Gist of Important RBI Circulars

Gist of Important RBI Circulars RPCD Circulars Section 17(2) of the Banking Regulation Act, 1949 Appropriation from the Reserve Fund In terms of Section 17(2) read with Section 51 of the Banking Regulation Act, 1949, and in order to ensure that recourse to drawing down the reserve fund is done prudently and is not in violation of any of the regulatory prescriptions, RRBs are advised to take prior approval from the Reserve Bank before any appropriation is made from the statutory reserve or any other reserves. RRBs are further advised that (i) all expenses including provisions and write-offs recognized in a period, whether mandatory or prudential, should be reflected in the profit and loss account for the period as an 'above the line' item (i.e. before arriving at the net profit), (ii) wherever draw down from reserves takes place with the prior approval of Reserve Bank, it should be effected only 'below the line' (i.e. after arriving at the profit/loss for the year); and (iii) it should also be ensured that suitable disclosures are made of such draw down of reserves in the 'Notes on Accounts' to the Balance Sheet. (RPCD.CO.RRB.No.BC. 45 /03.05.98 /2007-08 dated January 8, 2008) Section 24 of the Banking Regulation Act, 1949 - Maintenance of Statutory Liquidity Ratio (SLR) - RRBs The Banking Regulation (Amendment) Act, 2007 replacing the Banking Regulation (Amendment) Ordinance, 2007 came into effect from January 23, 2007. Consequent upon amendment to Section 24 of the Banking Regulation Act, 1949 all Regional Rural Banks shall continue to maintain a uniform statutory liquidity ratio (SLR) of 25 per cent on their total net demand and time liabilities in the assets as specified in the enclosed notification dated February 14, 2008. (RPCD.CO.RRB.No.BC.47/03.05.28 (B)/2007-08 dated February 14, 2008 ) Guidelines for Relief Measures by Banks to Poultry Industry Keeping in view the loss of income that has occurred due to culling of birds as well as steep fall in the demand for poultry products and their prices, banks may consider extending the following facilities to poultry units financed by them (i) Principal and interest due on working capital loans as also installments and interest on term loans which have fallen due for payment on/after the onset of bird flu, i.e. December 31, 2007 and remaining unpaid may be converted into term loans. The converted loans may be recovered in installments based on projected future inflows over a period up to three years with an initial moratorium of up to one year (the first year of repayment may be fixed after the expiry of moratorium period), (ii) The remaining portion of term loans may be rescheduled similarly with a moratorium period up to one year depending upon the cash flow generating capacity of the unit, (iii) The reschedulement/conversion may be completed on or before April 30, 2008, (iv)the rescheduled/converted loans may be treated as current dues, (v) After conversion as above, the borrower will be eligible for fresh need based finance, and (vi) The relief measures as above may be extended to all accounts of poultry industry, which were classified as Standard accounts as on December 31, 2007. (RPCD. PLFS. BC. No. 48 /05.04.02/ 2007-08 dated February 19, 2008); (UBD.PCB.Cir.No. 34 /09.14.000/07-08 dated March 3, 2008 in respect of UCBs) 71

Know Your Customer (KYC) Norms / Anti-Money Laundering (AML) Standards / Combating of Financing of Terrorism (CFT) Banks are advised to review their extant internal instructions on the subject. It is clarified that permanent correct address, as referred to in Annex-II to RBI's circular dated February 18, 2005, means the address at which a person usually resides and can be taken as the address as mentioned in a utility bill or any other document accepted by the bank for verification of the address of the customer. It has been observed that some close relatives, e.g. wife, son, daughter or parents, who live with their husband, father/mother and son, as the case may be, are finding it difficult to open an account with some banks as the utility bills required for address verification are not in their name. It is clarified, that in such cases, banks can obtain an identity document and a utility bill of the relative with whom the prospective customer is living along with a declaration from the relative that the said person (prospective customer) wanting to open an account is a relative and is staying with him/her. Banks can use any supplementary evidence such as a letter received through post for further verification of the address. While issuing operational instructions to the branches on the subject, banks should keep in mind the spirit of instructions issued by the Reserve Bank and avoid undue hardships to individuals who are, otherwise, classified as low risk customers. The instructions contained in the circular dated February 18, 2005 also require banks to put in place a system of periodical review of risk categorisation of accounts and the need for applying enhanced due diligence measures in case of higher risk perception on a customer. Banks are further advised that such a review of risk categorisation of customers should be carried out at a periodicity of not less than once in six months. Banks should also introduce a system of updating the customer identification data (including photograph/s) at a periodicity of not less than once in five years after the account is opened in case of low risk category customers, and not less than once in two years in case of high and medium risk categories. In terms of PMLA Rules, suspicious transactions should include transactions which give rise to a reasonable ground of suspicion that these may involve financing of the activities relating to terrorism. Banks are, therefore, advised to develop suitable mechanism through appropriate policy framework for enhanced monitoring of accounts suspected of having terrorist links and swift identification of the transactions and making suitable reports to the Financial Intelligence Unit India (FIU-IND) on priority. As and when lists of individuals and entities, approved by Security Council Committee established pursuant to various United Nations' Security Council Resolutions (UNSCRs), are received from Government of India, the Reserve Bank circulates these to all banks. Banks should ensure to update the consolidated list of individuals and entities as circulated by the Reserve Bank. Further, the updated list of such individuals/entities can be accessed in the United Nations website at http://www.un.org/sc/committees/1267/ consolist.shtml. Banks are advised that before opening any new account it should be ensured that the name/s of the proposed customer does not appear in the list. Further, banks should scan all existing accounts to ensure that no account is held by or linked to any of the entities or individuals included in the list. Full details of accounts bearing resemblance with any of the individuals/entities in the list should immediately be intimated to the Reserve Bank and FIU-IND. It may be appreciated that KYC norms/aml standards/cft measures have been prescribed to ensure that criminals are not allowed to misuse the banking channels. It would, therefore, be necessary that adequate screening mechanism is put in place by banks as an integral part of their recruitment/hiring process of personnel. (RPCD.CO.RRB.No. BC. 50 /03.05.33 (E)/2007-08 dated February 27, 2008 for RRBs); (RPCD.CO.RF.AML.BC. No.51/ 07.40.00/ 2007-08 dated February 28, 2008 for StCBs and DCCBs); (UBD. CO. BPD. (PCB). No.32 /09.39.000/2007-08 dated February 25, 2008 in respect of UCBs); (DBOD.AML.BC. No.63/ 14.01.001 / 2007-08 dated February 18, 2008 in respect of commercial banks) UCB Circulars Prudential Norms for Capital Adequacy Risk Weight for Educational Loans-UCBs It has been decided that 'educational loans' will not be classified as consumer credit for the purpose of capital adequacy norms. Accordingly, the risk weight applicable to educational loans would be 100 per cent, as against 125 per cent at present. (UBD. PCB.Cir.No. 31 /09.11.600/07-08 dated January 29, 2008) 72

Advances to Builders / Contractors As per extant instructions, UCBs should normally refrain from sanctioning loans and advances to builders / contractors. However, where contractors undertake comparatively small construction work on their own (i.e. when no advance payment are received by them for the purpose), UCBs may consider extending financial assistance to them against hypothecation of construction materials, provided such loans and advances are in accordance with the bye-laws of the banks and instructions / directives issued by the Reserve Bank from time to time. It has been observed that while financing builders / contractors as above, certain banks were found to be valuing the land for the purpose of security, on the basis of the discounted value of the property after it is developed, less the cost of development. This is not in conformity with established norms. It is clarified that UCBs should not extend fund based / non-fund based facilities to builders / contractors for acquisition of land even as a part of a housing project. Further, wherever land is accepted as collateral, valuation of such land should be at the current market price only. (UBD. CO. BPD. (PCB). No. 33/13.05.000/2007-08 dated February 29, 2008) Classification of UCBs for Regulatory Purposes - Revised Norms It has been decided to amend the definition of Tier I banks and accordingly banks may be classified in Tier I category for regulatory purposes as under: (a) (b) Tier I banks : (i) Unit banks i.e. banks having a single branch / Head Office and banks with deposits below Rs.100 crore, whose branches are located in a single district, (ii) Banks with deposits below Rs.100 crore having branches in more than one district, provided the branches are in contiguous districts and deposits and advances of branches in one district separately constitute at least 95% of the total deposits and advances respectively of the bank and (iii) Banks with deposits below Rs.100 crore, whose branches were originally in a single district but subsequently, became multidistrict due to reorganization of the district. Tier II Banks: All other banks. (UBD (PCB).Cir.No.35 /09.20.001/07-08 dated March 7, 2008) Customer charges for use of ATMs for cash withdrawal and balance enquiry RBI had placed on its website an Approach Paper on the subject matter and sought public comments. The comments received have been analysed. Based on the feedback, a framework of service charges for use of ATMs would be implemented by all banks as under: Service For use of own ATMs for any purpose For the use of other bank ATMs for balance enquiries Charges Free (With immediate effect) Free (With immediate effect) For use of other bank ATMs for cash with drawals No bank shall increase the charges prevailing as on December 23, 2007 (i.e. the date of release of Approach Paper on RBI website) Banks which are charging more than Rs. 20 per transaction shall reduce the charges to a maximum of Rs. 20 per transaction by March 31, 2008 Free with effect from April 1, 2009 73

For the services at (1) and (2) above, the customer will not be levied any charge under any other head and the service will be totally free. For the service number (3) the charge of Rs.20/- indicated will be all inclusive and no other charges will be levied to the customers under any other head irrespective of the amount of withdrawal. The service charges for the following types of cash withdrawal transactions may be determined by the banks themselves: a) cash withdrawal with the use of credit cards (b) cash withdrawal in an ATM located abroad (UBD. CO. BPD. (PCB) No.36 /12.05.001/2007-08 dated March 12, 2008); (DPSS No.1405 / 02.10.02 / 2007-2008 dated March 10, 2008) Prudential Norms for Capital Adequacy Risk Weight for Educational Loans It has now been decided that the 'educational loans' be classified as non-consumer credit for the purpose of capital adequacy norms. Accordingly, the risk weight applicable to educational loans would be as follows: a) Under Basel I framework, the risk weight would be 100 per cent, as against 125 per cent at present and b) Under Basel II framework, the educational loans, now no longer being a part of consumer credit, would be treated as a component of the regulatory retail portfolio under paragraph 5.9 of our circular dated April 27, 2007 and attract a risk weight of 75 per cent, as against 125% at present. (DBOD.BP.BC. No.59/21.06.001/2007-08 dated January 17, 2008) Bank Finance to Factoring Companies DBOD / DBS Circulars It has now been decided that, henceforth, banks can extend financial assistance to support the factoring business of Factoring Companies which comply with the following criteria: a) The companies carry out all the components of a standard factoring activity, viz., financing of receivables, sale-ledger management and collection of receivable,. b) They derive at least 80 per cent of their income from factoring activity, c) The receivables purchased/financed, irrespective of whether on 'with recourse' or 'without recourse' basis, form at least 80 per cent of the assets of the Factoring Company, d) The assets/income referred to above would not include the assets/income relating to any bill discounting facility extended by the Factoring Company, and e) The financial assistance extended by the Factoring Companies is secured by hypothecation or assignment of receivables in their favour. (DBOD.BP. BC. No. 60 /08.12.01/2007-08 dated February 12, 2008) Section 24 of the Banking Regulation Act, 1949 Maintenance of Statutory Liquidity Ratio The Banking Regulation (Amendment) Act, 2007 replacing the Banking Regulation (Amendment) Ordinance, 2007 came into effect from January 23, 2007. Consequent upon amendment to Section 24 of the Banking Regulation Act, 1949 all scheduled commercial banks shall continue to maintain a uniform statutory liquidity ratio (SLR) of 25 per cent on their total net demand and time liabilities in the assets as specified in the notification dated February 13, 2008 (DBOD No. Ret.BC. 62/12.02.001/2007-08 dated February 13, 2008) Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks The time limit given to the customer for preferring their complaints/grievances as specified in the above para has now been revised. If a complainant does not get satisfactory response from the bank within 30 days from the date of his lodging the complaint, he will have the option to approach the Office of the concerned Banking Ombudsman for redressal of his grievance/s. (DBOD.NO.BP. 64 / 21.04.158/ 2007-08 dated March 03, 2008 ) Prudential Norms for Issuance of Letters of Comfort by Banks regarding their Subsidiaries The matter of issuance of LoCs by the banks was examined by the RBI recently in view of the possible liabilities / obligations that may have to be met by the issuing banks in future and it has been decided to lay down the following prudential norms in 74

this regard: (i) Every issuance of an LoC should be subject to the prior approval by the Board of Directors of the bank. The bank should lay down a well defined policy for issuance of LoCs, including the indicative cumulative ceilings up to which LoCs could be issued by the banks for various purposes. The policy must, inter alia, provide that the banks will obtain and keep on record a legal opinion in regard to the legally binding nature of the LoC issued. An appropriate system for keeping record of all the LoCs issued should also be put in place, (ii) The bank should make an assessment, at least one a year, of the likely financial impact that might arise from the LoCs issued by it and outstanding, in case it is called upon to support its subsidiary in India or abroad, as per the obligations assumed under the LoCs issued. Such an assessment should be made qualitatively on judgmental basis and the amount so assessed should be reported to the Board, at least once a year. As a first time exercise, such an assessment should be undertaken in respect of all the outstanding LoCs issued and outstanding as on March 31, 2008 and the results placed before the Board in the ensuing meeting. Such an assessment should form a part of the bank's liquidity planning exercise as well, iii) Any LoC that is assessed to be a contingent liability of the bank by a rating agency / internal or external auditors/ internal inspectors or the RBI inspection team, shall be treated, for all prudential regulatory purposes, on the same footing as a financial guarantee issued by the bank, and iv) The banks should disclose full particulars of all the LoCs issued by them during the year, including their assessed financial impact, as also their assessed cumulative financial obligations under the LoCs issued by them in the past and outstanding, in its published financial statements, as part of the 'Notes to Accounts. (DBOD No. BP. BC.65 / 21.04.009/ 2007-08 dated March 4, 2008) Annual Reporting System in respect of Non-SSI Sick/Weak Industrial Units The revised definitions of Non-SSI sick/weak units are as follows, which may be followed henceforth for reporting of the captioned return/data: (i) A Non-SSI sick unit is a Non-SSI industrial undertaking (regardless of type of incorporation) whose accumulated losses, as at the end of the latest financial year, equal or exceed its entire net worth (viz., paid up capital and free reserves), and (ii) A Non-SSI weak unit is a Non-SSI industrial undertaking (regardless of type of incorporation) if (a) any of its borrowal accounts (principal or interest has remained overdue for a period exceeding one year; (b) there is erosion in the net worth due to accumulated losses to the extent of 50% of its net worth during the previous financial year. The data reporting format is given in ANNEX-I. Also, to facilitate proper industry classification, detailed descriptions of industrial activities have been provided in ANNEX-II. Banks are advised to submit the annual return on Non-SSI sick/weak units as on March 31, within one month from the reference date. (DBS.CO.BC.OSMOS No.12/33.01.039/2007-08 dated March 19, 2008) Supervisory Review Process under the New Capital Adequacy Framework Guidelines for Pillar 2 The New Capital Adequacy Framework (NCAF), based on the Basel II Framework evolved by the Basel Committee on Banking Supervision, has been adapted for India vide RBI's Circular DBOD.No.BP.BC 90/ 20.06.001/ 2006-07 dated April 27, 2007. These guidelines are being issued by way of further guidance to the banks. The Basel II Framework has three components or three Pillars. The Pillar 1 is the Minimum Capital Ratio while the Pillar 2 and Pillar 3 are the Supervisory Review Process (SRP) and Market Discipline, respectively. While the guidelines on the Pillar 1 and Pillar 3 have already been issued by the RBI vide the aforesaid circular, the guidelines in regard to the SRP and the Internal Capital Adequacy Assessment Process (ICAAP) are furnished at Annex - I. An illustrative outline of the format of the ICAAP document is furnished at Annex II. The objective of the SRP is to ensure that the banks have adequate capital to support all the risks in their business as also to encourage them to develop and use better risk management techniques for monitoring and managing their risks. This in turn would require a well-defined internal assessment process within the banks through which they assure the RBI that adequate capital is indeed held towards the various risks to which they are exposed. The process of assurance could also involve an active dialogue between the bank and the RBI so that, when warranted, appropriate intervention could be made to either reduce the risk exposure of the bank or augment / restore its capital. Thus, ICAAP is an important component of the SRP. It is recognised that there is no one single approach for conducting the ICAAP and the market consensus in regard to the best practice for undertaking ICAAP is yet to emerge. The methodologies and techniques are still evolving particularly in regard to measurement of non-quantifiable risks, such as reputational and strategic risks. These guidelines, therefore, seek to provide only broad principles to be followed by the banks in developing their ICAAP. The banks are advised to develop and put in place, with the approval of their Boards, an ICAAP commensurate with their size, level of complexity, risk profile and scope of operations. The ICAAP would be in addition to a bank's calculation of regulatory capital requirements under Pillar 1 and must 75

be operationalised with effect from March 31, 2008 by the foreign banks and the Indian banks with operational presence outside India, and from March 31, 2009 by all other commercial banks, excluding the Local Area Banks and Regional Rural banks. The banks are advised to transmit to the RBI, a copy of their Board-approved ICAAP document. The document should, inter alia, include the capital adequacy assessment and projections of capital requirement for the ensuing year, along with the plans and strategies for meeting the capital requirement. An illustrative outline of a format of the ICAAP document is furnished at Annex II, for guidance of the banks though the ICAAP documents of the banks could vary in length and format, in tune with their size, level of complexity, risk profile and scope of operations. The first ICAAP document should reach the RBI not later than June 30, 2008 or March 31, 2009, as applicable, and thereafter, before the end of March every year, covering the capital assessment and projections for the following financial year. (For details on guidelines on Pillar 2 and format of ICAAP, please refer to the original circular) (DBOD.No.BP.BC 66 / 21.06.001 / 2007-08 dated March 26, 2008) Prudential Guidelines on Capital Adequacy and Market Discipline Implementation of New Capital Adequacy Framework (NCAF) Amendments In the light of clarifications sought by banks during the course of implementation of the parallel run of the NCAF, the guidelines have been reviewed, and it has been decided to effect certain amendments as detailed in the Annex. All other provisions of the April 27, 2007 circular, except to the extent modified as per the Annex, remain unchanged. The amendments will come into force with immediate effect. (For details of the amendments, please refer to the original circular) (DBOD.No.BP.BC.67 /21.06.001/2007-08 dated March 31, 2008 ) DPSS Circulars Use of electronic mode of payment for large value transactions It is now decided to make large value payments of Rs.1 crore and above mandatory to be routed through electronic payment mechanism with time frame as under: Type of transactions Time frame (i) All payment transactions of Rs. 1 crore and above 1st April 2008 Between the RBI regulated entities such as banks, Primary dealers and NBFCs (ii) All payments of Rs. 1 crore and above in RBI regulated 1st April 2008 markets such as money market, Government securities market and foreign exchange market (DPSS No. 1407 / 02.10.02 / 2007-2008 dated March 10, 2008) RPCD: Rural Planning and Credit Department UBD: Urban Banks Department DBOD: Department of Banking Operations and Development DBS: Department of Banking Supvervision DPSS: Department of Payment and Settlement Systems Complied by : S. Thyagarajan, Member of Faculty College of Agricultural Banking, Reserve Bank of India, Pune. 76