V FINANCIAL REGULATION AND SUPERVISION
V.1 The conduct of financial regulation and supervision
by the Reserve Bank in 2004-05 was guided by the need for ensuring financial
stability. The overriding objective has been to maintain confidence in the financial
system by enhancing its soundness and efficiency. For this purpose, the Reserve
Bank evaluates system-wide risks and promotes sound business and financial practices.
It also conducts inspections and analyses of institution-wise risks. Over the
years, the Reserve Bank has progressively aligned the regulatory framework with
international best practices with country-specific adaptation. During the year,
in addition to fine-tuning the prudential guidelines, the Reserve Bank focussed
on encouraging market discipline and ensuring good governance with an emphasis
on ';fit and proper'; owners and diversified ownership. Steps to implement
Basel II norms were carried forward through the Capital Adequacy Assessment
Process (CAAP). With regard to Regional Rural Banks, the focus of regulation
and supervision was on consolidation, efficiency and expansion of areas of business.
Effor ts were carried forward during the year to develop urban cooperative banks
into a sound, well managed network of financial institutions providing quality
banking services to the widest sections of society. Regulatory issues in the
context of integrating development finance institutions into the financial system
engaged the Reserve Bank in 2004-05. As regards non-banking financial companies
(NBFCs), the focus during the year was on strengthening super visor y oversight
and disclosure standards.
V.2 This Section presents an overview of the regulator y and super visor
y policy initiatives undertaken in 2004-05. It reviews the measures initiated
during the year to strengthen the financial sector with a view to calibrating
the approach to a new supervisory regime compatible with the Basel II process.
Various measures initiated to enhance the coordination with other regulatory
agencies, to strengthen transparency and cor porate governance practices and
to improve customer service are also presented.
REGULATORY FRAMEWORK FOR THE INDIAN FINANCIAL SYSTEM
V.3 The Reserve Bank is vested with regulatory and supervisory
authority over commercial banks and urban co-operative banks (UCBs), development
finance institutions (DFIs) and non-banking financial companies (NBFCs). As
on March 31, 2005 there were 289 commercial banks, 1,872 UCBs, 8 DFIs and 13,187
NBFCs. The Board for Financial Supervision (BFS) has been constituted as a Committee
of the Central Board of the Reserve Bank since November 1994 and is headed by
the Governor with a Deputy Governor as Vice Chairperson and other Deputy Governors
and four Directors of the Central Board as members. In respect of State and
district central cooperative banks, while the Reserve Bank is the regulator,
the supervision is vested with the National Bank for Agriculture and Rural Development
(NABARD). Insurance companies and mutual funds are regulated by the Insurance
Regulatory and Development Authority (IRDA) and the Securities and Exchange
Board of India (SEBI), respectively.
V.4 During the year (July 2004 - June 2005), the BFS held
12 meetings and examined 105 inspection reports. Various issues which received
the attention of the BFS included ownership and governance in banks; further
progress towards international best practices in prudential norms; greater deregulation
and rationalisation of banking policies; and compliance with Know Your Customer
(KYC) norms. Strengthening the financial system for global integration in the
light of the ongoing liberalisation of the exchange and payments regime assumed
priority for the BFS in 2004-05. Greater inter-regulatory coordination and improving
the quality of public services rendered by banks were concurrent objectives.
V.5 A consultative approach to financial regulation and supervision was
persevered with through formal institutional structures such as the BFS, the
newly-formed Standing Committee on Financial Regulation, the Technical Advisory
Committee on Money, Foreign Exchange and Government Securities Markets, the
Standing Advisory Committee for Urban Cooperative Banks and also through specific
working groups and committees. This was reinforced by formal and informal consultations
with the regulated entities, external experts and professionals.
REGULATORY AND SUPERVISORY INITIATIVES
Scheduled Commercial Banks
V.6 Commercial banks (285 scheduled and 4 non-scheduled
at the end of March 2005) include 28 public sector banks, 30 private sector
banks, 31 foreign banks and four local area banks. There were 196 regional rural
banks (RRBs) operating in 26 States across 518 districts with a network of 14,487
branches as on March 31, 2005.
Ownership and Governance of Banks
V.7 In recent years, the Reserve Bank has initiated several
measures to enhance transparency and strengthen corporate governance practices
in the banking sector in India in order to ensure financial sector stability.
In this context, issues of ownership and governance in private sector banks
assumed importance in 2004-05. The BFS formulated a draft comprehensive policy
framework with regard to ownership of and governance in private sector banks
and placed it in the public domain on July 2, 2004.
Based on the feedback and inputs received from the public,
and in consultation with Government, the Reserve Bank released detailed guidelines
on February 28, 2005 stipulating diversified ownership and restrictions on cross
holding by banks (Box V.1). Based on the recommendation of the Working Group
to evolve guidelines for voluntary mergers involving banking companies, the
guidelines laying down the process of merger, determination of swap ratios,
disclosures, the stages at which Boards will get involved and norms for buying/selling
of shares by promoters before and during the process were finalised and sent
to all scheduled commercial banks in May 2005.
V.8 On April 1, 2005 the Reserve Bank sanctioned the amalgamation
of IDBI Bank Limited with Industrial Development Bank of India Limited. ';IDBI
Bank Limited'; was, therefore, excluded from the second schedule of the
Reserve Bank of India Act with effect from April 2, 2005.
V.9 The prudential ceiling on a bank’s aggregate investment
in Tier II bonds issued by other banks and financial institutions (FIs) up to
10 per cent of the investing bank’s capital funds was made applicable to banks’/FIs’
investments in the following types of
Box V.1
Guidelines on Ownership and Governance in Private Sector Banks
The broad principle underlying the guidelines on ownership
and governance in private sector banks is to ensure that the control of private
sector banks is well diversified to minimise the risk of misuse or imprudent
use of leveraged funds. The guidelines require that: (i) important shareholders
(i.e., with shareholding of five per cent and above) are ‘fit and proper’
as per the Reserve Bank’s guidelines on acknowledgement for allotment and transfer
of shares; (ii) the directors and the Chief Executive Officer who manage the
affairs of the bank are ‘fit and proper’ and observe sound corporate governance
principles; (iii) banks have minimum capital/net worth for optimal operations
and systemic stability; and (iv) policy and processes are transparent and fair.
Some additional requirements are that : (a) banks maintain
a net worth of Rs.300 crore at all times; (b) shareholding or control in any
bank in excess of 10 per cent of the paid-up capital by any single entity or
group of related entities requires the Reserve Bank’s prior approval; (c) banks
(including foreign banks having branch presence in India)/ financial institutions
are not allowed to exceed equity holding of five per cent of the equity capital
of the investee bank; (d) large industrial houses are allowed to acquire shares
not exceeding 10 per cent of the paid-up capital of
the bank subject to the Reserve Bank’s prior approval; (e)
the Reserve Bank would permit a higher level of shareholding on a case-by-case
basis for restructuring of problem/weak banks or in the interest of consolidation
in the banking sector; and (f) if the shareholding exceeds the prescribed limit
or if the net worth is below Rs.300 crore in any bank, a time-bound programme
to reduce the stake or to augment the capital should be submitted to the Reserve
Bank.
On the issue of aggregate foreign investment in private banks
from all sources (FDI, FII, NRI), the guidelines stipulate that it cannot exceed
74 per cent of the paid-up capital of a bank. If FDI (other than by foreign
banks or foreign bank groups) in private banks exceeds 5 per cent, the entity
acquiring such stake would have to meet the ‘fit and proper’ criteria indicated
in the share transfer guidelines and get the Reserve Bank’s acknowledgement
for transfer of the shares. The aggregate limit for all FII investments is restricted
to 24 per cent which can be raised to 49 per cent with the approval of the board/
shareholders. The current aggregate limit for all NRI investments is 24 per
cent, with the individual NRI limit being five per cent, subject to the approval
of the board/ shareholders.
instruments issued by other banks/FIs: (a) equity shares; (b)
preference shares eligible for capital status; (c) subordinated debt instruments;
(d) hybrid debt capital instruments; and (e) any other instrument approved as
in the nature of capital. Furthermore, banks/FIs were advised not to acquire
any fresh stake in a bank’s equity shares in excess of 5 per cent of the investee
bank’s equity capital. Banks/FIs which exceed these limits are required to approach
the Reserve Bank along with a definite road map for reduction of the exposure
within prudential limits in a prescribed time frame.
Strengthening Prudential Norms
V.10 The Reserve Bank has accepted the adoption of the New
Capital Adequacy Framework (Basel II) in principle. The pace of approaching
the various levels of sophistication under the Basel II standards would be decided
by the Reserve Bank depending upon the preparedness of the banks. Accordingly,
commercial banks in India (excluding RRBs) are required to adopt the Standardised
Approach for credit risk and Basic Indicator Approach for operational risk as
on March 31, 2007. After adequate skills are developed, some banks would be
allowed to migrate to the Internal Rating Based (IRB) Approach. In terms of
the New Capital Adequacy Framework, banks will be allowed to adopt/migrate to
the advanced approaches only with the specific approval of the Reserve Bank.
Banks aiming to adopt the advanced approaches should first make an objective
self assessment of their fulfilment of the minimum criteria prescribed under
Basel II. Banks that meet the minimum requirements for adopting advance methods
may approach the Reserve Bank with a road map that has approval of their board
of directors for migration to these approaches. In order to ensure a smooth
transition to Basel II in a non-disruptive manner, a consultative approach has
been adopted. The Reserve Bank appointed a Steering Committee comprising senior
officials from 14 banks. On the basis of the recommendations of the Steering
Group, draft guidelines on implementation of the New Capital Adequacy Framework
were formulated and issued to banks on February 15, 2005. An Internal Working
Group was also constituted for identifying eligible domestic credit rating agencies
whose ratings may be used by the banks for computing capital for credit risk
under Basel II.
V.11 Pillar 2 of the New Capital Adequacy Framework recognises
the responsibility of bank management in developing an Internal Capital Adequacy
Assessment Process (ICAAP) and setting capital targets that are commensurate
with banks’ risk profile and control environment. Banks were encouraged to focus
on for malising and operationalising their ICAAP, which will serve as a useful
benchmark while undertaking the parallel run with effect from April 1, 2006.
V.12 Banks were advised of the applicability of the Accounting
Standard (AS) 11 in respect of the effects of changes in foreign exchange rates
for compliance. A minimum framework for disclosures on risk exposures in derivatives
was required to be furnished by banks as a part of the ‘Notes on Accounts’ to
the balance sheet with effect from March 31, 2005.
V.13 Banks maintaining capital of at least nine per cent of
risk weighted assets for credit risk and market risk for both held-for-trading
(HFT) and available-for-sale (AFS) categories were allowed to transfer the balance
in excess of five per cent of securities included under the HFT and the AFS
categories in the Investment Fluctuation Reserve (IFR) to Statutory Reserve
which is eligible for inclusion in Tier I capital. This transfer shall be made
a ‘below the line’ item in Profit and Loss Appropriation Account.
V.14 Pursuant to the recommendations of the Joint Parliamentary
Committee (JPC) on Stock Market Scam and Matters Relating Thereto and consistent
with the international best practices in disclosure of penalties imposed by
the regulator, it was decided to place in the public domain the details of the
levy of penalty on a bank with effect from November 1, 2004. Strictures or directions
on the basis of inspection reports or other adverse findings will also be placed
in the public domain. Banks are also required to disclose the penalty in the
';Notes on Accounts'; to the balance sheet in their next Annual Report.
V.15 On the basis of the inputs received from an informal Working
Group comprising representatives of banks, a draft guidance note on management
of operational risk was issued to banks on March 11, 2005.
V.16 Pursuant to the announcement in the Union Budget 2004-05,
banks were advised in August 2004 that in case of rural housing advances granted
to agriculturists under the Indira Awas Yojana and Golden Jubilee Rural
Housing Finance scheme, the interest/ instalment payable on such advances should
be linked to crop cycles.
V.17 The margin requirement on all advances against shares/financing
of IPOs/issue of guarantees was increased on December 2004 from the existing
40 per cent to 50 per cent and the minimum cash margin from 20 per cent to 25
per cent. The risk weight on exposure of banks to commercial real estate as
well as for credit risk on capital market exposure was increased from 100 per
cent to 125 per cent, effective July 26, 2005.
Resolution of NPAs
V.18 With a view to increasing the options available to banks
for dealing with non-performing assets (NPAs), guidelines were issued on sale/purchase
of NPAs on July 13, 2005. The guidelines broadly cover the areas on procedure
for purchase/sale of NPAs by banks including valuation and pricing aspects,
prudential norms and disclosure requirements.
V.19 In April 2004, a Supreme Court ruling on the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act, 2003 struck down the provisions requiring the borrower to pre-deposit
75 per cent of the liability in case the borrower wants to appeal against the
order of attachment of the assets. The SARFAESI Act was amended in 2004 in order
to dissuade the borrower from delaying the repayment of dues and to facilitate
the speedy recovery of debt of secured creditors. By end-March 2005, public
sector banks had issued 83,984 notices involving an outstanding amount of Rs.26,291
crore. An amount of Rs.3,337 crore was recovered in respect of 41,697 cases.
Furthermore, an amount of Rs.2,193 crore was received through 21,311 compromise
proposals.
V.20 Under the Recovery of Debts due to Banks and Financial
Institutions Act, which provides for the establishment of tribunals for expeditious
adjudication and recovery of debts due to banks and financial institutions,
67,875 cases involving Rs. 1,05,169 crore had been filed with Debt Recovery
Tribunals (DRTs) by the banks up to March 31, 2005. 32,389 cases involving Rs.33,861
crore have been adjudicated with the amount recovered at Rs.10,281 crore.
V.21 Lok Adalats also provide banks with an avenue to
recover their smaller NPAs. According to the earlier guidelines, banks could
settle banking disputes involving amounts up to Rs.5 lakh through Lok Adalats.
The monetary ceiling of cases to be referred to Lok Adalats organised
by civil courts was enhanced to Rs.20 lakh. Furthermore, banks were advised
to participate in the Lok Adalats convened by various DRTs/DRATs for
resolving cases involving Rs. 10 lakh and above to reduce the stock of NPAs.
As on March 31, 2005 the number of cases filed by commercial banks with Lok
Adalats stood at 634,521 involving Rs.3,162 crore. The number of cases decided
was 252,829 involving an amount of Rs.1,224 crore. The recovery effected in
202,173 cases stood at Rs.426 crore.
V.22 A Special Group (Chairperson: Smt. S. Gopinath) was constituted
in September 2004 to under take a review of the Cor porate Debt Restr ucturing
(CDR) scheme. Based on the recommendations made by the Special Group, the major
modifications proposed to the existing CDR Scheme are: (i) extension of scheme
to corporate entities on whom banks and institutions have an outstanding exposure
of Rs.10 crore or more, from the existing Rs.20 crore or more; (ii) requirement
of support of 60 per cent of creditors by number in addition to the support
of 75 per cent of creditors by value; (iii) linking the restoration of asset
classification to implementation of package within three months from the date
of approval; (iv) restricting the regulatory concession in asset classification
and provisioning requirement to the first restructuring; (v) limiting the Reserve
Bank’s role to providing broad guidelines for the CDR System; (vi) enhancing
balance sheet disclosures; (vii) pro-rata sharing of additional finance
requirements; and (viii) including One-Time Settlement (OTS) as a part of the
CDR Scheme to make the exit option more flexible.
Inter-Regulatory Co-ordination and Co-operation
V.23 Conflict of interest is a crucial issue in the area of
corporate governance in the context of ensuring financial stability in an environment
of growing financial openness. Legislative and regulatory measures have been
adopted by different countries to ensure that conflicts of interest are not
allowed to compromise the interest of stakeholders and public at large. As indicated
in the Mid-term Review of October 2004, the Reserve Bank constituted a Working
Group on Conflict of Interest in the Indian Financial Services Sector (Chairman:
Shri D. M. Satwalekar) to identify the sources and nature of potential conflicts
of interest in the financial sector in India and possible measures/actions to
be taken for mitigating them.
Opening up of the Financial Sector
V.24 Indian banks continued to expand their presence overseas.
During the year, State Bank of India opened branches in Sydney (Australia),
Ruwi
(Oman), Chittagong and Sylhet (Bangladesh). Bank of India opened
a branch in Kenya and Punjab National Bank opened its branch in Kabul (Afghanistan).
The number of Indian banks with overseas operations increased from 10 to 11
and the number of branches increased to 100 as at end-June 2005. Bank of Baroda
opened representative offices in Kuala Lumpur (Malaysia) and Guang Zhou (China),
State Bank of India opened an office in Luanda (Angola), Punjab National Bank
in Shanghai (China), while ICICI Bank Ltd. opened offices in Dhaka (Bangladesh)
and Johannesburg (South Africa). As at end-June 2005, the number of representative
offices increased by five to 27, while the total number of subsidiaries set
up by Indian banks abroad stood at 17.
V.25 Out of the ten banks which were given ‘in principle’ approval
during 2003-04 to open 14 Offshore Banking Units (OBUs) in Special Economic
Zones (SEZs), six banks commenced operations in the Santa Cruz Electronics Exports
Processing Zone (SEEPZ), Mumbai, Noida, Uttar Pradesh and SEZ Kochi, Kerala
in 2004-05. Vijaya Bank, which was given approval to open an OBU at SEEPZ surrendered
its authorisation.
V.26 During 2004-05, permission was granted to seven foreign banks to open
12 branches. A scheme of amalgamation of the Indian operations of Sumitomo Mitsui
Banking Corporation with Indian branches of Standard Chartered Bank was sanctioned
in February 2005 under Section 44A of the Banking Regulation Act, 1949. During
the year, Banco de Sabadell from Spain opened its representative office in New
Delhi. The total number of representative offices operating in India stood at
27 at end-June 2005.
V.27 As a part of the measured approach to integrating into
the global financial system, the Reserve Bank set out a roadmap for the presence
of foreign banks in India on February 28, 2005 (Box V.2).
Towards More Deregulation
V.28 Banks were advised that the quantum and margin requirement
for loans / advances to individuals against units of exclusively debt-oriented
mutual funds can be decided by the individual banks themselves in accordance
with their loan policy. At the time of extending credit facility, banks are
required to satisfy themselves about the acceptability of credit needs of borrowers
and end use of the funds. As regards loans and advances against units of other
mutual funds (other than exclusively debt-oriented mutual funds), the existing
guidelines remained unchanged.
V.29 Preventing misuse of the financial system and preserving
its integrity is vital for orderly development of the financial system. Keeping
in view the sweeping changes across the financial sector, the Reser ve Bank
has suggested cer tain amendments to the Banking Regulation Act, 1949 to enhance
its regulatory and supervisory powers, consistent with best international practices.
These, inter alia, include: (i) redefining the category of ‘approved
securities’; (ii) enabling the banking companies to issue preference shares;
(iii) inserting a new section requiring the prior approval of the
Box V.2
Road Map for Presence of Foreign Banks
Under the road map, during the first phase, between March 2005
and March 2009, foreign banks satisfying the eligibility criteria prescribed
by the Reserve Bank will be permitted to establish presence by way of setting
up a wholly owned banking subsidiary (WOS) or converting the existing branches
into a WOS following the one mode presence criterion. The WOS should have a
minimum capital of Rs.300 crore and sound corporate governance. The WOS will
be treated on par with the existing branches of foreign banks for branch expansion
with flexibility to go beyond the existing WTO commitments of 12 branches in
a year and preference for branch expansion in under-banked areas. The Reserve
Bank would also prescribe market access and national treatment limitation consistent
with WTO commitments as also other appropriate limitations consistent with international
practices and the country’s requirements. Permission for acquisition of
shareholding in Indian private sector banks by eligible foreign
banks will be limited to banks identified by the Reserve Bank for restructuring.
The Reserve Bank would consider permitting such acquisition if it is satisfied
that such investment by the foreign bank concerned will be in the long term
interest of all the stakeholders in the investee bank. Where such acquisition
is by a foreign bank having presence in India, a maximum period of six months
will be given for conforming to the ‘one form of presence’ concept.
The second phase will commence in April 2009 after a review
of the experience gained and after due consultation with all the stakeholders
in the banking sector. Extension of national treatment to WOS, dilution of stake
and permitting mergers / acquisitions of any private sector banks in India by
a foreign bank would be considered, subject to the overall investment limit
of 74 per cent.
Reserve Bank for acquisition of five per cent or more of shares
and voting rights of a banking company by any person and empowering the Reserve
Bank to grant such approval; (iv) removing the restriction on voting rights,
currently at 10 per cent; (v) empowering the Reserve Bank to grant exemption
to any banking company from the provisions of Section 20; (vi) doing away with
the lower and upper limit on the statutory liquidity ratio (SLR) and empowering
the Reserve Bank to specify SLR without any floor or ceiling; (vii) empowering
the Reserve Bank to direct banking companies to disclose financial statements
and also to carry out their inspection; (viii) providing the Reserve Bank the
powers to supersede the board of a banking company; and (ix) allowing the Reserve
Bank to order special audit of co-operative banks in the public interest.
V.30 Banks have been allowed to extend financial assistance
to Indian companies for acquisition of equity in overseas joint ventures/wholly
owned subsidiaries or in other new or existing overseas companies as strategic
investment, in terms of a board approved policy duly incorporated in the loan
policy of the bank.
Improving Customer Service
V.31 Based on the recommendations of the Committee on Procedures
and Performance Audit on Public Services (CPPAPS) (Chairman: S.S.Tarapore),
efforts were renewed in 2004-05 for facilitating improvements in customer service
in banks. All public sector/private sector banks and select foreign banks were
advised in August 2004 to constitute Customer Service Committees of their boards
with a view to strengthening the corporate governance structure in the banking
system and bringing about ongoing improvements in the quality of customer service.
Formulation of a comprehensive deposit policy, addressing issues such as the
treatment on death of a depositor for operation of his account, the product
approval process, the annual survey of depositor satisfaction and the tri-enniel
audit of such services were issues which were placed in the ambit of the functioning
of these Committees. They would also play a pro-active role with regard to complaints/grievances
resolved by the Banking Ombudsmen. Banks were advised to ensure that the awards
of the Banking Ombudsmen are implemented immediately and with active involvement
of Top Management. Furthermore, banks were also advised to place all the awards
of the Banking Ombudsmen before the Customer Service Committee. All the awards
remaining unimplemented without valid reasons for more than three months before
the Customer Service Committee are required to be reported to the board.
V.32 Banks were advised to constitute ad hoc Committees
to under take procedures and performance audit on public services rendered by
them. The CPPAPS had observed that there should be a dedicated focal point for
customer service in banks which should have sufficient powers to evaluate the
functioning in various depar tments. It had recommended that the ad hoc Committees
should be converted into Standing Committees on Customer Service. Banks were
advised in April 2005 to take necessary action to convert the existing ad
hoc Committees into Standing Committees on Customer Service. It was felt
that the ad hoc Committees can serve as the micro level executive committee
driving the implementation process and provide relevant feedback while the Customer
Service Committee of the board would oversee and review/modify the initiatives.
Thus, the two Committees would be mutually reinforcing.
V.33 The CPPAPS had recommended that a Banking Codes and Standards
Boards of India (BCSBI) should be set up as an independent organisation but
strongly supported by the Reserve Bank. Accordingly, as announced in the Annual
Policy Statement for 2005-06, it is proposed to set up an independent BSCBI
on the model of the mechanism in the UK in order to ensure that a comprehensive
code of conduct for fair treatment of customers is evolved and adhered to.
V.34 From time to time, the Reserve Bank has been issuing instructions
to banks on issues relating to credit of local/outstation cheques. It was decided
to withdraw these instructions, leaving it to the individual banks to formulate
policies in this regard. Banks were advised to formulate a comprehensive and
transparent customer service policy taking into account technological capabilities,
systems and processes and other internal arrangements for collection through
correspondents. The policy framed in this regard was required to be integrated
with the deposit policy formulated by the banks in line with the Indian Banks
Association’s (IBA’s) model deposit policy. The policy was also required to
clearly lay down the liability of the banks by way of interest payments due
to delays for non-compliance with the standards set by the banks themselves.
Compensation by way of interest payment, where necessary, was required to be
made without any claim from the customer.
V.35 The requirement of obtaining ';No-Objection Certificate';
(NOC) from the lending bank(s) for opening current accounts of entities which
enjoy credit facilities from the banking system was eased and banks were given
the freedom to open current accounts of prospective customers after a minimum
waiting period. Banks are required to put in place policies and procedures to
implement KYC norms and Anti-Money Laundering standards to prevent laundering
of funds through the banking system (Box V. 3).
V.36 In the light of the recommendations of CPPAPS, instructions
were issued to banks in supersession of all earlier instructions on settlement
of claims in respect of deceased depositors covering aspects relating to: (a)
access to balance in deposit accounts; (b) premature termination of term deposit
accounts; (c) treatment of flows in the name of the deceased depositor; (d)
access to the safe deposit lockers/safe custody articles; and (e) time limit
for settlement of claims.
Supervisory Initiatives
V.37 During 2004-05, the BFS continued to guide the development
of supervisory prescriptions and practices relating to: (a) strengthening of
asset classification norms; (b) ';fit and proper'; status of directors;
(c) ownership and governance of private sector banks; (d) eligibility norms
for appointment of statutory auditors; (e) integrated approach for monitoring
of frauds of the entire financial system through setting of a fraud monitoring
cell; (f) monitoring of FIs; and (g) revision of off-site surveillance reporting.
V.38 Basel II rests on three pillars viz., (a) minimum
capital requirements (Pillar 1), (b) supervisory review process (Pillar 2) and
(c) market discipline (Pillar 3). All the three pillars need to be implemented
for a system to be Basel II compliant. In this context, supervisors are required
to encourage the implementation of the key principles underlying Pillars 2 and
3, even before they move to Pillar 1. Pillar 2 discusses the key principles
of supervisory review, risk management guidance and super visor y transparency
and accountability with respect to banking risks. A group was set up by the
Reserve Bank for the implementation of Pillar 2. The group consists of three
sub-groups on the internal capital adequacy assessment process, supervisory
review and evaluation process, and supervisory review process for securitisation.
Pillar 2 is meant not only for ensuring adequate capital to support all the
risks in a bank, but also to encourage banks to adopt better risk management
(Box V.4).
Box V.3
Guidelines on Know Your Customer (KYC) and Anti-Money Laundering Measures
The Reserve Bank issued comprehensive guidelines to banks in
November 2004 which require banks to frame their KYC policies incorporating
the four key elements viz., (i) customer acceptance policy (ii) customer
identification procedures (iii) monitoring of transactions and (iv) risk management.
The salient features of the policy are :
• No account to be opened in anonymous, fictitious or benami names;
• The identify of the customer and his address to be verified through documentary
evidence;
• Customer accounts to be classified according to risk perceived and a customer
profile should be prepared;
• Banks should look for ';beneficial owners'; in
case of legal persons and accounts operated under mandate in respect of individuals
and establish their identity;
• Accounts of politically exposed persons residing outside
India to be opened with specific approval of senior management;
• Banks to establish correspondent banking relationships
with banks operating abroad after ascertaining commitment to KYC norms and the
regulatory environment in that country;
• Banks to develop a system of ongoing monitoring of transactions
in customers’ accounts. Transactions that fall outside the regular pattern of
customer activity and cash transactions of Rs. 10 lakh and above are to be reported
to Head/Controlling office;
• Banks to ensure that adherence to KYC policies/ procedures
is tested and evaluated by internal/concurrent auditors.
• Any remittance of funds by way of demand draft, mail/
telegraphic transfer or any other mode and issue of travellers’ cheques for
value of Rupees fifty thousand and above to be effected by debit to the customer’s
account or against cheques and not against cash payment.
• Provisions of Foreign Contribution and Regulation Act, 1976 to be adhered
to strictly.
• Banks should apply revised KYC norms to the existing customers on the
basis of material and risk;
• Banks are required to put in place a proper policy framework
on ‘Know Your Customer’ and anti-money laundering measures with the approval
of their boards and ensure that they are fully compliant before December 31,
2005.
Box V.4
Pillar 2 of the Basel II Accord
The Supervisory Review Process is intended to ensure that banks
have adequate capital to support all the risks in their business and also to
encourage banks to develop and use better risk management techniques in monitoring
and managing their risks. This process also recognises the responsibility of
bank management in developing an internal capital assessment process and setting
capital targets that are commensurate with the bank’s risk profile and control
environment. Supervisors are expected to evaluate how well banks are assessing
their capital needs relative to their risks and to intervene where appropriate.
The four basic and complementary principles on which the Pillar
2 rests are: (a) a bank should have a process for assessing its overall capital
adequacy in relation to its risk profile as well as a strategy for maintaining
its capital levels; (b) supervisors should review and evaluate a bank’s internal
capital adequacy assessment and strategy as well as its compliance with regulatory
capital ratios; (c) supervisors expect banks to operate above the minimum regulatory
capital ratios and should have the ability to require banks to hold capital
in excess of the minimum; and (d) supervisors should seek to intervene at an
early stage to prevent capital from dipping below prudential levels.
Implementation of Pillar 2 requires that a comprehensive assessment
of risks be carried out by both the banks (internally) and the supervisor (externally).
Banks and supervisors need to focus on key risks which are not directly addressed
under Pillar 1 and supervisors are required to ensure proper functioning of
certain aspects of Pillar 1. Some of the key issues are: (i) interest rate risk
in banking book; (ii) residual risk; and (iii) credit concentration risk. Supervisors
are also required to consider whether the capital requirement generated by Pillar
1 gives a consistent picture of the bank’s operational risk exposure.
V.39 In view of the impor tance of RRBs as purveyors of rural
credit, the Union Budget 2004-05 emphasised that the sponsor banks would be
accountable for the performance of their RRBs. Sponsor banks were advised by
the Reserve Bank to provide support to their sponsored RRBs in matters relating
to efficient management, training of staff, computerisation and networking of
activities. Empowered committees for RRBs under the chairmanship of the Reserve
Bank’s Regional Directors have been constituted to monitor performance of RRBs
under the jurisdiction of the regional offices of the Reserve Bank.
V.40 As indicated in the Mid-term Review of the Annual Policy
Statement for the year 2004-05, sponsor banks are being encouraged to merge
their RRBs. Sponsor banks were advised that the appointment of chairmen of their
RRBs should be approved by the management committees of their boards. The Government
was requested to ensure that independent and professionally qualified persons
are nominated to the boards of RRBs to make them more vibrant and proactive.
V.41 In order to re-position RRBs as an effective instrument
of credit delivery in the Indian financial system, an Internal Group was set
up within the Reserve Bank on February 23, 2005 (Chairman: Shri A. V. Sardesai)
to examine various alternatives available within the existing legal framework
for strengthening the RRBs and making them viable rural financial institutions.
The Group made recommendations relating to minimum capital requirements of the
RRBs and suggested, inter alia, measures for better governance, suitable
regulation and supervision.
Co-operative Banks
V.42 It has been the endeavour of the Reserve Bank to ensure
that the UCBs emerge as a sound and healthy network of jointly owned, democratically
controlled and ethically managed banking institutions providing need based quality
banking services, essentially to the middle and lower middle classes and marginalised
sections of the society. Accordingly, in 2004-05, the Reserve Bank continued
its efforts to integrate the urban cooperative banking system with the rest
of the banking system (Box V.5). Major policy initiatives undertaken by the
Reserve Bank in 2004-05 with a view to further strengthening the urban banking
sector relate to legislative and structural changes, regulatory measures on
scheduled and non-scheduled urban cooperative banks and computerisation of returns.
V.43 Scheduled UCBs generally have a large deposit base and
hence de-scheduling weak scheduled banks or taking them into liquidation may
have a significant systemic impact. Accordingly it was decided to draw up a
programme for their restructuring and rehabilitation in a time-bound manner.
As the restructuring involves generation of funds internally and through exter
nal sources (Government), discussions are underway among the various regulators
to put in place a package that would ensure turnaround in a reasonable timeframe.
Box V.5
Draft Vision Document for Urban Co-operative Banks
The Draft Vision Document seeks to (i) rationalise the existing
regulatory and supervisory approach; (ii) facilitate a focused and continuous
system of supervision through enhancement of technology; (iii) enhance professionalism
and improve the quality of governance in UCBs by providing training for skill
upgradation; (iv) put in place a mechanism that addresses the problems of dual
control, given the present legal framework, and the time consuming process in
bringing requisite legislative changes; (v) put in place a consultative arrangement
for identifying weak but potentially viable entities in the sector; and (vi)
identify the unviable entities and provide an exit path for such entities.
These objectives are to be addressed through a differentiated regulatory regime
as opposed to a ';one-size-fits-all'; approach. Therefore, a two-tier
regulatory regime is proposed: (i) a simplified regulatory regime for unit banks
and banks with operations confined to a single district with deposits up to
Rs.100 crore and (ii) for all other banks, regulation will be at par with commercial
banks.
As the strategy to deal with UCBs needs to be State specific,
a State Level Task Force would be constituted comprising senior officials from
the Reserve Bank, State Governments and local/ central co-operative federations.
The Task Force will be responsible for identifying weak but viable UCBs and
framing of time-bound programme for revival, recommending nature and extent
of financial support, future set-up of unlicensed banks and time frame for exit
of unviable banks. In order to address issues/difficulties related to dual control
within the existing legal framework, a working arrangement in the form of a
Memorandum of Understanding (MoU) between the Reserve Bank and the State Governments
has been proposed. In this regard, the Reserve Bank has already entered into
agreement with two State Governments through MoUs and discussions are underway
with other State Governments as well.
V.44 In order to ensure that only financially strong UCBs are
accorded scheduled status, the Government of India notified the prescribed minimum
level of demand and time liabilities (DTL) at Rs.250 crore against the earlier
requirement of Rs.100 crore, based on the recommendations of an internal group
of the Reserve Bank. It was also decided not to include any more banks in the
scheduled category, pending a comprehensive policy on UCBs.
V.45 On receipt of representations from cooperative federations/banks,
small loans up to Rs.1 lakh, including gold loans, had been exempted from the
purview of the 90 day impairment norm and continue to be governed by the 180-day
impairment norm. However, this exemption will be available only up to March
31, 2006. It was also decided to grant an additional time of two years to UCBs
as compared with commercial bank counterparts to meet the 100 per cent provisioning
norm for advances identified as doubtful for more than three years.
V.46 Asset classification and provisioning requirements of
UCBs in respect of State Government guaranteed advances and investments were
earlier linked to invocation of the State Government guarantee. This was de-linked
and same norms as applicable to exposures not guaranteed by the State Governments
were prescribed. The revised norms will be effective from the year ending March
31, 2006.
V.47 UCBs were given some relaxation in their investment portfolio.
They were allowed to exceed the present limit of 25 per cent of a bank’s total
investment under the HTM category provided (a) the excess comprises only of
SLR securities and (b) the total SLR securities held in the HTM category are
not more than 25 per cent of their NDTL as on the last Friday of the second
preceding fortnight.
V.48 In consonance with the best practices, it was decided
that details of the levy of penalty on a bank would be put in the public domain
through a press release by the Reserve Bank. The UCBs were advised that the
penalty should also be disclosed in the ';Notes on Accounts'; to their
balance sheets in the annual reports.
V.49 As a prudential measure aimed at better risk management
and avoidance of concentration of credit risk, UCBs were advised (a) to fix
the prudential exposure limits at 15 per cent and 40 per cent of the capital
funds in case of single borrower and group of borrowers, respectively; (b) to
fix capital funds for the purpose of prudential exposure norm in relation to
the bank’s total capital funds (both Tier I and Tier II capital); and (c) that
the exposure shall henceforth include both credit exposure and investment exposure
(non-SLR).
V.50 The off-site sur veillance system for supervision of all
scheduled UCBs was extended to non-scheduled banks with deposit base of over
Rs.100 crore with effect from June 2004.
V.51 UCBs were advised to ensure that they are fully compliant
with the provisions of the revised KYC guidelines before December 31, 2005.
V.52 For resolving problems arising out of the dual control
regime on UCBs, a draft legislative bill proposing certain amendments to the
Banking Regulation Act, 1949 in line with the recommendations of the High Power
Committee on UCBs had been forwarded to the Gover nment of India. The Government
of India had proposed certain changes to the recommendations seeking to make
cooperatives more autonomous and professional. The proposals were re-examined
in light of the above developments and revised proposals have been communicated
to the Government of India.
V.53 Some of the UCBs that have faced problems in recent times
are those that have had weak governance, either by design or by default. In
this regard, the UCBs have been advised to have at least two directors
with professional qualifications or adequate experience in banking on their
boards. The most important stakeholder in a UCB is the depositor. Therefore,
a mandatory right to regular membership for depositors above a threshold limit
is under consideration.
V.54 With a view to encouraging and facilitating consolidation
and emergence of strong entities and providing an avenue for non-disruptive
exit of weak/ unviable entities in the co-operative banking sector, guidelines
were issued to facilitate merger/ amalgamation in the sector (Box V.6).
V.55 The Government of India had constituted a Task Force on
Revival of Rural Co-operative Credit Institutions, under the Chairmanship of
Prof. A. Vaidyanathan, Professor Emeritus, Madras Institute of Development
Studies, Chennai to propose an action plan for reviving the rural cooperative
banking institutions and suggest an appropriate regulatory framework for these
institutions. The Task Force submitted its report to the Central Government
on February 15, 2005 (Box V.7). In his Budget Speech for the year 2005-06, the
Union Finance Minister announced that the Government has accepted the recommendations
of the Task Force in principle and would begin the process of implementing the
recommendations in the States that show willingness to accept the recommendations.
The Government of India has entrusted the work of studying the long term cooperative
credit structure for agriculture and rural development to the same Task Force.
V.56 Keeping in view the precarious financial position of District
Central Cooperative Banks (DCCBs), the Reserve Bank has so far rejected licence
applications of eight DCCBs. Besides, show cause notices were issued to six
DCCBs for rejection of licence application during the year 2004-05. As on March
31, 2005, nine State Cooperative Banks/ DCCBs were placed under the Reserve
Bank’s directions, prohibiting them from granting any loans and advances and/or
accepting fresh deposits and renewing the existing ones.
V.57 In November 2004, scheduled or licensed State Cooperative
Banks and licensed DCCBs with minimum net worth of Rs.100 crore were permitted
to undertake insurance business as corporate agent without r isk par ticipation,
subject to cer tain conditions, after obtaining prior permission of the Reserve
Bank. The minimum net worth was reduced to Rs.50 crore in February 2005. Furthermore,
in May 2005, all State Cooperative Banks and DCCBs were allowed to under take
insurance business on a referral basis without any risk participation through
their network of branches without prior approval of the Reserve Bank.
Development Finance Institutions (DFIs)
V.58 Consolidation in the banking sector has also encompassed
the Development Finance Institutions (DFIs) which have been the traditional
providers of long-term finance in India. The complexities involved in harmonising
the role and operations of the DFIs
Box V.6
Guidelines for Mergers/Amalgamations for Urban Cooperative Banks
The Reserve Bank will consider proposals for merger/ amalgamation
of UCBs of the following types, subject to the post-merger entity meeting the
prescr ibed prudential norms:
(i) net worth of the acquiree bank is positive and the acquirer
bank assures to protect entire deposits of all the depositors of the acquired
bank;
(ii) when the net worth of acquiree bank is negative, the acquirer
bank on its own assures to protect deposits of all the depositors of the acquired
bank; and
(iii) when the net worth of the acquiree bank is negative and
the acquirer bank assures to protect the deposits of all the depositors with
financial support from the State Government extended upfront as part of the
process of merger.
Box V.7
Task Force on Revival of Rural Co-operative Credit Institutions
Major recommendations of the Task Force in the Final Report are:
• The approach for financial restructuring should be contingent
on commitment to and implementation of legal and institutional reforms. The
total package is likely to be of the order of Rs.14,839 crore.
• All losses should be covered by the revival package.
• Special audit of accounts as of 31st March
2004 should be undertaken, the cost of which would be borne by the revival package.
• A contingency fund of Rs.4,000 crore to take care of covering accumulated
losses (part of the total package).
• The Central Government should provide a soft loan to concerned
States if the latter do not have necessary resources to pay the cooperative
banks in case of invocation of guarantees.
• Assistance necessary to bring all cooperatives, including
primary agricultural cooperative societies (PACS), to a minimum CRAR of seven
per cent may be provided and cooperatives then may be asked to increase it to
12 per cent within five years from their internal resources.
• Cooperatives will need to computerise and costs (estimated
at Rs.1,030 crore) should be met through grant assistance by the Centre.
• All PACS which have a recovery rate of at least 50 per
cent and whose gross margin covers at least 50 per cent of their establishment
costs should be covered under the package. DCCBs with positive net worth and
those with negative net worth but with less than 25 per cent deposit erosion
may be taken up under the package for revival. The same criteria will also apply
to State Co-operative Banks.
• The proposed financial assistance package for revival
of cooperatives should be only a one-time measure. Assistance will be strictly
conditional and released on the implementation of the recommendations for legal
and institutional reforms.
• State Governments may issue executive orders to bring
in the desired reforms. A model Cooperative Law can be enacted by the State
Governments.
• Amendments to the Banking Regulation Act may be made to
bring cooperative banks on par with commercial banks as far as regulatory norms
are concerned.
• NABARD would be designated as the implementing agency of the scheme.
were examined and the Reserve Bank enabled the reverse-merger
of a large DFI with its commercial banking subsidiary. Another large DFI also
converted into a bank.
V.59 As announced in the Annual Policy Statement for the year
2004-05, a Technical Group on Refinancing Institutions was constituted on September
3, 2004 (Chairman: Shri G.P.Muniappan) to evaluate the efficacy of regulatory
and supervisory systems of refinancing institutions (RFIs) (Box V.8).
Non-Banking Financial Companies (NBFCs)
V.60 Supervisory oversight over non-banking financial companies
(NBFCs) continued to be based on a four-pronged strategy comprising: a) on-site
inspection based on CAMELS methodology, b) off-site monitoring suppor ted by
state-of-the-ar t technology, c) market intelligence and d) reports of statutory
auditors. The emphasis was on developing NBFCs into a financially strong sector
with improved skills and technology. The policy changes made by the Reserve
Bank during the year related to issue of credit cards, preparation of balance
sheets, premature withdrawal of deposits, quarterly returns
for NBFCs not accepting/holding public deposits and having
an asset size of Rs.500 crore and above, cover for public deposits and policy
changes for RNBCs (Box V.9).
V.61 NBFCs are not allowed to undertake credit card business
without prior approval of the Reserve Bank. NBFCs were advised that the issue
of debit cards, stored value cards, smart cards and value added cards have a
characteristic akin to demand deposits and acceptance of deposits payable on
demand is a banking function. The Reserve Bank, therefore, advised banks that
they should not issue smart/debit cards in tie-ups with any other non-bank entities.
V.62 In terms of the extant directions, every NBFC is required
to prepare its balance sheet and profit and loss account as on March 31 every
year. Whenever an NBFC intends to extend the date of its balance sheet as per
provisions of the Companies Act, 1956 it should take prior approval of the Reserve
Bank before approaching the Registrar of Companies (RoC) for this purpose. In
the cases where permission is granted for extension of time, the company would
be required to furnish to the Reserve Bank a proforma
Box V.8
Report of the Technical Group on Refinancing Institutions (RFIs)
The major recommendations of the Technical Group are:
Regulatory Systems
Entities regulated/supervised by RFIs should be classified
into those accepting public deposits and those not accepting public deposits.
The Reserve Bank should subject entities accepting public deposits to direct
regulation till such time they cease to accept public deposits. Furthermore,
entities not accepting public deposits should be segregated into (a) entities
with an asset size of more than Rs.100 crore and which either do not avail of
refinance from RFIs at all or those whose dominant source of funds is not refinance
from RFIs, (b) entities with an asset size of more than Rs.100 crore but whose
sole/dominant source of funds is refinance from RFIs and (c) entities with asset
size equal to or less than Rs.100 crore. Regarding entities in category (a),
the Reserve Bank should provide to RFIs a broad framework for regulation of
these entities. Regulation of entities falling under categories (b) and (c),
including prescription of prudential norms, may be entirely left to the RFI
themselves. Fur thermore, SFCs may be discouraged from accepting public deposits
and the Reserve Bank may withdraw permission granted to them for accessing public
deposits. Acceptance of public deposits by non-bank financial intermediaries
should be phased out and eventually, regulation of entities accepting public
deposits should converge with the prudential norms of commercial banks.
Supervisory Practices
Supervision may be carried out on the basis of CAMELS approach
and the capabilities should preferably be developed in-house. SIDBI and NHB
may consider setting up boards of supervision (BoS), as in the case of NABARD.
The supervisory functions of SIDBI need to be well defined with no State Government
intervention and adequate powers for imposition of penalty be vested in SIDBI.
NHB may consider introducing the system of awarding ratings to HFCs in a phased
manner.
Coordination between the Reserve Bank and RFIs
A Standing Committee comprising representatives of the Reserve
Bank, SIDBI, NABARD and NHB may be set up for ensuring coordination. The arrangements
existing between the Reserve Bank and NABARD may be replicated between the Reserve
Bank, on the one hand, and SIDBI and NHB, on the other. As in the case of NHB
and NABARD, the Reser ve Bank may have a Top Management level nominee on the
board of SIDBI.
Reserve Bank Oversight over the Regulatory/Supervisory Systems of RFIs
While the existing arrangements of annual financial inspection
and special scrutinies are necessary and useful, a for mal system to measure
super visor y effectiveness may be developed by the RFIs and implemented after
approval from the Reserve Bank.
Income Recognition, Asset Classification and Provisioning Norms of the RFIs
The aggregate refinance by a RFI to an apex lending institute
may be viewed as if it were a bundle of back-to-back facilities granted to various
primary lending institutions or to various categories of borrowers. It may be
permissible to classify the contaminated portion and non-contaminated portion
of the facility separately so that the entire refinance assistance to an apex
lending institution does not get classified as NPA in the books of the RFI merely
as a result of contamination of only a part. The revised prudential norms recently
prescribed by the Reserve Bank for banks in regard to State Government guaranteed
exposures should be applied to RFIs as well.
Reference
Report of the Technical Group on Refinancing Institutions (Chairman:
Shri G.P.Muniappan) (2005), Reserve Bank of India, January.
balance sheet (unaudited) as on March 31 of the year and the statutory returns
on the due dates.
V.63 NBFCs not accepting/holding public deposits and having
asset size of Rs.500 crore and above were advised to submit a quarterly return
in the prescribed format commencing from the quarter ended September 2004. It
was also advised that a provisional return for the quarter ended March may be
submitted within 30 days of the close of the quarter and a final return should
be submitted with a copy of the audited balance sheet as soon as the same is
finalised but not later than September 30 of the year. Non-submission of return
would be viewed seriously and penal action would be taken for such non-compliance.
V.64 In order to protect depositors’ interest, all NBFCs accepting/holding
public deposits were advised to ensure that there should be full asset cover
available for public deposits accepted by them. The assets should be evaluated
at their book value or realisable/market value, whichever is lower, for this
purpose. NBFCs have to report to the Reserve Bank in case the asset cover calculated
falls short of the liability on account of public deposits.
Box V.9
Recent Policy Changes Relating to RNBCs
Residuary Non-Banking Companies (RNBCs) are a sub-set of NBFCs
whose principal business is acceptance of public deposits. RNBCs mobilise deposits
largely from rural/semi-urban centres in the form of daily, recurring and fixed
deposits. RNBCs account for more than 85 per cent of the aggregate public deposits
of registered deposit-taking NBFCs. Two large RNBCs had a share of more than
99 per cent of the total deposits accepted by all the RNBCs. The aggregate deposits
of RNBCs have shown rapid growth compared to other NBFCs. RNBCs are required
to invest 80 per cent of the deposit liability in directed investment with the
remaining 20 per cent being at the discretion of the board of the company.
Investment
The directions for investments by RNBCs were rationalised in
June 2004 with a view to reducing the overall systemic risk in the financial
sector and safeguard the interests of depositors. A road map was also put in
place to phase out the discretionary investments by the companies by April
1, 2006 and substitute them with investment in the securities
specified by the Reserve Bank. Towards this target, beginning April 1, 2005,
RNBCs are required to invest 90 per cent of their public deposit liability in
directed investments. Besides, the requirement of AA+ rating and listing on
stock exchange has been introduced for bonds/ debentures which qualify towards
directed investments. These measures are expected to impart greater liquidity
and safety to the investments of RNBCs and thus enhance protection available
to depositors.
Corporate Governance
‘Fit and proper’ guidelines were prescribed for evaluating
the suitability of the directors appointed to the boards of RNBCs. The companies
were asked to comply with the guidelines on connected lending relationships.
They were also to ensure compliance with the KYC guidelines by agents and sub-agents.
The companies were instructed to put in place a process of due diligence in
respect of agents/sub-agents collecting deposits on behalf of the company through
a uniform policy for appointment and detailed verification. All deposit receipts
are required to indicate identification particulars like name and address of
the agent / sub-agent who mobilised the deposits and of the link branch with
telephone numbers. Agency commission structure, which is not detrimental to
the interest of the depositors, is also to be devised.
V.65 NBFCs were advised to ensure that they are fully compliant
with the revised KYC guidelines before December 31, 2005.
V.66 At the end of March 2005, a total of 38,096 applications
had been received for grant of Certificate of Registration (CoR). The Reserve
Bank approved 13,724 applications, including 642 applications of companies authorised
to accept/hold public deposits. A total of 537 CoRs were cancelled which included
168 deposit taking NBFCs. As on March 31, 2005 the number of non-deposit taking
NBFCs stood at 12,713 while NBFCs authorised to accept deposits stood at 474.
V.67 Inspection policy of NBFCs was revised in January 2005.
During the period April 2004 to March 2005, a total of 570 (315 deposit taking
companies and 255 non-deposit taking companies) registered NBFCs were inspected.
In addition, the Reserve Bank conducted 236 snap scrutinies during the same
period.
MACRO-PRUDENTIAL INDICATORS REVIEW
V.68 In line with international best practices for monitoring
the stability of the financial system, the Reserve Bank has been compiling macro-prudential
indicators (MPIs), comprising both aggregated micro-prudential indicators (AMPIs)
relating to the health of individual financial institutions and macro economic
indicators (MEIs) associated with financial system soundness. India is one of
the few countries which has volunteered to par ticipate in the coordinated compilation
of the financial soundness indicators for December 2005 under the aegis of the
International Monetary Fund.
V.69 The MPI review for 2004-05 indicates that capital ratios
were well above minimum requirements across the financial system in India with
a distinct improvement in asset quality. This was accompanied by some erosion
in ear nings and profitability indicators, except for development finance institutions,
and an increase in operating costs. The salient features of the MPI review for
2004-05 are set out below (Tables 5.1).
Capital Adequacy
V.70 The aggregated capital ratio of scheduled c o m m e r
c i a l b a n k s a t e n d - M a r c h 2 0 0 5 was marginally lower than at
end-March 2004. The small decline in CRAR of scheduled commercial banks over
the year could be attributed to the increase in total risk weighted assets relative
to
Table 5.1: Select Financial Indicators