PART TWO : THE WORKING AND OPERATIONS OF THE RESERVE BANK OF INDIA |
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Commercial Banking |
Non-Banking Financial Companies |
Developments in the Exchange Management |
Co-operative Banking |
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COMMERCIAL BANKING |
8.1 Some of the major policy reforms relating to commercial banking undertaken during 1998-99 have already been outlined in Section I of this Report. The thrust of the policy reforms in the banking sphere continued to be on moving towards internationally accepted best practices, including prudential norms, improved and transparent accounting framework, better disclosure norms and higher supervision and regulation standards. The fast changing financial environment has exposed Indian banks to risks in terms of interest rates and currency rates. The Reserve Bank, therefore, issued guidelines to banks relating to asset-liability management (ALM) and advised the banks to adopt appropriate ALM systems from April 1, 1999. It is expected that when the ALM stabilises, the banks would enable themselves to switch over to more sophisticated methods like 'duration gap analysis', 'simulation' and 'value at risk' models for interest rate risk management. Prudential, capital adequacy and provisioning norms, and valuation of the investment portfolio of banks were further strengthened during the year 1998-99 to move towards the international standards. |
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8.2 The present disclosure framework in bank balance sheets has shown that for more systematic analysis of the data and for undertaking meaningful scrutiny of the balance sheets to identify and analyse the key measures of returns and risks assumed by banks and to demonstrate the relationship between returns and risks, a uniform framework is required. A format has accordingly been devised to address this issue. The inputs and outputs that emerge out of the information sought through the format are broadly classified on the CAMELS basis, and are also utilised to measure the liquidity and interest rate risks assumed by banks. |
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8.3 Large arrears in the reconciliation of inter-branch accounts have been a cause of concern. The banks were, therefore, advised in March 1999 that beginning from the accounting year 1998-99, they should make 100 per cent provision for the net debit position in their inter-branch accounts, arising out of the unreconciled entries (both debit and credit) outstanding for more than three years as on March 31, every year. Further, beginning from April 1, 1999, banks were advised to maintain category-wise (head-wise) accounts for various types of transactions put through inter-branch accounts, so that netting can be done category-wise. As on the balance sheet date, banks shall segregate the debit and credit entries which have remained unreconciled for more than three years and arrive at the net position category-wise. Thereafter, the net debit under all categories of inter-branch accounts shall be segregated and a provision equivalent to 100 per cent of the aggregate net debit shall be made. While netting, it should be ensured that net debit under one category is not set off against net credit in another category. |
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8.4 In order to enable the banks to have all the existing instructions relating to advances against shares at one place, a consolidated master circular incorporating certain changes in these instructions was issued in August 1998. In order to help industrial, corporate or other borrowers , banks were allowed to accept security of shares and debentures including promoters' shares as collateral from borrowers other than NBFCs for secured loans granted as working capital or for other productive purposes. In the course of setting up of new projects for expansion of existing business or for the purpose of raising additional working capital required by units other than NBFCs, there may arise situations where such borrowers are not able to find the required funds towards margin, pending mobilisation of long term resources. In such cases, banks could obtain collateral security of shares and debentures by way of margin. Such arrangements would, however, be of a temporary nature and may not be continued beyond a period of one year. Banks have to satisfy themselves regarding the capacity of the borrower to raise the required funds and to repay the advances within the stipulated period. |
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8.5 On April 29, 1998, the Reserve Bank advised the banks that interest rates chargeable on loans and advances granted to depositors against their domestic/NRE term deposits should not exceed PLR. While PLR was coming down, the interest rates on deposits remained unaltered on the existing deposits. In certain cases, this resulted in the interest rates on advances based on PLR being lower than the interest rates on deposits. In order to remove this anomaly, it has been decided in April 1999 that in cases where deposit rates are equal to or more than PLR or less than one percentage point below PLR, the banks will have freedom to charge suitable rates of interest on advances against domestic/NRE term deposits without reference to the ceiling of PLR. Thus, the interest rates on advances shall invariably be more than the interest rates paid on respective deposits. |
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Conversion of NRE Accounts of the Returning Indians into Resident Foreign Currency (RFC) Accounts |
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8.6 In April 1999, banks have been allowed to pay interest at their discretion, at the time of conversion of NRE account into RFC account even if the same has not run for a minimum maturity of six months, subject to the condition that the rate of interest does not exceed the rate payable on savings bank deposits held under the RFC account scheme and the request for conversion is received immediately on return of the NRE account holder to India. |
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Interest Rates on Deposits Accepted in Japanese Yen Under Foreign Currency Non-Resident Accounts (Bank) |
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8.7 The instructions relating to fixing interest rate of LIBOR minus 25 basis points on deposits accepted for six months and above but less than one year under FCNR(B) scheme was reviewed following the representation received from banks that this requirement resulted in negative interest rates for FCNR(B) deposits in Japanese Yen. It has, therefore, been decided that until further notice all scheduled commercial banks authorised to deal in foreign exchange may pay fixed/floating rate of interest 'not exceeding LIBOR' on deposits accepted by them in Japanese Yen for six months and above but less than one year under FCNR(B) Scheme. In respect of deposits of maturity of one year and above, the interest shall be paid within the ceiling of swap rates for the respective currency/ maturity plus 50 basis points. |
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Performance Obligations and Commitments for 1998-99 |
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8.8 In pursuance of the guidelines issued by the Reserve Bank in April 1992 which prescribed minimum capital adequacy norms by Indian banks in a phased manner, Government of India have been contributing additional capital to nationalised banks since 1993-94. The capital is being contributed on the condition that the banks would fulfil certain performance obligations and commitments required from them in respect of various business and functional parameters, in a time bound manner. Although no capital contribution was made by the Government to profit making nationalised banks since 1994-95, commitments from all nationalised banks were obtained and discussions held with them, as this exercise has been useful. However, starting from 1998-99, it was decided at the instance of Government of India, to hold such discussions with only those banks which did not qualify for autonomy in terms of prescribed standards of capital adequacy, non-performing assets and profitability. |
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Subsidiary for Credit Card Business |
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8.9 The State Bank of India was accorded approval for setting up a subsidiary for credit card business viz., State Bank of India Cards and Payment Services Pvt. Ltd. (SBICPSL), jointly with GE Capital Corporation of USA, with a paid-up capital of Rs.100 crore, the bank's share being 60 per cent and the remaining 40 per cent being held by GE Capital Corporation. The SBICPSL commenced its credit card business from October 1998. |
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New Private Sector Banks |
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8.10 During the year the Reserve Bank has not issued any "in principle" approval/licence to set up new private sector banks. The number of new private sector banks (excluding a primary co-operative bank) continues to be nine. An in-house committee, which was set up to go into various aspects of working of new private sector banks and suggest the policy framework for licensing new banks in the future, has since submitted its report which is under consideration in consultation with the Government. |
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Local Area Banks |
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8.11 The Reserve Bank has given 'in principle' approval to set up 8 local area banks; of which 5 were given in 1998-99. Application of one of these banks is at an advance stage in the process towards issuance of licence. |
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Customer Service |
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8.12 Improvement in customer service by banks has always been the focal point of endeavours of the Reserve Bank and Government of India. Towards this end, on the occasion of the celebration of Golden Jubilee of India's Independence, the public sector banks have brought out "citizens' charters". These charters are regarded as code of fair banking and provide information on various banking services offered by the banks to their customers for bringing about transparency in the matter of customer service. The Charters are intended to make the customers aware of their rights and also grievances redressal mechanism set up by the banks for dealing with customers' complaints. On the occasion of observance of "Consumers Rights Day" on March 15 the world over, it was decided to observe March 15, 1999 as the "Customers' Day" in order to focus attention on the rights and responsibilities of the consumers and to generate awareness among them. |
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Bridge Loans |
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8.13 In January 1999, banks have been permitted to extend bridge loans, besides against the expected equity flows/issues, also against the expected proceeds of non convertible debentures, external commercial borrowings, global depository receipts and/or funds in the nature of foreign direct investments, provided the bank is satisfied that the borrowing company has already made firm arrangements for raising the aforesaid resources/funds. The total amount of sanctions under such bridge loans should be accommodated within the ceiling of 5 per cent of incremental deposits prescribed for banks' investment in shares etc. |
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Disclosure of Information about Defaulters of Banks and Financial Institutions |
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8.14 Under the Scheme of Disclosure of Information about Defaulters of Banks and Financial Institutions introduced in April 1994, the Reserve Bank has been collecting information from banks and financial institutions about their borrowers with outstanding of about Rs.1 crore and above, and which have been classified as doubtful or loss and also the suit filed accounts. The information so collected is consolidated and disseminated to banks and FIs for their confidential use. Under the above scheme, the Reserve Bank also publishes a list of such borrowal accounts with outstanding of Rs.1 crore and above against which banks and FIs have filed suits for recovery of funds annually. The last such list was published on March 31, 1998. The Reserve Bank also introduced with effect from April 1, 1999 a scheme under which the banks and financial institutions will submit details of the cases of willful defaulters of Rs.25 lakh and above on quarterly basis for dissemination among banks. |
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Restructuring of Weak Public Sector Banks |
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8.15 The Reserve Bank has set up a Working Group in consultation with the Government of India, under the Chairmanship of Shri M.S. Verma, the former Chairman of State Bank of India and Honorary Adviser, Reserve Bank, to suggest measures for revival of weak public sector banks. The terms of reference of the Working Group are: (a) to lay down criteria for identification of weak public sector banks; (b) to study and examine the problems of weak public sector banks; (c) to undertake a case by case examination of the weak public sector banks and to identify those which are potentially revivable; and (d) to suggest a strategic plan of financial, organisational and operational restructuring of weak public sector banks. |
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8.16 The Group is looking into the various aspects of weaknesses observed in three identified weak public sector banks viz., Indian Bank, UCO Bank and United Bank of India. An approach to the restructuring of these banks would be decided upon in the light of the above. |
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Issue of Shares by Private Sector Banks |
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8.17 The banks in private sector, hitherto, were required to obtain prior approval of the Reserve Bank for issue of all types of shares viz., public, preferential, rights/special allotment to employees and bonus shares. The working of these banks have been reviewed in July 1998 and it has been decided that in future, banks whose shares are listed on stock exchanges need not seek prior approval of the Reserve Bank for issue of shares, except bonus shares. |
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Indian Banks' Operations Abroad |
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8.18 Nine Indian banks (8 in the public sector and 1 in the private sector) are having branches abroad. During 1998-99 the number of these branches declined to 95 from 97 following the closure of their branches in London by the State Bank of India and the UCO Bank in September 1998 and January 1999, respectively. The number of representative offices of Indian banks increased from 15 to 16 following the opening of two representative offices at Almaty in Kazakhstan by the Punjab National Bank and at Sydney in Australia by the State Bank of India and the closure of representative office by the Indian Bank at Jakarta. While there was no change in the number of wholly owned subsidiaries of Indian banks abroad which remained at 13, the number of joint ventures abroad increased to 8 following the opening of a joint venture – the Everest Nepal Bank in Nepal by the Punjab National Bank. |
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Foreign Banks' Operations in India |
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8.19 During the year 1998-99, 3 foreign banks opened their branches in India. The Bank Muscat International SAOG opened a branch at Bangalore, the Morgan Guaranty Trust Co. and the KBC Bank NV opened a branch each at Mumbai. In addition, 8 other foreign banks opened additional branches in different cities. At the same time, Commercial Bank of Korea closed down its office in India. The number of branches of the ANZ Grindlays Bank came down to 40 from 57 following restructuring operations. The Standard Chartered Bank closed down two existing branches and opened a new branch at Pune, bringing down its total number of branches from 24 to 23. The number of foreign banks operating in India increased to 44 from 42, while the number of their branches in the country reduced to 180 from 182. |
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Liquidation and Amalgamation |
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8.20 As on December 31, 1998, 84 banks were in liquidation. The matter with regard to early completion of liquidation proceedings continues to be pursued with the concerned official/court liquidators. The Bareily Corporation Bank Ltd. has been amalgamated with the Bank of Baroda with effect from June 3, 1999. |
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Developments in Supervision |
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8.21 Following the Narasimham Committee report on Financial Sector Reforms, significant changes have taken place in the Indian banking system as well as in the regulatory and supervisory approaches and strategies. The Board for Financial Supervision (BFS), which was constituted in 1994 to suit the demanding needs of a strong and stable financial system functions under the aegis of the Reserve Bank. Under BFS, the Bank's supervisory strategy has changed from the system of periodic inspections to a system of 'continuous supervision and periodic inspections.' The key elements of the new supervisory strategy are: restructuring the system of bank inspections i.e., focus, process, reporting and follow-up; off-site surveillance as a supplement to on-site inspections; enhanced role for external auditors; and strengthened corporate governance and internal control and audit systems. In respect of on-site inspection, Reserve Bank's focus is now on the statutory mandate viz., protection of depositors' interests with concentration on a core assessment based on CAMELS model. The supervisory framework prevalent in India is largely in compliance with the principles of the Basle Committee on "Core Principles for Effective Banking Supervision". However, some gaps were observed in the areas of risk management, consolidated supervision and inter-agency co-operation. In this connection the course of action following from the work done in the areas of risk management system for banks; amendments in banking legislation, structuring of the regime of penalties, introduction of consolidated supervision, home and host country relations, inter-agency cooperation and inter-department coordination are currently under implementation. |
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Off-site Monitoring and Surveillance |
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8.22 Off-site surveillance system was set up in 1995 for domestic operations of banks with the primary objective of estimating the evolving financial condition of banks in-between on-site examinations for purposes of undertaking any corrective actions, if needed. The off-site supervision has stabilised from the quarter ended March 1997 and a database on key banking parameters over the 10 quarters since then has already been built-up. The second tranche of four ALM returns covering liquidity and interest rate risk have been introduced with effect from June 30, 1999, initially on a quarterly cycle. To take on the increased volumes, the upgradation of banking statistics database work is in progress and the project is likely to put in place an off-site monitoring system by March 2000 with enhanced capabilities, which would further strengthen the supervisory system. |
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8.23 Besides off-site monitoring, quarterly on-site monitoring is undertaken in the case of newly licensed banks in their first year of operation as also private sector banks displaying weaknesses. Public sector banks displaying serious deficiencies are placed under special monitoring, while weak banks are monitored quarterly on the basis of structured financial data. As far as regular on-site inspection is concerned, all banks i.e., public sector banks, foreign banks and private sector banks are inspected every year. The role of Reserve Bank nominee directors has been redefined with a view to improving their effectiveness and bringing in effective corporate governance at the Board level. |
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Annual Financial Inspection |
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8.24 During the year 1998-99, annual financial inspection under section 35 of the Banking Regulation Act, 1949 has been completed in respect of 26 public sector banks, 35 private sector banks and 40 foreign banks. All commercial banks were inspected based on CAMELS parameters. |
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Frauds/Robberies |
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8.25 During the year 1998-99 (July-March), commercial banks reported 1,974 cases of frauds involving an amount of Rs.606.21 crore. These cases were followed up with the banks for necessary remedial measures. During the period 1998-99(July-June), 97 cases of robberies/decoities involving an amount of Rs.6.13 crore were reported by public sector banks. |
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8.26 The Reserve Bank monitors frauds in banks and cautions them with a view to enabling them to put in place appropriate safeguards. The Advisory Board on Bank Frauds functions under the aegis of the Central Bureau of Investigation (CBI) and the Reserve Bank provides secretarial support to the Board. The Reserve Bank in association with the office of the Chief Vigilance Commissioner finalised a special chapter on banks for inclusion in the vigilance manual. |
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NON-BANKING FINANCIAL COMPANIES (NBFCs) |
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8.27 The Department of Non-banking Supervision (DNBS) has been entrusted with the responsibility of framing regulatory framework/policy as also of implementation of the provisions of the Reserve Bank of India Act, as amended, including registration of NBFCs with a view to bringing about necessary synergy between regulation and supervision. The synergy has been found to be indispensable for expeditious decision making on regulatory and supervisory concerns. All registered NBFCs with public deposits of Rs.50 crore and above will be inspected once in a year and registered NBFCs with public deposits between Rs.5 crore and Rs.50 crore once in two years by the Bank's staff. Registered NBFCs with public deposits of Rs.50 lakh but up to Rs.5 crore are inspected by engaging external auditors. One of the major planks of supervision of NBFCs is off-site monitoring. The NBFCs are required to submit to the Reserve Bank a set of periodical returns certified by their auditors. These returns which are very comprehensive in nature and coverage are analysed with extensive use of information technology for determining the quality of performance and adherence to regulatory standards prescribed by the Reserve Bank. |
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8.28 Various policy measures, which have been taken to protect the interests of depositors include inter alia: i) a clear definition of the term 'public deposit' and prescription of a ceiling on the quantum of such deposits in relation to NOF; ii) a ceiling on the interest rate on deposits and rationalisation of the rate of brokerage; iii) a prescription about the requirement of minimum investment grade credit rating for large sized NBFCs for acceptance of public deposits; iv) a prescription of higher capital adequacy ratio in lieu of credit rating for small and medium equipment leasing and hire purchase finance companies that are allowed to accept public deposits; v) permission for loan and investment companies to accept public deposits up to 1.5 times of their NOF subject to their achieving Capital to Risk Weighted Assets Ratio (CRAR) of 15 percent or more and minimum investment grade credit rating; vi) prohibition of NBFCs with NOF below Rs.25 lakh from accessing public deposits; vii) widening of the requirement for disclosure in application forms and advertisements for deposits to enable depositors to take well-informed decision; viii) publicity campaign for depositors' education so that they place deposits with NBFCs after understanding the financial matters; ix) prescription of prudential norms for income recognition and provisioning for bad and doubtful debts to disclose true and fair picture of the financial health of NBFCs; x) restrictions on investments by NBFCs in real estate and unquoted shares; xi) restrictions on NBFCs on creation of fresh assets in the event of failure to repay matured deposits; xii) requirement of maintenance of liquid assets against public deposits and lodgement of these securities with one of the scheduled commercial banks or Stock Holding Corporation of India Ltd. on the condition that such securities cannot be withdrawn except for repayment to the depositors; xiii) strengthening of financial position of NBFCs by creation of reserve fund by them and transfer of at least 20 per cent of net profits to such fund every year; xiv) a requirement that Residuary Non-Banking Companies should invest at least 80 per cent of the deposit liabilities in the specified securities as per the investment pattern prescribed by the Bank in lieu of linkage of NOF to total deposits; xv) a comprehensive supervisory framework together with powers to initiate adverse action against the recalcitrant and errant companies; and xvi) involvement of the state governments in efforts to curb activities of unauthorised acceptance of deposits. |
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Action against Errant NBFCs |
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8.29 Actions were initiated against errant NBFCs and unincorporated bodies for various defaults and violations of the Reserve Bank of India Act and the directions issued thereunder. The actions included prohibition from accepting further deposits, filing of winding up petitions and launching of criminal proceedings against the errant companies and their managements. The Bank had also filed complaints with the economic intelligence wings of the state police authorities against the unincorporated bodies unauthorisedly carrying on their financial business by accepting public deposits. |
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Coordination with State Governments |
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8.30 Close liaison and coordination with state governments is maintained so that activities of unauthorised acceptance of deposits by unincorporated bodies and NBFCs are curbed. The States were requested to put in place legislation on the lines of Tamil Nadu Protection of Interests of Depositors (in establishments) Act, 1997 and Maharashtra Protection of Interests of Depositors (in establishments) Ordinance, 1999. |
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Publicity Campaigns |
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8.31 Extensive efforts were made for educating the depositors through aggressive publicity in print media so that they take well informed decisions while placing deposits with NBFCs. Instant publicity was given to adverse actions like rejection of applications for certificate of registration, issuance of prohibitory orders etc. Consolidated lists of NBFCs which have been approved for issue of certificate of registration and allowed to accept public deposits and those whose applications have been rejected, have been published and widely circulated periodically. |
