Regulatory and Other Measures

April 2010

RBI/2009-2010/379 UBD.PCB.Cir. No. 54/ 13.05.000/2009-10 dated April 5, 2010

The Chief Executive Officer of all Primary (Urban) Co operative Banks

UCBs - Agricultural Debt Waiver and Debt Relief Scheme, 2008 – Prudential Norms on IRAC, Provisioning and Capital Adequacy

Please refer to our circulars UBD. PCB. Cir. No.5 / 13.05.000 / 2008-09 dated July 30, 2008, UBD. PCB. Cir. No. 54 / 13.05.000 / 2008-09 dated March 09, 2009, UBD. PCB. Cir. No. 72 / 13.05.000 / 2008 - 09 dated June 26, 2009, and UBD. PCB. Cir. No. 8 / 13.05.006/ 2009 – 10 dated September 03, 2009 on the captioned subject.

2. In terms of the circular dated September 3, 2009, we had advised that the Government had decided to make the accounts of “other farmers” eligible for the debt relief of 25%, from Government of India, provided they pay their entire share of 75% by December 31, 2009.

3. In view of the recent drought in some States and the severe flood in some other parts of the country, the Government of India, as announced in the Union Budget 2010- 11, has now decided to extend the last date of payment of 75% of overdue portion by the “other farmers” under Debt Relief Scheme (under ADWDR) for another six months beyond December 31, 2009, i.e. up to June 30, 2010. The eligible “other farmers” may be allowed to repay this amount in one or more instalments up to June 30, 2010.

4. The Government of India has also advised that the banks/ lending institutions are allowed to receive even less than 75% of the eligible amount under OTS provided the banks / lending institutions bear the difference themselves and do not claim the same either from the government or from the farmer. The Government will pay only 25% of the actual eligible amount under debt relief.

5. The Government has once again clarified that the lending institutions would not charge any interest on the eligible amount for the period from February 29, 2008 to June 30, 2009. However, they may charge normal rate of interest on the eligible amount from July 01, 2009 up to the date settlement. Further, no interest shall be paid by the Government of India to the lending institutions for this six month extension under the Scheme while reimbursing the 25% amount to the lending institutions as per the delayed reimbursement schedule.

6. Where the farmers covered under the Debt Relief Scheme have given the undertaking, agreeing to pay their share under the OTS, their relevant accounts may be treated by banks as “standard” / “performing” provided:

1. adequate provision is made by the banks for the loss in present value (PV) terms for all the receivables due from the borrowers. (For computing the amount of loss in PV terms under the Scheme, the balance amount receivable from the farmers may be assumed to be due on June 30, 2010, and the interest payment would be as per paragraph 5 above. The cash flows should be discounted to the present value at the interest rate at which the loan was granted including the element of interest subsidy, if any, available from the Government.)

2. such farmers pay their share of the settlement latest by the revised last date, i.e. June 30, 2010.

7. In case, however, the payments are delayed by the farmers beyond June 30, 2010, the outstanding amount in the relevant accounts of such farmers shall be treated as NPA. The asset classification of such accounts shall be determined with reference to the original date of NPA (as if the account had not been treated as performing in the interregnum based on the aforesaid undertaking). On such downgradation of the accounts, additional provisions as per the extant prudential norms should also be made.

8. The accounting treatment for the Debt Relief Scheme as indicated in paragraph 5 of our circular dated September 3, 2009, may continue to be followed.

9. All other terms of the aforesaid circulars including provisioning remain unchanged.

RBI/2009-10/384 DBOD.No.BP.BC.86 / 21.06.001 (A)/2009-10 dated April 7, 2010

The Chairmen and Managing Directors / Chief Executive Officers of All Commercial Banks (Excluding Regional Rural Banks and Local Area Banks)

Prudential Guidelines on Capital Adequacy - Implementation of Internal Models Approach for Market Risk

Please refer to our circular DBOD BP. BC. 23/21.06.001/2009-10 dated July 7, 2009, inter alia advising banks desirous of moving to advanced approaches under Basel II that they can apply for migrating to Internal Models Approach for market risk from April 1, 2010 onwards, provided they are adequately prepared.

2. Basel II Framework offers a choice between two broad methodologies in measuring market risks for the purpose of capital adequacy. One methodology is to measure market risks in a standardised manner as per the Standardised Measurement Method (SMM) which is being used by banks in India since March 31, 2005. The alternative methodology known as Internal Models Approach (IMA) is also available which allows banks to use risk measures derived from their own internal market risk management models. The permissible models under IMA are the ones which calculate a value-at-risk (VaR) - based measure of exposure to market risk. VaR-based models could be used to calculate measures of both general market risk and specific risk. As compared to the SMM, IMA is considered to be more risk sensitive and aligns the capital charge for market risk more closely to the actual losses likely to be faced by banks due to movements in the market risk factors.

3. The guidelines governing use of internal models for measuring the capital charge for market risk are annexed. To begin with banks in India may model general market risk and continue to use SMM for specific risk. However, banks should endeavour to develop capabilities to model specific risk including Incremental Risk.

4. Banks interested in migrating to IMA for computing capital charge for market risk are advised to assess their preparedness with reference to these guidelines. As and when they are ready for introduction of IMA, they may first give Reserve Bank of India (RBI) (Chief General Manager-in-Charge, Reserve Bank of India, Department of Banking Operations & Development, Central Office, 12th Floor, Shahid Bhagat Singh Road, Mumbai - 400001), a notice of intention for the same. RBI will first make a preliminary assessment of the bank’s risk management system and its modelling process. If the result of this preliminary assessment is satisfactory, then RBI will allow the bank to make a formal application for migrating to IMA in a prescribed format, which would be made available to banks in due course. RBI will then perform a detailed analysis of its model with a view to approving the same.

5. It may be reiterated that banks would have the discretion to adopt IMA for market risk, while continuing with simpler approaches for computation of capital charge for credit and operational risks.

RBI/2009-10/387 RPCD.CO.RRB.BC.No.65/ 03.05.33/2009-10 dated April 8, 2010

The Chairman
All Regional Rural Banks (RRBs)

Cheque Collection Policy (CCP) - Immediate credit of Local / Outstation Cheques

Please refer to our circular RPCD.CO. RRB.BC.No. 87/03.05.33/2008-09 dated February 5, 2009 advising RRBs to frame their Cheque Collection Policies covering local and outstation cheque collection as per the time frame prescribed by the National Consumer Disputes Redressal Commission.

2. RRBs are advised that the Cheque Collection Policy should include instructions on immediate credit for local/ outstation cheques in addition to the aspects of time frame for collection of local/ outstation instruments and interest payment of delayed collection.

RBI/2009-10/388 RPCD.No.PLFS.BC.66/ 05.04.02/2009-10 dated April 8, 2010

The Chairman/ Managing Director/Chief Executive Officer, All Scheduled Commercial Banks (including Local Area Banks)

Agricultural Debt Waiver and Debt Relief Scheme, 2008

We forward herewith a copy of letter bearing number F.No.3/9/2008-AC dated March 26, 2010, received from Government of India, Ministry of Finance, New Delhi, on the captioned subject. The contents are self explanatory.

2. You are requested to take necessary action in this regard and give wide publicity to the change in the Scheme as envisaged in the above letter so that farmers can avail maximum benefits of ADWDR Scheme, 2008.

3. In this connection, your attention is invited to paragraph 2 f) of our circular RPCD.No.PLFS.BC.24/05.04.02/2008-09 dated September 4, 2008. The “Final” claims pertaining to “Debt Relief” arising till December 31, 2009 (including the cases settled through the Grievances Redressal Mechanism operating till January 31, 2010) may be submitted to this Department by June 30, 2010 in the prescribed format duly certified by the Central Statutory Auditors, as stated in the said circular.

4. In view of paragraph 5 of the above letter from Government of India, as no interest shall be paid by Government of India to the lending institutions for the six month extension period of the Scheme while reimbursing 25% amount to the lending institutions, banks may forward a separate claim to this Department in respect of “Debt Relief” cases that may be settled during the period January 1, 2010 to June 30, 2010 (including the cases settled through the Grievances Redressal Mechanism operating from February 1, 2010 to July 31, 2010), duly certified by the Central Statutory Auditors, in the manner stated in our circular dated September 4, 2008 mentioned above. The latter may be clearly marked as “Additional Final Claims –Debt Relief - Not Eligible for Interest” and should reach this office latest by June 30, 2011.

4. All other conditions of the above circular remain unchanged.

The above guidelines issued to banks, shall mutatis mutandis apply to the State Cooperative Banks, District Central Cooperative Banks and Urban Co-operative Banks.

RBI/2009-10/390 DBOD. No. Dir. BC 88 / 13.03.00/2009-10 dated April 9, 2010

All Scheduled Commercial Banks (excluding RRBs)

Guidelines on the Base Rate

Following the announcement in the Annual Policy Statement for the year 2009-10, Reserve Bank of India constituted a Working Group on Benchmark Prime Lending Rate (Chairman: Shri Deepak Mohanty) to review the present benchmark prime lending rate (BPLR) system and suggest changes to make credit pricing more transparent. The Working Group submitted its report in October 2009 and the same was placed on the Reserve Bank’s website for public comments. Based on the recommendations of the Group and the suggestions from various stakeholders, the draft guidelines on Base Rate were placed on the Reserve Bank’s website in February 2010.

2. In the light of the comments/suggestions received, it has been decided that banks switch over to the system of Base Rate. The BPLR system, introduced in 2003, fell short of its original objective of bringing transparency to lending rates. This was mainly because under the BPLR system, banks could lend below BPLR. For the same reason, it was also difficult to assess the transmission of policy rates of the Reserve Bank to lending rates of banks. The Base Rate system is aimed at enhancing transparency in lending rates of banks and enabling better assessment of transmission of monetary policy. Accordingly, the following guidelines are issued for implementation by banks.

Base Rate

1. The Base Rate system will replace the BPLR system with effect from July 1, 2010. Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. Banks may choose any benchmark to arrive at the Base Rate for a specific tenor that may be disclosed transparently. An illustration for computing the Base Rate is set out in the Annex. Banks are free to use any other methodology, as considered appropriate, provided it is consistent and is madeavailable for supervisory review/scrutiny, as and when required.

2. Banks may determine their actual lending rates on loans and advances with reference to the Base Rate and by including such other customer specific charges as considered appropriate.

3. In order to give banks some time to stabilise the system of Base Rate calculation, banks are permitted to change the benchmark and methodology any time during the initial six month period i.e. end-December 2010.

4. The actual lending rates charged may be transparent and consistent and be madeavailable for supervisory review/ scrutiny, as and when required.

Applicability of Base Rate

5. All categories of loans should henceforth be priced only with reference to the Base Rate. However, the following categories of loans could be priced without reference to the Base Rate: (a) DRI advances (b) loans to banks’ own employees (c) loans to banks’ depositors against their own deposits.

6. The Base Rate could also serve as the reference benchmark rate for floating rate loan products, apart from external market benchmark rates. The floating interest rate based on external benchmarks should, however, be equal to or above the Base Rate at the time of sanction or renewal.

7. Changes in the Base Rate shall be applicable in respect of all existing loans linked to the Base Rate, in a transparent and non-discriminatory manner.

8. Since the Base Rate will be the minimum rate for all loans, banks are not permitted to resort to any lending below the Base Rate. Accordingly, the current stipulation of BPLR as the ceiling rate for loans up to Rs. 2 lakh stands withdrawn. It is expected that the above deregulation of lending rate will increase the credit flow to small borrowers at reasonable rate and direct bank finance will provide effective competition to other forms of high cost credit.

9. Reserve Bank of India will separately announce the stipulation for export credit.

Review of Base Rate

10. Banks are required to review the Base Rate at least once in a quarter with the approval of the Board or the Asset Liability Management Committees (ALCOs) as per the bank’s practice. Since transparency in the pricing of lending products has been a key objective, banks are required to exhibit the information on their Base Rate at all branches and also on their websites. Changes in the Base Rate should also be conveyed to the general public from time to time through appropriate channels. Banks are required to provide information on the actual minimum and maximum lending rates to the Reserve Bank on a quarterly basis, as hitherto.

Transitional issues

11. The Base Rate system would be applicable for all new loans and for those old loans that come up for renewal. Existing loans based on the BPLR system may run till their maturity. In case existing borrowers want to switch to the new system, before expiry of the existing contracts, an option may be given to them, on mutually agreed terms. Banks, however, should not charge any fee for such switch-over.

12. In line with the above Guidelines, banks may announce their Base Rates after seeking approval from their respective ALCOs/ Boards.

Effective date

13. The above guidelines on the Base Rate system will become effective on July 1, 2010.

RBI/2009-10/392 RPCD.CO.Plan.BC.64/ 04.09.01/2009-10 dated April 9, 2010

The Chairman/ Managing Director [All domestic scheduled commercial banks (excluding Regional Rural Banks)]

Priority Sector Lending – Advances to Micro and Small Enterprises engaged in exports

Please refer to our Master Circular dated July 1, 2009 on Lending to Priority Sector, in terms of which finance granted by banks to micro and small enterprises as defined under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, is eligible for classification under priority sector.

2. Some commercial banks have sought clarification in respect of classification of loans granted to micro and small enterprises engaged in exports, under priority sector. The issue has been examined and it is clarified that loans granted by commercial banks to micro and small enterprises (MSE) (manufacturing and services) are eligible for classification under priority sector, provided such enterprises satisfy the definition of MSE sector as contained in MSMED Act, 2006, irrespective of whether the borrowing entity is engaged in export or otherwise.

3. The export credit granted to MSEs may be reported separately under heading “Export credit to micro and small enterprises sector”.

RBI/2009-10/405 FMD.MOAG. No.43/ 01.01.01/2009-10 dated April 20, 2010

All Scheduled Commercial Banks (excluding RRBs) and Primary Dealers

Liquidity Adjustment Facility – Repo and Reverse Repo Rates

As announced in the Annual Policy Statement for the Year 2010-11, the Reserve Bank has decided to increase the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.00 per cent to 5.25 per cent and the reverse repo rate by 25 basis points from 3.50 per cent to 3.75 percent with immediate effect.

2. All other terms and conditions of the current LAF scheme will remain unchanged.

RBI/2009-10/407 Ref: DBOD.No.Ret.BC.90 / 12.01.001/2009-10 dated April 20, 2010

All Scheduled Commercial Banks (excluding Regional Rural Banks)

CRR increased

Please refer to our Circular DBOD. No. Ret. BC.71/12.01.001/ 2009-10 dated January 29, 2010 on the captioned subject.

2. On the basis of the current assessment and in line with the policy stance, as set out in the Reserve Bank’s Monetary Policy Statement 2010-11 issued on April 20, 2010, it has been decided to increase the Cash Reserve Ratio (CRR) for Scheduled Commercial Banks by 25 basis points from 5.75 per cent to 6.00 per cent of their net demand and time liabilities (NDTL) with effect from the fortnight beginning April 24, 2010.

3. A copy of the relative notification DBOD. No. Ret. BC.89 /12.01.001/2009-10 dated April 20, 2010 is enclosed.

The above guidelines issued to banks, shall mutatis mutandis apply to the Regional Rural Banks, State Co-operative Banks and Urban Co-operative Banks.

RBI/2009-2010/420 RBI / DP No. 2303 / 02.14.003 / 2009-2010 dated April 23, 2010

The Chairman and Managing Director / Chief Executive Officers

All Scheduled Commercial Banks including RRBs / Urban Co-operative Banks / State Co-operative Banks / District Central Co-operative Banks

Credit/Debit Card transactions- Security Issues and Risk mitigation measures for IVR transactions

Please refer to our circular RBI/DPSS/ No.1501/02.14.003/2008-2009 dated February 18, 2009, wherein a directive was issued making it mandatory for banks to put in place additional authentication/ validation based on information not visible on the cards for all on-line card not present (CNP) transactions except IVR transactions.

2. After extensive deliberations with the banks/card companies it has been decided to extend this requirement of additional authentication/validation to all CNP transactions including IVR transactions. Accordingly, banks are advised to implement the contents of the above circular to all CNP transactions with effect from January 01, 2011.

3. These Directions are issued by the Reserve Bank of India, in exercise of the powers conferred by Section 18 of the Payment and Settlement Systems Act, 2007 (Act 51 of 2007). Banks are advised to strictly adhere to the instructions and time discipline indicated in this circular. Nonadherence to the directions shall attract penalties prescribed under the Act.

RBI/2009-10/426 DBOD.Dir.(Exp).BC.No.94/ 04.02.001/2009-10 date April 23, 2010

All Scheduled Commercial Banks (excluding RRBs)

Rupee Export Credit Interest Rates

Please refer to our circular DBOD.Dir.(Exp).BC.No.26 /04.02.001/2009-10 dated July 31, 2009. In this connection, the Government of India has decided to extend Interest Subvention of 2 percentage points w.e.f. April 1, 2010 to March 31, 2011 on pre and post shipment rupee credit, for certain employment oriented export sectors as under:

1. Handicrafts

2. Carpets

3. Handlooms

4. Small & Medium Enterprises (SME) (as defined in the Annex)

2. As per the existing guidelines, banks charge interest rate not exceeding BPLR minus 2.5 percentage points on rupee preshipment credit up to 270 days and postshipment credit up to 180 days. Banks will now charge interest rate not exceeding BPLR minus 4.5 percentage points on preshipment credit up to 270 days and postshipment credit up to 180 days on the outstanding amount for the period April 1, 2010 to March 31, 2011 to the above mentioned sectors. However, the total subvention will be subject to the condition that the interest rate, after subvention will not fall below 7 per cent which is the rate applicable to the agriculture sector under priority sector lending. The banks may ensure that the benefit of the 2 per cent interest subvention is passed on completely to the eligible exporters.

3. In respect of other categories of exporters, the provisions of the circular DBOD.Dir.(Exp).BC.No.54/04.02.001/2009- 10 dated October 29, 2009, would continue to apply.

5. The procedure for claiming subvention is as follows:

1. The amount of subvention would be reimbursed on the basis of claim submitted as at the end of respective quarters in the format enclosed.

2. The amount of subvention will be calculated on the amount of export credit from the date of disbursement

   1. up to the date of repayment; or

   2. up to the date beyond which the outstanding export credit becomes overdue; or

   3. for pre-shipment credit up to 270 days and post-shipment credit up to 180 days, whichever is earlier.

3. The claims should be accompanied by an External Auditor’s Certificate certifying that the claims for subvention of Rs…………….for the respective quarter is true and correct. Settlement of the claim will be done only on receipt of this certificate.

4. Claims may be submitted in the enclosed format to the Chief General Manager-in-Charge, Department of Banking Operations and Development, Reserve Bank of India, Central Office, World Trade Centre, Mumbai-400 005.

RBI /2009-10/432 DBOD.No.BL.BC.99/ 22.01.009/2009-2010 dated April 26, 2010 Vaishakha 6, 1932 (S)

All Commercial banks (including RRBs and Local Area Banks)

Financial Inclusion by Extension of Banking Services – Use of Business Correspondents (BCs)

A reference is invited to paragraph 79 of the Annual Policy Statement for the year 2010-11 regarding the proposed relaxation in the guidelines relating to Business Correspondent model.

2. As per the extant guidelines on the Business Correspondent (BC) model, only certain select categories of individuals are permitted to be engaged as BCs. In terms of circular DBOD.No.BL.BC.74/22.01.009/2007- 08 dated April 24, 2008, banks have been permitted to engage retired bank employees, ex-servicemen and retired government employees as BCs. Further, in terms of circular DBOD.No.BL.BC.63/22.01.009/2009- 10 dated November 30, 2009, banks have been permitted to engage the following entities as BCs: (i) Individual kirana/medical/ fair price shop owners (ii) Individual Public Call Office(PCO) operators (iii) Agents of Small Savings Schemes of Government of India/Insurance Companies (iv) Individuals who own Petrol Pumps (v) Retired teachers and (vi) Authorised functionaries of well run Self Help Groups(SHGs) linked to banks.

3. On a review and with a view to providing more flexibility to banks, it has been decided to permit banks to engage any individual, including those operating Common Service Centres (CSCs) as BC, subject to banks’ comfort level and their carrying out suitable due diligence as also instituting additional safeguards as may be considered appropriate to minimise the agency risks.

4. All other terms and conditions in our circular DBOD.No.BL.BC.63/22.01.009/2009- 10 dated November 30, 2009, will remain unchanged.

RBI/2009-10/441 RPCD.CO.Plan.BC.78/ 04.09.01/2009-10 dated April 30, 2010

The Chairman/ Managing Director [All domestic scheduled commercial banks (excluding Regional Rural Banks)]

Priority Sector Lending – Export credit for agriculture and allied activities

Please refer to our Master Circular dated July 1, 2009 on Lending to Priority Sector, in terms of which loans granted by banks for agriculture and allied activities, as indicated therein, are eligible for classification under priority sector.

2. Some commercial banks have sought clarification in respect of classification of working capital limits granted to units engaged in agricultural and allied activities and to food and agro-based processing units by way of export credit, under priority sector. The issue has been examined and it is clarified that loans granted by commercial banks for agricultural and allied activities are eligible for classification under priority sector, irrespective of whether the borrowing entity is engaged in export or otherwise.

3. The export credit granted for agricultural and allied activities may be reported separately under heading “Export credit to agriculture sector”.