Volume V ♦ Issue 8

February 2009

MONETARY AND CREDIT INFORMATION REVIEW

POLICY

The broad objective of the FLCCs will be to provide free financial literacy/education and credit counselling. The specific objectives of the FLCCs would be to:

(i) provide financial counselling services through face-to-face interaction as well as through other available media like e-mail, fax, mobile, etc., education on responsible borrowing, proactive and early savings, and offer debt counselling to individuals who are indebted to formal and/ or informal financial sectors;

(iii) make people aware of the advantages of being connected with the formal financial sector;

(iv) formulate debt restructuring plans for borrowers in distress and recommend them to formal financial institutions, including cooperatives, for consideration; and

(v) take up any such activity that promotes financial literacy, awareness of banking services, financial planning and amelioration of debt-related distress of individuals.

To start with, banks may set up trusts/societies for running the FLCCs, singly or jointly with other banks. A bank may induct respected local citizens on the Board of such a trust/society.

Serving bankers should not be included in the Board. To begin with, FLCCs may be fully funded by bank/s.

The counselling centres should maintain arm's length relationship with the parent bank and, preferably should not be located in the bank's premises to avoid any impression that such centres are a part of the bank itself. The centres should not promote the products of their parent banks. Initially, if the parent bank's branch premises are used to minimize cost, the FLCC should be kept completely separated with a separate entrance and a different look and feel from that of the bank's branch so as to maintain a distinct identity from the parent bank. Banks' officers may make dummy calls or incognito visits for effective supervision and monitoring of the activities of such trusts/societies.

Banks should put in place proper infrastructure with adequate communication and networking facilities. They should have a toll free line, e-mail and fax facilities for easy contact. Separate cubicles could be set up to maintain privacy/ confidentiality of the discussions with clients.

To maximise the outreach of the counselling centre, mobile units should also be set up to service all the blocks in the districts.

and curative. In case of preventive counselling, the centres could provide awareness regarding cost of credit, availability of backward and forward linkages, where warranted, etc. The clients could be encouraged to avail of credit on the basis of their repaying capacity. Preventive counselling can be through the media, workshops and seminars.

FLCCs may consider introducing a generic financial education module in vernacular language. Broadly, the module content can include the need for savings, budgeting, advantages of banking with formal financial institutions, concept of risk and rewards and time value of money, various products offered by banks, insurance companies, etc. The module may also cover aspects relating to deposits and various other financial products, the method of calculation of interest on savings bank accounts, fixed deposits, etc., and the method of compounding.

FLCCs should also give due emphasis to customers' rights under the fair practices code, benefits of nomination facilities, operation of accounts, etc.

Preventive counselling may be made mandatory for individual borrowers based on their income level or size of loan. Such mandatory credit counselling could be made a part of the fair lending practice of banks.

In the case of curative counselling, clients may approach the counselling centres to work out individual debt management plans for resolving their unmanageable debt portfolio. Here, the centres could work out effective debt restructuring plans that could include repayment of debt to informal sources, if necessary, in consultation with the bank branch.

Banks may encourage their own customers in distress or customers of any bank to approach the FLCCs set up by them. Information about such FLCCs can be provided through the various fora available under the Lead Bank Scheme. Banks may evolve trigger points to refer cases, where there are early warning signals, to the counselling centres before taking measures for recovery. Timely intervention would help to arrest any further financial deterioration of the borrower.

To ensure that there is no conflict of interest, persons managing the FLCC should not be staff of the bank.

To help the customers in making informed decisions, all banks should display on their websites necessary information regarding fees, charges, etc., as prescribed in the Reserve Bank’s circular of November 3, 2008. Banks should also place on their websites, details of the services offered by the FLCCs opened by them.

With a view to enhancing the security of online credit/debit card transactions, the Reserve Bank has advised banks to mandatorily put in place from August 1, 2009 -

i) a system of providing for additional authentication/ validation based on information not visible on the cards for all on-line ‘card not present’ transactions except interactive voice recognition (IVR) transactions; and

ii) a system of "Online Alerts" to the cardholder for all 'card not present' transactions of the value of Rs. 5,000 and above.

The real time gross settlement (RTGS) system timings have been extended from 12.00 noon to 12.30 hours for customer transactions and from 14.00 to 14.30 hours for inter­bank transactions on Saturdays. The new RTGS cut off timings for customer and inter-bank transactions are:

•  Extend their customer windows commensurate with the Reserve Bank’s business sessions.

•  Popularise   the   products   by   educating   customers/ advertisements, etc.

•  Create a user friendly atmosphere at the branch level.

•  Identify branches which have the potential but are not using the system.

•  Incentivise the branches for extensive use of RTGS.

•  Make their entire branch network RTGS enabled.

•  Expedite providing RTGS facility to the customers of RRBs sponsored by respective banks.

ATM Transactions - Reimbursement of Wrongful Debits

Pursuant to receiving a number of complaints from bank customers regarding debit of accounts even though the automated teller machines (ATMs) have not disbursed cash for various reasons, the Reserve Bank has advised banks to reimburse to customers the amount wrongfully debited within a maximum period of 12 days from the date of receipt of customer complaints.

Indo - Nepal Remittance Scheme - Service Charges Revised

Prudential Inter-bank Counter Party Limit

Non-scheduled UCBs in Tier I are presently exempted from maintaining statutory liquidity ratio (SLR) in government and other approved securities up to 15 per cent of their net demand and time liabilities (NDTL) provided the amount is held in interest bearing deposits with public sector banks and IDBI Bank Ltd. These deposits are exempted from the prudential limit on inter-bank exposure limits indicated above.

Balances maintained by UCBs with the central cooperative bank of the district concerned or with the state cooperative bank of the state concerned are treated as SLR under the provisions of Section 24 of the Banking Regulation Act, 1949 (AACS). These deposits are exempted from the prudential limit on inter­bank exposure limits indicated above.

The placement of deposits by non-scheduled UCBs with scheduled UCBs would continue to be as per the guidelines issued by the Reserve Bank on May 17, 2003. The amount of deposits placed by a non-scheduled UCB with any scheduled UCB should not, however, exceed 5 per cent of the depositing bank's total deposit liabilities as on March 31 of the previous year. The total inter-UCB deposits accepted by a scheduled UCB should not exceed 10 per cent of its total deposit liabilities as on March 31 of the previous financial year.

Keeping in view the above prudential limits, UCBs should formulate a policy taking into account their funds position, liquidity and other needs for placement of deposits with other banks, the cost of funds, expected rate of return and interest margin on such deposits, counter party risk, etc, and place it before their Board of Directors. The Board should review the position at least at half yearly intervals.

UCBs may invest in -

(a) "A" or equivalent and higher rated commercial papers (CPs), debentures and bonds.

(b) Units of debt mutual funds and money market mutual funds (MMMFs).

Restrictions

(i) Investment in perpetual debt instruments is not permitted.

(ii) Investment in unlisted securities would be subject to a minimum rating prescribed at (a) above and should not exceed 10 per cent of the total non-SLR investments at any time. Where banks have already exceeded the prescribed limit, no further investment in such securities would be permitted.

(iii) Investment in deep discount/zero coupon bonds would be subject to the minimum rating as stated above and comparable market yields for the residual duration.

(iv) Investment in units of mutual funds, other than units of debt mutual funds and MMMFs, are not permitted. The existing holding in units of mutual funds other than debt mutual funds and MMMFs, including those in Unit Trust of India (UTI), should be disinvested. Till such time that they are held in the books of the UCB they would be treated as non-SLR investments for reckoning the 10 per cent limit. UCBs should, however, review their risk management policy so as to ensure that they do not have disproportionate exposure in any one scheme of a mutual fund.

(v) Non-SLR investment, other than in units of debt mutual funds and MMMFs, and CPs, should be in instruments with an original maturity of over one year.

(vi) Fresh investments in shares of All India Financial Institutions (AIFIs) are not permitted. The existing share holding in these institutions should be phased out and till such time that they are held in the books of the UCB, they will be treated as non-SLR investments for reckoning the 10 per cent limit.

(vii) All fresh investments under the non-SLR category should be classified under ‘held for trading’ (HFT)/’available for sale’ (AFS) categories only and ‘marked to market’ as applicable to these categories of investments.

(viii) All non-SLR investments would be subject to the prescribed prudential single/group counter party exposure limits.

(ix) All transactions for acquisition/sale of non-SLR investments in secondary market should be undertaken only with commercial banks/primary dealers as counterparties.

FEMA

Permissible Debits

• Payment for import/purchase of rough diamonds from overseas/local sources.

• Payment for purchase of cut and polished diamonds, coloured gemstones and plain gold jewellery from local sources.

• Payment for import/purchase of gold from overseas/ nominated agencies and repayment of USD loans availed from the bank.

• Transfer to rupee account of the exporter.

Edited and published by Alpana Killawala for the Reserve Bank of India, Department of Communication, Central Office, Shahid Bhagat Singh Marg, Mumbai - 400 001 and printed by her at Onlooker Press, 16, Sassoon Dock, Colaba, Mumbai - 400 005. For renewal and change of address please write to the Chief General Manager, Press Relations Division, Reserve Bank of India, Central Office Building, 12th floor, Fort, Mumbai - 400 001 without enclosing DD/cheque. MCIR is also available on Internet at www.mcir.rbi.org.in