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RBI Governor argues for Independent Central Bank for Macroeconomic Stability of the Country


In his last public speech as the RBI Governor at St. Stephens College, New Delhi on September 3, 2016, Dr. Raghuram G. Rajan explained why central banking was not as easy as it appeared - just raising or cutting interest rates - and why it needed decisions, sometimes unpopular or hard-to-explain ones, to be made under conditions of extreme uncertainty and argued in favour of having an independent central bank and the role and responsibilities of the central bank governor.

The central bank governor has to make difficult policy choices often in the face of uncertainties after weighing the alternatives as best as one can. He cited the example of 2013, when due to weak macro fundamentals the rupee tumbled and it was necessary to get back the confidence of international investors and how he, who had just taken over as the Governor of the Reserve Bank, had to decide on introducing the FCNR(B) scheme in the midst of uncertainties. That the decision proved to be beneficial for the country, the Reserve Bank and the banks, taught him that "Policy making invariably involves taking measured risks in the face of uncertainty." He then made out a case for India to have a strong and independent central bank so that it could ensure macroeconomic stability.

It is for taking complex decisions - often difficult for the common citizens to understand - that the central banks should be independent and should be able to say 'no' to seemingly attractive proposals, he argued but added that at the same time, it also cannot become free of all constraints. "It has to work under a framework set by the Government," he said. In his view, "Frameworks reduce the space for differences" and it was important that the constitutional authorities clearly outlined the central bank's responsibilities.

He gave two examples - a framework for inflation objective and a risk management framework for RBI that indicated the level of equity the RBI needed, given the risks it faced, to be adopted by the RBI Board. "The RBI did not have the luxury of economic inconsistency," he said, be it interest rates, exchange rate, pushing banks to clean up or paying dividend to the government. In a poor country like India where so many people lived at the margin, the role of the central bank was to ensure that growth did not exceed the country's potential, adopting prudential policies that reduce the risk, and building sufficient buffers that the country was protected against shocks. The Governor also explained the economic rationale of why the RBI cannot pay special dividend to the government - in addition to the entire surplus being paid out for the last three years.

He explained that paying a special dividend over and above the surplus RBI generated, as had been suggested, was legally not possible. And even if it were legally possible, and even if the Board were convinced a higher dividend would not compromise the creditworthiness of the RBI, this not reduce overall market borrowing by the government, defeating the very purpose of special dividend! He instead made out a case for transferring to the government the entire surplus of the RBI, retaining just enough buffers that were consistent with good central bank risk management practice. "Separately, the government could infuse capital into the banks. The two decisions need not be linked," he pointed out and further suggested that the Government should acknowledge its substantial equity position in the RBI and subtract it from its outstanding debt when it announces its net debt position. That would satisfy all concerned without monetary damage.

The Governor also argued for operational freedom of the central bank, "albeit invariably in consultation with the Finance Ministry" in matters relating to macroeconomic stability. "Multiple layers of scrutiny, especially by entities that do not have the technical understanding, will only hamper decision making," he said and suggested that instead, the government-appointed RBI Board, which included ex-officio government officials as well as government appointees, should continue to play its key oversight role. He pointed out in this context that at present all important RBI decisions including budgets, licenses, regulation, and supervision are either approved by the Board or one of its sub-committees and it was, therefore, important to quickly fill the vacancies in the RBI Board so that the full expertise and oversight of the Board could be utilised.

In the interests of macroeconomic stability again, he argued that the Governor’s rank should be commensurate with her position as the most important technocrat in charge of economic policy in the country. On communication, Governor said that in a developing democracy such as India, the RBI Governor also has to continuously make the case for the actions the central bank is taking, including the many structural reforms that were underway. Communication was as much about educating as it was about informing - be it with entrepreneurs and retail borrowers or pensioners or Parliamentarians, he said and added that public understanding could help ease the way for reforms, as well as increase support for policies. "The RBI Governor therefore has to explain again and again...and occasionally also warn about the dangers of certain courses of action or certain tendencies in the economy for growth and macroeconomic stability."



 RBI has  decided that banks shall follow the following guidelines for pricing their advances:

a) Internal Benchmark

i. All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 will be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark for such purposes.

ii. The MCLR will comprise of:

  1. Marginal cost of funds;
  2. Negative carry on account of CRR;
  3. Operating costs;
  4. Tenor premium.

iii. Marginal Cost of funds

The marginal cost of funds will comprise of Marginal cost of borrowings and return on networth. 

iv. Negative Carry on CRR

Negative carry on the mandatory CRR which arises due to return on CRR balances being nil, will be calculated as under:

Required CRR x (marginal cost) / (1- CRR)

The marginal cost of funds arrived at (iii) above will be used for arriving at negative carry on CRR.

v. Operating Costs

All operating costs associated with providing the loan product including cost of raising funds will be included under this head. It should be ensured that the costs of providing those services which are separately recovered by way of service charges do not form part of this component.

vi. Tenor premium

These costs arise from loan commitments with longer tenor. The change in tenor premium should not be borrower specific or loan class specific. In other words, the tenor premium will be uniform for all types of loans for a given residual tenor.

vii. Since MCLR will be a tenor linked benchmark, banks shall arrive at the MCLR of a particular maturity by adding the corresponding tenor premium to the sum of Marginal cost of funds, Negative carry on account of CRR and Operating costs.

viii. Accordingly, banks shall publish the internal benchmark for the following maturities:

  1. overnight MCLR,
  2. one-month MCLR,
  3. three-month MCLR,
  4. six month MCLR,
  5. One year MCLR.

In addition to the above, banks have the option of publishing MCLR of any other longer maturity.

b) Spread

i. Banks should have a Board approved policy delineating the components of spread charged to a customer. The policy shall include principles:

  1. To determine the quantum of each component of spread.
  2. To determine the range of spread for a given category of borrower / type of loan.
  3. To delegate powers in respect of loan pricing.

ii. For the sake of uniformity in these components, all banks shall adopt the following broad components of spread:

a. Business strategy

The component will be arrived at taking into consideration the business strategy, market competition, embedded options in the loan product, market liquidity of the loan etc.

b. Credit risk premium

The credit risk premium charged to the customer representing the default risk arising from loan sanctioned should be arrived at based on an appropriate credit risk rating/scoring model and after taking into consideration customer relationship, expected losses, collaterals, etc.

iii. The spread charged to an existing borrower should not be increased except on account of deterioration in the credit risk profile of the customer. Any such decision regarding change in spread on account of change in credit risk profile should be supported by a full-fledged risk profile review of the customer.

iv. The stipulation contained in sub-paragraph (iii) above is, however, not applicable to loans under consortium / multiple banking arrangements.

c) Interest Rates on Loans

i. Actual lending rates will be determined by adding the components of spread to the MCLR. Accordingly, there will be no lending below the MCLR of a particular maturity for all loans linked to that benchmark

ii. The reference benchmark rate used for pricing the loans should form part of the terms of the loan contract.

d) Exemptions from MCLR

i. Loans covered by schemes specially formulated by Government of India wherein banks have to charge interest rates as per the scheme, are exempted from being linked to MCLR as the benchmark for determining interest rate.

ii. Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL), etc. granted as part of the rectification/restructuring package, are exempted from being linked to MCLR as the benchmark for determining interest rate.

iii. Loans granted under various refinance schemes formulated by Government of India or any Government Undertakings wherein banks charge interest at the rates prescribed under the schemes to the extent refinance is available are exempted from being linked to MCLR as the benchmark for determining interest rate. Interest rate charged on the part not covered under refinance should adhere to the MCLR guidelines.

iv. The following categories of loans can be priced without being linked to MCLR as the benchmark for determining interest rate:

(a) Advances to banks’ depositors against their own deposits.

(b) Advances to banks’ own employees including retired employees.

(c) Advances granted to the Chief Executive Officer / Whole Time Directors.

(d) Loans linked to a market determined external benchmark.

(e) Fixed rate loans granted by banks. However, in case of hybrid loans where the interest rates are partly fixed and partly floating, interest rate on the floating portion should adhere to the MCLR guidelines.

e) Review of MCLR

i. Banks shall review and publish their Marginal Cost of Funds based Lending Rate (MCLR) of different maturities every month on a pre-announced date with the approval of the Board or any other committee to which powers have been delegated.

ii. However, banks which do not have adequate systems to carry out the review of MCLR on a monthly basis, may review their rates once a quarter on a pre-announced date for the first one year i.e. upto March 31, 2017. Thereafter, such banks should adopt the monthly review of MCLR as mentioned in (i) above.

f) Reset of interest rates

i. Banks may specify interest reset dates on their floating rate loans. Banks will have the option to offer loans with reset dates linked either to the date of sanction of the loan/credit limits or to the date of review of MCLR.

ii. The Marginal Cost of Funds based Lending Rate (MCLR) prevailing on the day the loan is sanctioned will be applicable till the next reset date, irrespective of the changes in the benchmark during the interim.

iii. The periodicity of reset shall be one year or lower. The exact periodicity of reset shall form part of the terms of the loan contract.

g) Treatment of interest rates linked to Base Rate charged to existing borrowers

i. Existing loans and credit limits linked to the Base Rate may continue till repayment or renewal, as the case may be.

ii. Banks will continue to review and publish Base Rate as hitherto.

iii. Existing borrowers will also have the option to move to the Marginal Cost of Funds based Lending Rate (MCLR) linked loan at mutually acceptable terms. However, this should not be treated as a foreclosure of existing facility.

h) Time frame for implementation

In order to give sufficient time to all the banks to move to the MCLR based pricing, the effective date of these guidelines is April 1, 2016.







Main features of Gold Monetisation Scheme (GMS), 2015:

The Scheme:

The GMS will replace the existing Gold Deposit Scheme, 1999.

However, the deposits outstanding under the Gold Deposit Scheme will be allowed to run till maturity unless the depositors prematurely withdraw them.

Resident Indians (Individuals, HUF, Trusts including Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations and Companies) can make deposits under the scheme.

The minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold of 995 fineness. There is no maximum limit for deposit under the scheme.

The gold will be accepted at the Collection and Purity Testing Centres (CPTC) certified by Bureau of Indian Standards (BIS) and notified by the Central Government under the Scheme. The deposit certificates will be issued by banks in equivalence of 995 fineness of gold.

The principal and interest of the deposit under the scheme will be denominated in gold.

The designated banks will accept gold deposits under the Short Term (1-3 years) Bank Deposit (STBD) as well as Medium (5-7 years) and Long (12-15 years) Term Government Deposit Schemes.

While the former(1-3 years) will be accepted by banks on their own account.

The latter(5-7 years and 12-15 years) will be on behalf of Government of India. There will be provision for premature withdrawal subject to a minimum lock-in period and penalty to be determined by individual banks.

Interest on deposits under the scheme will start accruing from the date of conversion of gold deposited into tradable gold bars after refinement or 30 days after the receipt of gold at the CPTC or the bank’s designated branch, as the case may be and whichever is earlier.

During the period from the date of receipt of gold by the CPTC or the designated branch, as the case may be, to the date on which interest starts accruing in the deposit, the gold accepted by the CPTC or the designated branch of the bank shall be treated as an item in safe custody held by the designated bank.

Reserve requirements
The short term bank deposits will attract applicable cash reserve ratio (CRR) and statutory liquidity ratio (SLR). However, the stock of gold held by the banks will count towards the general SLR requirement.

KYC to apply
The opening of gold deposit accounts will be subject to the same rules with regard to customer identification as are applicable to any other deposit account.

Utilisation of gold mobilised under GMS
The designated banks may sell or lend the gold accepted under STBD to MMTC for minting India Gold Coins (IGC) and to jewellers, or sell it to other designated banks participating in GMS.

The gold deposited under MLTGD will be auctioned by MMTC or any other agency authorised by the Central Government and the sale proceeds credited to the Central Government’s account with the Reserve Bank. The entities participating in the auction may include the Reserve Bank, MMTC, banks and any other entities notified by the Central Government. Banks may utilise the gold purchased in the auction for purposes indicated above.

Risk Management
Designated banks should put in place a suitable risk management mechanism, including appropriate limits, to manage the risk arising from gold price movements in respect of their net exposure to gold. For this purpose, they have been allowed to access the international exchanges, London Bullion Market Association or make use of over-the-counter contracts to hedge exposures to bullion prices subject to the guidelines issued by the Reserve Bank.

Grievance redress
Complaints against designated banks regarding any discrepancy in issuance of receipts and deposit certificates, redemption of deposits, payment of interest will be handled first by the bank’s grievance redress process and then by the Reserve Bank’s Banking Ombudsman.

The objective of the Scheme is to mobilise gold held by households and institutions of the country and facilitate its use for productive purposes, and in the long run, to reduce country’s reliance on the import of gold.





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Facts About RBI
• Name of Central Bank of India: Reserve Bank of India (RBI)RBI
• Reserve Bank of India Act passed in 1934.
• Reserve Bank of India (RBI) established on 1 April 1935.
• Reserve Bank of India (RBI) established on the recommendation of Hilton-Young Commission.
• Hilton-Young Commission submitted its report in the year 1926.
• RBI is a statutory body.
• RBI is the sole authority in India to issue Banknotes in India.
• RBI can issue currency notes as much as the country requires, provided it has to make a security deposit of Rs. 200 crores, out of which Rs. 115 crores must be in gold and Rs. 85 crores must be FOREX Reserves.
• Emblem of RBI: Panther and Palm Tree.
• Initially the headquarter of RBI was in Calcutta (Now Kolkata) but in 1937 it was permanently moved to Mumbai, Maharashtra.
• The Reserve Bank of India has 4 Zonal offices,22 regional offices, most of them in state capitals and 9 Sub-offices
• The Executive head of RBI is known as Governor.
• RBI is controlled by the Central Board of Directors.
• Indian government appoints the directors for four years tenure. The central board of directors comprises Governor, four deputy governor and fifteen directors.
• The bank has also two training colleges for its officers, viz. Reserve Bank Staff College at Chennai and College of Agricultural Banking at Pune.
• RBI is a member bank of the Asian Clearing Union.
• 1st women Deputy Governor of RBI -K.J.Udeshi.
• RBI is central Bank for INDIA.
• RBI prints currency in 15 Languages.
• RBI is a member of IMF (International Monetary Fund).
• Its financial year is from 1 July to 30 June. The emblem of RBI is a tiger and a Palm tree.
• The first governor of RBI was Sir Osborne Smith (1935-1937). The first Indian governor was CD Deshmukh (1943-1949). 
Dr Manmohan Singh  Former Prime Minister of INDIA earlier held position as Governor of RBI.

Q:Why Credit control is treated as most important function of Reserve Bank of India. 
A:Credit control in the economy is required for the smooth functioning of the economy.
By using credit control methods RBI tries to maintain monetary stability.
Q;Name types of methods.
A:There are two types of methods:
1. Quantitative control to regulates the volume of total credit.
2. Qualitative Control to regulates the flow of credit.
Q: List type of Quantitative methods.
1. Management of Bank Rate :By increasing or reducing Bank rate, RBI works on pricing of funds. It is assumed as and when funds becomes costly, it would result in lower demand of fund, conversely 
it is assumed as and when funds becomes cheaper, it would result in higher demand of fund.

2. Open market operations :
The term open market operation refers to purchase or sale of government securities by the central bank.Purchase of securities by the central bank in open market provides money to market/banks whereas sale of securities sucks money from market/banks .OMO is now very frequently used by RBI.

3. Management of Cash reserve ratio : Increase in CRR means Banks to keep more money with RBI , hence they will left with lower funds for lending.this affect supply of money in market,adversely.

4. Repo & Reverse Repo :By increasing or reducing REPO rate, RBI works on pricing of funds. It is assumed as and when funds becomes costly, it would result in lower demand of fund, conversely 
it is assumed as and when funds becomes cheaper, it would result in higher demand of fund. It also affects the pricing of credit in market.

5. Altering Statutory Liquidity Ratio:Increase in SLR means Banks to invest more money SLR securities , hence they will left with lower funds for lending.this affect supply of money in market,adversely.

6. MSF:By increasing or reducing MSF rate, RBI works on pricing of funds. It is assumed as and when funds becomes costly, it would result in lower demand of fund, conversely 
it is assumed as and when funds becomes cheaper, it would result in higher demand of fund. It also affects the pricing of credit in market.
Q: List Qualitative Methods:
1. Selective Qualitative Credit controls
By making changes in margin and rate of interest, RBI regulates credit in specific areas. normally this is used for sensitive items.
2. Moral persuasion and direct action :
RBI uses this technique to regulate flow of credit to specific sectors of economy. by imposing ban or by allowing higher flow of funds this is achieved.



Computation of Base Rate
New guidelines for Base rate(issued by RBI on 19/01/2015):

While computing Base Rate, banks will have the freedom to calculate cost of funds either on the basis of average cost of funds or on marginal cost of funds or any other methodology in vogue, which is reasonable and transparent provided it is consistent and made available for supervisory review/scrutiny as and when required. It is clarified here that where the card rate for deposits of one or more tenor is the basis, the deposits in the chosen tenor/s should have the largest share in the deposit base of the bank.

Review of Base Rate

As hitherto, 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 Committee (ALCO) as per the bank’s practice.

Review of Base Rate methodology

(i) With a view to providing banks greater operational flexibility, it has been decided to allow banks to review the Base Rate methodology after three years from date of its finalisation instead of the current periodicity of five years. Accordingly, banks may change their Base Rate methodology after completion of prescribed period with the approval of their Board of Directors/ ALCO.

(ii) Banks will, however, not be allowed to change their methodology during the review cycle.


(i) Banks should have a Board approved policy delineating the components of spread charged to a customer. It should be ensured that any price differentiation is consistent with bank’s credit pricing policy.

(ii) Bank’s internal pricing policy must spell out the rationale for, and range of, the spread in the case of a given category of borrower, as also, the delegation of powers in respect of loan pricing. The rationale of the policy should be available for supervisory review.

(iii) The spread charged to an existing borrower should not be increased except on account of deterioration in the credit risk profile of the customer or change in the tenor premium. Any such decision regarding change in spread on account of change in credit risk profile should be supported by a full-fledged risk profile review of the customer. The change in tenor premium should not be borrower specific or loan class specific. In other words, the change in tenor premium will be uniform for all types of loans for a given residual tenor.

(iv) The guidelines contained in sub-paragraph (iii) above are, however, not applicable to loans under consortium/ multiple banking arrangements.



Entry of Banks into Insurance Business:

(New rbi guidelines issued on 15/01/2015)
on conduct of insurance business by banks have been reviewed. It is advised that banks may undertake insurance business by setting up a subsidiary/joint venture, as well as undertake insurance broking/ insurance agency/either departmentally or through a subsidiary subject to the conditions given in the Annex. However, it may be noted that if a bank or its group entities, including subsidiaries, undertake insurance distribution through either broking or corporate agency mode, the bank/other group entities would not be permitted to undertake insurance distribution activities, ie, only one entity in the group can undertake insurance distribution by either one of the two modes mentioned above.

4. i) Banks setting up a subsidiary/JV for undertaking insurance business with risk participation

Banks are not allowed to undertake insurance business with risk participation departmentally and may do so only through a subsidiary/JV set up for the purpose. Banks which satisfy the eligibility criteria (as on March 31 of the previous year) given below may approach Reserve Bank of India to set up a subsidiary/joint venture company for undertaking insurance business with risk participation:

a) The net worth of the bank should not be less than Rs.1000 crore;

b) The CRAR of the bank should not be less than 10 per cent;

c) The level of net non-performing assets should be not more than 3 percent.

d) The bank should have made a net profit for the last three continuous years;

e) The track record of the performance of the subsidiaries, if any, of the concerned bank should be satisfactory.

RBI approval would factor in regulatory and supervisory comfort on various aspects of the bank’s functioning such as corporate governance, risk management, etc.

It may be noted that a subsidiary of a bank and another bank will not normally be allowed to contribute to the equity of the insurance company on risk participation basis.

It should be also be ensured that risks involved in insurance business do not get transferred to the bank and that the banking business does not get contaminated by any risks which may arise from insurance business. There should be an ‘arms length’ relationship between the bank and the insurance outfit.

ii) Banks undertaking insurance broking/corporate agency through a subsidiary/JV

Banks require prior approval of RBI for setting up a subsidiary/JV. Accordingly, banks desirous of setting up a subsidiary for undertaking insurance broking/corporate agency and which satisfy the eligibility criteria (as on March 31 of the previous year) given below may approach Reserve Bank of India for approval to set up such subsidiary/JV:

a) The net worth of the bank should not be less than Rs.500 crore after investing in the equity of such company;

b) The CRAR of the bank should not be less than 10 per cent;

c) The level of net non-performing assets should be not more than 3 per cent.

d) The bank should have made a net profit for the last three continuous years;

e) The track record of the performance of the subsidiaries, if any, of the concerned bank should be satisfactory.

As hitherto, RBI approval would also factor in regulatory and supervisory comfort on various aspects of the bank’s functioning such as corporate governance, risk management, etc.

5. Banks undertaking corporate agency functions/broking functions departmentally

Banks need not obtain prior approval of the RBI to act as corporate agents on fee basis, without risk participation/undertake insurance broking activities departmentally, subject to IRDA Regulations, and compliance with the conditions given in the Annex.

6. Banks undertaking referral services

In terms of IRDA (Sharing of Database for Distribution of Insurance Products) Regulations 2010, no bank is presently eligible to conduct insurance referral business.


 Implementation of Basel III Capital Regulations in India – Revised Framework for Leverage Ratio(issued on 8/01/2015)

Definition, Minimum Requirement and Scope of Application of the
Leverage Ratio
Definition and minimum requirement
The Basel III leverage ratio is defined as the capital measure (the numerator)
divided by the exposure measure (the denominator), with this ratio expressed as a percentage:

leverage ratio =capital measure/exposure measure.

Reserve Bank will monitor individual banks against an
indicative leverage ratio of 4.5%.,from april15.

Capital Measure
The capital measure for the leverage ratio is the Tier 1 capital of the risk-based
capital framework, taking into account various regulatory adjustments /deductions and the transitional arrangements. In other words, the capital measure used for the leverage ratio at any particular point in time is the Tier 1capital measure applying at that time under the risk-based framework.

Exposure Measure
.1 General Measurement Principles
(i) The exposure measure for the leverage ratio should generally follow
the accounting value, subject to the following:
on-balance sheet, non-derivative exposures are included in the
exposure measure net of specific provisions or accounting
valuation adjustments (e.g. accounting credit valuation
adjustments, e.g. prudent valuation adjustments for AFS and
HFT positions);
netting of loans and deposits is not allowed.
(ii) Unless specified differently below, banks must not take account of
physical or financial collateral, guarantees or other credit risk mitigation
techniques to reduce the exposure measure.
(iii) A bank’s total exposure measure is the sum of the following exposures:
(a) on-balance sheet exposures;
(b) derivative exposures;
(c) securities financing transaction (SFT) exposures; and
(d) off- balance sheet (OBS) items.
The specific treatments for these four main exposure types are defined


RBI releases Financial Stability Report (Including Trend and Progress of Banking in India 2013-14) December 2014:(updated on 29/12/2014)

The highlights of the latest Report are as follows:

Macro-financial risks

The current weak global growth outlook may prolong easy monetary policy stance in most advanced economies (AEs). Consequently, low risk premia may lead to accumulation of vulnerabilities, and sudden and sharpovershooting in markets cannot be ruled out. As of now, financial risk taking has not translated into commensurate economic risk taking. Against the backdrop of low interest rates in AEs, portfolio flows to emerging market and developing economies have been robust, increasing the risk of reversals on possible adverse growth or financial market shocks, thus necessitating greater alertness. On the domestic front, macroeconomic vulnerabilities have abated significantly in recent months on the back of improvement in growth outlook, fall in inflation, recovery in the external sector and political stability. However, growth in the banking business and activity in primary capital markets remain subdued due to moderate investment intentions. Sustaining the turnaround in business sentiment remains contingent on outcomes on the ground.

Financial institutions: Developments and stability

The growth of the Indian banking sector moderated further during 2013-14. Profitability declined on account of higher provisioning on banks’ delinquent loans and lacklustre credit growth. The financial health of urban and rural co-operatives indicated divergent trends in terms of key indicators. While urban co-operative banks exhibited improved performance, the performance of primary agriculture credit societies and long term rural credit co-operatives remained a matter of concern with a further increase in their losses coupled with a deterioration in asset quality. While the asset size of the non-banking financial companies (non deposit taking-systemically important) showed an expansion, asset quality deteriorated further during the period of review. The banking stability indicator suggests that overall risks to the banking sector remained unchanged during the first half of 2014-15. In individual dimensions, though the liquidity position improved in the system, concerns remain on account of deterioration in asset quality along with weakened soundness. The profitability dimension of the indicator showed an improvement but it remained sluggish. The stress tests suggest that the asset quality of banks may improve in the near future under expected positive developments in the macroeconomic conditions and banks may also be able to meet expected losses with their existing levels of provisions. However, the asset quality of scheduled commercial banks may worsen from the current level if the macroeconomic conditions deteriorate drastically, and banks are likely to fall short in terms of having sufficient provisions to meet expected losses under adverse macroeconomic risk scenarios. Analysis of the interconnectedness indicates that the size of the interbank market in relation to total banking sector assets has been on a steady decline. However, contagion analysis with top five most connected banks reveals that the banking system could potentially lose significant portion of its total Tier-I capital under the joint solvency-liquidity condition in the event of a particular bank triggering a contagion.

Financial sector regulation and infrastructure

While the capital to risk weighted assets ratio (CRAR) of the scheduled commercial banks at 12.8 per cent as of September 2014 is satisfactory, going forward, the banking sector, particularly the public sector banks would require substantial capital to meet regulatory requirements with respect to additional capital buffers. With the increased regulatory focus on segregating the cases of wilful defaults and ensuring the equity participation of promoter(s) in the losses leading to defaults, there is a need for greater transparency in the process of carrying out a net economic value impact assessment of large Corporate Debt Restructuring (CDR) cases. Another aspect that impinges upon the banks’ asset quality is corporate leverage and its impact on banks’ balance sheets, particularly ‘double leveraging’ through holding company structures and the pledging of shares by promoters. Indian stock markets have seen a rapid growth in recent months. While the retail investor base still remains comparatively low, India’s stock markets have been attracting substantial amounts of foreign investments, increasing the risk of reversal. The Securities and Exchange Board of India has introduced an additional safety net in the form of core settlement guarantee fund to mitigate risks from possible default in settlement of trades and to strengthen risk management framework in the domestic capital markets. With a view to improving participation of actual users / hedgers and the quality of price discovery in the market, the Forward Markets Commission has revised position limits which are linked to estimated production and imports of the underlying commodities. To deal with issues relating to unauthorised deposit acceptance and financial frauds, the State Level Coordination Committee (SLCC) mechanism has been strengthened under the initiative of the Financial Stability and Development Council (FSDC).



Levy of charges for non-maintenance of minimum balance in savings bank account shall be subject to the following additional guidelines:

(i) In the event of a default in maintenance of minimum balance/average minimum balance as agreed to between the bank and customer, the bank should notify the customer clearly by SMS/ email/ letter etc. that in the event of the minimum balance not being restored in the account within a month from the date of notice, penal charges will be applicable.

(ii) In case the minimum balance is not restored within a reasonable period, which shall not be less than one month from the date of notice of shortfall, penal charges may be recovered under intimation to the account holder.

(iii) The policy on penal charges to be so levied may be decided with the approval of Board of the bank.

(iv) The penal charges should be directly proportionate to the extent of shortfall observed. In other words, the charges should be a fixed percentage levied on the amount of difference between the actual balance maintained and the minimum balance as agreed upon at the time of opening of account. A suitable slab structure for recovery of charges may be finalized.

(v) It should be ensured that such penal charges are reasonable and not out of line with the average cost of providing the services.

(vi) It should be ensured that the balance in the savings account does not turn into negative balance solely on account of levy of charges for non-maintenance of minimum balance.

Extension of RTGS time window

It has been the endeavour of the Reserve Bank of India to keep enhancing the systems, procedures, etc. to meet the growing needs of the markets/ customers. The launch of the new RTGS system in October 2013 was one of the steps taken by the Bank for catering to the growing volume and to provide liquidity saving and other features of the new system to the members.

2. Of late there has been a market demand for extending business hours of the RTGS system to facilitate customer and inter-bank transactions as also to facilitate other market obligations to settle in the RTGS system. Accordingly, the RTGS business hours are being revised to meet the market expectation.

3. It has hence been decided to advance RTGS business hours to 8:00 hours from 9.00 hours and extend closing time of RTGS to 20.00 hours on week days. RTGS business window will be open from 8.00 hours to 15.30 hours on Saturdays.

4. In view of the above, the RTGS time window will be modified as under with effect from December 29, 2014.

Timing on Weekdays / Regular Days

08:00 A.M. to 8.00 P.M..

Timing on Saturdays / Short Days
08:00 A.M. to 3.30 P.M.