Volume III
Issue 8 March 2007 MONETARY
AND CREDIT INFORMATION REVIEW
CONTENTS |
BANKING
POLICY | Greater
Transparency in Processing Loan Applications |
Prudential Limits for Inter-Bank
Liabilities | Banks
not to Grant Loans for Acquiring KVPs |
Agency Commission - PPF/SCSS |
Service
Charges for Non-chest Branches Increased |
CRR Exempt Categories of
DTL | Maintenance
of CRR | INFORMATION |
Interest
Payment on CRR Balances |
FOREX |
Liberalisation
of Export and Import Procedures |
BANKING POLICY
Greater
Transparency in Processing Loan Applications With
a view to achieving greater transparency in loan processing, the Reserve Bank
has advised all scheduled commercial banks and all India financial institutions
(FIs) that loan application forms in respect of all categories of loans, irrespective
of the amount of loan sought by the borrower, should be comprehensive and should
include information about the fees/charges, if any, payable for processing, the
amount of such fees refundable if the application is not accepted, pre-payment
options and any other matter which affects the interest of the borrower. This
would enable the borrower to make a meaningful comparison with that of other banks
and take an informed decision. Banks/FIs have been advised to work out a transparent
policy in this regard with their board’s approval. Further, in
respect of all categories of loans, including credit card applications, irrespective
of any threshold limits, if the loan application has been rejected, banks/FIs
should convey in writing the main reason/reasons which, in their opinion
led to the rejection. Banks/FIs have been advised to make necessary modifications
in the Fair Practices Code by April 30, 2007 with their board’s approval.
The modified Fair Practices Code should be placed on their website and given wide
publicity. Prudential
Limits for Inter-Bank Liabilities In
order to reduce the extent of banks’ concentration on the liability side,
the Reserve Bank has prescribed measures as follows: (a) The inter-bank
liability (IBL) of a bank should not exceed 200 per cent of its networth as on
March 31 of the previous year. Individual banks may, however, with the approval
of their board of directors, fix a lower limit for their inter-bank liabilities,
keeping in view their business model. (b) Banks whose capital to risk
weighted assets ratio (CRAR) is at least 25 per cent more than the minimum CRAR
(9 per cent) i.e. 11.25 per cent as on March 31 of the previous year, are allowed
to have a higher limit of up to 300 per cent of the net worth for IBL. (c)
These limits would include only fund based IBL within India (including inter-bank
liabilities in foreign currency to banks operating within India). In other words,
the IBL outside India are excluded. (d) The above limits would not include
collateralised borrowings under collateralised borrowing and lending operations
(CBLO) and refinance from National Bank for Agriculture and Rural Development
(NABARD), Small Industries Development Bank of India (SIDBI) etc. (e)
The existing limit on the call money borrowings prescribed by the Reserve Bank
would operate as a sub-limit within the above limits. (f) Banks having
high concentration of wholesale deposits should be aware of the potential risk
associated with such deposits and should frame suitable policies to contain the
liquidity risk arising out of excessive dependence on such deposits.
These guidelines are applicable from April 1, 2007. Banks which are not in a position
to comply with these requirements from April 1, 2007, should, however, furnish
a plan to the Reserve Bank for approval indicating the date by which they would
be able to comply with the requirements. Banks
not to Grant Loans for Acquiring KVPs The
Reserve Bank has advised banks not to sanction loans for acquiring/investing in
small savings instruments including Kisan Vikas Patras (KVPs). The Reserve
Bank had come across certain instances where banks had sanctioned loans to individuals,
mostly high networth individuals, for acquisition of KVPs. The high networth
individuals were first required to bring in 10 per cent of the total face value
of the proposed investment in the KVPs as margin and the remaining 90 per cent
of the investment was treated as loan and funded by the bank for acquisition of
the KVPs. Once the KVPs were acquired in the borrower’s name, they were
thereafter pledged to the bank. Agency
Commission - PPF/SCSS It
has been decided in consultation with the Government of India and a few select
banks to follow only one channel of payment of remuneration to banks for handling
transactions under the Public Provident Fund Scheme, 1968 (PPF)
and the Senior Citizens Savings Scheme 2004 (SCSS). The Reserve
Bank will pay agency commission on these transactions as below:
Type
of Transaction | Rate
(in Rs) | Receipts |
Rs.45 per transaction |
Payments |
9 paise per Rs.100 turnover |
These
rates are applicable from July 1, 2005 for PPF transactions and from April 1,
2006 for SCSS transactions. With this revision of rates, the Government of India
will discontinue payment of remuneration for managing PPF and SCSS. There
will not be any change in the existing arrangement for payment of commission paid
at source to small savings agents for mobilising deposits under the two schemes
and the government will continue to reimburse the commission. Service
Charges for Non-chest Branches Increased The Reserve Bank has
permitted currency chest holding banks to enhance the ‘service charges’
from Re.1 per note packet of 100 pieces to Rs.2 per packet to be levied
on cash deposited by the non-chest bank branches with effect from CRR
Exempt Categories of DTL - Liabilities
to the banking system in India as computed under Clause (d) of the Explanation
to Section 42(1) of the RBI Act, 1934;
- Credit balances
in ACU (US$) Accounts;
- Transactions in
collaterialised borrowing and lending obligation (CBLO) with Clearing Corporation
of India (CCIL); and
- Demand and time
liabilities (DTL) in respect of their offshore banking units (OBUs).
The
exemptions are subject to banks maintaining statutory minimum CRR of 3 per cent
of their total DTL. April 01, 2007. The constituent banks should be advised well
in advance regarding the enhancement in the service charge. The exemption
granted to co-operative banks and regional rural banks on their cash deposits
for the purpose of transfer of funds under the Reserve Bank of India’s Remittance
Facility Scheme would, however, continue. Maintenance of CRR
The Reserve Bank of India (Amendment) Act, 2006 was enacted in June 2006.
Consequent to the enactment, the Reserve Bank, on June 22, 2006 decided to -
(i) continue the status quo on the rate of cash reserve ratio (CRR) to be
maintained by scheduled banks and the existing exemptions (please see box on this
page); (ii) remove the statutory minimum CRR maintenance requirement
of 3 per cent; and (iii) not pay any interest on the eligible CRR balances
maintained by scheduled banks with effect from the fortnight beginning June 24,
2006. The Extraordinary Gazette notification No.S.O.21(E) dated January
9, 2007 notified January 9, 2007 as the date on which all the provisions, except
Section 3, of the Reserve Bank of India (Amendment) Act, 2006 would come into
force. Section 3 the Reserve Bank of India (Amendment) Act, 2006 provided
for the removal of: - The
ceiling and floor on the CRR to be prescribed by the Reserve Bank having regard
to the need for securing monetary stability in the country; and
- The
provisions for interest payment on eligible CRR balances [i.e., the amount of
reserves between the statutory minimum CRR and the CRR prescribed by the Reserve
Bank.
Since
Section 3 has not been notified so far, in consultation with the Government, it
has been decided: (i) That the minimum CRR level of 3.0 per cent and
the maximum CRR level of 20 per cent of total of banks’ demand and time
liabilities remain as per the existing provisions of Section 42(1) of the Reserve
Bank of India Act, 1934; (ii) To exempt those banks from payment of
penal interest that have breached the statutory minimum CRR level of 3.0 per cent
between June 22, 2006 and March 2, 2007 on account of CRR exemptions reckoned
for computation of demand and time liabilities for CRR; and (iii) o
pay interest on eligible CRR balance during the interregnum as follows:
Rate
of Interest (in per cent) |
For
the Period | 3.5 |
June 24 to
December 8, 2006 | 2.0 |
December
9, 2006 to February 16, 2007 |
1.0 |
February
17, 2007 until further notice |
INFORMATION
Interest
Payment on CRR Balances Current
Position The Reserve Bank has been paying interest on eligible
CRR balances since 1973. Eligible balances were defined as the difference between
the amount required to be maintained and the statutory minimum of 3.0 per cent
CRR on net demand and time liabilities (NDTL). On the eve of the amendment, that
is, till June 22, 2006, the prescribed CRR was 5.0 per cent of NDTL. Banks thus
received interest at the rate of 3.5 per cent on eligible balances which worked
out as 5.0 per cent of NDTL less 3.0 per cent of NDTL, the latter being the statutory
minimum CRR. No interest has been payable on the statutory minimum requirement
of 3.0 per cent and on excess CRR balances maintained with the Reserve Bank. Furthermore,
several exemptions from the CRR were allowed to banks, such as, inter-bank liabilities
up to 14 days, collateralised borrowing and lending obligations (CBLO), Asian
Clearing Union (ACU) transactions and offshore banking units (OBUs), subject to
the maintenance of the minimum statutory requirement of 3.0 per cent. Inter-bank
liabilities of 15 days to one year maturity were totally exempt from the calculation
of NDTL. Given these exemptions the effective interest rate on eligible CRR balances
worked out to 1.4 per cent. Background In terms
of Section 42(1) of the RBI Act, the Reserve Bank can prescribe CRR for scheduled
banks between 3 per cent and 20 per cent of total of their demand and time liabilities.
During the 1970s, the CRR was actively employed as an instrument of monetary policy
to contain inflationary pressures emanating from international oil price shocks.
While the level of the CRR was moderate, it steadily rose from 5.0 per cent in
1973 to 6.0 per cent by 1980. The Reserve Bank started paying interest on eligible
CRR balances since 1973 to compensate for the erosion in the profitability of
banks. Initially the rate of interest was 4.75 per cent per annum which gradually
increased to 7.0 per cent by the end of the 1970s. During the 1980s,
monetisation of the fiscal deficit progressively became a dominant influence on
the conduct of monetary policy, which had to contend with the secondary rounds
of monetary expansion entailed by primary budget financing. Consequently, the
CRR evolved as one of the principal instruments of monetary policy and the level
of the CRR rose progressively to 15.0 per cent by 1992. Besides, an additional
CRR of 10.0 per cent was prescribed on incremental NDTL (related to a base date)
starting from 1983 up to 1992. Over the same period, the rate of interest payable
on eligible CRR balances had to be gradually increased form 8.0 per cent to 10.0
per cent per annum. At this juncture, the CRR was increasingly viewed
as a punitive tax on the banking system, adversely impacting the profitability
of banks on account of fiscal profligacy. In this context, the Committee on the
Financial System, 1991 (Chairman : Shri M. Narasimham) observed : 'As
regards the cash reserve ratio, the Reserve Bank should have the flexibility to
operate this instrument to serve its monetary policy objectives. The Committee
believes that given the Government’s resolve to reduce the fiscal deficit,
the occasion for the use of cash reserve ratio to control the secondary expansion
of credit should also be less. The Committee accordingly proposes that the Reserve
Bank consider progressively reducing the cash reserve ratio from its present high
level. With the deregulation of interest rates there would be more scope for the
use of open market operations by the Reserve Bank with correspondingly less emphasis
on variations in the cash reserve ratio. The Committee proposes that the interest
rate paid to banks on their SLR investments and on CRR in respect of impounded
deposits above the basic minimum should be increased'. In the ensuing
period, the level of the CRR was gradually, albeit flexibly, reduced to the current
level of 5.0 per cent. The additional CRR was also discontinued in 1993. Interest
was paid on eligible cash balances at 10.5 per cent per annum under a two-tier
formula under which CRR on incremental NDTL earned a lower rate which was lowered
from 8.0 per cent per annum in 1990 to 3.0 per cent in 1992 and was finally abolished
in the same year. With payment of zero interest on incremental CRR and the final
abolition of CRR on incremental NDTL, the effective rate of interest on the eligible
CRR balances worked out to 3.5 per cent. Accordingly, as a measure of rationalisation,
the interest rate on CRR balances was set at 4.0 per cent. This had the effect
of improving the return on eligible CRR balances since the revised rate was made
applicable to the entire balances. Another round of rationalisation occurred
in 2001 following the re-activation of the Bank Rate as a medium-term signaling
rate for monetary policy. The Statement on Monetary and Credit Policy for 2001-02
by former Governor, Dr. Bimal Jalan, aligned the interest rate on eligible CRR
balances with the Bank Rate in two stages and announced that the medium-term objective
would be to reduce the CRR to its statutory minimum. The Internal Group
on Liquidity Adjustment Facility recommended in December 2003 that “with
substantial scaling down of CRR coupled with marked decline in overall interest
rate structure in the economy and increasing liquidity needs of participants in
the wake of higher inter-linkages among different segments of the market, the
degree to which CRR had been impacting banks as an implicit taxation earlier is
considerably less in recent period. Accordingly, the remuneration of eligible
cash balances at the Bank Rate is no longer justifiable and the remuneration of
CRR, if any, be de-linked from the Bank Rate and placed at a lower rate than the
repo rate”. Accordingly, the interest paid on the eligible CRR balances
was brought down to 3.5 per cent from September 2004 and eliminated from June
24, 2006. FOREX Liberalisation
of Export and Import Procedures In
order to facilitate external trade and provide greater flexibility to the authorised
dealer category - I (AD Category - I) banks, certain relaxations have been made
in the areas of exports and imports and foreign currency accounts. The relaxations
are : EXPORTS Extension of Time for Realisation
of Export Proceeds AD Category-I banks may now extend the period
of realisation of export proceeds, beyond six months from the date of export,
up to a period of six months, at a time, irrespective of the invoice
value of the export, provided - (a) The export transactions covered by
the invoices are not under investigation by the Enforcement Directorate/Central
Bureau of Investigation or other investigating agencies; (b) The AD
Category-I bank is satisfied that the exporter has not been able to realise the
export proceeds for reasons beyond his control; (c) The exporter submits
a declaration that the export proceeds would be realised during the extended period;
and (d) While considering extension beyond one year from the date of
export, the total outstanding of the exporter does not exceed USD one million
or 10 per cent of the average export realisations during the preceding three financial
years, whichever is higher. The date up to which the extension has been
granted should be indicated in the ‘Remarks’ column of the XOS statement.
In cases where the exporter has filed suits abroad against the buyer, extension
may be granted irrespective of the amount involved/outstanding. Cases which do
not fall under the above category would require the Reserve Bank’s prior
approval. Earlier, AD Category - I banks could extend the period of realisation
of export proceeds in certain cases beyond six months, up to a period of three
months at a time, where the invoice value of the export did not exceed USD one
million or its equivalent. Write-off of Unrealised Export Bills
Status holder exporters can now write-off outstanding export dues to
the extent of (i) 5 per cent of their average annual realisation during
the preceding three financial years or (ii) 10 per cent of the export
proceeds due during the financial year, whichever is higher. On-site
Software Contracts - Repatriation of Funds Overseas
offices/branches of software exporter companies/ firms now need not repatriate
to India 30 per cent of the contract value of each on-site contract. The companies
should, however, repatriate the profits of the on-site contract after the completion
of the contract. Earlier, software exporter companies/firms were obliged
to repatriate to India 100 per cent of the contract value of each off-site contract
and at least 30 per cent of the contract value of each on-site contract.
Reduction in Invoice Value AD Category - I banks can now allow reduction
in the invoice value up to 25 per cent of the invoice. In cases where goods have
been shipped and are to be transferred to a buyer other than the original buyer
in the event of default by the latter, the Reserve Bank’s prior approval
is not required if the reduction in value, if any, involved does not exceed 25
per cent and the realisation of export proceeds is not delayed beyond a period
of six months from the date of export. IMPORTS
Import Bills – Credit Report on the Overseas Supplier
AD Category - I banks now need not obtain credit report on the overseas supplier
from his banker/reputed credit agency before processing import bills received
directly from the overseas supplier, provided (i) the invoice value does not exceed
USD 100,000, and (ii) the bonafides of the transaction and track record of the
importer are satisfactory. GENERAL Time
Base for Trade Related Transactions Henceforth, ‘financial
year’ (April to March) should be reckoned as the time base for all trade
related transactions. To mitigate the mismatch in the time period due to change
of time base from calendar/previous year to financial year, AD Category –
I banks may, up to March 31, 2007 only, reckon the time base
which is beneficial to their constituent/s. Statement
about ownership and other particulars concerning MONETARY AND CREDIT
INFORMATION REVIEW FORM IV 1.
Place of publication
: Mumbai 2. Periodicity of publication
: Monthly 3. Editor, publisher and
: Alpana Killawala, Reserve Bank of India Indian printer’s
name, nationality Press
Relations Division and address
Central Office, Shahid Bhagat
Singh Road, Mumbai 400 001. 4. Name and address of
: Reserve Bank of India the individual who owns the Press
Relations Division News Paper
Central Office, Shahid Bhagat
Singh Road, Mumbai 400 001
I, Alpana Killawala, hereby declare that the particulars given above are true
to the best of my knowledge and belief. Alpana
Killawala
Signature of Publisher
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 Onlooker Press Ltd.,
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 |