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Gist of RBI Guidelines Issued in July 2014



Rajesh Goyal 

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Detailed RBI Guidelines

RBI issues draft guidelines for "Licensing of Payments Banks and Small Banks"


On 17th July, 2014, RBI issued the draft guidelines for “Licensing of Payments Banks” and for “Licensing of Small Banks”  The final guidelines will be issued based on the feedback received on these draft guidelines.  Therefore, we here give broad gist of the concept of the new envisaged entities.



Both, payments banks and small banks are “niche” or “differentiated” banks, with the common objective of furthering financial inclusion.

(a) Small banks will provide a whole suite of basic banking products, such as, deposits and supply of credit, but in a limited area of operation.

(b) Payments banks will provide a limited range of products, such as, acceptance of demand deposits and remittances of funds, but will have a widespread network of access points, particularly to remote areas, either through their own branch network or through Business Correspondents (BCs) or through networks provided by others. They will add value by adapting technological solutions to lower costs.




(a) The entities eligible to set up a payments bank include existing non-bank pre-paid instrument issuers (PPIs), non-banking finance companies (NBFCs), corporate BCs, mobile telephone companies, super-market chains, companies, real sector cooperatives, and public sector entities.

(b) The entities eligible to set up a small bank include resident individuals with ten years of experience in banking and finance, companies and societies, NBFCs, micro finance institutions (MFIs) and local area banks.

The eligible entities should be “fit and proper” in order to be eligible to promote payments banks and small banks.


The minimum paid up capital requirement of both payments banks and small banks is kept at Rs. 100 crore, of which the promoters’ initial minimum contribution will be at least 40 per cent, to be locked in for a period of five years.


The Reserve Bank is also working on the guidelines for continuous authorisation of universal banks and will come out with these separately.


Flexible Loan Structuring to raise Long Term Bonds


The Reserve Bank of India issued on July 15, 2014, a number of instructions to banks specifying the operational guidelines and incentives in the form of flexibility in loan structuring and refinancing, and also granting exemptions from regulatory pre-emptions, such as, cash reserve ratio (CRR), statutory liquidity ratio (SLR) and priority sector lending (PSL).


The objective of these instructions is to mitigate the asset-liability management (ALM) problems faced by banks in extending project loans to infrastructure and core industries sectors, and also to ease the raising of long term resources for project loans to infrastructure and affordable housing sectors.


Framework for dealing with D-SIBs


On 22nd July, RBI released the Framework for dealing with Domestic Systemically Important Banks (D-SIBs).   This Framework discusses the methodology to be adopted by the RBI for identifying the D-SIBs and additional regulatory/ supervisory policies which D-SIBs would be subjected to.


The assessment methodology adopted by the Reserve Bank is primarily based on the Basel Committee on Banking Supervision (BCBS) methodology for identifying the Global Systemically Important Banks (G-SIBs) with suitable modifications to capture domestic importance of a bank. The indicators which would be used for assessment are:


(a) size,  (b) interconnectedness, (c) substitutability and (d) complexity.


Based on the sample of banks chosen for computation of their systemic importance, a relative composite systemic importance score of the banks will be computed. RBI  will determine a cut-off score beyond which banks will be considered as D-SIBs. Based on their systemic importance scores in ascending order, banks will be plotted into four different buckets and will be required to have additional Common EquityTier-I capital requirement ranging from 0.20 per cent to 0.80 per cent of risk weighted assets, depending upon the bucket they are plotted into.


Based on the data as on March 31, 2013, it is expected that about 4 to 6 banks may be designated as D-SIBs under various buckets. D-SIBs will also be subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system.


The computation of systemic importance scores will be carried out at yearly intervals. The names of the banks classified as D-SIBs will be disclosed in the month of August every year starting from 2015.


Loans against Gold Jewellery for non-agricultural purposes

On 22nd July, 2014, RBI issued guidelines to the effect that loans extended against pledge of gold ornaments and jewellery, for other than agricultural purposes, where both interest and principal are due for payment at maturity of the loan will be subject to certain modified conditions.


The Reserve Bank has also clarified that loan-to-value (LTV) of 75 per cent shall be maintained throughout the tenure of the loan for all loans extended against pledge of gold ornaments and jewellery for non-agricultural end uses. The LTV ratio shall be computed against the total outstanding in the account, including accrued interest, and current value of gold jewellery accepted as security/collateral, determined as per the methodology prescribed in the circular dated January 20, 2014.


For the purpose of valuation of gold, banks may use the historical spot gold price data publicly disseminated by a commodity exchange regulated by the Forward Markets Commission on a consistent manner as per their Board approved policy, in addition to the prices disseminated by the India Bullion and Jewellers Association Limited.




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LRS for resident individuals-Increase in the limit

On 17th July, 2014, RBI  has allowed AD Category–I banks to remit up to USD 1,25,000 per financial year, under the Liberalised Remittance Scheme, for any permitted current or capital account transaction or a combination of both.


Further, it is clarified that the Scheme can now be used for acquisition of immovable property outside India.


Financial Literacy by FLCs and Rural Bank Branches


The Reserve Bank, on July 7, 2014, has decided to monitor the financial literacy activities by rural bank branches, that are mandated to conduct minimum of one financial literacy camp in a month, on a quarterly basis. Since the literacy camps are being conducted for the last two years, the Reserve Bank decided to measure the extent of financial inclusion achieved through these camps. Accordingly, the Reserve Bank advised all state-level bankers committees (SLBCs) /Union Territory-level bankers committees (UTLBCs) to submit quarterly reports of the financial literacy activities by rural bank branches and financial literacy centres as per the prescribed formats, to the respective regional offices of the Reserve Bank within 20 days after the end of each quarter.

IWG on Implementation of CCCB Framework in India


The Reserve Bank, on July 21, 2014, released the Report of the Internal Working Group (IWG) on Implementation of Counter Cyclical Capital Buffer (CCCB) in India (Chairperson: Shri B. Mahapatra).


The key recommendations of the IWG are:

  • While the credit-to-GDP gap shall be used for empirical analysis to facilitate CCCB decision, it may not be the only reference point in the CCCB framework for banks in India and the credit-to-GDP gap may be used in conjunction with other indicators like Gross Non-Performing Assets (GNPA) growth for CCCB decisions in India.
  • The CCCB decision may be pre-announced with a lead time of 4-quarters.
  • The lower threshold (L) where the CCCB is activated may be set at 3 percentage points of the credit-to-GDP gap, provided its relationship with GNPA remains significant and the upper threshold (H) where the CCCB is at its maximum may be kept at 15 percentage points of credit-to-GDP gap.
  • The CCCB shall increase gradually from 0 to 2.5 per cent of the risk weighted assets (RWA) of the bank but the rate of increase would be different based on the level/position of credit-to-GDP gap between 3 and 15 percentage points. For example, the CCCB requirement shall increase linearly from 0 to 20 basis points when credit-to-GDP gap moves from 3 to 7 percentage points. Similarly, for above 7 and up to 11 percentage points range of credit-to-GDP gap, CCCB requirement shall increase linearly from above 20 to 90 basis points. Finally, for above 11 and up to 15 percentage points range of credit-to-GDP gap, the CCCB requirement shall increase linearly from above 90 to 250 basis points. However, if the credit-to-GDP gap exceeds 15 percentage points, the buffer shall remain at 2.5 per cent of the RWA. If the credit-to-GDP gap is below 3 percentage points then there will not be any CCCB requirement.
  • The supplementary indicators shall include incremental C-D ratio for a moving period of three-years (along with its correlation withcredit-to-GDP gap and GNPA growth), Industry Outlook (IO) assessment index (alog with its correlation with GNPA growth) and interest coverage ratio (along with its correlation with credit- to-GDPgap). In due course, indices like House Price Index / RESIDEX and Credit Condition Survey may also form a part of the supplementary indicators for CCCB decision.
  • The Reserve Bank of India may apply discretion in terms of use of indicators while activating or adjusting the buffer.
  • The CCCB framework in India may be operated in conjunction with sectoral approach that has been successfully used in India over the period of time.
  • The same set of indicators that are used for activating CCCB may be used to arrive at the decision for the release phase of the CCCB. However, instead of hard rule-based approach, flexibility in terms of use of judgement and discretion may be provided to the Reserve Bank of India for operating the release phase of CCCB. Further, the entire CCCB may be released promptly at a single point in time.
  • The CCCB may be maintained in the form of Common EquityTier-I capital only.
  • For all banks operating in India, CCCB shall be maintained on solo basis as well as on consolidated basis.
  • The indicators and thresholds used for CCCB decisions may be subject to continuous research and empirical testing for their usefulness and new indicators may be explored to support CCCB decisions.

RBI releases June 2014 Financial Stability Report


RBI has  released the Financial Stability Report (FSR) June 2014.   The report reflects the collective assessment of the Sub- Committee of the Financial Stability and Development Council (FSDC), on risks to financial stability. The Report aims to promote awareness about the vulnerabilities in the financial system, to inform about the resilience of the financial institutions and to encourage debate on issues relating to development and regulation of the financial sector.


The latest issue is being brought out at a time when global financial markets are showing signs of improved stability although growth is still not on strong ground and easy monetary policy continues in many jurisdictions. On the domestic front, the return to political stability has provided impetus to the outlook and the capital markets reflect the expectations on policy measures to address the adverse growth-inflation dynamics and saving-investment balance as also efficient implementation of policies and programmes.


India’s financial system remains stable, though the banking sector is facing some major challenges, mainly relating to public sector banks (PSBs). Although there has been some improvement in the asset quality of scheduled commercial banks (SCBs) since September 2013, the level of gross non-performing advances as percentage of total gross advances (GNPA ratio) of PSBs was significantly higher as compared to the other bank groups. While the ownership pattern and recapitalisation of PSBs are contingent upon government policy and the fiscal situation, there is a case for reviewing the governance structures of PSBs, with a greater emphasis on market discipline.


Macro stress tests show that the system level capital to risk- weighted assets ratio (CRAR) of SCBs remains well above the regulatory minimum even under adverse macroeconomic conditions.


The regulation of securities markets in India is in sync with international developments, although mutual funds and other asset management activities in Indian markets do not carry risks similar to those experienced in other jurisdictions. The lending activity of insurance companies, though relatively small and within the prescribed exposure limits applicable for insurance companies, may need to be streamlined and monitored under a prudential framework comparable to that for banks to eliminate the possibility of regulatory arbitrage. Revised norms for corporate governance as also warehouse and related processes are expected to strengthen the functioning of the commodity derivatives market. In the context of India’s pension sector, inadequate liability computation in case of several defined benefit pension schemes can be a potential source of fiscal stress in years to come.




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