Statement by Dr.Bimal Jalan, Governor, Reserve Bank of India on Mid-Term Review of Monetary and Credit Policy for the year 2000-2001 - ربی - Reserve Bank of India
Statement by Dr.Bimal Jalan, Governor, Reserve Bank of India on Mid-Term Review of Monetary and Credit Policy for the year 2000-2001
The Statement on Mid-Term Review of Monetary and Credit Policy consists of three parts:
I. Mid-Term Review of Macro-economic and Monetary Developments in 2000-01;
II. Stance of Monetary Policy for the second half of 2000-01; and
III. Financial Sector Reforms and Monetary Policy Measures.
I. Mid-Term Review of Macro-economic and
Monetary Developments in 2000-01 Domestic Developments
2. On the basis of the meteorological reports available upto September 2000, it has been observed that the south-west monsoon was active and the quantum and distribution of rainfall were fairly satisfactory at the aggregate level. Of the 35 meteorological sub-divisions, 28 sub-divisions received excess or normal rainfall, which was the same as that of the last year. As some sub-divisions were affected by deficient rainfall or floods, the agricultural out-turn in 2000-01 remains somewhat uncertain. As of now, the output of foodgrains during the year is expected to remain close to that of last year. The total buffer stock of foodgrains stood at 40.8 million tonnes at the end of August 2000, which is higher by 38.3 per cent over the stock level of 29.9 million tonnes at the end of August 1999. The stocks of rice at 13.56 million tonnes are higher by 57.5 per cent, and those of wheat by 27.9 per cent. Overall, therefore, the outlook for agricultural supplies is comfortable during the year.
- The increase in US interest rates by 50 basis points in May 2000, which was followed by hikes in the European interest rate by 50 basis points in June and 25 basis points in August 2000. The increase in US interest rate in May coming on top of several earlier increases, significantly reduced the interest differential in respect of holdings in US dollars vis-a-vis Indian rupees.
- In April 2000, there was considerable uncertainty about the prospects of the US economy. This was reflected, among other things, in the sharp drop in equity prices. In April, the NASDAQ index fell by nearly 25 per cent, which in turn affected equity prices, in all major stock exchanges, including the Sensex in India. The US outlook, however, changed dramatically in June/July with an increasing consensus that the US economy was 'soft landing' and US growth rates were likely to be sustained at a relatively high level.
- In view of the continuing uncertainty about recovery in Japan and the outlook for European economies, the US dollar appreciated sharply against most major currencies. US dollar appreciated by 5.7 per cent, 2.2 per cent and 0.8 per cent against Euro, Pound-Sterling and Japanese Yen, respectively, during the period end-May to end of September 2000. US dollar also appreciated by 7.8 per cent against Thai Baht, 1.7 per cent against Indonesian Rupiah, 8.5 per cent against Philippines Peso, and 0.4 per cent against Singapore dollar during the same period. (It may be noted that, as depreciation of the rupee against the US dollar was less than that of several other currencies, the rupee also appreciated against the Euro and Pound Sterling from end-May to mid-September by 4.4 per cent and 3.4 per cent, respectively. However, rupee depreciated by 1.8 per cent against the Japanese Yen during the same period.)
- The price of crude oil imported by India increased further during the year, on top of the sharp increase recorded in the previous year. Average prices of Brent crude in September 2000 were US $ 32.97 per barrel as compared with US $ 25.55 in December 1999 and US $ 22.51 in September 1999. As a result, there was a substantial increase in the volume of demand for foreign currency by Indian Oil Corporation (IOC) and other bulk importers of crude oil.
- For various reasons, including some uncertainty about the prospects of the equity market in India, there was a sharp reversal in capital flows on account of Foreign Institutional Investors (FIIs). In the months May to August, 2000, there was a net outflow of US $ 505 million as against a net inflow of US $ 948 million during the first quarter of the calendar year.
16. In order to cope with the adverse effects of the above factors, which persisted for several weeks, the Reserve Bank had to adopt a combination of measures. These included: (a) use of foreign exchange reserves to partially meet the excess demand in currency markets, particularly on account of oil imports and government debt servicing; (b) increasing the cost of bank financing for imports and overdue export bills; (c) allowing the exchange rate to move in response to the prevailing demand/supply situation; (d) increasing the Bank Rate to pre-April level in order to partially reverse the narrowing of interest differential between dollar/rupee holdings in order to improve inflows. In order to mop up some excess liquidity in the system, CRR was also increased by 0.5 percentage point. The very short-term Repo and reverse Repo rates were also increased in order to make it less attractive to hold daily long positions in US dollars; and (e) repatriation of 50 per cent of balances held in EEFC accounts, along with reduction in entitlement in respect of further accretions to these accounts.
26. The action taken by the Reserve Bank to reduce accumulated balances and further accretions to EEFC account in August 2000 has no doubt caused some disappointment among exporters. It may be recalled that this account was essentially meant for use by exporters for certain specified purposes to facilitate mostly current account and other permissible payments. While most exporters were using the scheme for the intended purposes, in the recent period, it was noticed that balances in these accounts were being increased, which added to the magnitude of 'leads' and 'lags' in external receipts. The Reserve Bank has reviewed the scheme in the light of previous experience and feedback received from premier export organisations. It is desirable to persevere with the positive feature of the scheme, viz., the reduction in the 'transaction' and banking costs for exporters for making current account and other permissible payments, while at the same time ensuring that the scheme is not used for unintended purposes. The details of the revised EEFC scheme are given in Part III.
29. Recently, the Government has delegated powers to the Reserve Bank to approve External Commercial Borrowings(ECB) upto US $ 50 million under the automatic route, and upto US $100 million on a case-by-case basis. In order to avoid recourse to short-term or high-cost ECBs, Government has also laid down certain conditions regarding minimum maturity period and acceptable spreads for such borrowings. In respect of ECB proposals under the automatic route, which conform to Government guidelines, prior approval of RBI will not be required. The procedure for proposals requiring specific approval of RBI is also being simplified.
II. Stance of Monetary Policy for the
Second Half of 2000-2001
- For various reasons, including some uncertainty about the prospects of the equity market in India, there was a sharp reversal in capital flows on account of Foreign Institutional Investors (FIIs). In the months May to August, 2000, there was a net outflow of US $ 505 million as against a net inflow of US $ 948 million during the first quarter of the calendar year.
- The price of crude oil imported by India increased further during the year, on top of the sharp increase recorded in the previous year. Average prices of Brent crude in September 2000 were US $ 32.97 per barrel as compared with US $ 25.55 in December 1999 and US $ 22.51 in September 1999. As a result, there was a substantial increase in the volume of demand for foreign currency by Indian Oil Corporation (IOC) and other bulk importers of crude oil.
- In view of the continuing uncertainty about recovery in Japan and the outlook for European economies, the US dollar appreciated sharply against most major currencies. US dollar appreciated by 5.7 per cent, 2.2 per cent and 0.8 per cent against Euro, Pound-Sterling and Japanese Yen, respectively, during the period end-May to end of September 2000. US dollar also appreciated by 7.8 per cent against Thai Baht, 1.7 per cent against Indonesian Rupiah, 8.5 per cent against Philippines Peso, and 0.4 per cent against Singapore dollar during the same period. (It may be noted that, as depreciation of the rupee against the US dollar was less than that of several other currencies, the rupee also appreciated against the Euro and Pound Sterling from end-May to mid-September by 4.4 per cent and 3.4 per cent, respectively. However, rupee depreciated by 1.8 per cent against the Japanese Yen during the same period.)
30. On April 1, 2000, the Reserve Bank had announced a number of measures to enhance liquidity and reduce the cost of funds to banks. These measures included a reduction in the Bank Rate, CRR and the Repo rate by 1 percentage point each. On April 27, 2000, the annual monetary and credit policy statement expressed RBI's intention 'to continue the current stance of monetary policy and ensure that all legitimate requirements of bank credit are met while guarding against any emergence of inflationary pressures due to excess demand. Towards this objective, the Reserve Bank will continue its policy of active management of liquidity through OMO, including two-way sale/purchase of treasury bills, and reduction in cash reserve ratio as and when required'. On July 21, 2000, however, RBI increased the Bank Rate by 1 percentage point and CRR by 0.5 percentage point. Short-term repo rates were also substantially raised in several stages, soon after the introduction of Liquidity Adjustment Facility (LAF) on June 5, 2000 (these rates have recently been reduced). The change in course within four months of the April 1 reductions in Bank Rate/CRR has elicited a fair amount of comment and debate among experts, market participants and bankers.
III. Financial Sector Reforms and
Monetary Policy Measures38. The recent annual Monetary and Credit Policy Statements as well as Mid-Term Reviews have focussed on structural measures to strengthen the financial system and to improve the functioning of the various segments of financial markets. As pointed out in the April policy statement, the main objectives of these measures have been five-fold: (a) to increase operational effectiveness of monetary policy by broadening and deepening various segments of the market; (b) to redefine the regulatory role of the Reserve Bank in order to make it more efficient and purposive; (c) to strengthen the prudential and supervisory norms; (d) to improve the credit delivery system; and (e) to develop the technological and institutional infrastructure of the financial sector.
41. As part of April 2000 policy statement, certain measures were announced to facilitate the development of the Forward Rate Agreements/Interest Rate Swaps (FRAs/IRS) and Certificates of Deposit (CDs). Similarly, the policy stance relating to call/notice money market and Commercial Paper (CP) had also been indicated. After a review of the developments, the following measures are being introduced :
(a) Permission to non-banks to lend
in the call money market(b) Guidelines for issue of Commercial Paper (CP)
It was indicated in the April policy statement that the current guidelines for issue of CP would be modified in the light of recommendations made by an Internal Group. Accordingly, a draft of the revised guidelines as also the Report of the Internal Group were circulated in July 2000. Taking into account the suggestions received from the participants, the guidelines have now been finalised. A summary of the guidelines is in Annexure I. Full Text is being issued separately.
(c) Transfer of Certificates of Deposit (CDs)
(d) Rating Requirement for Term Deposits
Raised by Financial InstitutionsDevelopment of Government
Securities Market42. Important developments in respect of the measures announced in the April policy statement are :
- It was proposed to introduce a scheme for automatic invocation by the SGL Account holder of undrawn refinance/liquidity support from RBI for facilitating smooth securities settlement. Detailed guidelines for implementation of the facility has since been issued.
- With a view to facilitating sale of securities allotted in primary issues on the same day, it was proposed to allow the entities which get allotments in primary issues to sell the allotted securities on the same day.Relevant instructions have been issued.
- The day of payment in respect of 14 and 91 day Treasury Bills was changed from Saturday to the next working day pending a review after six months. Since the system has been working smoothly, it has been decided to continue with the change of day of payment from Saturday to the next working day.
- A detailed review of liquidity support to PDs has been undertaken and modifications introduced in the scheme in consultation with them. Further, the commission payment to PDs for auction Treasury Bills has since been withdrawn. A note containing the proposed capital adequacy standards for PDs was circulated and suggestions received from them have been examined and incorporated in the guidelines. Revised guidelines are being separately issued to the PDs.
- State Bank of India as the chief promoter has constituted a Core Group, which is working on a Report for setting up a Clearing Corporation for money, debt and foreign exchange markets. The Core Group is presently engaged in having presentations from different entities with expertise for setting up the proposed Clearing Corporation and it would come out with its recommendations shortly.
(a) Guidelines for Constituents' SGL Accounts
(b) Order-driven Screen-based trading
in Government Securities(a) General Provisions on Standard
Assets as Tier 2 CapitalThe Narasimham Committee on Banking Sector Reforms had observed that our standards with regard to asset classification in banks were liberal and needed to be revised to fall in line with the international best practices. In this connection, the Committee had recommended for a general provision of 1 per cent on standard assets, which RBI should consider introducing in a phased manner. Accordingly, as a part of tightening the prudential norms, banks were advised in October 1998 to make a general provision on standard assets of a minimum of 25 basis points from the year ended March 31, 2000. The guidelines were partially modified on April 24, 2000 stipulating that the provision should be made on a global portfolio basis and not on domestic advances, the general provision on standard assets will not be eligible for inclusion in Tier 2 Capital, etc. In view of the international best practices followed in this regard, it is proposed to include the general provision on standard assets in Tier 2 Capital. Necessary instructions will be issued separately.
(b) Categorisation and Valuation
of Banks' Investment PortfolioAs mentioned in the Mid-Term Review of Monetary and Credit Policy for 1999-2000, the Report of the Informal Group on Valuation of Banks' Investment Portfolio was circulated among banks and discussed with the Institute of Chartered Accountants of India and the Indian Banks Association. The guidelines have now been finalised keeping in view the comments and suggestions received from them. The revised guidelines are in consonance with the best international practices on categorisation and valuation of investments and are effective from the half-year ended September 30, 2000.
A summary of the revised guidelines on categorisation and valuation of banks' investments is in Annexure II. Detailed operational instructions are being issued separately.
(c) Annexing Balance Sheets of Subsidiaries
to Parent Bank's Balance SheetBanks are required to voluntarily build-in risk weighted components of their subsidiaries into their own balance sheet on notional basis and earmark additional capital in their books, in stages, beginning from the year ending March 2001. However, at present, public sector banks are not required to annex the balance sheets of their subsidiaries to their balance sheet. In order to bring more transparency to the balance sheets of public sector banks and as a further step towards consolidated supervision and to provide additional disclosures, it has been decided that public sector banks should also annex the balance sheets of their subsidiaries to their balance sheet beginning from the year ending March 31, 2001.
(d) Non-Performing Asset – 'Past Due' Concept
(e) Move towards Risk Based Supervision
(f) Discussion Paper on Prompt
Corrective ActionTo guard against regulatory forbearance and to ensure that regulatory intervention is consistent across institutions and in keeping with the extent of problem, a framework for Prompt Corrective Action (PCA) has been prepared with various trigger points for prompt responses by the supervisors. The framework provides certain mandatory and discretionary action points for the supervisors. The schedule of corrective actions has been worked out based on three parameters, i.e., Capital to Risk-Weighted Assets Ratio (CRAR), Net NPAs and Return on Assets (ROA) which represent the three important parameters of capital adequacy, asset quality and profitability. When a bank's performance activates these trigger points, a certain set of mandatory/ discretionary actions will follow. These action points are proposed to pre-empt any deterioration in the soundness of banks. The PCA has been put on the web site (www.rbi.org.in) for wide discussion, debate, and comments. The scheme will be finalised in the light of comments and suggestions received from experts and market participants.
(g) Macro-Prudential Indicators (MPIs)
(h) Credit Exposures to Individual/Group Borrowers
Bank Financing of Equities and
Investments in Shares45. The Standing Technical Committee, comprising officials of RBI and SEBI, which was requested to develop operating guidelines for a transparent and stable system of bank financing of equities and investments in shares, submitted its report in August 2000. This report was released for public comments by RBI. On the basis of the comments received from experts and other market participants on the proposals made by the Committee as well as the views expressed by banks in the meeting taken by RBI with the Chief Executives of major banks in September 2000, draft guidelines were prepared by RBI and circulated once again, among select banks, and also placed on the RBI website for comments from banks, financial institutions and other market participants. Based on the feedback received from banks and other market participants, the guidelines on bank financing of equities and investment in shares have now been finalised. These are given in Annexure III.
Review of Exchange Earners Foreign
Currency A/cs (EEFC) Facility47. Since August 14, 2000, banks are permitted to credit 35 per cent of the inward remittances in the EEFC accounts of Export oriented units, units in Export Processing Zone, Software Technology Park or Electronic Hardware Technology Park and 25 per cent of inward remittances in respect of others. Prior to this, the respective entitlements were 70 per cent and 50 per cent. On a review, in order to facilitate quick export-related payments and reduce transaction costs, it has been decided to restore fully the earlier entitlements to 70 per cent and 50 per cent, respectively. Payments which can be made from these accounts will also remain the same as before.
(a) Charging of Penal Interest: Deregulation
(b) Margins on Credit for Free
sale Sugar: Deregulation(c) Review of Consortium
arrangement for Food Credit(e) Review of recommendations of the
Bills Discounting GroupA Working Group on Bills Discounting by Banks was constituted under the Chairmanship of Shri K.R. Ramamoorthy, to examine inter alia the possibility of extending bills discounting facility to services sector especially industries such as information technology, software services, travel and tourism, etc. In view of the services sector transforming the economic profile of the country and is poised to register tremendous growth and contribute significantly to the overall economy, the Group undertook a detailed scrutiny of the key issues involved in bill financing and examined the possibility of strengthening the existing bill discounting mechanism and extending its scope to services sector. The Group has made several recommendations duly taking into account the Indian context in respect of bill financing, Banker's Acceptance, Bill financing - services sector and challenges of e-commerce that may be thrown up in the financial sector of the country. The Working Group has submitted its report to the Reserve Bank of India recently. The full text of the Report has already been placed on the RBI website (www.rbi.org.in), for wider debate and discussion. Based on the feedback and in consultation with market participants, RBI will evolve suitable guidelines for implementation.
(g) Implementation of Swarnjayanti
Gram Swarozgar Yojana (SGSY)(i) Small Scale Industries (SSI)
Non-Banking Financial Companies (NBFCs)
(a) Regulatory Norms for NBFCs
(b) Working Group on Asset Securitisation
(a) Preparation of a 'Payment
System Vision Document'(b) Working Group on Internet Banking
(c) Use of Imaging Technology for reducing
Clearing Reconciliation Differences(d) Imaging to serve as pre-cursor
for Cheque TruncationInternational Financial
Standards and Codes53. As mentioned in the April policy statement, a Standing Committee on International Financial Standards and Codes was set up to identify and monitor the developments in global standards and codes being evolved in the context of the international developments and consider the applicability of these standards and codes to the Indian financial system and chalk out a road map for aligning India's standards and practices with international best practices. Advisory Groups in ten major subject areas were set up in the beginning of this year to assist the Standing Committee. Of these ten Advisory Groups, the Advisory Group on 'Transparency in Monetary and Financial Policies' submitted its Report in September 2000. The Group has examined issues related to the clarity of roles and responsibilities including transparency in monetary policy formulation and implementation in detail. The Advisory Groups on 'Payment and Settlement System', 'Banking Supervision' and 'Insurance Regulation' have also submitted the first part of their Report. The Report on 'Payment and Settlement System' deals with issues pertaining to the inter-bank payment and settlement system covering Core Principle and Central Bank responsibilities. The Report on 'Banking Supervision' has taken an exhaustive account and given recommendations pertaining to 4 major areas in banking regulation, viz., corporate governance in banks, transparency practices in Indian banking, supervision of cross-border banking and internal rating practices adopted by banks. The Report on 'Insurance Regulation' mainly deals with the various provisions relating to licensing of insurance companies in the light of standards set by the International Association of Insurance Supervisors (IAIS) and the Twenty Insurance Guidelines issued by OECD. The Reports of the Advisory Groups are available on Bank's Website (www.rbi.org.in).
Annexure I
Summary of Guidelines for Issue of
Commercial Paper (CP)Eligibility: Corporates, primary dealers (PDs), satellite dealers (SDs), and all-India financial institutions (FIs) ; for a corporate to be eligible, (a) the tangible net worth of Rs.4 crore; (b) having a sanctioned working capital limit from a bank/FI; and (c) the borrowal account is a Standard Asset.
Rating Requirement: The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other approved agencies.
Maturity: A minimum of 15 days and a maximum upto one year.
Denomination: Minimum of Rs.5 lakh and multiples thereof.
Limits and Amount : CP can be issued as a 'stand alone' product. Banks and FIs will have the flexibility to fix working capital limits duly taking into account the resource pattern of companies' financing including CPs.
Issuing and Paying Agent (IPA): Only a scheduled bank can act as an IPA.
Investment in CP: CP may be held by individuals, banks, corporates, unincorporated bodies, NRIs and FIIs.
Mode of Issuance : CP can be issued as a promissory note or in a dematerialised form. Underwriting, not permitted.
Preference for Demat : Issuers and subscribers are encouraged to prefer exclusive reliance on demat form. Banks, FIs, PDs and SDs are advised to invest only in demat form as soon as arrangements are put in place.
Stand-by Facility : It is not obligatory for banks/FIs to provide stand-by facility. They have the flexibility to provide credit enhancement facility within the prudential norms.
Role and Responsibilities : The Guidelines prescribe role and responsibilities for issuer, IPA and Credit Rating Agency. FIMMDA as an SRO may prescribe standardised procedure and documentation in consonance with the international best practices. Till then, the procedures/documentations prescribed by the IBA should be followed.
- State Bank of India as the chief promoter has constituted a Core Group, which is working on a Report for setting up a Clearing Corporation for money, debt and foreign exchange markets. The Core Group is presently engaged in having presentations from different entities with expertise for setting up the proposed Clearing Corporation and it would come out with its recommendations shortly.
- A detailed review of liquidity support to PDs has been undertaken and modifications introduced in the scheme in consultation with them. Further, the commission payment to PDs for auction Treasury Bills has since been withdrawn. A note containing the proposed capital adequacy standards for PDs was circulated and suggestions received from them have been examined and incorporated in the guidelines. Revised guidelines are being separately issued to the PDs.
- The day of payment in respect of 14 and 91 day Treasury Bills was changed from Saturday to the next working day pending a review after six months. Since the system has been working smoothly, it has been decided to continue with the change of day of payment from Saturday to the next working day.
A Summary of Guidelines on Categorisation
And Valuation of Banks' InvestmentsThe categorisation of the banks' investment portfolio both in the SLR and non-SLR segments will be as per details given below. The proposed guidelines will be made effective from the half-year ended September 30, 2000.
A. Categorisation :
1) The entire investment portfolio of the banks (including SLR securities and non-SLR securities) will be classified under three categories, viz., `Held to Maturity', `Available for Sale' and `Held for Trading'. Under each category the six-fold classification, if applicable, will continue as hitherto. Consequently, in the balance sheet, the investments will continue to be disclosed as per the existing six classifications (a) Government Securities, (b) Other approved securities, (c) Shares, (d) Debentures and Bonds, (e) Subsidiaries and Joint Ventures and (f) Others.
[Definitions : The securities acquired by the banks with the intention to hold them up to maturity will be classified under Held to Maturity. The securities acquired by the banks with the intention to trade by taking advantage of the short-term price/interest rate movements will be classified under Held for Trading. The securities which do not fall within the above two categories will be classified under Available for Sale]
2) Banks should decide the category of the investment at the time of acquisition and the decision should be recorded on the investment proposals.
Held to Maturity
3) The investments classified under 'Held to Maturity' will include the following :
- Re-capitalisation bonds.
- Investment in subsidiaries and joint ventures.
- Investments in debentures, which are deemed to be in the nature of an advance.
- Any other investment that the bank may decide to include in this category. Such investments will not exceed 25 per cent of the total investments, which will exclude the investments specified at (i), (ii) and (iii) above.
4) The banks, which had already marked to market more than 75 per cent of their SLR portfolio, will be given the option to re-classify their investments under this category up to the permissible level.
5) Profit on sale of investments in this category should be first taken to the Profit & Loss Account and thereafter be appropriated to the `Capital Reserve Account'. Loss on sale will be recognised in the Profit & Loss Account.
Available for Sale & Held for Trading
6) The banks will have the freedom to decide on the extent of holdings under Available for Sale and Held for Trading categories. This will be decided by them after considering various aspects such as basis of intent, trading strategies, risk management capabilities, tax planning, manpower skills and capital position.
7) The investments classified under Held for Trading category are to be sold within 90 days. If the bank is not able to sell the security within 90 days due to exceptional circumstances such as tight liquidity conditions, or extreme volatility, or market becoming unidirectional, the security should be shifted to the Available for Sale category.
8) Profit or loss on sale of investments in both the categories will be taken to the Profit & Loss Account.
B. Shifting among categories :
9) Banks may shift investments to/from Held to Maturity category with the approval of the Board of Directors once a year. Such shifting will normally be allowed at the beginning of the accounting year. No further shifting to/from this category will be allowed during the remaining part of that accounting year.
10) Banks may shift investments from Available for Sale category to Held for Trading category with the approval of their Board of Directors/ALCO/Investment Committee.
11) Shifting of investments from Held for Trading category to Available for Sale category is generally not allowed. However, it will be permitted only under exceptional circumstances as mentioned at item 7 above with the approval of the Board of Directors/ALCO/Investment Committee.
12) Transfer of scrips from one category to another, under all circumstances, should be done at the acquisition cost/book value/market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully provided for.
C. Valuation :
13) Investments classified under Held to Maturity category need not be marked to market and will be carried at acquisition cost unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity.
14) Banks should recognise any diminution, other than temporary, in the value of their investments in subsidiaries/joint ventures which are included under Held to Maturity category and provide therefor. Such diminution should be determined and provided for each investment individually.
15) The individual scrips in the Available for Sale category will be marked to market at the year-end or at more frequent intervals.
16) The individual scrips in the Held for Trading category will be revalued at monthly or at more frequent intervals.
Market value
17) The `market value' for the purpose of periodical valuation of investments included in the Available for Sale and the Held for Trading categories would be the market price of the scrip as available from the trades/quotes on the stock exchanges, price of SGL transactions, price list of RBI.
18) Reserve Bank of India will not announce the Yield to Maturity (YTM) rates for unquoted Government securities, as hitherto, for the purpose of valuation of investments by banks. The banks should value the unquoted SLR securities on the basis of the YTM rates to be put out by the Primary Dealers Association of India (PDAI) jointly with the Fixed Income Money Market and Derivatives Association (FIMMDA) at quarterly intervals. The valuation of the other unquoted non-SLR securities, wherever linked to the YTM rates, will be with reference to the YTM rates as put out by the PDAI/FIMMDA.
Annexure III - With a view to facilitating sale of securities allotted in primary issues on the same day, it was proposed to allow the entities which get allotments in primary issues to sell the allotted securities on the same day.Relevant instructions have been issued.
Guidelines on Bank Financing of
Equities and Investments in SharesThe Standing Technical Committee on Bank Financing of Equities, comprising officials of RBI and SEBI, set up to develop operating guidelines for a transparent and stable system of bank financing of equities and investments in shares submitted its report on August 30, 2000. The report was released for public comments. On the basis of the comments received from the media and other market participants on the proposals made by the Committee as well as the views expressed by banks in the meeting taken by RBI with the Chief Executives of major banks on September 19, 2000, RBI prepared new draft guidelines. These draft guidelines were again circulated among select banks and also placed on the RBI website for comments from banks, financial institutions and other market participants.
Based on the feed back received from banks and others, the guidelines on bank financing of equities and investments in shares have now been finalised. These are given below.
1. Bank financing of equities
(i) Financing of Initial Public Offerings (IPOs)
(a) The financing of Initial Public Offerings (IPOs) should be treated as advances against shares to individuals. Accordingly, banks may grant advances for subscribing to IPOs only to individuals. Further, the terms and conditions for financing of IPOs should be the same as those applicable to advances against shares to individuals, set out in our Master circular DBOD.No.Dir.BC.90/ 13.07.05/1998 dated August 28, 1998. The maximum amount of finance that can be extended to an individual against IPOs should be Rs.10 lakh, as applicable to advances against physical shares. The corporates should not be extended credit by banks for investment in other companies' IPOs. Similarly, banks should not provide finance to NBFCs for further lending to individuals for IPOs.
(b) Finance extended by a bank for IPOs should be reckoned as an exposure to capital market.
(ii) Issue of guarantees on behalf of brokers
A minimum margin of 25 per cent inclusive of cash margin, should be obtained by banks for issue of guarantees on behalf of share brokers. Banks may, at their discretion, obtain margin higher than 25 per cent as per the policy approved by their Board of Directors.
(iii) Total exposure
The Board of Directors of banks may lay down a prudential ceiling on the bank's aggregate exposure to capital market, keeping in view its overall risk profile. Boards of each bank should also take a view on the exposure on a particular corporate either through primary or secondary market or through book building route, keeping in view its overall risk management policy. The bank's exposure should, however, meet the statutory requirements regarding holding of shares of a company contained in sections 19(2) and (3) and 20(1)(a) of the Banking Regulation Act, 1949, as also the single borrower and borrower-group exposure norms stipulated by the RBI. The following may be excluded for reckoning the bank's aggregate exposure to capital market:
(a) Advances against collateral security of shares.
(b) Advances to individuals for personal purposes like education, housing, consumption, etc., against the security of shares.
(c) Credit substitutes like Commercial Paper, non-convertible debenture, etc., may not be reckoned as part of credit portfolio for arriving at the bank's exposure to capital market.
2. Banks' investments in shares and debentures
(i) In terms of circular DBOD No.Dir.BC..61/13.07.05/94 dated May 18, 1994, banks are free to acquire shares, convertible debentures of corporates and units of equity oriented mutual funds, subject to a ceiling of 5 per cent of the incremental deposits of the previous year. The RBI-SEBI Technical Committee has recommended that the ceiling prescribed for banks' investments in shares, convertible debentures, etc., should be related to outstanding advances and not to incremental deposits of the previous year. It has, therefore, been decided that within the overall exposure to sensitive sectors, a bank's total exposure to capital market by way of investments in shares, convertible debentures and units of mutual funds (other than debt funds) should not exceed 5 per cent of the banks' total outstanding credit as on March 31 of the previous year. It is further clarified that the ceilings for investments in shares, etc., are maximum permissible ceiling and a bank's Board of Directors is free to adopt a lower ceiling for an individual bank, keeping in view the bank's overall risk profile and volatility in equity prices. In respect of those banks where the present outstanding investments in equities are relatively small and well below the 5 per cent overall ceiling, as a prudential measure, the Board should also lay down an annual ceiling for fresh investments in equities so that any increase in fresh investments in equities take place in a phased, gradual and cautious manner, within the absolute ceiling fixed by the Board for each year.
(ii) Banks may make investment in shares directly or through UTI and SEBI approved other diversified mutual funds with good track records. Investment in UTI/mutual funds will be as per the investment policy approved by the Board of Directors, taking into account the in-house expertise available within the bank. It is advised that the decisions in regard to investments in shares, etc., should be taken by the Investment Committee set up by the bank.
(iii) Underwriting commitments taken up by the banks in respect of primary issues through book building route would also be within the above norms.
(iv) Loans sanctioned to corporates for meeting promoters' contributions and bridge loans sanctioned to companies for a period not exceeding one year against expected equity flows/issues, expected proceeds of non-convertible debentures, external commercial borrowings, GDRs and/or funds in the nature of foreign direct investments, (which are now within the ceiling of 5 per cent of the incremental deposits of the previous year), would also continue to be within the above overall ceiling.
(v) The decision on investments in shares, debentures, etc., maybe made by the Board/ALCO of each bank keeping in view the permitted tolerance levels of mismatch. The quantum and tenure of such investments may be decided by Boards of each bank.
(vi) Banks whose investments in shares, etc., are now in excess of 5 per cent of outstanding credit as on March 31, 2000 may bring down their investments gradually to conform to this prudential norm, by March 31, 2001.
3. Valuation and disclosure
Banks should mark to market their investment portfolio in equities like other investments on a quarterly basis. Further, banks should disclose the total investments made in shares, convertible shares and units of equity oriented mutual funds as also aggregate advances against shares, etc., in the 'Notes on Accounts' to their balance sheets, beginning from the year ending March 2001.
4. Review of Guidelines
The Standing Technical Committee of RBI and SEBI will review the guidelines after six months in consultation with banks, keeping in view the operational mechanism and the experience gained. In case any changes are required in the light of actual experience, the Committee will make appropriate recommendations to the RBI.
- In April 2000, there was considerable uncertainty about the prospects of the US economy. This was reflected, among other things, in the sharp drop in equity prices. In April, the NASDAQ index fell by nearly 25 per cent, which in turn affected equity prices, in all major stock exchanges, including the Sensex in India. The US outlook, however, changed dramatically in June/July with an increasing consensus that the US economy was 'soft landing' and US growth rates were likely to be sustained at a relatively high level.