235
FEBRUARY
1999

The Reserve Bank of India has given autonomy to banks, including foreign banks operating in India, to raise rupee subordinated debt as tier II capital, subject to certain terms and conditions. Banks are required to ensure that the terms and conditions mentioned below are strictly adhered to.

The amount of subordinated debt to be raised may be decided by the Boards of Directors of the banks.

Subordinated debt instruments with an initial maturity period of less than five years, or with a remaining maturity of one year should not be included as part of tier-II capital. Further, they should be subjected to progressive discount as they approach maturity at the rates shown below :

The bonds should have a minimum maturity of five years. However, if the bonds are issued in the last quarter of the year, i.e., from January to March, they should have a minimum tenure of 63 months.

The interest rate should not be more than 200 basis points above the yield on Government of India securities of equal residual maturity at the time of issuing the bonds. The instruments should be 'vanila' with no special features like options, etc.

The instruments should be fully paid-up, unsecured, subordinated to the claims of other creditors, free of restrictive clauses and should not be redeemable at the initiative of the holder, or without the consent of the Reserve Bank.

Necessary permission from the Reserve Bank should be obtained for issuing the instruments to non-resident Indians/overseas corporate bodies/financial institutional investors.

Banks should comply with the terms and conditions, if any, set by SEBI/other regulatory authorities in regard to issue of the instruments.

Nationalised banks should obtain permission from the Government for issuing the instruments.

In the case of foreign banks rupee subordinated debt should be issued by the head office of the bank, through the Indian branch after obtaining specific approval of the Reserve Bank.

Subordinated debt instruments should be limited to 50 per cent of tier-I capital of the bank. These instruments, together with other components of tier II capital, should not exceeed 100 per cent of tier I capital.

Banks should not grant advances against the security of their own bonds.

The funds collected by various branches of the bank or other banks for the issue, and held pending finalisation of allotment, should be taken into account for the purpose of calculating reserve requirements.

To the extent the instruments are treated as tier II capital (after discount at the specified rates), they would be exempted from reserve requirements. However, in view of the multiple prescriptions on different categories of liabilities, including prescription of a zero reserve requirement on certain liabilities, as stipulated under the law, effective CRR and SLR maintained by the bank on the total demand and time liabilities, including the total amount raised under subordinated debt, should not be less than 3 per cent and 25 per cent respectively.

Investments by banks in subordinated debt of other banks should be assigned 100 per cent risk weight for capital adequacy purpose.

For issue of subordinated debt instruments in foreign currency, as well as for borrowing from head office, for inclusion in tier II capital, prior approval of the Reserve Bank of India would be required.

The Reserve Bank of India has issued final guidelines on Asset-Liability Management (ALM) Systems for implementation by banks effective from April 1, 1999. The guidelines mainly address liquidity and interest rate risks and have been formulated to serve as a benchmark for banks not having formal ALM systems. Banks which have already adopted more sophisticated systems, have been permitted to continue their existing systems but have been asked to finetune their management information systems (MIS) to be compatible with the ALM system suggested in the guidelines. Other banks have been asked to upgrade their MIS to meet the prescriptions of the new ALM system. Keeping in view, however, the prevailing MIS and the low level of computerisation, banks have been asked to ensure a coverage of at least 60 per cent of their assets and liabilities to start with. Banks have also been asked to set targets in the interim, for covering 100 per cent of their business by April 1, 2000.

The Reserve Bank had, in September 1998, issued broad draft guidelines for asset-liability management systems in banks. The draft guidelines were reviewed by the Reserve Bank in the light of the feedback received from the banks. The final guidelines issued on the basis of this feedback require banks to give adequate attention to putting in place an effective ALM system. Banks have been asked to set up an internal Asset-Liability Committee (ALCO), headed by the CEO/CMD or the ED. The Management Committee or any specific Committee of the Board should oversee the implementation of the system and review its functioning periodically.

The statement of structural liquidity, designed to measure the maturity profile of cash flows should be prepared at quarterly intervals. The intention is to eventually move over to a monitoring system on a fortnightly basis by April 1, 2000. As a prudent measure, banks have been advised to operate within a negative gap of 20 per cent of cash outflows during 1-14 days and 15-28 days time periods. Banks which have structural mismatches and need higher limits, could operate with higher limits with the approval of the board/management committee. Such banks should, however, comply with the prudential limit by April 1, 2000.

The statement of interest rate sensitivity should be prepared at quarterly intervals and moved over to monthly schedule by April 1, 2000. The statement would provide useful feedback on interest rate risk faced by banks. Banks' boards should fix prudent levels of earnings at risk (EAR) or net interest margin (NIM) to minimise the risk profile.

Banks are required to capture the impact of embedded options, exercised by depositors/borrowers to fine-tune ALM practices. Banks should also evolve internal transfer pricing mechanism for supplementing the efficacy of ALM techniques.

The final guidelines are available on the website of the Reserve Bank of India (URL: http://www.rbi.org.in).

The Reserve Bank has permitted banks to extend bridge loans against the expected proceeds of non-convertible debentures, external commercial borrowings, global depository receipts and/or funds in the nature of foreign direct investment, in addition to expected equity flows/issues, provided the bank is satisfied that the borrowing company has made firm arrangements for raising the aforesaid resources/funds. The other terms and conditions for providing bridge loans remain unchanged.

The Reserve Bank had, in October 1997, permitted banks to sanction bridge loans to companies for periods not exceeding one year against expected equity flows/issues. Such loans were required to be accomodated within the ceiling of 5 per cent of the incremental deposits of the previous year prescribed for banks' investment in ordinary shares/convertible debentures of corporates, including shares of public sector units, loans sanctioned to corporates for meeting promoters' contribution and in units of mutual funds schemes the corpus of which was not exclusively invested in corporate debt instruments.

The Reserve Bank has reviewed its instructions relating to eligibility of direct housing finance for achievement of annual housing finance targets. It has consequently decided to immediately withdraw the stipulation regarding the age of old dwelling units (so far restricted to five years), as lending banks are expected to evolve their own operational guidelines/norms governing housing finance which take into account the technical, commercial and financial feasibilities of the old houses.

The Reserve Bank of India had advised banks to put into place appropriate time bound stategies to assess, convert, validate and implement fully compliant systems by December 31, 1998. They were also advised to formulate contingency plans to ensure business continuity in the event of Y2K induced breakdowns, and to forward a copy of the contingency plans approved by their boards of directors, to the Reserve Bank, by March 31, 1999.

From the feedback received from banks, the Reserve Bank has observed that some banks are lagging behind in their compliance efforts. The Reserve Bank has therefore reiterated the importance of tackling the Y2K issue on a war footing, as non-compliance could result in serious systemwide consequences, apart from business continuity problems for banks, and loss to customers. The Reserve Bank has also emphasised the fact that the issue requires the attention and commitment of the top management, and has advised banks to ensure adequate budgets for their Y2K compliance programmes.

The Reserve Bank has decided to enforce a set of measures if in its assessment, the banks' efforts towards Y2K compliance are less than satisfactory. This is to ensure that Y2K issues are adequately addressed to by banks and also to keep up with international supervisory practices. While the specific course of action will be decided by the Reserve Bank, after taking into account the findings of on-site inspection and the information contained in the monthly reports submitted by the banks, the enforcement measures may include one or combinations of the following:

The Reserve Bank has further liberalised regulations relating to release of foreign exchange to students going abroad for studies, as under:

The Reserve Bank of India, in consultation with the Department of Electronics (DOE), Government of India, has decided that besides computer software in non-physical form ( direct data transmission through dedicated earth stations/satellite links), export of video/ TV software and all other types of software products/packages should be declared on the SOFTEX (software export declaration) form. The SOFTEX form ( form no.AB) has been revised with effect from February 1, 1999. It is also available on the Reserve Bank website (/en/web/rbi.

The Reserve Bank has revised its instructions regarding the issue/use of International Credit Cards as under:

The Reserve Bank has examined the question of matching of GR forms in case of export of flowers for auctions, where the correct realisable value is not known at the time of export, and realisation is dependant on the result of the auctions held abroad. Authorised dealers have been advised, in such cases to dispose of the GR forms relating to export of flowers for auctions abroad, on the basis of suitable documentary evidence being produced by the exporter indicating the price determined at the auctions.

The Reserve Bank has decided that authorised dealers should complete form A4 for all credit transactions of Rs.100,000 and above. For debit transactions, form A-4 should be completed only if the transaction relates to investment in shares/securities/commercial paper of Indian companies, or for purchase of immovable property in India, if the amount involved is Rs.100,000 or more. Authorised dealers are required to submit form A4 to the Reserve Bank for debits and credits to non-resident accounts of all types other than the accounts of non-resident banks, requiring approval of the Reserve Bank or for reporting to the Reserve Bank.

The Reserve Bank has clarified that authorised dealers may also allow change of tenor of export bills drawn on the original buyer/ alternate buyer, provided the revised due date of payment, falls within six months from the date of shipment, and the change of tenor takes place before the original due date of payment of the bill.

In terms of exchange control regulations, prior approval of the Reserve Bank is not necessary, if the goods after shipment, are to be transferred to a party other than the original buyer, provided among other things, the realisation of export proceeds is not delayed beyond six months from the date of shipment.