 2012. The
committee submitted its report to the Government
on April 30, 2010. The committee has assessed
that 40 RRBs will require capital infusion to the
extent of `22 billion. The NABARD has reported
that 36 RRBs have been recapitalised fully,
whereas in 4 RRBs, the recapitalisation process
is yet to be completed. The recapitalisation scheme
has been extended up to 2013-14 to complete the
process.
DEPOSIT INSURANCE AND CREDIT
GUARANTEE CORPORATION
VI.83 The Deposit Insurance and Credit Guarantee
Corporation (DICGC) is a wholly-owned subsidiary
of Reserve Bank of India. The number of insured
banks as on March 31, 2013 stood at 2,167
comprising 89 commercial banks, 67 RRBs, 4 LABs
and 2,007 co-operative banks. With the present limit
of deposit insurance in India at `0.1 million, the
number of fully protected accounts at 1,393 million
(as on March 31, 2013) constituted 94 per cent of
the total number of accounts (1,482 million) as
against the international benchmarks of 80 per cent.
Amount-wise, insured deposits at `21,584 billion
constituted 32.6 per cent of assessable deposits at
`66,211 billion against the international benchmark
of 20-40 per cent4. At the current level, the insurance
cover works out to 1.45 times per capita income as
on March 31, 2013.
VI.84 The DICGC builds up its Deposit Insurance
Fund (DIF) through transfer of its surplus, i.e.,
excess of income (mainly comprising premia
received from insured banks, interest income from
investments and cash recovery out of the assets of
failed banks) over expenditure each year, net of
taxes. This fund is used to settle the claims of
depositors of banks taken into liquidation/
reconstruction/amalgamation, etc. During the year
2012-13, the DICGC settled aggregate claims
amounting to `2.00 billion in respect of 63 cooperative
banks as compared with claims
aggregating `2.87 billion in the previous year. The
size of DIF stood at `361.20 billion as on March 31,
2013, implying a reserve ratio (DIF/Insured
Deposits) of 1.7 per cent.
VI.85 The Financial Stability Board (FSB)
undertook a peer review of resolution regimes in
order to evaluate the existing regimes in the FSB’s
jurisdictions and any planned changes to those
regimes using Key Attributes (KAs) as a benchmark.
The Peer Review Report was released by the FSB
in April 2013. The Review report found that, while
major legislative reforms have taken place in some
jurisdictions, implementation of the KAs remains at
an early stage. Further work is needed to implement
robust resolution regimes that are capable of
addressing failing institutions, including SIFIs.
VI.86 During the global financial crisis, the
uncertainty triggered panic and the collapse of
banks. Under these circumstances, deposit
insurance emerged as an important part of financial
safety net in arresting panic (Box VI.5).
NON-BANKING FINANCIAL COMPANIES
New Category of NBFCs
VI.87 During 2012-13, a new category of NBFCs,
viz., Non-Banking Financial Company - Factors was
created. The guidelines for the new NBFC category
are provided in Box VI.6.
Miscellaneous Instructions
VI.88 Revised guidelines on securitisation were
introduced for NBFCs which specify inter alia that
the portfolio can be securitised after a minimum
holding period and the originators need to retain a
portion of the securitised portfolio. The guidelines
also deal with bilateral assignments under which
no credit enhancement can be provided by the
originators.
VI.89 All NBFCs lending against the collateral of
gold were advised to maintain a Loan-to-Value
(LTV) ratio not exceeding 60 per cent and disclose
in their balance sheet the percentage of such loans
to their total assets. Where gold loans comprise 50
per cent or more of the financial assets, the NBFCs
shall maintain a minimum Tier l capital of 12 per
cent by April 01, 2014. Further, NBFCs should not
grant any advances against bullion/primary gold
and gold coins or for purchase of gold in any form,
including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds
(ETF) and units of gold Mutual Funds
Box VI.5
Deposit Insurance in the Financial System – Some Observations
The provision of deposit insurance serves several purposes.
First, it secures public confidence in the banking system,
thereby contributing to financial stability. Second, deposit
insurance benefits depositors, particularly small ones, through
protection of their deposits, thereby contributing to the social
security objective. Third, confidence in the banking system
coupled with broad access to safe and affordable small
savings accounts promotes financial inclusion and helps
households prepare for unexpected expenses and plan for a
more secure financial future. Deposit insurance is a very
effective tool to attain financial inclusion, given the existing
high level of financial exclusion around the globe, especially
in the underdeveloped world and emerging and developing
economies.
The Financial Stability Board (FSB) undertook a peer review
of deposit insurance systems among its member institutions.
The report observed that the global financial crisis has
illustrated the importance of effective depositor compensation
arrangements. The crisis resulted in greater convergence in
practices across jurisdictions and emerging consensus about
appropriate design features that include higher coverage
levels, elimination of co-insurance, improvements in the
payout process, greater depositor awareness, adoption of ex
ante funding by more jurisdictions and strengthening of
information sharing and co-ordination with other safety net
participants.
In order to play an effective role in the financial system, deposit
insurers must comply with the BCBS-IADI ‘Core Principles
for Effective Deposit Insurance Systems’. In some areas, there
are deviations from the ‘Core Principles’, which need to be
addressed. In some countries, including India, non-bank
deposit-taking institutions do not have deposit insurance
coverage. Second, coverage limits need to be periodically
examined so as to achieve a balance between financial
stability and market discipline. The deposit insurer would also
need to take into consideration the value (of deposits) at risk
and the likelihood of failure for determining the sufficiency of
funds. In addition, adequacy, timeliness and efficiency in
payout are important for the deposit insurance agency, that
is contingent on timely access to information. Deposit
insurance systems should regularly test the readiness and
effectiveness of their payout processes. In this regard, data
systems such as the “single customer view” in the US and
the UK need to be implemented in India.
The financial crisis led to the expansion of mandates in many
systems. The challenge before economies is to ensure proper
co-ordination between the deposit insurer and other safety
net participants, which would ensure appropriate resolution
and expeditious claims settlement. The cross-border
information-sharing arrangements between deposit insurance
agencies also need to be strengthened.
VI.90 In light of the operational issues surrounding
micro finance and lending against collateral of gold
jewellery, the guidelines issued on Fair Practices
Code for such NBFCs were revised/amended. As
per the guidelines such NBFCs should put in place
Board-approved grievance redressal mechanism
with the name of the grievance redressal officer
prominently displayed at all branches; the Fair
Practices Code in vernacular language should be
prominently displayed; there should be transparency
in loan pricing, besides others. NBFCs lending
against gold jewellery have been advised to follow
KYC guidelines; have internal policies to establish
ownership of gold; have adequate security and
insurance on gold collateral and have Board-approved
auction policy in place. NBFCs themselves
cannot participate in their auctions.
VI.91 The margin cap for all NBFCs irrespective
of their size have been revised to 12 per cent until
March 31, 2014. However, with effect from April 1,
2014 margin caps may not exceed 10 per cent for
large MFIs (loans portfolios exceeding `100 crore)
and 12 per cent for the others.
VI.92 In view of the unique business model of
Core Investment Companies (CICs), it was decided
to issue a separate set of guidelines for their entry
into insurance business. Eligibility criteria include,
inter alia, owned funds of ` 500 crore, net NPA of
not more than 1 per cent of net advances and
earning profits for three consecutive years. The CIC
will be permitted to invest upto 100 per cent of the
equity of the insurance company.
Box VI.6
NBFC-Factors
The Factoring Regulation Act 2011, notified by the Central
Government in January 2012, aims to regulate factors and
assignment of receivables in favour of factors, as also
delineate the rights and obligations of parties to assignment
of receivables.
Under the Act, factoring companies other than banks,
Government companies etc. (as provided in Section 5 of the
Act) would be registered with the Reserve Bank as NBFCs
and would be subject to prudential regulations by the
Reserve Bank. Hence, it has been decided to introduce a
new category of NBFCs viz., Non-Banking Financial
Company-Factors and separate Directions in this regard
have been issued.
This Directions states, inter alia, that every company
intending to undertake factoring business shall make an
application for grant of certificate of registration (CoR) as
NBFC-factor to the Reserve Bank as provided under Section
3 of the Act. Existing NBFCs that satisfy all the conditions
enumerated in these Directions have been advised to
approach the Regional Office of the Reserve Bank where it
is registered, along with the original CoR issued by the
Reserve Bank for change in their classification as NBFCFactor
within six months from the date of this notification.
Their request must be supported by their Statutory Auditor’s
certificate indicating the asset and income pattern. An entity
not registered with the Bank may conduct the business of
factoring if it is an entity mentioned in Section 5 of the Act
i.e., a bank or any corporation established under an Act of
Parliament or State Legislature, or a Government Company
as defined under section 617 of the Companies Act 1956. A
new company that is granted CoR by the Reserve Bank as
NBFC-Factor shall commence business within six months
from the date of grant of CoR by the Reserve Bank.
For every company seeking registration as NBFC-Factor,
the minimum Net Owned Fund (NOF) has been fixed at `5
crore. Existing companies seeking registration as NBFCFactor
but do not fulfil the NOF criterion of `5 crore have been advised to approach the Reserve Bank for time to
comply with the requirement.
Principal Business criteria for NBFC-Factor
(i) An NBFC-Factor shall ensure that its financial assets in
the factoring business constitute at least 75 per cent of
its total assets and its income derived from factoring
business is not less than 75 per cent of its gross income;
(ii) An existing NBFC registered with the Reserve Bank and
conducting factoring business that constitute less than
75 per cent of total assets / income shall have to submit
to the Reserve Bank within six months from the date of
this notification, a letter of its intention either to become
a Factor or to unwind the business totally, and a roadmap
to this effect. However, such NBFCs shall raise the asset/
income percentage as required at 6(i) above or unwind
the factoring business within a period of 2 years from
the date of this notification. They will be granted CoR
as NBFC-Factors only after they reach the required
asset/income percentage.
The provisions of Non-Banking Financial (Non-deposit
Accepting or Holding) Companies Prudential Norms
(Reserve Bank) Directions, 2007 or Non-Banking Financial
(Deposit Accepting or Holding) Companies Prudential Norms
(Reserve Bank) Directions, 2007, as the case may be and
as applicable to a loan company shall apply to an NBFCFactor.
The submission of returns to the Reserve Bank will
be as specified presently in the case of registered NBFCs.
Export / Import Factoring
The Foreign Exchange Department (FED) of the Reserve
Bank gives authorisation to Factors under FEMA, 1999.
Therefore, NBFC-Factors, intending to deal in forex through
export/import factoring, should make an application to FED
for necessary authorisation under FEMA, 1999 to deal in
forex and adhere to the terms and conditions prescribed by
FED and all the relevant provisions of the FEMA or Rules,
Regulations, Notifications, Directions or Orders made
thereunder from time to time.
VI.93 A separate set of Directions for CICs was
issued with regard to their overseas investments.
All CICs investing in joint ventures/subsidiaries/
representative offices overseas in financial sector
will require prior approval from the Bank. Apart from
a minimum eligibility criteria, CIC desiring to invest
in the financial sector overseas will need a registration from the Reserve Bank. A ceiling of 400
per cent of owned funds with a minimum of 200 per
cent in the financial sector has been prescribed.
VI.94 Based on the Second Quarter Review of
Monetary Policy 2012-13, the definition of
infrastructure lending for the purpose of financing
of infrastructure by banks and financial institutions was harmonised with that in the Master List of
Infrastructure sub-sectors’ notified by the
Government of India on March 27, 2012.
Accordingly, it was decided to harmonise the
definition of infrastructure lending for NBFCs with
that of banks and the extant definition of
infrastructure loan in the NBFC Prudential Norms
Directions, 2007 stands amended.
VI.95 In line with the increasing size and
complexity of the financial sector, the Reserve
Bank has taken steps to ensure that the laws
governing the sector are in line with modern
financial practices. Accordingly, several relevant
laws were amended to keep pace with the changing
developments (Box VI.7).
Recommendations of the Financial Sector
Legislative Reforms Commission
VI.96 Pursuant to the announcement made in the
Union Budget 2010-11, the Government of India set up the Financial Sector Legislative Reforms
Commission (Chairman: Justice Shri B.N.
Srikrishna), on March 24, 2011. The terms of
reference were wide in their ambit and included the
examination of the architecture of the legislative
and regulatory system governing the financial
sector, besides reviewing the existing laws that
govern the financial sector in India.
VI.97 The comments, suggestions and inputs
from the Reserve Bank were submitted to the
Commission in April 2012. The submissions
focused on the need for a clear and specific
mandate to the Reserve Bank for the pursuit of
financial stability, monopoly of the Reserve Bank
in the regulation of public deposits, the consolidation
of banking laws, the need for globally compatible
secrecy laws and continuation of the debt
management function with the Reserve Bank. The
Commission released an Approach Paper in
October 2012 and sought feedback from stakeholders. In its Approach Paper, the
Commission proposed far-reaching reforms in the
financial sector and it was perceived as the
blueprint of the legislative reforms contemplated
by the Commission.
Box VI.7
Legal developments in the banking sector
Banking Laws (Amendment) Act, 2012
The Banking Laws (Amendment) Act, 2012 came into force
from January 18, 2013. This Act has amended the Banking
Regulation Act, 1949, the Banking Companies (Acquisition
and Transfer of Undertakings) Act, 1970 and the Banking
Companies (Acquisition and Transfer of Undertakings) Act,
1980 to make the regulatory powers of Reserve Bank more
effective and to increase the access of the nationalised banks
to capital market to raise capital required for expansion of
banking business. The major features of the Act are as follows:
Reserve Bank has been empowered to supersede the Board
of Directors of banking company subject to a total period of
twelve months and appoint administrator till alternate
arrangements are made.
Banking companies have been enabled to issue preference
shares subject to regulatory guidelines by Reserve Bank.
The prior approval of Reserve Bank is required for acquisition
of 5 per cent or more of shares or voting rights in a banking
company by any person and Reserve Bank is empowered to
impose such conditions as it deems fit in this regard.
Provides for the creation of a Depositor Education and
Awareness Fund by utilising the inoperative deposit accounts.
The Reserve Bank has been empowered to collect information
and inspect associate enterprise of banking companies.
The nationalised banks have been enabled to raise capital
through “bonus” and “rights” issue and also to increase or
decrease the authorised capital with approval from the Central
Government and the Reserve Bank without being limited by
the ceiling of `3000 crore.
The penalties and fine for violations of the Banking Regulation
Act have been substantially increased.
Provides for primary credit societies to stop banking business
or to obtain license from Reserve Bank to continue doing
banking business.
The Reserve Bank has been empowered to order for
additional audit of cooperative banks.
It restricts the meaning of “approved securities” to Government
securities and Reserve Bank approved securities.
The Act enables the Reserve Bank to increase the ceiling on
voting rights from ten to 26 per cent in a phased manner.
The enforcement of Security Interest and Recovery of Debt
Laws (Amendment) Act, 2012
The provisions of this Act (except Sections 8 and 15(b)) have
came into effect from January 15, 2013. The provision of
sections 8 and 15(b) of the Act came into effect from May 15,
2013. This Act amends the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act,
2002 and the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993. The major features of the Act are as
follows:
The Act includes ‘multi-state cooperative banks’ in the existing
definition of bank in the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993 so that the measures for
recovery through the Debt Recovery Tribunals are now
available to multi-state cooperative banks.
It provides for conversion of any part of debt into shares of a
borrower company.
The Act allows secured creditor to accept the immovable
property in full or partial satisfaction of the claim against the
defaulting borrower in times when they cannot find a buyer
for the securities.
It enables the secured creditors or any person to file a caveat
so that before granting any stay, the secured creditor or person
is heard by the Debt Recovery Tribunal.
It empowers Central Government to require by notification,
registration of all transactions of securitisation, reconstruction
or creation of security interest on or before the date of
establishment of Central Registry, within prescribed time
period and on payment of prescribed fee.
The Central Government is enabled to exempt a class or
classes of banks or financial institutions from the provisions
of this Act on grounds of public interest.
It permits multi state cooperative banks with respect to debts
due before or after the commencement of the Act, to opt to
initiate proceedings either under the Multi State Cooperative
Societies Act, 2002 or under the Recovery of Debts due to
Banks and Financial Institutions Act, 1993.
Prevention of Money Laundering (Amendment) Act, 2012
Consequent to the submission of an action plan to the
Financial Action Task Force to bring anti money laundering
legislation in India at par with international standards and to
obviate some of the deficiencies in the Act experienced by
the implementing agencies, the Prevention of Money
Laundering Act has been amended. The amended Act came
into effect from February 15, 2013. The salient features of this
amendment Act are as follows:
It introduces the concept of ‘corresponding law’ to link the
provisions of Indian law with the laws of foreign countries and
provides for transfer of the proceeds of the foreign predicate
offence in any manner in India.
It introduces the concept of ‘reporting entity’ to include therein
a banking company, financial institution, intermediary or a
person carrying on a designated business or profession.
The Act enlarges the definition of offence of money-laundering
to include therein the activities like concealment,
acquisition, possession and use of proceeds of crime as
criminal activities.
It provides for attachment and confiscation of the proceeds
of crime even if there is no conviction so long as it is proved
that offence of money laundering has taken place and property
in question is involved in money laundering.
The Act stipulates that in the proceedings relating to money
laundering, the funds shall be presumed to be involved in the
offence, unless proven otherwise.
It makes the reporting entity, its designated directors on the
Board and employees responsible for omissions or
commissions in relation to the reporting obligations.
VI.98 In December 2012, the Reserve Bank
submitted its feedback to the Commission on major
issues arising out of the Approach Paper, such as
the role of the Reserve Bank in pursuing financial stability, autonomy and accountability of the
Reserve Bank, an independent Debt Management
Office, capital controls, regulation of NBFCs, credit
information companies and securitisation and asset
reconstruction companies likely to be transferred
to unified financial regulatory agency etc. The
Commission submitted its final report in two
volumes in March 2013. Volume I contains the
analysis and recommendations of the Commission
and Volume II contains the draft Indian Financial Code. The Report of the Commission is available
on the website of the Ministry of Finance.
Box VI.8
Major recommendations of the Financial Sector Legislative Reform Commission
The Commission has proposed a financial regulatory
architecture comprising of the following agencies:
i) Reserve Bank of India – performing three functions:
monetary policy, regulation and supervision of banking
and payment systems.
ii) Unified Financial Agency – for implementing consumer
protection law and microprudential law for all financial
firms other than banking and payment systems.
iii) Financial Sector Appellate Tribunal – as an appellate
body that will hear appeals against the Reserve Bank for
its regulatory functions, the unified financial agency,
decisions of the financial redressal agency and some
elements of the work of the resolution corporation.
iv) Resolution Corporation – into which the present DICGC
would be subsumed. It would work across the financial
system.
v) Financial Redressal Agency – as a one-stop shop where
consumers can file complaints against all financial firms.
vi) Public Debt Management Agency – as an independent
agency to manage public debt.
vii) Financial Stability Development Council – which will be
a statutory agency, and have modified functions in the
fields of systemic risk and development.
As regards capital controls, the Commission has envisaged
a set up where central government would control inbound
capital flows, the Reserve Bank would control outbound
capital flows and implementation of all capital controls would
vest with the Reserve Bank.
The Commission requires the regulators to frame regulations
to achieve their objectives. The detailed procedure for framing
regulations have been laid down which includes inviting public
comments on the draft regulations and considering the same,
cost-benefit analysis of the regulations etc. An exception is
carved out for regulations that are required to be framed in
emergencies. Regulators may issue clarifications on the
regulations by framing guidelines. The procedure for framing
guidelines is also the same as the procedure for framing
regulations. The Indian Financial Code contemplates that only
regulations and guidelines will be issued by the regulators
and no other form of delegated legislation such as circulars.
Contravention of the provisions of the IFC and the regulations
only will be actionable and not the contravention of the
guidelines.
VI.99 The Commission identified the following
as the nine components for constructing a
sound financial legal framework: (i) consumer
protection; (ii) microprudential regulation
(iii) resolution; (iv) capital controls; (v) systemic risk;
(vi) development and redistribution; (vii) monetary
policy; (viii) public debt management; and, (ix) contracts, trading and market abuse. The major
recommendations of the Commission are highlighted
in Box VI.8.
VI.100 The FSLRC Report has opened up several
issues that require careful examination in the
context of the global practices and what might be
suitable or not suitable for implementation in India,
as also the best timing for changes that may be
finally considered appropriate.
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