Volume XIII Issue 1
July 2016

MONETARY AND CREDIT INFORMATION REVIEW

Banking Regulation

Central KYC Registry set up

The Government of India has authorised the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) to act as, and to perform the functions of the Central KYC Records Registry (CKYCR). All Regulated Entities (REs) shall capture KYC information for sharing with the CKYCR in the manner prescribed for ‘individuals’ and ‘Legal Entities’. The Reserve Bank of India on July 8, 2016 modified its Know Your Customer (KYC) Directions, 2016 as under:

i. The ‘live run’ of the CKYCR has started from July 15, 2016 in phased manner.

ii. In the first phase, Scheduled Commercial Banks (SCBs) have been asked to upload the KYC data with CERSAI, in respect of new individual accounts opened on or after July 15, 2016.

iii. REs other than SCBs may also participate in the live run of CKYCR from July 15, 2016.

iv. Those REs which are not yet ready to join CKYCR process immediately, have been asked to take steps to prepare their systems for uploading the KYC data in respect of new individual accounts so that the same is complete as soon as possible in a time bound manner.

v. REs have been asked to prepare a plan for uploading the data in respect of existing individual accounts and include the same in their KYC Policy.

vi. Operational Guidelines for uploading the KYC data have been released by CERSAI. Further, ‘Test Environment’ has also been made available by CERSAI for the use of REs. (/en/web/rbi/-/notifications/amendment-to-master-direction-on-kyc-operationalisation-of-central-kyc-registry-ckycr-and-kyc-norms-for-foreign-portfolio-investors-fpis-10498)

Basel III Framework on Liquidity Standards

The Reserve Bank, on July 21, 2016 decided that in addition to previous limits, banks will be permitted to reckon government securities held by them up to another 1 per cent of their Net Demand and Time Liabilities (NDTL) under Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) within the mandatory Statutory Liquidity Ratio (SLR) requirement as level 1 High Quality Liquid Assets (HQLA) for the purpose of computing their Liquidity Coverage Ratio (LCR). Hence, the total carve-out from SLR available to banks would be 11 per cent of their NDTL. For this purpose, banks should continue to value such reckoned government securities within the mandatory SLR requirement at an amount no greater than their current market value (irrespective of the category of holding the security, that is, Available for Sale(AFS), Held for Trading (HFT) or Held to Maturity (HTM).

At present, the assets allowed as the Level 1 HQLAs for the purpose of computing the LCR of banks, inter alia, include Government securities in excess of the minimum SLR requirement and, within the mandatory SLR requirement, Government securities to the extent allowed by the Reserve Bank under Marginal Standing Facility (MSF) [presently 2 per cent of the bank’s NDTL] and under FALLCR [presently 8 per cent of the bank’s NDTL]. (/en/web/rbi/-/notifications/basel-iii-framework-on-liquidity-standards-liquidity-coverage-ratio-lcr-liquidity-risk-monitoring-tools-and-lcr-disclosure-standards-10522)

Guidelines for Relief Measures by Banks

In view of the difficulties faced by farmers in areas affected by natural calamities, the Reserve Bank, on June 30, 2016, advised all scheduled commercial banks to act with empathy and consider restructuring and granting fresh loans without waiting for the receipt of the insurance claims, in cases where there is reasonable certainty of receipt of the claim. This decision has been taken with an eye on present issues in restructuring the loans in the areas affected by natural calamities. (/en/web/rbi/-/notifications/guidelines-for-relief-measures-by-banks-in-areas-affected-by-natural-calamities-utilisation-of-insurance-proceeds-10468)

Payment and Settlement Systems

Settlement System under ACU

As the payment channel for processing Asian Clearing Union (ACU) Euro transactions is under review, the Reserve Bank on June 30, 2016 temporarily suspended operations in ‘ACU Euro’ with effect from July 1, 2016. All eligible current account transactions including trade transactions in ‘Euro’ are permitted to be settled outside the ACU mechanism until further notice.

It has been done in consonance with the earlier mechanism wherein the participants in ACU mechanism had the option to settle their transactions either in ‘ACU Dollar’ or in ‘ACU Euro’. The ‘ACU Dollar’ and ‘ACU Euro’ is equivalent in value to one US Dollar and one Euro, respectively. (/en/web/rbi/-/notifications/settlement-system-under-asian-clearing-union-acu-10473)

Financial Market Regulation

Demat Account Holders to have access to NDS-OM

It has been decided to allow Demat Account Holders of National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) to put through trades in Government Securities on the Negotiated Dealing System – Order Matching (NDS-OM) platform through their respective Depository Participant (DP) bank which is an Subsidiary General Ledger (SGL) Account Holder and a direct member of NDS-OM and Clearing Corporation of India Ltd.(CCIL).

The Reserve Bank on July 28, 2016 advised the CCIL to put in place necessary arrangements in coordination with the depositories, namely, NSDL and CDSL to enable demat account holders to trade on NDS-OM.

The decision was taken based on the recommendations of an Implementation Group with representation from all the stakeholders to recommend specific measures to enable seamless movement of securities from Subsidiary General Ledger (SGL) form to demat form and vice versa and to provide demat account holders a functionality to put through trades on NDS-OM. (/en/web/rbi/-/notifications/retail-participation-by-demat-account-holders-in-the-government-securities-market-access-to-nds-om-platform-10533)

Foreign Exchange Management

Reporting of Bank Guarantee Service Imports discontinued

On a review of the reporting requirements and to reduce the burden of compliance, AD Category I banks with effect from July 7, 2016 are not required to report to the Chief General Manager-in- Charge, Foreign Exchange Department, Foreign Investments Division, Reserve Bank of India, Central Office, Mumbai-400001 details about invocation of bank guarantee for service imports. They may, however, maintain records of such invocations and furnish the required details to Reserve Bank whenever sought.

AD Category-I banks were permitted to issue guarantees in favour of a non-resident service provider on behalf of their resident customers importing services, subject to certain conditions. AD Category-I banks were also advised to report to the Chief General Manager-in-Charge, Foreign Exchange Department, Foreign Investments Division Reserve Bank of India, Central Office, Mumbai for details about invocation of bank guarantee for service imports. (/en/web/rbi/-/notifications/discontinuation-of-reporting-of-bank-guarantee-on-behalf-of-service-importers-10489)

ECB Approval Process rationalised

In order to rationalise and expedite the process of giving approval, the Reserve Bank on June 30, 2016 decided that External Commercial Borrowings (ECB) proposals received in the Reserve Bank above a certain threshold limit (refixed from time to time) would be placed before the Empowered Committee. The Reserve Bank would take a final decision in the cases taking into account the recommendations of the Empowered Committee.

Earlier, all ECB cases coming under the approval route were required to be considered by an Empowered Committee set up by the Reserve Bank based on the set parameters. (/en/web/rbi/-/notifications/external-commercial-borrowings-ecb-approval-route-cases-10472)

Currency Management

Exchange of Soiled/ Mutilated/ Imperfect Notes

To improve customer service and enhance customer protection, the Reserve Bank on July 14, 2016 modified the procedure for the facility of exchanging mutilated/ imperfect notes under Note Refund Rules, 2009 at designated bank branches and non-chest branches as under:

Exchange of soiled notes

i) Notes presented in small number: Where the number of notes presented by a person is up to 20 pieces with a maximum value of ₹ 5000 per day, banks should exchange them over the counter, free of charge.

ii) Notes presented in bulk: Where the number of notes presented by a person exceeds 20 pieces or ₹ 5000 in value per day, banks may accept them, against receipt, for value to be credited later. Banks may levy service charges as permitted in Master Circular on Customer Service in Banks. In case tendered value is above ₹ 50000, banks are expected to take the usual precautions.

Exchange of mutilated and imperfect notes

While designated branches may continue to follow the procedure for exchanging mutilated and imperfect notes and issue receipt for the notes presented for adjudication, non-chest branches are required to follow the following procedure for notes presented in small numbers and in bulk.

i) Notes presented in small number: Where the number of notes presented by a person is up to 5 pieces per day, non-chest branches should normally adjudicate the notes and pay the exchange value over the counter. If the non-chest branches are not able to adjudicate the mutilated notes, the notes may be received against a receipt and sent to the linked currency chest branch for adjudication. The probable date of payment - not exceeding 30 days -should be informed to the tenderers on the receipt itself. Bank account details should be obtained from the tenderers for crediting the exchange value by electronic means.

ii) Notes presented in bulk: Where the number of notes presented by a person is more than 5 pieces not exceeding Rs. 5000 in value, the tenderer should be advised to send such notes to nearby currency chest branch by insured post giving his / her bank account details (a/c no, branch name, IFSC, etc) or get them exchanged at the currency chest branch in person. All other persons tendering mutilated notes whose value exceeds ₹ 5000 should be advised to approach nearby currency chest branch. Currency chest branches receiving mutilated notes through insured post should credit the exchange value to the account of sender by electronic means within 30 days of receipt of notes. (/en/web/rbi/-/notifications/facility-for-exchange-of-soiled-mutilated-imperfect-notes-10506)

Exchange of Pre-2005 Banknotes at Select RBI Offices

The Reserve Bank has observed that a major portion of the pre- 2005 banknotes have been withdrawn from circulation and only a small percentage of these notes remains in circulation. On a review, therefore, the Reserve Bank decided that from July 1, 2016 the facility of exchanging the pre-2005 banknotes will be available only at the following offices of the Reserve Bank - Ahmedabad, Bengaluru, Belapur, Bhopal, Bhubaneswar, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, New Delhi, Patna, Thiruvananthapuram and Kochi.

The Reserve Bank later also clarified further that banks are expected to continued to receive pre-2005 notes for deposit from their customers as these are legal tender. They, as usual, should not re-issue these notes but should remit them to currency chest branches and from there to the Reserve Bank.

The Reserve Bank had, in December 2015, set June 30, 2016 as the last date for public to exchange pre-2005 banknotes at the identified bank branches and Issue Offices of the Reserve Bank. It is a standard international practice not to keep currency notes from multiple series in circulation at the same time. Soliciting cooperation from members of the public in withdrawing these banknotes from circulation, the Reserve Bank of India had urged them to exchange pre-2005 banknotes at the above mentioned offices of the Reserve Bank, as per their convenience. The Reserve Bank will continue to monitor and review the process so that the public is not inconvenienced in any manner. (/en/web/rbi/-/press-releases/exchange-of-pre-2005-banknotes-at-select-offices-of-rbi-from-july-01-2016-37373)

Financial Inclusion and Development

Performance Audit of Crop Insurance Schemes

The Reserve Bank on June 30, 2016 advised all the scheduled commercial banks to facilitate access to their records pertaining to crop insurance schemes to the audit teams deputed by the Offices of the Principal Accountant General/Accountant General (Audit) in the respective States.

The Comptroller and Auditor General is conducting a performance audit of agricultural crop insurance schemes to examine the efficacy of crop insurance in providing succour to farmers who suffer damage to their crops. This audit is proposed to be conducted in the States of Andhra Pradesh, Assam, Gujarat, Haryana, Himachal Pradesh, Odisha, Maharashtra, Rajasthan and Telangana with the help of the Offices of the Principal Accountant General/Accountant General (Audit) in the respective States.

The Performance Audit will include examination of records of Department of Agriculture Cooperation and Farmers Welfare, Agriculture Insurance Company of India Limited, State Agriculture Department and other related departments. Further, as crop insurance schemes are being implemented with the help of various banks, insurance companies and co-operative institutions, examination of the records of these banks/ insurance companies/cooperative institutions is necessary to ascertain whether crop insurance schemes were being implemented effectively and delivering benefits to the targeted beneficiaries. (/en/web/rbi/-/notifications/performance-audit-of-crop-insurance-schemes-10474)

Limit of Priority Sector Loans given by MFIs doubled

The Reserve Bank on July 28, 2016 notified that the limit of the loans extended by Non-Banking Financial Company - Micro Finance Institutions (NBFC-MFIs) for which the tenure of the loan shall not be less than 24 months, has been raised to ₹ 30,000/- from the earlier limit of ₹ 15,000/-. (/en/web/rbi/-/notifications/priority-sector-lending-targets-and-classification-bank-loans-to-mfis-for-on-lending-qualifying-asset-revised-loan-limit-10530)

Co-operative Banking Regulation

Issue of Authorisation for opening Controlling Offices

The Reserve Bank on June 30, 2016 decided that licensed urban cooperative banks (UCBs) which have implemented Core Banking Solutions (CBS) may, at their discretion, open one controlling office for a cluster of not less than 40 branches without prior approval of the Reserve Bank. They should, however, be fulfilling the following criteria:

• Capital to Risk weighted Assets Ratio (CRAR) of not less than 10 per cent;

• Gross Non Performing Assets (NPAs) of less than 7 per cent and Net NPAs of not more than 3 per cent;

• Net profit in the immediate preceding financial year and overall and net profit in at least in three out of the preceding four financial years;

• No default in maintenance of CRR / SLR during the immediate preceding financial year;

• Sound internal control systems with at least two professional directors on the Board;

• Track record of regulatory compliance and no monetary penalty imposed on the bank for violation of the Reserve Bank directives / guidelines during the two financial years, preceding the year in which the controlling office is proposed to be opened.

UCBs must ensure that the controlling office is opened within their area of operation (as approved by the Reserve Bank) and should not have any direct interface / business transactions with customers. Furthermore, eligible UCBs are required to submit full details regarding opening of such offices, within two weeks to the regional office concerned for issue of license. (/en/web/rbi/-/notifications/issue-of-authorization-for-opening-controlling-offices-regional-zonal-administrative-offices-u-s-23-of-the-banking-regulation-act-1949-aacs-10470)

Long Term (Subordinated) Deposits reviewed

On a review, the Reserve Bank on July 7, 2016 relaxed certain guidelines in raising and redemption of Long Term (Subordinated) Deposits (LTDs) by co-operative banks and prescribed certain disclosure requirements.

Raising of LTDs:

Co-operative banks which fulfil the following criteria as per their latest audited financial statements may raise LTDs without prior approval of the Reserve Bank subject to the condition that the outstanding amount of LTD, which is eligible to be reckoned as Tier II capital, is limited to 50 per cent of Tier I capital:

i. CRAR not less than 10 per cent;

ii. Gross NPA less than 7 per cent and net NPA not more than 3 per cent;

iii. Net profit for at least three out of the preceding four years subject to the bank not having incurred net loss in the immediate preceding year;

iv. No default in maintenance of CRR/SLR during the preceding year;

v. The bank has at least two professional directors on its Board;

vi. Core Banking Solution (CBS) fully implemented;

vii. The bank has a track record of regulatory compliance and no monetary penalty has been imposed on the bank for violation of RBI directives / guidelines during the two financial years preceding the year in which the LTDs are being issued.

Banks which do not meet the above-mentioned criteria may approach the respective Regional Office of Department of Cooperative Bank Supervision for prior permission to raise LTDs.

Redemption / Repayment of LTDs

Co-operative banks may redeem LTDs on maturity without prior permission of the Reserve Bank subject to the condition that banks maintain CRAR above the minimum regulatory requirement prescribed by the Reserve Bank after redemption of LTDs.

Cross-holding of LTDs

Co-operative banks should not invest in LTDs issued by other cooperative banks. However, state co-operative banks may invest in LTDs issued by DCCBs affiliated to them subject to the condition that the amount so invested should be deducted from Tier II capital of the StCB.

Additional Disclosures in LTD application/prospectus/offer documents

Co-operative banks issuing LTD need to make certain disclosures in LTD application/prospectus/offer documents. (/en/web/rbi/-/notifications/long-term-subordinated-deposits-ltds-review-of-guidelines-10487)

Investments in Non-SLR instruments by StCBs/CCBs

With a view to providing greater flexibility to State and Central Co-operative Banks (StCBs/CCBs), the Reserve Bank on July 14, 2016 advised that StCBs/CCBs can invest in Non-SLR instruments subject to the following conditions:

Prudential Limit - Total Non-SLR investments shall not exceed 10 per cent of the total deposits of a bank as on March 31 of the preceding financial year.

Instruments - StCBs/ CCBs may invest in the following instruments:

(a) “A” or equivalent and higher rated Commercial Papers (CPs), debentures and bonds

(b) Units of Debt Mutual Funds and Money Market Mutual Funds

(c) Shares of Market Infrastructure Companies (MICs), for example Clearing Corporation of India Ltd. (CCIL), National Payments Corporation of India (NPCI), Society for World-wide Inter-bank Financial Telecommunication (SWIFT)

Restrictions

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

(b) Fresh investments in equity of All India Financial Institutions (AIFIs) will not be permitted. The existing share-holding in these institutions may be phased out over a period of three years and till the time such investments are held in the books of the bank, they will be reckoned as Non-SLR investments for the purpose of computing the limit.

(c) Investment in units of Mutual Funds, other than units of Debt Mutual Funds and Money Market Mutual Funds, is not permitted. The existing investments in units of Mutual Funds other than Debt / Money Market Mutual Funds should be disinvested. Till the time such ineligible investments are held in the books of the bank, they will be reckoned as Non-SLR investments for the purpose of computing the limit. The banks shall review their risk management policy and ensure that they do not have disproportionate exposure in any one scheme of a Mutual Fund.

(d) Investment in unlisted securities shall be subject to a minimum rating prescribed above and shall not exceed 10 percent of the total Non-SLR investments of a bank at any time. Where banks have already exceeded the said limit, no further investment in such securities shall be made. Investment in Non-SLR debt securities (both primary and secondary market) where the security is proposed to be listed on Stock Exchange(s) may be considered as investment in listed security at the time of making the investment. If such security is not listed subsequently within the period specified, the same will be reckoned for computing the 10 percent limit prescribed for unlisted Non-SLR securities. In case such investments under the unlisted Non- SLR securities lead to breach of 10 percent limit, the bank will not be allowed to make further investments in Non-SLR securities (both primary and secondary market) till such time its investment in unlisted securities is brought within the limit of 10 percent.

(e) Investment in deep discount / zero coupon bonds shall be subject to the minimum rating as stated above and comparable market yields for the residual duration. No investment shall be made in zero coupon bonds unless the issuer has created a sinking fund for all accrued interest and keeps it invested in liquid instruments / securities (government bonds).

(f) Non-SLR investment, other than in units of Debt Mutual Funds and Money Market Mutual Funds, and CPs, shall be in instruments with an original maturity of over one year.

(g) All fresh investments under Non-SLR category shall be classified under “current” category only and marked to market as applicable to these categories of investments.

(h) All Non-SLR investments shall be subject to the prudential limits prescribed for single /group counter-party exposure.

(i) StCBs / CCBs may invest in Certificates of Deposits (CDs) issued by scheduled commercial banks (other than Regional Rural Banks and Local Area Banks) and select All-India Financial Institutions that have been permitted by Reserve Bank to raise short-term resources within the umbrella limit fixed by the Reserve Bank. Investment in CDs will be treated as inter-bank deposits and shall not be reckoned for computing the limit on Non-SLR investments prescribed above.(/en/web/rbi/-/notifications/investments-in-non-slr-instruments-by-state-central-co-operative-banks-10505)

PMJJBY amended

The Reserve Bank after consultation with the Government of India on June 30, 2016 revised the Rules for Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and incorporated a lien clause in the rules of PMJJBY from June 1, 2016. As per the revised rules, claims for deaths which occur during the first 45 days from the date of enrolment will not be paid, effectively meaning that the risk cover will commence only after the completion of 45 days from the date of enrolment into the scheme by the member. However, deaths due to accidents will be exempt from the lien clause. (/en/web/rbi/-/notifications/amendment-in-rules-for-implementation-of-pradhan-mantri-jeevan-jyoti-bima-yojana-pmjjby-10469)

Master Circulars/Directions

The Reserve Bank issued the following Master Directions/Circulars in July, 2016

Edited and published by Alpana Killawala for the Reserve Bank of India, Department of Communication, Central Office, Shahid Bhagat Singh Marg, Mumbai - 400 001. MCIR can be accessed at www.mcir.rbi.org.in