2.20   Regional Rural Banks (RRBs) form an integral part of the rural financial architecture in India.  During 1997-98 further reforms were introduced to improve their viability, competitiveness, profitability and efficiency besides recapitalisation of weak RRBs.  During 1997-98, the growth in aggregate deposits and credit of RRBs decelerated.

Deposit and Credit Growth

2.21   During the financial year 1997-98, the aggregate deposits of RRBs registered a lower growth of 23.6 per cent, as compared with a rise of 26.9 per cent in 1996-97. While demand deposit growth was robust, growth in time deposits with RRBs decelerated.  Credit expansion of RRBs during 1997-98 at Rs.1,143 crore (13.4 per cent) was also lower than the credit growth during 1996-97 of Rs.1,255 crore (17.2 per cent) (Table II.12). Consequently, the credit deposit ratio of RRBs declined from 50.3 per cent in 1996-97 to 46.2 per cent  in 1997-98.

2.22   The purpose-wise distribution of credit of RRBs as on March 31, 1997 indicated that a major portion of their credit was directed towards agriculture and allied activities (46.3 per cent) (Table II.13).

Working Results

2.23  The available financial results of 151 RRBs during 1997-98 indicate considerable improvement in number of RRBs recording profits and overall profit ratios.  As against 34 profit-making RRBs (out of 151) in 1996-97, 96 RRBs made profits during 1997-98.  The amount of net profit earned stood at Rs.239crore (Rs.43.4 crore last year) [Table II.14]. The large profits - gross and net -during 1997-98 was facilitated by lower provisions. The net profit ratio of profit - making RRBs at 1.51 per cent in 1997-98 was far higher than the corresponding figure of 0.94 in 1996-97. Overall (including loss-making RRBs), net profit ratio stood at 0.33 per cent in 1997-98 as compared with a negative figure of -3.10 per cent in 1996-97. Further, the working results showed an improvement in the spread from 2.49 per cent in 1996-97 to 2.93 per cent in 1997-98.5

⁵ For profit making RRBs spread has come down (from 4.18 per cent in 1996-97 to 3.86 per cent in 1997-98), which is similar to trends in SCBs (see Table II.4).

Non-performing Assets

2.24   The quality of assets of RRBs showed substantial improvements after the implementation of prudential norms as suggested by NABARD.  The analysis of quality of assets indicated that as on March 31, 1997, the aggregate outstanding loans of RRBs consisted of: standard assets - 64 per cent; substandard assets - 8.2 per cent; doubtful assets - 23.0 per cent; and loss assets - 4.8 per cent(Table II.15). The NPA, as a percentage of outstanding loans at the end of March 1997 for 196 RRBs, was relatively lower at 36.0 per cent as compared with 42.5 per cent in the previous year.

Recovery of  Loans

2.25   The status of recovery of loans in RRBs showed signs of improvement during 1996-97. The percentage of recovery to demand has increased from 40.9 per cent by June 1992 to 56.7 per cent by June 1997.  State-wise, the recovery performance of RRBs showed that at the end of June 1997, Kerala ranked first (85.6  per cent), followed by Tamil Nadu (79.2 per cent) and Punjab (77.9 per cent).  The least recovery performance was in the State of Tripura at 10.7 per cent.  

Recapitalisation of RRBs

2.26   To strengthen the capital base of RRBs, the Government of India has been infusing capital through budgetary allocations. The process of recapitalisation initiated in 1994-95 continued during the year 1997-98. In the fourth Phase of 1997-98, 90 RRBs have been given capital support to the extent of Rs.400 crore. This consists of 15 RRBs getting capital support for the first time and the rest 75 RRBs which received assistance in the earlier phases, got further amount allotted to strengthen their capital.  The yearly contributions for recapitalisation of RRBs are given in Table II.16. The Government of India has made a further budgetary provision of Rs.265 crore in the Union Budget for the year 1998-99.

Restructuring  Programme

2.27   As RRBs provide substantial finances for the development of rural areas, a number of policy measures were taken in the last two years not only to make RRBs viable but also  to enable them to function effectively in a competitive banking environment. These measures include inter alia deregulation of interest rates on advances made by them, freeing of interest rates on deposits above one year maturity, rationalisation of branches including merging of loss making branches, revamping of RRBs with fresh capital infusion by the Government, and relaxation in norms relating to investments by RRBs.

Inspection of RRBs

2.28   NABARD being the Supervisory authority for RRBs, conducted inspection of  96 RRBs during 1996-97. The analysis of the inspection results indicated serious short-comings in the operations of some of the RRBs.  Low level of loan recoveries, mounting overdues, high level of non-performing assets leading to erosion in RRBs' net worth, besides poor quality of loan appraisal, ineffective loan supervision, etc. are some of the short- comings observed. To monitor the operations of RRBs more frequently, NABARD introduced off-site surveillance system through which financial appraisal of RRBs could be conducted on the basis of data provided by RRBs on a half-yearly basis.

2.29   The credit - deposit (CD) ratio of SCBs as on the last Friday of March 1998 (as per sanction) was marginally lower at 55.5 per cent as compared with 57.3 per cent in the corresponding period last year (Appendix Table II.7).  Most of the regions except the Western region showed deceleration in credit-deposit ratio during the year.  In the Western region, Maharashtra showed improvement in the credit-deposit ratio.  In the Northern region, the states of Haryana and Rajasthan showed improvements in their credit-deposit ratios.

Lending Rates

2.39   The Monetary and Credit Policy for the first half of 1997-98 announced on April 15, 1997, outlined several measures for streamlining and improving credit delivery system by giving greater freedom to banks.  With effect from April 16, 1997, the Bank Rate was reactivated as a signal and a reference rate by linking the maximum deposit rate for maturity of 30 days and upto one year to the Bank Rate and prescribing the maximum deposit rate at 'not exceeding the Bank Rate  minus 2 percentage points per annum'.  In response to these measures, banks lowered interest rates on deposits of shorter maturity by 1 - 2 percentage points.  The reduction in the cost of funds of the banks was also passed on to the borrowers by lowering Prime Lending Rates (PLRs). PLRs were reduced by 0.5 - 1.5 percentage points after April 15, 1997 and again in July 1997 by 0.5 to 1.5 percentage  points.

2.40   In July 1997, PLRs of SCBs were in the range of 13.5 - 17.5 per cent as against the range of 14.0 - 19.0 per cent in April 1997. Further, consequent upon number of measures introduced in the credit policy announced on October 21, 1997, like the cuts in the Bank Rate and CRR, the deregulation of interest rates on domestic term deposits and the introduction of separate  PLR, also called Prime Term Lending Rate (PTLR), for term loans of 3 years and above, the PLRs of public sector banks declined from 13.5 - 15.0 per cent to 12.5 - 13.5 per cent and PLRs of private sector banks declined by about 1 percentage point. PTLRs for term loans of 3 years and above were below the respective PLRs of banks by about 0.15 - 0.50 percentage point.

2.41   Due to increase in CRR in December 1997 and in the Bank Rate in January 1998 on account of monetary and foreign exchange situation, banks undertook upward revision in their lending rates (Table II.17).

2.42   With the reduction in CRR and the Bank Rate, subsequently in March-April  1998, banks once again reduced their PLRs.  In the credit policy announced on April 29, 1998, the reduction in the Bank Rate from 10 per cent to 9.0 percent influenced a number of scheduled commercial banks to revise their PLR downwards by 0.5 - 2.0 percentage points.  As at end of June 1998, PLRs of scheduled commercial banks were in the range of 12.75 per cent to 18.50 per cent and PTLR of scheduled commercial banks was in the range of 12.50 - 17.50 per cent.  The maximum spread over PLR was in the range of 3.0 to 7.5 per cent as against 2.0 to 6.25 per cent prior to April 1998 policy announcements.

2.43   SCBs invested in Government securities to the extent of 30.9 per cent of aggregate deposits as on last Friday of March 1998 as compared with 31.4 per cent a year earlier.  In incremental terms, this ratio was 28.1 per cent in 1997-98 as against 37.1 per cent in

1996-97.  In view of the growing linkages between various markets in the financial system, efforts were made to further improve the market clearing mechanisms in the primary market and also provide depth and volume to the secondary market.

Trends in Yields in Primary and Secondary Market in Government Securities

2.44   The prevalence of easy liquidity conditions in the money market and the resultant declining interest rates enabled the Reserve Bank to conduct market borrowings of the Central Government smoothly during the period April-December, 1997. In the remaining part of the year 1997-98, the interest rate firmed up due to measures introduced by the Reserve Bank to correct the imbalances in the money market. The coupon rates of Government dated securities ranged from 10.85 to 13.05 per cent in the primary market during the year (Chart II.9). Table II.18 provides an overview of yields on Government Securities in the primary market for the last four years.

2.45   In order to develop market for Government securities, the Reserve Bank extends liquidity support to Primary Dealers (PDs) and Satellite Dealers (SDs). The limit on liquidity support to Primary Dealers (PDs) in the form of reverse repos during 1997-98 (April-March) was fixed at Rs. 3,710 crore.  Due to volatile exchange market in January 1998, the Reserve Bank announced that PDs in Government securities market will have access to liquidity support on discretionary basis, subject to RBI stipulations relating to their operations in the call money market. Besides, the Monetary and Credit Policy of first half of the 1998-99 has announced that the practice of reverse repos with PDs in specified securities is being dispensed with and instead liquidity support against the security holdings in SGL Accounts would be provided.  Accordingly, in September 1998, it has been decided that liquidity support to PDs will henceforth be provided by way of demand loan against the security of their holdings in SGL accounts. Advances will be granted against the collateral of holdings of Government of India dated securities and 91/364-day auction Treasury Bills in SGL accounts maintained with the Reserve Bank.

Satellite Dealers (SDs)

2.46   As on November 18, 1997 the Reserve Bank has granted approval to 9 entities for registration as SDs. The Bank has also granted in-principle approval to two banks to be accredited as SDs in the Government securities market. The limit on liquidity support to SDs in the form of reverse repos during 1997-98 was fixed at Rs.759.19 crore.

2.47  With effect from June 17, 1998, SDs have been permitted access to short-term borrowings through issuance of CPs subject to fulfilment of certain conditionalities.

Valuation of investment Portfolio of banks

2.48   As the Reserve Bank is endeavouring to make a higher portion of banks' investments in Government and approved securities  marked to market and achieve fully marking to market of all Government securities investments at the earliest, the ratio of investments in permanent category was brought down to 40 per cent for the year ending March 1998.  It has been proposed to further bring down the ratio for permanent category to 30 per cent for the year ending 1998-99. In line with best international practice, it has been proposed to increase the ratio of current investments in approved securities progressively to 100 per cent in the next three years.

2.49   The availability of institutional credit and its timely distribution is very crucial in rural credit delivery system. The NABARD, as a developmental agency, is playing a pivotal role in the overall development of agriculture and, in particular, the management of proper flow of credit for the development of the rural sector. To enable NABARD to provide short-term credit facilities to co-operative banks and RRBs, the Reserve Bank has renewed the General Line of Credit (I and II) of Rs.5,700 crore for NABARD during 1997-98. It consisted of Rs.4,850 crore under GLC I (for seasonal agricultural operations) and Rs.850 crore under GLC II (for various approved other short-term purposes). The share capital of NABARD is also proposed to be increased by Rs.500 crore to Rs.2,000 crore during 1998-99 with a contribution of Rs.400 crore from the Reserve Bank and Rs.100 crore from the Government of India. With this, the share capital of NABARD will consist of Rs.1,450 crore from the Reserve Bank and Rs.550 crore from the Government. These steps would enable the NABARD to effectively leverage its equity and mobilise additional resources for investment credit.

2.50   Agriculture credit by PSBs witnessed marked improvement from Rs.31,012 crore as on last Friday of March 1997 to Rs.34,304.50 crore as on last Friday of March 1998, an increase of Rs.3,292.50 crore. However, the percentage of total agricultural advances to net bank credit has declined from 16.3 per cent to 15.7 per cent during the said period. From the year 1994-95, the Reserve Bank has advised all PSBs to prepare Special Agricultural Credit Plans.  The disbursements to agriculture under this plan during 1996-97 aggregated Rs.14,253.43 crore.  For 1997-98, the disbursements to agriculture under the plan amounted to Rs.14,808.35 crore up to March 1998 as against the target of Rs.16,069.04 crore.

2.51   With the objective of promoting credit to Khadi and Village Industries Boards (KVIBs), a consortium of banks has been formed under the leadership of the State Bank of India. In the consortium, the shares will be allotted to each bank on the basis of priority sector

shortfall. The outstanding credit provided by banks, which are treated as their indirect lending to small scale industries under priority sector, amounted to Rs.465.71 crore, out of the disbursed amount of Rs.510.00 crore as at the end of September 1998.

2.52   In order to cater to the needs of the local people and to provide efficient and competitive financial intermediation services in areas of operation extending over two or three contiguous districts as also to tapping retail savings where the branches of commercial banks are insignificant, the Reserve Bank has given 'in principle' approval for setting up Local Area Banks (LABs), one each in Maharashtra, Karnataka and Andhra Pradesh,  subject to the proposed banks complying with certain conditions.  Such banks will have to observe overall priority sector lending target of 40 per cent of net bank credit and the sub-target of 10 per cent of net bank credit for lending to weaker sections.  Interest rates on advances for LABs stand deregulated as in the case of RRBs.

Rural Infrastructural Development Fund (RIDF)

2.53   As stated in Chapter I, there are four tranches of Rural Infrastructural Development Funds in operation at NABARD for financing rural infrastructure;  RIDF-I with a corpus of Rs.2,000 crore, RIDF-II with a corpus of Rs. 2,500 crore, RIDF-III with a corpus of Rs.2,500 crore and RIDF-IV with a corpus of 3,000 crore. But utilisation of the funds is low and needs to be sharply improved.

Priority Sector Advances by Public Sector Banks

2.54   The priority sector advances of PSBs amounted to Rs.91,319 crore and formed 41.8 per cent of the NBC as on the last Friday of March 1998.  Agricultural advances of PSBs increased by Rs.3,293 crore to Rs.34,305 crore as on the last Friday of March 1998  forming 15.7 per cent of net bank credit (16.3 per cent last year).  Credit to SSI units increased from Rs. 31,542 crore (16.6 per cent of NBC ) as at end-March 1997 to Rs. 38,109 crore (17.5 per cent of NBC ) as at end-March 1998 (Appendix Table II.11).

Priority Sector Advances by Indian Private Sector Banks

2.55   The private sector commercial banks are also required to fulfil similar targets and sub-targets as applicable to domestic public sector banks for lending to the priority sectors.  The data on  priority sector advances of all the Indian private sector banks indicated that during the year 1997-98 (upto March 1998), the total amount went up to Rs.11,614 crore from Rs.8,832 crore in March 1997, showing 40.9 per cent of NBC as on last Friday of March 1998.  Their direct credit to agriculture, as proportion of NBC, was 9.7 per cent in March 1998 as against 9.1 per cent in March 1997. Advances to SSI units, as proportion of NBC, were at 20.6 per cent in March 1998, as compared with 22.2 per cent in March 1997 (Appendix Table II.12).

Priority Sector Advances by Foreign Banks

2.56   The foreign banks operating in India are required to fulfil a lower target of 32 per cent of net bank credit in lending to the priority sector with a specific lending sub-targets of 10 per cent for SSI  and 12 per cent of net credit for exports sector. The total priority sector advances of foreign banks which amounted to Rs.6,139 crore in March 1997, constituting 37.7 per cent of NBC, increased to Rs.6,940 crore accounting for 34.3 per cent of NBC as on last Friday of March 1998 (Appendix Table II.13). Advances to SSI units under priority sector stood at Rs.2,084 crore, equivalent to 10.3 per cent of NBC as compared with Rs. 1,836 crore (11.3 per cent of NBC) in March 1997. The export credit by foreign banks amounted to Rs.4,950 crore as at end-March 1998 (24.5 per cent of NBC ).

Integrated Rural Development Programme (IRDP)

2.57   During the year 1997-98, covering upto March 1998, bank credit of Rs.1,990.68 crore and Government  subsidy of Rs.1,106.21 crore has been disbursed to 16.97 lakhs families below poverty line (Table II.19).

2.58   During the year 1997-98, the number of districts covered in the country under the Lead Bank Scheme (LBS) has increased. As on March 31, 1998, 536 districts have been covered under the LBS in the country. There were 21 new districts as a result of reorganization/bifurcation of some of the existing districts. PSBs were assigned with lead responsibility of these districts.

2.59   Table II.20 presents an overall picture of Annual Credit Plan of all financial institutions (including SCBs, RRBs and Co-operative banks) under the LBS. For improving credit flow to rural areas of North Eastern States, major banks operating in that area have been advised to instruct their branch managers to closely associate themselves with the villages for recovery rather than depend on legal approach.

Prime Minister's Rozgar Yojana for Educated Unemployed (PMRY)

2.60   The Prime Minister's Rozgar Yojana (PMRY) scheme was launched in the year 1993-94 with the aim of providing sustained self-employment in micro-enterprises to rural and urban unemployed youth, resident in a particular area for more than three years, with family income not exceeding Rs.24,000 per annum. The progress of the scheme upto the year 1998-99 (upto August 1998) is presented in Table II.21.

NPA - Agricultural Advances

2.61   From the accounting year 1997-98, the advances granted for agricultural purposes may be treated as NPA, if interest and/or instalment of principal remains unpaid, after it has become past due, for two harvest seasons instead of two quarters stipulated earlier.

Bridge Loans

2.62   Effective October 21, 1997, banks have been permitted to sanction bridge loans to companies for a period not exceeding one year against expected equity flows/issues.  Such loans should be accommodated within the ceiling of 5 per cent of incremental deposits of the previous year prescribed for banks' investments in ordinary shares/convertible debentures of corporates including PSU shares, loans sanctioned to corporates for meeting promoters' contribution and units of mutual fund schemes, the corpus of which is not exclusively invested in corporate debt instruments.  Banks are also advised to formulate their own internal guidelines with the approval of their Board of Directors for grant of such loans.  Banks have been advised to exercise adequate caution and attention to obtain security for such loans.

Advances against Shares and Debentures/Bonds

2.63   Effective October 21, 1997, banks have been given freedom to stipulate margins on loans to individuals against preference shares and debentures/bonds of corporate bodies.  However, the minimum margin on loans to individuals against equity shares will continue to be 50 per cent as hitherto.

2.64   Based on the recent developments relating to the depository system and also the amendment of SEBI (Depositories and Participants)  Regulations to facilitate the pledge of dematerialised securities effective November 8, 1997, it has been decided that for securities which are held in dematerialised form under the depository system, the requirement that the shares/debentures should be transferred in bank's name be withdrawn.  Banks are therefore, free to take their own decision in regard to transfer of securities in their names.  The shares pledged with the bank under the depository mode will however, continue to be included for the purpose of determining the limits prescribed under Section 19(2) of the Banking Regulation Act, 1949.

2.65   In regard to shares not held in dematerialised form, the existing regulation on transfer of shares in bank's name remains unchanged.  Further, the guideline that banks shall exercise voting rights in respect of shares held by them in securities only with prior approval of the Reserve Bank has also been withdrawn and banks are free to decide about the exercise of their voting rights.  Banks have been advised to increasingly accept shares/debentures held in depository system in addition to those held in physical form as security for advances.

Settlement of Institutional Transactions in the Depository

2.66   To encourage the use of depository by both institutional and retail investors so as to reduce the risk associated with paper based transactions, SEBI had decided to make it compulsory for institutional investors having a minimum portfolio of securities of Rs.10 crore to settle transactions through the depository from January 15, 1998.  Accordingly, the Reserve Bank had advised the banks to settle transactions in the eight securities as notified by SEBI only through the depository.  Further, banks having large branch network have been advised to consider registering themselves as depository participants in order to provide depository services to their customers which will help the investors as well as the banks.

2.67   Since April 29, 1998, banks have been permitted to grant loans and advances to individuals against shares/debentures upto a ceiling of Rs.20 lakh per individual borrower if the advances are secured by shares and debentures held in dematerialised form.  The minimum margin prescription against dematerialised shares has also been reduced to 25 per cent.

11.   Para Banking Activities

Equipment leasing, Hire Purchase, etc. activities

2.68   Banks are permitted to undertake equipment leasing departmentally, with a cap of 5 years on the period of lease and upto 7 years where the value of leased assets was more than Rs.1 crore.  To facilitate flow of lease finance to infrastructure projects which involve longer gestation/pay back periods, banks have been given freedom to decide the period of lease finance subject to their framing an appropriate policy with the approval of their Boards and ensuring that suitable safeguards are in place to avoid asset-liability mismatches.

Investment Portfolio of Banks - Transactions  in Securities - Role of Brokers

2.69   Banks were instructed in November 1994 not to engage brokers either for inter-bank securities transactions or for transactions with non-bank clients except through members of NSE where the transactions are transparent.  Banks have since been permitted to undertake securities transactions through members of the Over The Counter Exchange of India (OTCEI), which is undertaking fully automated, nation-wide trading operations in equity and debt segments.

Credit Card

2.70   A review of the credit card business of banks was conducted recently and a few instances of misuse of credit cards by cardholders in collusion with bank officials have been noticed.  Banks were, therefore, advised in December 1997 that they should be selective in issuing credit cards and should make proper appraisal, taking into account the income, repaying capacity of the applicant and other relevant criteria before issuing credit cards.

Formation of Other Subsidiaries for Para-Banking Activities (Barring Housing Finance)

2.71   The State Bank of India has been accorded final approval for setting up a subsidiary  jointly with the SBI Capital Markets Ltd., Associate banks of SBI and Asian Development Bank, viz., SBI Securities Ltd., for undertaking securities broking and trading activities, with paid up capital of Rs.60 crore and with the bank itself taking up 51 per cent of the paid -up share capital.

2.72   The State Bank of India has been accorded final  approval to set up a subsidiary "SBI Cards and Payment Services Private Ltd." jointly with GE Capital Corporation (USA) with a paid-up capital of Rs.100 crore and with the bank taking up 60 per cent of the paid-up share capital.

Equity investment in Commodity Exchange

2.73   Four banks, viz., IndusInd Bank Ltd., Global Trust Bank Ltd., Union Bank of India and Canara Bank were permitted to contribute Rs.50 lakh each to the share capital of First Commodities Clearing Corporation of India Ltd. (FCCCI) to act as institutional members.  FCCCI, set up in Kochi by the India Pepper & Spice Trade Association is the first international exchange to be set up in India to deal in pepper futures.  Equity participation is a prerequisite for institutional members who are responsible for clearing and guaranteeing the future contracts on the exchange but cannot trade in futures.  Margins are required to be provided by traders and the liability of a member bank is limited to the extent of its equity participation which varies from Rs.10 lakh and Rs.50 lakh.

Housing Finance by Commercial Banks

2.74   The Corporation Bank has been accorded final approval to set up a housing finance subsidiary with an authorised capital of Rs.25 crore and a paid-up capital of Rs.10 crore.

12.   Customer Service

2.75   In order to improve the customer services in banks, a number of measures were taken, viz.,

a)  The increase of individual credit limit under the Electronic Clearing Service (Credit Clearing) from Rs.25,000 to Rs.50,000 with effect from June 1997 which was further raised to Rs.1,00,000 from July 1998.

b)  The ECS (Credit Clearing) scheme which was initially operating in the four metropolitan centres, was extended to four more centres viz. Ahmedabad, Bangalore, Hyderabad and Pune with effect from July 1, 1997 and it has been decided to extend it to eight more centres viz. Bhubaneshwar, Chandigarh, Guwahati, Jaipur, Kanpur, Nagpur, Patna and Thiruvananthapuram with effect from July 1, 1998.

2.76   At the instance of the Reserve Bank, a survey on collection of outstation cheques was carried out by M/s.Dun & Bradstreet Marketing Research Pvt. Ltd. in New Delhi and Mumbai in selected branches of Commercial banks. The survey revealed that there was undue delay in collection of outstation instruments at branches.  The banks were advised to meticulously follow all the instructions issued in connection with collection of outstation cheques based on the recommendations of the Goiporia Committee on customer service.  The banks were also advised to introduce additional measures to reduce the time taken for realisation of cheques such as presentation of cheques drawn on MICR centres through NCC, extensive use of modern telecommunication technology etc.  The banks were advised to monitor the implementation of these instructions through their internal inspection machinery.

13.   Supervisory Issues

Financial Supervision

2.77   During the period from July 1997 to April 1998, the Board for Financial Supervision (BFS) held nine meetings. The Board has been focusing on the supervisory strategy in respect of (a) off-site surveillance for banks, all-India financial institutions and NBFCs, (b) on-site inspection, (c) restructuring the system of bank inspections in terms of focus, process, reporting and follow-up, (d) strengthening the statutory audit of banks and enlarging the scope of utilising the services of chartered accountants in the supervisory process, and (e) strengthening internal control, management information systems, etc. within the supervised institutions as an extension of the task of supervision.

2.78   During the period under review, the Board considered various memoranda placed by the Department of Banking Supervision (DBS) on the performance of banks, financial institutions and subsidiaries of banks, for the period ended March 1996 and March 1997 and in some cases up to a later period ended September 30, 1997.  The Board gave its directions on several regulatory and supervisory issues thrown up in the course of deliberations on the performance of banks as revealed in the inspection reports.

2.79   The Board reviewed the monitoring done by the Department of Banking Supervision in regard to house-keeping in banks such as reconciliation of outstanding entries in inter-branch accounts, inter-bank accounts including Nostro Accounts and balancing of books of accounts.

2.80  The Board also reviewed the progress in the implementation of Technical Assistance Project of Overseas Development Administration [ODA-UK], now DFID, covering certain functional aspects of the Department such as up-gradation of skills of the supervisors through training, up-gradation of the supervisory system through off-site returns and computerisation of the operation of the department.

2.81   The Board considered recommendations of the Shere Working Group on creating separate instrumentality for regulation and supervision of residuary and other non-banking financial companies and extension of Deposit Insurance Scheme.

Advisory Council of BFS

2.82   The Advisory Council considered the paper prepared by the Department of Banking Supervision on the revised approach to annual financial inspections, the focus of such inspections and the content and coverage of inspection reports.  The matters  referred to and considered by the Advisory Council also included reports on capital adequacy standards and consequences of non-compliance/slip-back in the capital adequacy ratio by commercial banks, parameters of a bank's performance [public/private sector] to be disclosed.

2.83   The Council also advised on the new supervisory mechanism for NBFCs and methodology for on-site inspections through outside chartered accountants. It also  approved the modalities for issuance of certificate of registration to NBFCs under the RBI (Amendment) Act, 1997.

Audit Sub-Committee of BFS

2.84   The audit sub-committee of the BFS reviewed the position and the need for more disclosure and transparency in the final accounts of banks.  It was decided that the following seven financial ratios should be disclosed in the notes on account to the annual reports of banks from the year 1997-98.

2.85   The committee also reviewed the procedure for appointment of statutory central auditors of public sector banks and revised their fee structure.  Considering the increased cost of inputs and special validations required to be made by the statutory auditors of banks, it was decided to increase the fees payable to the auditors effective from 1997-98.  The committee also revised the fee structure for conducting the special audit of accounts of NBFCs.

2.86   During the year 1997-98, Annual Financial Inspection was completed in respect of 27 Public Sector banks and 11 Local Head Offices of SBI. The Bank also undertook financial inspection of 35 Private Sector banks and 37 Foreign banks.

2.87   The recommendations of the Working Group on Internal Control and Inspection/Audit System in banks (Jilani Committee) have been implemented. Based on the information received from banks, progress made by both the private sector and the public sector banks in the implementation of the recommendations which are mandatory, has been found to be satisfactory.

Off-site Monitoring and Surveillance

2.88   The off-site monitoring and surveillance system has been introduced from December 1995 quarter for foreign banks and from March 1996 for Indian banks. At present commercial banks are required to submit two types of off-site returns viz., DSB returns and Bank Profile Returns.  In the first tranche of DSB returns, the domestic banks are required to furnish seven reports and foreign banks, five reports, with quarterly data on (i) assets, liabilities and off balance-sheet exposures, (ii) weighting of these exposure, capital base and CRAR, (iii) unaudited operating results, (iv) asset quality, and (v) large credit exposures on single borrowers or borrower group exposures. The two additional reports for domestic banks require reporting on connected and related lending and profile of ownership, control and management (half yearly). Commercial banks have been advised to file Banks Profile Returns on annual basis. These returns provide an overview of each bank's operations for four years (including  the current year) and serve as a basis for drawing inferences about bank's asset quality, profitability and solvency position.

2.89   The off-site monitoring system (OSMOS) has been operationalised on Electronic Data Processing (EDP) basis, with the banks filing the reports on floppy diskettes with effect from March 1997.  The reports, which are to be received within 21 days from the end of the quarter from foreign banks and new Private Sector banks and within one month from the end of the quarter in respect of the remaining banks, are added to the data base.  A core group of analysts examine the returns and look for signals of supervisory concern which are then taken up by  Monitoring Divisions with the concerned banks. Peer group formed on the basis of asset sizes are used to prepare First Signal Reports every quarter. Based on the data bases built over the quarters, macro analytical reports on comparative performance of banks within their peer group, concentration of advances amongst large borrower/groups, spread of NPAs etc. are also prepared by the analysts for information of top management. A review of the entire banking system is put up to BFS at half-yearly intervals.

2.90   The second tranche of returns, planned to be introduced after the introduction of Asset Liability Management systems in banks, will call for reports on risk exposures (forex, liquidity exposures and gap, interest rate exposures) and consolidated reporting on financial condition and operating results on a group-wise basis. These returns will enable the supervisors to develop their own views on the bank's risk profile and initiate dialogue for corrective action.

2.91   On the basis of DSB data, the Reserve Bank has been preparing analytical reports on individual banks to bring out supervisory concerns, which are taken up with banks as a part of continuous supervision.   Analytical reports are also prepared on certain micro indicators.

Frauds

2.92   The Public Sector Banks have been advised to implement the recommendations of the Ghosh Committee (Committee on Frauds and Malpractices). The Reserve Bank had set up an Advisory Board on Bank Frauds' on February 17, 1997 under the Chairmanship of Shri S.S.Tarapore, former Deputy Governor of the Reserve Bank to advise  on cases referred by the Central Bureau of Investigation (CBI) either directly or through the Ministry of Finance-Government of India for investigation/ registration of cases against bank officers of the rank of General Manager and above.  The Board had started functioning since March 1, 1997 and the Advisory Board will also examine the requests of CBI for sanction for prosecution under Section 197 of the Criminal Procedure Code (CPC) and Section 19 of the Prevention of Corruption Act, 1988. The Board was initially formed with five members including its Chairman. Subsequently, one more member was inducted into the Board in December 1997.

2.93   During the year 1997-98 (July 1997 to March 1998), commercial banks reported 1,827 cases of frauds involving an amount of Rs.377.0 crores. In addition, 8 cases of frauds involving Rs.0.37 crore were reported in the overseas branches of banks. These cases were followed up with the banks for necessary remedial measures and fixing staff accountability. Eight circulars were issued during the year to alert banks about the modus operandi adopted by fraudsters.

Asset - Liability Management (ALM) System

2.94   The Monetary and Credit Policy for the second half of the financial year 1997-98 had indicated that broad guidelines for managing liquidity and interest rate risks faced by banks would be issued to them.  Detailed draft guidelines in this respect were circulated to scheduled commercial banks (excluding RRBs) on September 10, 1998, addressing banks' exposures to credit and market risks.  It is the intention of the Reserve Bank to ensure that banks adopt ALM system from April 1, 1999.  The draft guidelines have been circulated to elicit banks' views on the subject, and the difficulties they may face in the implementation of the System.

Debt Recovery Tribunals

2.95   The need for Debt Recovery Tribunals (DRTs) was felt in the light of difficulties in recovering  loans in the normal course due to lengthy legal proceedings involved in the recovery of suit filed loans as also the high cost of litigation.  Consequent upon the enactment of Recovery of Debts due to Banks and Financial Institutions Act, 1993, Debts Recovery Tribunals (DRTs) were established so far at Ahmedabad, Bangalore, Chennai, Calcutta, Guwahati, Jaipur, New Delhi, Patna with an Appellate Tribunal at Mumbai and Jabalpur, for expeditious adjudication and recovery of debts. As at end December 1997, 1841 cases have been disposed off by DRTs and Rs.182.05 crore was recovered.