The Reserve Bank has advised all scheduled commercial banks to formulate a comprehensive and transparent policy covering issues relating to (i) immediate credit of local/outstation cheques (ii) time frame for collection of local/outstation cheques and (iii) interest payment for delayed collection. Consequently, the Reserve Bank’s earlier instructions in this regard now stand withdrawn.

While framing their cheque collection policy, banks have been advised to -

• Take into account their technological capabilities, systems and processes adopted for clearing arrangements and other internal arrangements for collection through correspondents.
• Review their existing arrangements and capabilities and work out a scheme for reduction in collection period.
• Take adequate care to ensure that the interests of the small depositors are fully protected.
• Ensure that the policy is integrated with their deposit policy formulated in line with the Indian Banks’ Association’s (IBA’s) model deposit policy.
• Lay down their liability by way of interest payments due to delays for non-compliance with the standards set by them. Compensation by way of interest payment, where necessary, should be made without any claim from the customer.

Banks should place the policy before their Board alongwith the Reserve Bank’s instructions in this regard and the Board’s specific approval should be obtained on the reasonableness of the policy.

Banks should give wide publicity to the policy by placing it on the web-site and also displaying it on the notice board in their branches. Banks should clearly apprise their customers of the assurances on the services on these aspects at the time of establishment of the initial relationship be it as a depositor, borrower or otherwise. Further, banks should also take necessary steps to keep the customers duly informed of the changes in the policy formulated by them from time to time.

Banks have been further advised that the Reserve Bank and the Banking Ombudsman would continue to exercise the prerogative to examine any dispute which may arise between a bank and any of its customer, vis-à-vis their published policies and procedures.

To bring consistency in the procedure of fixing interest rates on non-resident (external) rupee (NRE) and foreign currency nonresident (banks) FCNR (B) deposits, banks have been advised to fix the interest rates on FCNR (B) deposits on the basis of LIBOR/ SWAP rates as prevailing on the last working day of the preceding month, effective from November 1, 2004. The ceiling on interest rates would, however, continue to be the LIBOR/SWAP rate minus 25 basis points, as hitherto, except in the case of Yen deposits, where banks have the freedom to set the FCNR (B) deposit rates which may be equal to or less than the LIBOR.

• Annual inflation, as measured by point-to-point variations in the wholesale price index, rose from 4.6 per cent at end-March to 8.3 per cent in end-August but has since come down to 7.1 per cent by October 9, 2004.
• The point-to-point inflation rate based on WPI for the year 2004-05 is projected at around 6.5 per cent for policy purposes as against of 5.0 per cent projected earlier.
• Money supply (M3) growth in this fiscal year (up to October 1^, 2004) lower at 5.4 per cent as compared with 7.8 per cent in the previous year.
• Projected expansion of money supply (M3) for 2004-05 retained at 14.0 per cent.
• A robust increase in non-food credit by 11.5 per cent in this fiscal year (up to October 1, 2004) as compared with an increase of 6.0 per cent in the previous year.
• The Central Government has completed gross market borrowings of Rs.75,044 crore in the fiscal year (up to October 21, 2004), which is 49.8 per cent of the budgetary amount.
• The Central Government has completed net market borrowings of 29.0 per cent of the budgeted amount up to October 21, 2004.
• The market borrowing programme in the remaining part of the year needs to be calibrated carefully in view of strong credit demand.
• Financial markets have remained generally stable though the government securities market tended to show some nervousness in recent months.
• The market interest rates have displayed some upward movement, particularly at the longer end.
• Banks advised to prepare themselves to implement the capital charge for market risk as envisaged under Basel II norms in a phased manner by end-March 2006.

It has been decided that until further notice, the interest rates on NRE deposits for one to three years maturity contracted with effect from November 1, 2004 should not exceed the LIBOR/SWAP rates, as on the last working day of the previous month, for US dollar of corresponding maturity plus 50 basis points. The revised interest rates for three year deposits would also be applicable in case the maturity period exceeds three years and to NRE deposits renewed after their present maturity period.

In order to provide uniformity in the tenor of term deposits, banks have been permitted to reduce the minimum tenor of domestic/ordinary non-resident (NRO) term deposits, even those below Rs.15 lakh, from 15 days to 7 days. Banks would, however, continue to have the freedom to offer differential rates of interest on term deposits of Rs.15 lakh and above. The revised instructions are effective from November 1, 2004.

Earlier, banks could accept term deposits of Rs.15 lakh and above for a minimum maturity period of 7 days. In the case of term deposits of less than Rs.15 lakh, the minimum maturity period was15 days.

Units set up in electronics hardware technology parks (EHTPs), software technology parks (STPs) and bio-technology parks (BTPs) and 100 per cent export oriented units (EOUs) are now allowed to realise and repatriate the full value of export proceeds within a period of twelve months from the date of export. This relaxation would be available for exports made on or after September 1, 2004. The existing guidelines regarding crediting 100 per cent of the foreign exchange earnings to the exchange earners’ foreign currency (EEFC) account would, however, continue.

With a view to providing an option to issuers to raise short-term resources through commercial paper (CP) as also an avenue to investors to invest in quality short-term papers, the minimum maturity period of CP has been reduced from 15 days to 7 days with immediate effect.

The Reserve Bank has advised banks that they may extend finance to non-banking finance companies (NBFCs) against second hand assets financed by them. Banks may also extend financial assistance to customers directly for purchase of second hand assets.

Banks have been further advised to formulate suitable loan policies with their board of directors’ approval to finance second hand assets, both directly and through NBFCs.

Earlier, banks were precluded from granting finance against existing assets whether by way of term loans for purchase of such assets or by way of finance to leasing companies for purchase and re-lease of such assets.

With a view to bringing in the urban poor into the formal financial system, it has been decided that banks may advance loans to distressed urban poor to prepay their debt to non-institutional lenders, against appropriate collateral or group security. Banks may formulate suitable guidelines in this regard with their board of directors’ approval. Urban poor in this case would include families in the urban areas who are below the poverty line.

Further, banks may classify such loans to the urban poor, as loans to weaker sections, within the priority sector. Such loans may, however, be reported under a separate sub-head, "loans to urban poor indebted to non-institutional lenders" under the broad head "other priority sector" in the returns submitted to the Reserve Bank.

In order to facilitate smooth flow of credit to small scale industries (SSIs), the composite loan limit for SSI entrepreneurs has been enhanced from Rs.50 lakh to Rs.1 crore.

In order to further improve flow of credit to the housing sector, banks may, with the approval of their boards, extend direct finance to housing sector up to Rs. 15 lakh irrespective of location, as part of their priority sector lending.

Banks have been advised to make efforts to increase their disbursements to small and marginal farmers to 40 per cent of their direct advances under special agricultural credit plans (SACP) by March 2007. Banks have also been advised to separately furnish data in respect of their lending to small and marginal farmers in the half-yearly statements on disbursements under SACP.

With a view to further improving credit delivery to the agriculture sector, it has been decided to increase the limit on advances under priority sector for dealers in agricultural machinery including drip/sprinkler irrigation systems from Rs. 20 lakh to Rs.30 lakh and for distribution of inputs for allied activities from Rs.25 lakh to Rs.40 lakh.

Edited and published by Alpana Killawala for the Reserve Bank of India, Press Relations Division, Central Office, Shahid Bhagat Singh Marg, Mumbai-400 001 and printed by her at Alco Corporation, A-2, 72, Shah & Nahar Ind. Estate, Lower Parel (West), Mumbai - 400 013. Readers desirous of subscribing may remit the subscription, by way of cheque/DD payable at Mumbai to the Director, DRRP (Sales Section), DEAP, Reserve Bank of India, Amar Building, Sir P. M. Road, P. B. No. 1036, Mumbai - 400 001. Also available on Internet at www.cir.rbi.org.in