banking update - august 2009

7/29/2019 Banking Update - August 2009

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Banking UpdateVolume 20 August 2009

Section I: Regulatory Updates

Reserve Bank of India’s (RBI) Notifications

Synopsis of significant amendments based on certain RBI’s Circulars / Notifications issued duringthe month of August 2009 are as under:

I. Know Your Customers (KYC) & Anti Money Laundering

II. Fraud – Classification and Reporting

III. Governance

I. KYC & Anti Money Laundering:

1. List of Terrorist Individuals/Organisations - under UNSCR 1267(1999) and 1822(2008) onTaliban/Al-Qaida Organisation

Issued to: All Scheduled Commercial Banks (Excluding RRBs)/Local Area Banks / Financial Institution

Banks requested to report to RBI as well as the Financial Intelligence Unit-India on accounts maintainby persons and organisations bearing resemblance to terrorists and their outfits in the fresh list issuedthe UN.

II. Fraud – Classification and Reporting:

2. Collection of account payee cheque – Prohibition on crediting proceeds to third party account

Issued to: All Commercial Banks (excluding RRBs)

The practice of collection of cheque crossed ‗account payee‘ through third party accounts (co-operativcredit societies) not permissible.

II. Governance:

3. Lending under Consortium Arrangements/Multiple Banking Arrangements

Issued to: Select All-India Term-lending and Refinancing Institutions.(Exim Bank, NABARD, NHB andSIDBI))

The previous circular issued by RBI on the below mentioned areas shall apply to the select all-IndiaFinancial Institutions (AIFIs) for sharing of information among the AIFIs and with banks.

(i) Lending under Consortium Arrangement/Multiple Banking Arrangements



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(ii) Frauds in borrowal accounts having multiple banking arrangements

4. Implementation of the New Capital Adequacy Framework (NCAF)

Issued to: All Commercial Banks (excluding Local Area Banks and Regional Rural Banks)

With respect to Prudential Guidelines on Capital Adequacy and Market Discipline, RBI directed banks

(i) Furnish a copy of the ‗Internal Capital Adequacy Assessment Process‘ (ICAAP) document to RBIthe end of March every year.

(ii) Banks may submit their ICAAP document latest by the end of first quarter (i.e April – June) of therelevant financial year.

5. StCBs/DCCBs – Housing Finance

Issued to: All State and Central Co-operative Banks

The RBI has permitted the State and Central co-operative banks to provide enhanced housing loan toindividual borrower as below:

(i) Limits on quantum of housing loan that can be granted to an individual borrower by a State / CenCooperative Bank revised upto Rs. 20 lakh. In specified cases, the limit increased to Rs. 30 lakh(earlier limit Rs. 5 lakh).

(ii) The aggregate of housing loans outstanding on any day against individuals, institutions, andsocieties should not exceed 10 % of total loans and advances of the bank as on 31st March of thepreceding year. However, this limit can be exceeded to the extent of funds obtained for the purpofrom the higher financing agency and refinance from the National Housing Bank.

(iii) Housing loans not to include finance to commercial real estate sector.

(iv) For repairs, additions, alterations etc., to the existing houses, the maximum amount of loan per individual borrower stands revised to Rs. 1 lakh (earlier limit Rs. 50,000)

6. Rupee Export Credit - Interest Rate Subvention

Issued to: All Scheduled Commercial Banks (excluding RRBs)

All scheduled commercial banks should ensure strict adherence and initiate corrective measures toensure strict compliance banks to the scheme of providing interest rate subvention to in respect of rupexport credit to specified categories of exports formulated by Government of India.

7. Use of RTGS/NEFT/NECS/ECS for Credit to NRE Accounts –Compliance with FEMA Regulationand Wire Transfer Guidelines

Issued to: All banks participating in RTGS/NEFT/NECS/ECS

The RBI has directed that all banks participating in RTGS / NEFT / NECS / ECS that when thedestination of funds is to an NRE account, the originating / sponsor bank must ensure that the funds aeligible to be credited to an NRE account in India under the existing FEMA Regulations and WireTransfer Guidelines.

8. Policy Guidelines for issuance and operation of Prepaid Payment Instruments in India

Issued to: All System Providers, System Participants and any other prospective prepaid payment instrument issuer

The RBI has carried out amendments in the Policy Guidelines for issuance and operation of PrepaidPayment Instruments in India. These include:

(i) Other Persons are permitted to issue mobile phone based semi-closed system pre-paid paymentinstruments.

(ii) Entities issuing mobile phone based semi-closed payment instruments shall specifically note to ens



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full compliance to the safeguards against money laundering (KYC/AML/CFT) provisions.

(iii) The mobile phone based semi-closed payment instruments issued by other persons shall also comwith certain specified conditions.

(iv) All persons proposing to operate payment systems involving the issuance of these Pre-paid PaymeInstruments shall seek authorization from the Department of Payment and Settlement Systems, RBunder the Payment and Settlement Systems Act, 2007.

9. Increase in exemption of collateral security in respect of individual and group loans under SGSScheme

Issued to: All Scheduled Commercial Banks (Excluding RRBs)

The RBI has increased the exemption of collateral security in respect of individual and group loans unSGSY Scheme.

10. Collateral Free loans – Micro and Small Enterprises(MSEs)

Issued to: All Scheduled Commercial Banks (including RRBs & Local Area Banks)

Banks must not obtain collateral security in the case of loans upto Rs. 5 lakh extended to all units of thMSE sector.

11. Finance for Housing Projects – Disclosure of Information on Mortgage of Property

Issued to: All Scheduled Commercial Banks (Excluding RRBs)

The RBI has directed that while granting finance to specific housing / development projects, banks areadvised to stipulate as a part of the terms and conditions that:

(i) The builder / developer / company would disclose in the Pamphlets / Brochures etc., the name(s) othe bank(s) to which the property is mortgaged.

(ii) The builder / developer / company would append the information relating to mortgage while publishadvertisement of a particular scheme in newspapers / magazines etc.

(iii) The builder / developer / company would indicate in their pamphlets / brochures, that they wouldprovide No Objection Certificate (NOC) / permission of the mortgagee bank for sale of flats / properif required.

12. Prudential Treatment in respect of Floating Provisions

Issued to: All Scheduled Commercial Banks (including Local Area Banks) (Excluding RRBs)

Banks should continue to have the choice between deducting their existing floating provisions from grNPAs to arrive at net NPAs or reckoning it as part of Tier II capital subject to the overall ceiling of 1.25of total Risk Weighted Assets.

13. Acceptance of Deposits by Chit Fund Companies

Issued to: All Miscellaneous Non-Banking Companies (MNBCs)

All Miscellaneous Non-Banking Companies (MNBCs) prohibited from accepting deposits from public,

except from shareholders, with immediate effect. Any deposit accepted and held by the MNBCs other than from its shareholders as on date shall be repaid on maturity and shall not be eligible for renewal.

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In the Press

RBI asks indian fin institutions to act against fraudulent borrowers7

thAugust, 2009. Trading Markets.com

To keep a check on loan defaulters, the Reserve Bank of India (RBI) asked financial institutions like Exim

Bank, National Bank for Agriculture and Rural Development (NABARD) and Small Industries DevelopmenBank of India (SIDBI) to take coordinated efforts against erring borrowers.The central bank asked financial institutions to share information among one another and with other bankabout unscrupulous borrowers, who are availing credit facilities under the consortium arrangements.

"It is advised that the guidelines on consortium arrangements/multiple banking arrangement issued tobanks, shall mutates mutandis apply to the select all-India Financial Institutions (Exim Bank, NABARD,National Housing Bank (NHB) and SIDBI) for sharing of information among the AIFIs and with banks," RBsaid.

RBI has already asked banks to take coordinated actions against the defaulters taking loans under multipbanking arrangements or through consortium of lenders.

The central bank's move follows certain complaints of borrowers using accounts maintained at other financial institution or bank to siphon off funds fraudulently.

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RBI asks banks to report suspect transactions12

thAugust, 2009. Business Standard

To track terror funding, the Reserve Bank of India (RBI) has directed banks to submit reports on accountsrelating to persons and organistions having links with Al-Qaeda terror group that includes underworld donDawood Ibrahim and Lashker-e-Taiba Chief Hafeez Saeed. The RBI directive came a day after the UniteNations issued a composite list of individuals, entities and other undertakings associated with the Al-Qaeterror group. In a letter to chairmen and CEOs of all scheduled commercial banks, local area banks andfinancial institutions, the RBI said, ""Utmost care should be taken by banks to ensure cross checking of aaccount opening applications and transactions carried out in the existing accounts with the updatedconsolidated list (of the UN).

Banks and others were also asked to report to the RBI and Financial Intelligence Unit-India those accounwhich bear resemblance to the individuals and entities listed (by the UN). The UN issued a fresh list of terrorist organisations and individuals, which include underworld don Dawood Ibrahim Kaskar, LeT chief Hafeez Mohd Saeed and mastermind of Mumbai attacks accused Zaki-ur-Rehman Lakhvi, in addition toOsama bin Laden, Al-Qaeda and Taliban.

The Global Relief Foundation, which is a listed relief organisation having branches in India as well, has abeen named as entities associated with Al-Qaeda. The list also names terror outfits like Lashkar-e-Taiba,Jaish-e-Mohammad and Harkat-ul-Mujahedeen, which are active in India, especially in Jammu andKashmir.

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Current Rates

As on 31-08-2009 (Source : RBI Website)

Policy Rates Reserve Ratios

Bank Rate : 6.00% CRR 5.00%

Repo Rate : 4.75 % SLR 24.00%

Reverse Repo Rate : 3.25%



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Exchange Rates

RBI Reference Rate

INR / 1 USD : 48.88 PLR : 12.75%-13.25%

INR / 1 Euro : 69.70Savings BankRate : 3.50%

INR / 100 Jap. YEN : 52.70 Deposit Rate : 7.50%-9.60%

INR / 1 Pound Sterling : 79.21

As on 31-07-2009 (Source : RBI Website)

Policy Rates Reserve Ratios

Bank Rate : 6.00% CRR 5.00%

Repo Rate : 4.75 % SLR 24.00%

Reverse Repo Rate : 3.25%

Exchange Rates

RBI Reference Rate

INR / 1 USD : 48.16 PLR : 12.75%-13.25%

INR / 1 Euro : 68.08Savings BankRate : 3.50%

INR / 100 Jap. YEN : 50.57 Deposit Rate : 7.50%-9.60%INR / 1 Pound Sterling : 79.75

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Other RBI notifications for the month of August 2009

Aug 31, 2009

Agricultural Debt Waiver and Debt Relief Scheme, 2008 – Prudential Norms

UCBs - Forms of Business in which Banking Companies may Engage

Investment Portfolio of Primary Dealers-Relaxation in the existing norms

Aug 28, 2009 Auction for Sale (Re-issue ) of ‗8.24 per cent Government Stock, 2027'

Auction for Sale (Re-issue ) of ‗6.90 per cent Government Stock, 2019‘


Auction of Government of India Dated Securities

Guidelines on Exchange Traded Interest Rate Derivatives

Exchange Traded Interest rate futures

Aug 24, 2009

Scheme of Non-Competitive Bidding Facility in the Auctions of State Development Loans

Aug 21, 2009

Revised Scheme for Non-competitive Bidding Facility in the Auctions of State Government Securities(Annex – II of the General Notification)





Aug 20, 2009

Payment of interest on accounts frozen by UCBs

http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=5244&Mode=0






























































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Aug 18, 2009

Exim Bank's Line of Credit to the Government of Lao People's Democratic Republic

Aug 17, 2009

UCBs - Agricultural Debt Waiver and Debt Relief Scheme, 2008

Auction for Sale (Re-issue ) of ‗8.24 per cent Government Stock, 2027'


Auction for Sale (Re-issue ) of ‗6.49 per cent Government Stock, 2015‘ Auction of Government of India Dated Securities

Aug 12, 2009

Payment of interest on accounts frozen by banks

Aug 07, 2009

Auction for Sale of a New Government Stock of 7 Years


Auction for Sale (Re-issue ) of ‗6.35 per cent Government Stock, 2020'


Aug 04, 2009

Inter-Bank Participations - Scheduled Commercial Banks

Section 23 of the Banking Regulation Act, 1949 (As Applicable to Co-operative Societies) – Policy for opening of new place of business by State Co-operative Banks

Inter-Bank Participations

Aug 03, 2009

Memorandum of Instructions governing money changing activities

Inclusion of First Rand Bank Ltd in the Second Schedule to the RBI Act, 1934

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Other Regulatory Updates [Extracts]

Banks can deduct floating provision from gross NPAs14


RBI move will help lenders report lower bad debts, higher profits. The Reserve Bank of India (RBI) hasagreed to a request from banks for reversal its guidelines on floating provisions. The regulator will nowallow banks, at least in the current financial year, to deduct floating provisions from gross non-performingassets (NPAs) to arrive at net NPAs.

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Co-op banks’ limit for housing loans raised14


State and central co-operative banks can now provide housing loans up to Rs 20 lakh to their customers.a notification issued by the Reserve Bank of India, the central bank allowed State and central co-operativbanks to provide housing loans of up to Rs 20 lakh, up from Rs 5 lakh permitted before.The RBI has also raised the limit of State and central co-operative bank loans for repairs, alterations,additions from Rs 50,000 to Rs 1 lakh.

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Nod for ‘semi-closed’ instruments 15

thAugust, 2009. Hindu Business Line

The Reserve Bank of India has permitted entities other than banks and non-banking financial companies also issue prepaid semi-closed payment instruments. Earlier, they were permitted to issue only closedpayment instruments. Semi-closed payment instruments are those which are redeemable at a group of clearly identified merchant locations/ establishments which contract specifically with the issuer to accept tpayment instrument. However, a closed instrument is issued by business establishments for use at their respective establishment only. These instruments do not permit cash withdrawal or redemption. The

maximum value of semi-closed payment instruments issued by entities other than banks and NBFCsshould not exceed Rs 5,000, the RBI said.

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Access to banking for all by 2011: RBI panel24

thAugust, 2009. MicroFinance Focus

The panel on Lead Bank Scheme constituted by the Reserve bank of India has recommended a sub-committee at the district level to draw up a roadmap to provide banking services in every village with apopulation of over 2,000, through mobile banking, business correspondents among others, by March 201In states where banking penetration is better, the date may be advanced. The High Level Committee,headed by Usha Thorat, was set up by the central bank to examine the scheme with a focus on financialinclusion.

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RBI releases rules for rate futures trading28

thAugust, 2009. The Economic Times

RBI has finalised the framework for trading in interest rate futures in consultation with the market regulatoand said the directions were effective immediately. The RBI said commercial banks would be allowed totake trading positions in interest rate futures but would not be allowed to trade on behalf of their clients.The National Stock Exchange has said it would launch interest rates futures from 31

stAugust, 2009.

The central bank said it would place the guidelines on its website

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Section II: Banking Developments

Bank on voiceprint3

rdAugust, 2009. Hindu Business Line

With the growth of online banking and frauds thereon (including phishing and pharming scams), customeand financial institutions seem united in their quest for a secure solution.

Multi-factor authentication involves providing two or more parameters and is considered fairly safe. So apfrom the user login-ID and password, your bank, for instance, may want to know the name of your pet or the colour of your first car when you pay bills online, by way of securing online banking transactions.

Identification by physical characteristics like fingerprints (biometrics) is popular for some multi-factor authentication, though not online banking. Financial institutions use multi-factor systems, includingbiometrics, to control access to physical facilities such as computer rooms and makers of ATMs experimewith fingerpr int readers and software that recognises customers‘ faces.

Voice ID

Voice ID (sometimes called voice authentication, voiceprint) is a type of user authentication that uses voicprints and pattern recognition software to verify a speaker. Voice ID relies on the fact that vocalcharacteristics are unique for each individual just as fingerprints and retinal pattern.

―An individual‘s speech pattern has more unique qualities and is often recognised as the most natural forof biometrics. The human voice is also considered the most common form of communication and is an ideform of personal identification, because your voice can never be lost, stolen or shared without your knowledge,‖ says Arunan, co-founder and Director of Bay Talkitec.



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Bay Talkitec recently announced a biometric voice authentication facility which is expected to enablecontact centres improve caller experience by streamlining the log-in process, increase security and doaway with forgettable PINs and passwords.

―Our voice authentication technology also works with existing IVR systems, including Bay Talkitec‘sSmartCall Customer Interaction Management Platform and can be easily integrated with current call centinfrastructure.

We see huge market potential in this next generation identity validation technology both from a securityperspective and with concerns of privacy on the rise.

The criteria that a voice ID system bases decisions on are created by the shape of the speaker‘s mouth athroat, rather than more variable conditions. Because of the relative permanence of the characteristics itmeasures, the technology is not likely to be fooled by an attempt to disguise a voice, and is not generallyaffected by changes that can make a voice sound quite different to the human ear, such as a bad cold or extreme emotion,‖ says Arunan.

Voiceprint

During enrolment for a voice authentication system, a user‘s voice is recorded, creating what is called avoiceprint for comparison with samples taken for user identification. To foil attempts to fool the system wita pre-recorded voice sample, people may be asked to read or repeat a list of words which they can then brequested to repeat in random combinations.

Voice ID systems have been used in a variety of security-related applications. The US‘ judicial system haused the technology, on a limited basis, for about 10 years, to ensure that prisoners incarcerated in their homes or out on temporary passes were where they were supposed to be. Voice-based systems can beeffective where secure authentication is especially important.

In fact, it needs no extra hardware such as the ones required for finger prints, retinal and facial capture.

The authentication is carried out using voice circuit media which is different from IP media. It ensuresadditional security and convenience of use and above all can be accessed wherever telephone is availabexplains Arunan.

Banks and credit card companies are increasingly turning to voice authentication as a means of decreasithe potential for fraud and identity theft and at the same time, cutting the costs associated with customer verification, he says.

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ATM machines to become disable-friendly soon28


Electronic devices like ATM machines that have made our lives easier are likely to become accessible todisabled people too. The information technology ministry has approved a draft on National Policy onElectronic Accessibility prepared by an NGO and will submit it to the central government for approval.

Javed Abidi of the National Centre for Promotion of Employment for Disabled People (NCPEDP) along wtechnology experts submitted the policy draft to the IT ministry. After making certain changes, the ministryhas decided to forward it to the central government for an approval soon.

Aiming at ""creating equal opportunities in the electronic age"", the plan has been chalked out to makesimple things like withdrawing money from an ATM machine or watching the TV by a blind person or accessing a kiosk at the railway station by the physically handicapped possible.

According to NCPEDP, India is home to 50-75 million disabled people.

One of the three salient features of the policy is that the hardware of all electronic products should bedesigned, developed and maintained in such a way that it can be used by all, including the disabled.

The policy also states that all public documents like periodicals and brochures and educational text must made available in accessible format for the disabled such as the Braille format for the blind or audio throuan automated conversion process. Greater awareness on disability and more funds on research for development of technological aids which will help the disabled access all services is also highlighted in thpolicy.



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It further suggests that a committee, which will look into the implementation of the policy and monitor it,should be formed within a month of its adoption. Besides government agencies, private companies shoulalso adopt the policy recommendations, it said.

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Other Banking Developments [Extracts]

Opening branches may be made easier for Indian banks

13th

August, 2009. Business Standard

The Reserve Bank of India (RBI) has kicked off a review of the branch licensing norm, but any liberalisatiis unlikely to cover foreign banks operating in the country. Banking sources said the central bank had set an internal working group headed by a chief general manager-rank official for preparing a roadmap for easing up the branch licensing policy. The group has been mandated to draft guidelines which would be pup for discussion. According to the sources, even if banks might not need prior approval from the centralbank for opening branches in future, it could stipulate the proportion of branches that should be opened inunder-banked and rural areas.

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Now, pay tax via ATMs19


Finance secretary Ashok Chawla launched the first of its kind banking service, where a customer can payhis income tax using an ATM. The facility has been started by Corporation Bank. Initially, at least 10-20lakh people who have an account in the bank will benefit. Gradually, in the next one or two years the facilwill be provided by all other banks, said S S N Moorthy, chairman of the Central Board of Direct Taxes.Corporation Bank chairman and managing director J M Garg said, ‗‗a customer after registering with thebank can pay his income tax and a system generated challan number will be provided for record.‘‘ Thebank has also tied up with the I-T department and NSDL where a customer can view his tax paymentrecord online.

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Section III: Banking Issues

Conduct reaudit of heavy profit-making banks: Sharma

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August, 2009. Business Standard

The Bharatiya Banking Consumer Forum has urged the Union Finance Ministry to conduct a detailedreaudit of all such nationalised banks which have shown profits.

A memorandum to this effect has been sent to the Union Finance Minister by the President of the ForumOm Prakash Sharma. Sharma told newsmen that a number of nationalised banks have shown profit in thbooks of accounts.

This balance sheet with a profit in it is a matter of serious concern as the country is presently facing seriofinancial crisis.There are several examples of the banks and financial institutions which have lost their investments to the various companies which have wound up and perished. To name a few he said oneclassic example was that of Satyam and Lehman Brothers where the banks and financial institutions hadmade enormous investments and are now repenting.

To add to this there are several defaulters in small loans and big loans too and the NPA of the banks aretoo high. When such is the case how can the banks earn so much profit, he said.

This means something is really fishy which needs to be investigated, he demanded and added that in ordto save their skin the higher-ups in these banks were managing the audits, which is doubted he said.The forum comprises of renown seniors like members of judiciary, financial experts, those retired from theIAS, IPS and IRS cadre.

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Claims on financial inclusion by some States flawed: RBI15


The Reserve Bank of India plans to go beyond setting quantitative targets for banks on financial inclusionits Governor, Dr D. Subbarao, said.

―Some States said they had achieved 100 per cent financial inclusion. But during inspections, we havefound that only 50 per cent of the people have bank accounts, of which only 10 per cent were beingoperated,‖ Dr Subbarao said, while responding to a query during a panel discussion on ‗Challenges for thcentral banks‘ organised by the RBI.

Improving the access of quality and quantum of financial inclusion was a big challenge, the Governor saidOn a request to allow the non-banking finance companies (NBFCs) and micro-finance institutions to collemicro deposits, the Governor said he could not give any definite commitment due to some issues.

Dr C. Rangarajan, Chairman of the Prime Minister‘s Economic Advisory Council, said the RBI should lookinto the recommendations submitted to it (by a panel headed by him), on the role of businesscorrespondents to be employed by banks in rural areas for financial inclusion. ―That is the only way in whrural branches of banks can reach out to people due to practical difficulties in brick and mortar expansionbranch network,‖ he added.

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Other Banking Issues [Extracts]

Bank margins to improve on credit offtake pick-up3

rdAugust, 2009. The Economic Times

The country‘s banks may have recorded creditable increases in first quarter profits, but they are in for blockbuster earnings in the coming months, analysts tracking the financial services sector said. A major part of the banks‘ profits in the quarter came from treasury income or income from their investments. Withcredit off-take showing signs of a revival, margins also will improve over the next six months, they said.Margins reported by banks in the first quarter were the lowest in recent times, as they continued to parkmost of their funds with the low-yielding reverse repo window of the Reserve Bank of India and governmesecurities because of a fall in credit demand from corporates.

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Multiple banking should be more integrated: RBI

5th

August, 2009. SiliconIndia

In a move to prevent banking frauds, the Reserve Bank of India (RBI) has urged the banks to have a morintegrated and dextral arrangement for multiple banking. The regulator said that all participating banks in multiple banking arrangement must share the details with other banks to enable earliest detection of delinquencies. Under the current multiple banking arrangement, a borrower continues to enjoy creditfacilities with other lending banks even after defrauding with one of the banks. The regulator reasoned thathis is due to the lack of a proper integrated system for exchange of information among the banks.

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Banks urged to create contingent capital6


Banks could weather crisis situations by creating room for contingent capital within the overall capital, Dr

Raghuram G Rajan, Economic Adviser (Honorary) to the Prime Minister, has said.Contingent capital coulbe in the form of convertible debentures which will convert into equity in distress (to absorb losses) andback into debt when the going is good. The RBI should shed the responsibility for managing Governmentdebt so that it can take independent monetary policy decisions. Further, it should have a clearer focus oninflation, he said.

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Post-2011, bank books to carry real numbers11


Banks will soon have to shift to a new, more accurate, accounting standard where the value of assets willbe based on current rather than historical cost. At a meeting with select bank chief executives on, 10

th

August, 2009, at the RBI headquarters in Mumbai, RBI deputy governor Usha Thorat said banks will havto adopt the International Financial Reporting Standards (IFRS) by 2011. This is in line with a directiveissued by the Institute of Chartered Accountants of India (ICAI), the apex body that sets accountingstandards in the country, that all listed companies and entities dealing with public funds must adopt IFRSaccounting principles by April 2011.

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RBI may get cracking on fake notes12


Central bank group suggests ATMs with in-built detectors, sorting machines at all bank branches. A grouset up by the Reserve Bank of India (RBI) has come out with several recommendations to check circulatioof fake notes. It has issued directions to banks to set up note sorting machines at all branches in a phasemanner. The high-level group on systems and procedures for currency distribution has suggested thatbanks switch over to the ―cassette swap system‖ to feed automated teller machines (ATMs). The centralbank might ensure that the new series of banknotes with more robust security features be introduced asearly as possible.

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Reserve Bank's surplus rises 67% to Rs 25,000 crore14

thAugust, 2009. Yahoo Business News

The Reserve Bank of India (RBI) has seen its profit soaring by 67% to Rs 25,000 crore in 2008-09.On 13

thAugust, 2009, the RBI said it would pay a surplus profit of Rs 25,009 crore to the government fo

the year ended 30th

June, 2009. Last year, the RBI had transferred Rs 15,011 crore for the year ended 30June, 2008. During the board meeting, held on 13

thAugust, 2009, the central bank approved the dividend

amount to be paid to the government.

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Deposits continue to swell; PSBs grab major chunk17


BL Research Bureau Indians poured Rs 7,28,078 crore into the banking system by way of deposits in theyear ended 31st July, 2009, 27 per cent more than in the preceding year. State Bank of India alone raked28 per cent of this money, with the public sector banks garnering the bulk of new inflows. Aggregatedeposits with scheduled commercial banks grew to nearly Rs 39 lakh crore by end-March 2009. The repoalso reveals that new deposits gravitated towards the public sector banks, with SBI and the other publicsector banks put together grabbing nearly three fourths (73.6 per cent) of the total deposit base by March2009. While the public sector banks saw their deposits expanding by 26 per cent, private and foreign banhad to make do with a much lower growth of 9 and 13 per cent respectively.

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Allow PCOs, kirana stores to function as banks: RBI Working Grp19


Villagers in far-flung areas would be able to open bank accounts and carry out a full range of financialactivities at the local kirana, medicine shops and PCOs, if the suggestions of an RBI Working Group in thregard are accepted. The working group to review the business correspondent (BC)model- whereintermediaries are allowed to carry out banking functions. Others who can be roped in to spread bankingfunctions, as per the group, include agents of small saving schemes and insurance companies, petrol pumowners, retired teachers, select self help groups and non deposit taking non-banking finance companies.

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No proposal yet to banks' HTM limits: Finmin26


The government has not received any proposal to raise the hold to maturity (HTM) limit for banks or toreview the current year's borrowing either, a finance ministry official who did not wish to be named said."The government has no proposal at present to raise HTM limits for banks," the official said. "

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Credit flow to MSMEs to double in five years: PM

28th August, 2009. The Financial Express

The government is committed to doubling credit flow to micro, small and medium enterprises, which emp6 crore persons and contribute 45 per cent to India's manufactured goods, Prime Minister Manmohan Sinsaid. The government is committed to double the flow of credit to MSMEs in five years, Singh said. According to estimates, MSMEs are given credit of about Rs 1,50,000 crore by PSU banks per annum.There are 2.60 crore units in the sector which contribute 40 per cent to exports.

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Section IV: Banking News

Online credit card accreditation must3

rdAugust, 2009. DNA News & Analysis

The Reserve Bank of India (RBI) has asked all credit card issuers to set up a new framework of checks toensure that online frauds using credit cards are reduced. The move comes at a time when credit cardfrauds are rising by the day. Frustrated, many consumers have decided that they would no longer useCredit Cards in their daily activities.

The majority of online credit card frauds pertain to the use of the card for airline tickets or for services inwhich a payment is for a service already used. In the former, the air ticket is printed by the fraudulent useand in the latter, the price of goods purchased is directly debited to the cardholder's account. It is almostunheard of for online frauds to ask for goods to be delivered to a certain address as a trail would exist at tplace of delivery for the law-enforcing agencies to chase.

There is, however, no denying the fact that some element of negligence also lies at the doorsteps of airlinand the bill payment receivers in this online fraud. Airline counters are supposed to check the name,photograph and identity proof of a person flying on their aircraft before issuing a Boarding Pass to theclient. Ticket conditions for air tickets purchase by use of a Credit Card state that the consumer must alsoproduce the Credit Card at the airport counter. If all these are scrupulously checked, how can a personboard a flight with a ticket purchased fraudulently on someone else's Credit Card?

In reality, there exists a syndicate of persons from the credit card issuers, airline agencies, airline staff another touts who have made systematic misuse of credit card frauds to siphon of crores of rupees fromfinance companies and consumers alike. While the card issuers are aware of these rackets and some of the better ones have started sending SMSes of any purchases online to the credit card's original owner, tswindling has not reduced. The cyber crime branch of the police has its their hands full with crimesinvolving large sums of money siphoned off and rarely, if ever, make any attempt to hone in on thecriminals who defraud smaller consumers.

The process of registering a crime when one's Credit Card is misused is so tedious, that most consumersare left tearing their hair at the time and effort involved in clearing up the mess. The RBI's new order may

hopefully bring some semblance of order in this chaotic scene.

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NPAs of PSU banks rise to Rs 44,000 crore5


Non-performing assets (NPAs) of government banks have been rising sharply and have grown to anastronomical Rs 44,000 crore till March 2009 despite the fact that last year UPA government had waived a large portion of these bad loans through agricultural loan waiver scheme extended to lakhs of farmersacross the country.



13

Interestingly, between 20% and 55% of the NPA component of PSU banks comprise agricultural loans ancredit extended to small scale industries (SSI) — sectors under intense pressure in the current fiscal dueseasonal and global conditions.

The government is more concerned about the truant rains which have already brought down the crop aresignificantly due to drought like situation prevailing in many parts of the country. Crop failure and lower yiecould further push the NPA level in these banks which have been given enhanced target of loan disbursain the current fiscal. The Manmohan Singh-led UPA government has set a target of Rs 3,25,000 crore in2009-10 for credit to agricultural and allied sectors, up from last year‘s Rs 2,87,000 in which more than 94target was achieved.

An analysis of top 10 banks based on their NPA level shows each of these banks have NPAs between R1,000 crore and Rs 15,000 core — about 14% of which is in the agriculture sector alone, according tofinance ministry data.

For instance, the country‘s largest bank the State Bank of India has seen a significant increase in its nonperforming asset level from Rs 9,800 crore till March 2007 to Rs 15,100 crore up to March 2009. In this, tshare of agricultural NPA is around Rs 1,800 crore compared to Rs 1,700 crore for small scale industriesFor Punjab National Bank (PNB), though the total NPAs have come down from Rs 3,400 crore in 2007 toRs 2,700 crore in 2009, its NPAs to agriculture and SSI sectors are around Rs 1,537 crore, almost 55% oits total NPAs.

The high percentage of agricultural and Small Scale Industries NPA is alarming given the fact that monsohas been playing hide-and-seek and industry has been quite restless in finding favourable environment toregister respectable growth.

The government, however, evaded a direct response on the issue when the matter was raised by membein Parliament last week. It merely stated that banks are ‗‗striving to contain the level of their gross NPAswithin acceptable limits‘

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Kanpur: Multi-crore scam in SBI, seven suspended6


A multi-crore bungling of funds was unearthed at the main branch of the State Bank of India. Acting swiftltop management of the SBI immediately suspended seven officials, including one assistant generalmanager and two chief managers.

Senior SBI officials of the region, including chief general manager BV Chaubal, general manager Arun

Sarin and other members of vigilance team of the bank had rushed to the main branch located at theMahatma Gandhi Marg here from the state capital on 4

thAugust, 2009 and took the action after carrying o

preliminary investigation in the matter.

As the matter is of serious nature, the case has been referred to the Central Bureau of Investigation for athorough probe. However, the vigilance team of SBI would continue with its parallel probe, added anothesenior SBI official while talking to TOI.

The three senior officials who were suspended with immediate effect were identified as AGM Ajeet Guptaand chief managers Jaideep Banerjee, and Vineet Kannaujiya. According to general manager Sarin, thesuspensions came following the unauthorised withdrawal of money worth several crores from the SBI mabranch in Kanpur.

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Rising frauds expose banks to greater operational threats28

thAugust, 2009. The Financial Express

In 2008-09, there were 212 banking frauds that amount to Rs 1,404 crore, while in total there were 23,914fraud cases involving Rs 1,883 crore.

However, the figures were less in 2007-08, as there were 177 cases of banking fraud totalling a Rs 659crore, while on a whole there were 21,247 instances of frauds involving a Rs 1,883 crore.

During the year 2008-09, 102 caution advices were issued to banks by the Reserve Bank of India(RBI)through secured e-mail in respect of unscrupulous borrowers who perpetrated frauds of amounts exceed



14

Rs 25 lakh. The banks could, in turn, exercise due care while considering sanction of credit facilities tothem, said the RBI‘s report released.

With a view to putting in place some deterrent action against entities such as builders, warehouse ownerschartered accountants, lawyers and valuers of properties, who do not have any contractual relationship wbanks, it was decided that banks could inform the Indian Banks‘ Association (IBA) about the names of suentities so that the IBA could prepare a caution list for circulation amongst banks. A circular was issued tobanks in March 2009 in this regard, said the report.

The fraud monitoring function of the RBI has assumed greater significance in recent years as there hasbeen an increase in the number of frauds involving larger amounts. Frauds have been noticed in tradition

as also in new areas, such as housing loans, credit cards, internet banking and outsourcing businesses.

The complexity of cases is increasingly exposing banks to greater operational risk. The RBI, as part of itssupervisory process, has been intimating banks from time to time about common fraud-prone areas, modoperandi of frauds and the measures to be taken to prevent/ reduce the incidence of frauds.

During the economic slowdown in 2008-09, the need for proactive credit expansion for stimulating theeconomy, especially in certain specified segments, such as housing and infrastructure, was recognised.There is, however, a potential scope for internal controls getting relaxed due to the exigency of creditexpansion. Weaker standards of control and risk management tend to facilitate frauds, especially whenrapid credit expansion has to be achieved in a slowing economy.

Therefore, appropriate precaution needs to be integrated into banks‘ oversight structure. In this context, tRBI proposes to evolve a prudential approach to fraud oversight as against the existing legal approach. Tapproach would seek to align the supervisory oversight on frauds with the Supervisory Review & EvaluatProcess under Pillar 2 of Basel II by factoring in the sharp rise in frauds, while profiling the operational risfacing the banks.

Banks were also advised to be extremely cautious while continuing relationships with respondent bankslocated in countries with poor KYC standards and countries identified as ‗uncooperative‘ in the fight againmoney laundering and terrorist financing. The anti-money laundering (AML)/combating financing of terrorism (CFT) guidelines issued by the Reserve Bank are in consonance with the Financial Action TaskForce (FATF) recommendations.

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Worrying sign: Value of fake notes up 183 per cent28


Despite various measures taken by the Reserve Bank of India (RBI) to curb the menace of counterfeitnotes, the value of such currencies detected by RBI offices and branches of various banks has gone up b183.14 per cent in the last one year.

At the same time, the number of fake notes went up by 103 per cent to 3,98,111 in 2008-09 as against1,95,811 during the corresponding period last year. There has been an increase in forging of notes of higher denominations, especially Rs 500 and Rs 1,000 notes.

In order to facilitate the examination and detection of counterfeit notes at the currency chest level itself, thapex bank has asked banks to install note sorting machines (NSMs) at bank branches. According to datareleased by the RBI in its annual report (2008-09), the value of fake notes detected in the year stood at R15.57 crore as compared to Rs 5.49 crore last year.

The share of Rs 500-notes in the overall volume increased to 35.6 pieces per million in 2008-09 as again12.7 pieces per million in 2007-08. Similarly, the share of counterfeit Rs 1,000 notes went up from 7.2million pieces per million in 2007-08 to 16.6 pieces per million in 2008-09.

Out of the total fake notes detected, 3,42,281 pieces were spotted at bank branches, mainly due toincreased use of NSMs. Also, setting up of the Forged Note Vigilance Cells (FNVCs) at branches helpedbanks in a big way and ensured stringent level of anti-counterfeit management.

Bank branches have proved more effective in detecting counterfeits than the RBI offices. While RBI officedetected 14 per cent of the fake notes in 2008-09, the note sorting machines detected the rest.

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15

Other Banking News [Extracts]

RBI hints at rollback of monetary expansion1

stAugust, 2009. Business Standard

The Reserve Bank of India (RBI) will roll back the special monetary measures if the government commitsitself to fiscal discipline by chalking out a fiscal consolidation plan and the economy shows more definitesigns of recovery, RBI Governor Duvvuri Subbarao has said. The challenge for RBI was to maintaincomfortable liquidity while anchoring inflation expectations, he said. RBI has made available potentialliquidity of Rs 560,000 crore, nearly 9 per cent of India‘s gross domestic product, to help the country facethe liquidity crisis following the global financial meltdown. This year, RBI would have to manage the delicabalance between government borrowing and maintaining ample liquidity to meet the demand for privatecredit as it picked up in the coming months, he said.

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I-T dept unearths money laundering racket2

ndAugust, 2009. The Times of India

The income-tax (I-T) department has detected a flourishing money laundering racket run by a Jamshedpubased co-operative bank. According to a rough estimate of the department, a sum of Rs 300 crore isinvolved in the racket which converts black money into white. Sources in the I-T department revealed thadocuments of the Urban Co-operative Bank, where a survey was conducted in the last couple of days,show that the amount involved in the racket is over Rs 300 crore.

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Online transactions: Is the new security system enough?2

ndAugust , 2009. The Economic Times

By the time you will read this, the new Reserve Bank of India (RBI) norms that enforce a third-factor identification for all online credit/debit card transactions will be already applicable. As a cardholder, you wno longer be able to make online purchases or payments if you haven‘t register ed yourself for an additionsecurity layer with your partner bank. On the face of it, the move is a welcome one. It will ensure you ascustomer have a third factor authentication which until now was not readily available on the plastic and threduce the chance of an online fraud. However, there is no guarantee you might not be charged by bank future. The new guidelines also make it compulsory for banks to intimate the customers via an online alersystem for any transactions exceeding Rs 5,000 on their card. Though most of the banks send textmessage on transactions above Rs 5,000, banking experts feel the day is not far when you will be given tleeway to zero-in on the amount you feel above which you should receive an alert.

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Banks hope to make fast buck via IPOs3

rdAugust, 2009. Hindu Business Line

With the primary market for equity issuance reviving after a hiatus of almost a year-and-a-half, domesticbanks are keenly eyeing listing gains from the initial public offers (IPOs) of Adani Power Ltd and NHPC LBank treasury officials are laying much store by quick gains from the equity markets as yields ongovernment securities are gradually edging up (i.e. G-Sec prices are falling) on account of the hugebudgeted government (Central and State) borrowing programme, pegged 34 per cent higher in FY 2010 aRs 5.37 lakh crore over the previous year‘s actual borrowing of Rs 4.02 lakh crore. Banks and LifeInsurance Corporation of India are understood to have bid for the Adani Power IPO under the qualifiedinstitutional bidder (QIB) category in a big way.

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Banks asked exchange customer info to prevent loan defaults4

thAugust, 2009. Rupee Times

The Reserve Bank of India has asked the banks to have more a more integrated and dextral arrangemenfor multiple banking as a step towards prevention of the banking frauds.The regulator noticed that allparticipating banks in a multiple banking arrangement must share the details with all other banks to enabearliest detection of delinquencies.The regulator has asked the banks to lend a borrower, under thisintegrated arrangement. This would enable the lending banks to obtain necessary information about thecustomer like details of modus operandi before making any advances. It will help the banks to takecoordinated action(s) against any case of detected frauds, enable easier follow-ups for recovery, and

reduce changes of loan defaults.

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Banks eye big role in UIN project4


Banks are likely to play a vital role in the government‘s initiative to issue unique identification number (UINfor every Indian citizen. The Chairman of Indian Banks Association, MV Nair said that the IBA will like towork very closely with the government to make this venture successful because eventually banks will bethe biggest beneficiaries. Nair said that the UIN will drastically reduce the paperwork that banks require todo to open a new account. This is because since 2004 banks are required to verify the identify of thecustomer which requires them to undertaking a vigorous exercise — know your customer (KYC). The KYexercise involves a lot of paper work to support customers identify.

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Online credit card payments hit ‘password’ snag5


Trade and commerce on the Internet are suffering a slight hiccup now. The reason — cyber security for credit card payments just got a bit tighter. The response from card holders has, however, been lukewarmDespite sustained campaigns over the past few weeks, many who transact on the Web have not registeretheir passwords yet — as seen from reports of failed transactions on the Web. Banks are unwilling to admto the rather poor response so far and think it is too early to comment.

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Normal fees for public issue facility by banks, says Sebi

6

th

August, 2009. The Financial Express

In order to encourage more banks to provide investors the facility to apply for a public issue without makinpayment, capital market regulator Securities and Exchange Board of India (SEBI) said such application wfetch as much commission as normal ones. This facility, Application Supported by Blocked Amount (ASBAwas introduced in 2008. With this facility, the amount required for the number shares applied for will beblocked in the investor‘s personal account. Upon allocation of shares, a proportionate amount is debitedfrom the account. The scheme, however, failed to take off due to lack of adequate incentives for self-certified syndicate banks which were assigned to the task of accepting ASBAs, uploading details in thebidding system and blocking or unblocking of the account. Currently there are around 20 banks providing ASBA facility that includes Axis Bank, HDFC Bank, ICICI Bank, HSBC, IDBI Bank, Kotak Mahindra Bank,PNB, SBI, and Bank of Baroda, among others.

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India seeks $3.2 bn from World Bank to recapitalise PSU banks7

thAugust, 2009. The Live Mint

The government has sought a $3.2 billion loan from the World Bank to infuse capital into public sector banks, the Lok Sabha was informed. To enable the PSBs to meet credit requirements of the economy whmaintaining a healthy and comfortable level of regulatory capital to risk-weighted assets ratio, a proposalhas been sent to the World Bank.

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Open more branches in rural areas: RBI tells banks7


Underscoring the need to improve banking facilities in rural areas, RBI asked the banks to open morebranches in the villages. "There should be greater money supply to the hands of the rural people so thatthey can avail the services in the priority sectors," RBI deputy governor KC Chakraborty said. Pointing toMeghalaya where the cash deposit ratio was as low as 40 per cent, Meghalaya chief secretary RanjanChatterjee said banks, particularly the private ones, are reluctant to open branches in rural areas of thestate. The chief secretary said Meghalaya government offered accommodation to the banks and assured

security in rural areas.

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Bank derivative exposure to SMEs low8


The Lok Sabha was informed on, 7th August, 2009, that very few banks had derivative exposure to smalland medium enterprises (SMEs). Also, most SMEs had not been allowed exotic products by the banksbased on their customer appropriateness policies. As on end-December 2008, the total marked-to-marke(MTM) derivative exposure of the banks to SMEs was only Rs 196 crore, which accounts for less than onper cent of their total MTM exposure in derivatives.

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RBI occasional paper moots for special funds for SHG9


A Reserve Bank occasional paper has mooted a special fund for self help groups (SHGs) to deal withregional imbalances in credit disbursement to poor, particularly in the eastern and central regions of thecountry. At present, only one-fifth of the total loans to self help groups went into the eastern and centralregions which accounted for more than three-fifth of the total poor in India. The paper said that the averagbank loans to SHGs in the western, eastern, northern, central and particularly in the northeastern region amuch lower than their southern counterparts. The paper said that out of the total credit disbursed byscheduled commercial banks, the smallest category of Rs 25,000 and below accounted for only three percent (14.2 per cent in 1996) of the total credit outstanding in 2006.

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RRBs embrace core banking solutions10th

August, 2009. The Economic Times

In step with RBI's direction to implement 100% core banking solutions (CBS) by September 2011, UnitedBank of India (UBI)-sponsored regional rural banks in four states have started working on their IT-systemon a warfooting. State Bank of India, Punjab National Bank and Union Bank of India have completed CBSimplementation in their respective RRBs. In case of UBI-sponsored banks, Ernst & Young (E&Y) isassisting the four banks in rolling out CBS branches. Although UBI has guided these banks in choosingE&Y as consultant, the RRBs are sharing the cost for engaging the consultant.

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Govt turns to banks to meet cash shortfall11


The government has made the first move to use the surplus funds of commercial banks to meet its short-term cash needs. Banks have been regularly parking the excess money, for which they can‘t find borrowewith RBI under the reverse-repo facility. Now in a letter to banks, the central bank has said the governmewill issue new shorter-tenure treasury bills that will help the government meet its temporary cash flowmismatches. The intention is to come out with an instrument, with which the government can raise short-term money at a day‘s notice.

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RBI against extension of debt recast deadline12


The RBI is of the view that there is no case for an extension of deadline for restructuring of loans beyond30th August, 2009. Not only banks, the corporate debt restructuring (CDR) cell had also maderepresentations to RBI for extension of the deadline for restructuring of assets which ends on 30th Augus2009.RBI is of the view that exceptional regulatory treatment of retaining the asset quality even with secorestructuring was an one-time special dispensation in response to the stressful economic conditions andthe global slowdown.

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Heavy disbursals give bank credit a big push13


Fortnight ended 31st July, 2009 witnesses Rs 29,500-crore jump. On account of heavy disbursals of pre-sanctioned funds, bank credit grew by Rs 29,471 crore during the fortnight ended 31st July, 2009. A largenumber of loans sanctioned during the last two quarters were being used now, bankers said. According tothe latest RBI data, outstanding bank credit stood at Rs 28,07,033 crore at the end of 31st July, 2009.During the previous fortnight, loans from banks had dropped by Rs 21,185 crore as companies wereaccessing funds through short-term instruments at a lower cost. Bankers said the demand for credit wasimproving. Also, industrial output grew by 7.8 per cent on a y-o-y basis in June 2009 from a 2.2 per centrise in May 2009.

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It's business as usual for banks as dust settles down13


Banks have recorded a strong growth in deposits, investments and loans in the fortnight ended 31st July,2009, after recording a sharp decline in business in the first half of the month. According to the latestfigures released by the Reserve Bank of India(RBI), total loans extended by banks rose to Rs 27,77,567crore as on 31st July, 2009, up Rs 29,472 crore over the previous fortnight‘s levels. Both food credit — loans to Food Corporation of India (FCI) for grain procurement and non-food credit, which comprises loanto individuals, farmers, corporates and other businesses rose by Rs 743 crore and Rs 28,729 crore,respectively, during the fortnight. However, as the year-on-year loan growth is still at around 15.9%, waybelow RBI‘s expectations of 20% for the year.

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Banks want curbs on free ATM use14


The free run at automated teller machines might end soon, with banks petitioning the Reserve Bank of In(RBI) to put curbs on cash withdrawals at third-party ATMs. Representatives from the Indian Banks Association, who met central bank officials late last month to make a case, said RBI had accepted most otheir suggestions and these are likely to come into effect soon. After witnessing a surge in number of transactions but a fall in the ticket value of each transaction, banks have sought modifications in the free ATM rule. Chief among their suggestions is the imposition of a limit of Rs 10,000 per withdrawal whencustomers use a third-party ATM and a cap on the number of free third-party transactions at five a monthBanks have also proposed that they be allowed to pass on the interchange cost to customers withdrawingfunds from current accounts. Banks have argued that current accounts, unlike savings bank accounts, donot have a minimum balance requirement and money deposited in such accounts does not earn interest.

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Fake home loans: Bank manager, others charged14

thAugust, 2009. Indian Express

The CBI has filed a chargesheet against M T V Reddy, Chief Manager of the State Bank of Mysore, for allegedly siphoning off more than Rs 5 crore by issuing housing loans to several non-existent employees prominent government organisations. The CBI claims Reddy, who was posted at the Gandhinagar branchof the bank in Bangalore, along with managing directors of several private firms conspired to avail 76 boghome loans amounting to Rs 5.5 crore between August 2003 and January 2006. All accused have beencharged with criminal breach of trust, cheating, forgery for the purpose of cheating, forgery of valuablesecurity, knowingly using the forged documents as genuine and criminal misconduct.

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Mortgage lenders move to match SBI rates15


The action in the home loans market seems to be hotting up with many banks and housing financecompanies moving to match the competitive schemes unveiled by the country‘s largest lender, State Banof India. The latest to join the fray is LIC Housing Finance (LICHF). The country‘s second-largest mortgagplayer has cut floating rates by 50 basis points (bps) from 9.25 per cent to 8.75 per cent for loans of Rs 3075 lakh. SBI had slashed rates to attract customers across income segments. Now, loans from SBI areavailable at an interest rate of 8 per cent for the first year and 8-9 per cent for the next two years dependion the size of the scheme. Housing Development and Finance Corporation (HDFC), also reworked itshome loan slabs, resulting in a 50 bps cut from 9.5 per cent to 9 per cent for loans of Rs 30-50 lakh.

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Banks reaching limit for govt bond buys17


The government may face fresh problems for its mammoth borrowing programme, with several major banks, especially public sector players, expressing difficulty in buying more long-tenure bonds during theauctions owing to growing mark-to-market risks to their balance sheet. Treasury executives at some of thlargest bond buyers said their bank had little headroom to buy government securities and hold these in thheld-to-maturity (HTM) category. Many of the treasury heads at the public sector players confirmed thatthey stayed away from the 7th August, 2009 auction and at least one of them has also written to the centrbank, pointing to its inability to make large purchases.

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Banks to meet target by lending for allied agricultural activities17


India‘s state-owned banks are increasing their share of loans to farm-related activities to meet their targetfor priority sector lending as also aid distressed farmers staring at a drought. Agriculture and allied activitias well as small enterprises are covered under the priority sector, which also includes extending loans tothe weaker sections of society. Domestic banks are required to deploy at least 40% of their loan book undpriority sector lending, compared with 32% for foreign banks. Bankers fear demand for agricultural creditmay be seriously affected as rainfall remains lower than average this year. If banks are not able to meettheir target, they have to put the money aside under the Rural Infrastructure Development Fund, which isutilized by the National Bank for Agriculture and Rural Development.

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Banking Sector has lost Rs 1,480 crore in 200822

ndJuly, 2009. Stock Market Today

The banking sector has lost Rs 1,480 crore in 2008 due to various frauds. The amount represents a 29.7per cent rise over Rs 1,141 crore that the banks lost in 2007. The number in terms of volume has slightlydecre-ased to 22,540 in 2008 compared to 22,884 in 2007. The Reserve Bank of India has reported thatunscrupulous customers of banks, third party outsiders and even the banks own staff perpetrate frauds.

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20

Govt to inject capital into ailing RRBs18


The Centre has decided to inject a fresh capital into weak regional rural banks (RRBs)-with a CRAR (caprisk weighted assets ratio) below 7%. The move is aimed to shore up an RRBs capital adequacy so that ican enhance credit flow to poor farmers. The size of the fresh recapitalisation is being worked out. Thegovernment wants fragile RRBs in terms of capital to achieve 7% CRAR by 2010, and 9% by 2012. Therewere 33 RRBs whose CRAR was below the 7% mark as on March 2008. While there has been someimprovement in 2008-09, the finmin is yet to release the fresh data relating to the 84-odd RRBs.

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After a hiatus, tea cos back in favour with banks18


Leading banks, such as State Bank of India (SBI), UCO, United Bank of India, have started taking freshinterest in the tea sector after a near seven-year hiatus. So much so, they are now upbeat about the sectoand are open to the idea of taking exposure in tea companies, as they feel their repayment capability hasincreased following a turnaround in the tea sector. The banks have started sending positive signals to thesector. For instance, SBI is now very positive on the sector and is offering loans to tea companies,especially the viable units.

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Banks remain cautious on global fund raising plans18


Public and private sector banks are holding back their global capital-raising programmes through MediumTerm Note (MTN) issuances despite softening of international interest rates. PSB officials said that theywould prefer to wait for a lead from the State Bank of India. An MTN issue by SBI would set the benchmapricing for other public and private sector banks in the country. SBI is currently the best rated entity in thecountry, with global rating close to the country rating. The officials said that the MTN costs are attractive.With six-month dollar LIBOR hovering around 1 per cent, tapping the global markets appears cost effectivbankers said. However, there was the risk of a likely increase in LIBOR, once the US Federal Reservebegins exiting from the monetary expansion measures initiated in the aftermath of the sub-prime crisisworldwide.

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ADRs, GDRs, FCCBs Of Banks Not Part Of FDI19

thAugust, 2009. Deal Curry

The contentious issue of foreign ownership in local banks is set to be resolved. The Reserve Bank of Indi(RBI) has suggested to the finance ministry that foreign investment in local banks in the form of Americandepository receipts (ADRs), global depository receipts, foreign currency convertible bonds and any type oconvertible warrants be excluded while calculating the foreign direct investment (FDI) limit for Indian bankThe controversy was triggered when the department of industrial policy and promotion (DIPP) issued PreNotes 2, 3 and 4 in February 2009 which suggested changes in the rules for calculating FDI.

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RBI plans sweetener for banks to park funds with Govt19


In order to push through the gargantuan Government borrowing programme, the Reserve Bank of Indiamay have to throw-in a sweetener by allowing banks higher headroom for parking securities in the ‗held-tmaturity‘ or HTM bucket. By doing so, banks would be encouraged to participate in the auction of Government securities without having to worry about mark-to-market provisioning towards depreciation inthe prices of securities in the current scenario when yields are rising (that is prices are falling).

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21

Microfinance NBFCs can be Business Correspondents: RBI Working Group19

thAugust, 2009. MicroFinance Focus

A Reserve Bank of India Working Group has recommended appointing non-deposit taking NBFCs, whosemicrofinance portfolio is not less than 80 per cent of their loan outstanding in the financially excludeddistricts, as Business Correspondents (BCs) for banks in rural and semi-urban areas, among others. TheRBI Working Group said the banks would need to accept the BC model as extremely vital for achieving thgoals of financial inclusion. The BCs should be used not only for opening and servicing no-frills accountsbut for the full range of financial activities, including the proposed routing of government‘s payments

through the banking system.

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Come Sep, data on frauds to aid lenders20


Lenders in India will soon be able to look up in a database, the names of people who have defrauded banand finance companies here, even study their modus operandi. The Credit Information Bureau (India) Ltd(Cibil), which tracks the credit history of commercial and consumer borrowers, will launch in September 2009 the first national, centralized database of fraudulent financial activities. This database, to be namedCibilDetect, comes as a response to rising instances of fraud in the financial sector and has been developat the behest of the Reserve Bank of India (RBI) and the Indian Banks‘ Association (IBA), which represenall banks in the country.

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Banks told to display details of grievance officials20


The RBI has asked banks to ensure that all branches prominently display the names and contact details oofficials who can be approached in case of a complaint. Further, the name and details of the nodal officerappointed under the Banking Ombudsman Scheme, 2006, should also be displayed at the branch, thecentral bank said. With a view to strengthen the redressal mechanism, the RBI has also advised banks todisplay on their Web sites the names and contact details of the officials at their head office, regional officeand zonal offices who can be contacted by customers to lodge complaints.

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Banks step up issue of certificates of deposit20th

August, 2009. Hindu Business Line

After a long lull, banks have stepped up short-term resource mobilisation through issue of certificates of deposit (CD). The increased activity in CD markets stems from anticipation that the Reserve Bank of Indiais likely to begin exiting the process of monetary expansion. CD rates that dropped to below 5 per cent inJuly 2009 are now close to 6 per cent. Since the beginning of this week, banks raised Rs 3,000 crore. Bualong with banks, institutions such as Nabard, PFC and the Rural Electrification Corporation have alsostepped up short-term resource mobilisation.

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RBI puts Rs 10,000 cap per withdrawal from third party ATMs21

stAugust, 2009. The Economic Times

The Reserve Bank, which made third party ATM transactions free from April 2009, has said not more thanRs 10,000 can be withdrawn each time they are used and limited the number of such transactions to five month. The apex bank has sent a communication in this regard to Indian Banks' Association (IBA) and this expected to be implemented shortly, IBA Chairman K Ramakrishnan said. Also, the number of suchtransactions will be limited to five times a month.

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Public sector banks flooded with cash21

stAugust, 2009. Hindu Business Line

With the Centre and States raising money upfront but back-ending budgetary expenditure for the currentfinancial year, public sector banks are saddled with large floating funds. This financial year so far, theCentre has raised Rs 2.25 lakh crore or 49.89 per cent, of its gross borrowing programme. In addition,States have also raised close to Rs 32,000 crore during the same period, through issuance of 10-year Stadevelopment loans. The funds are currently parked with the public sector banks (PSBs), as both the Centand States‘ expenditure programmes, (Plan and non-Plan), are yet to take off, more so in view of themonsoon deficit.

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Banks may be allowed to tie up with multiple insurer 21

stAugust, 2009. The Economic Times

Banks may be allowed to tie up with more than one insurer in the life and general insurance sector with aset of stringent checks and balances. At least, this is what the committee on bancassurance formed byInsurance Regulatory & Development Authority (IRDA) feels. At present, a bank can tie up with only one insurer and a general insurer for selling covers. IRDA formed the committee to take a fresh look at theexisting regulatory architecture on bancassurance intermediation model and the possibility of tweaking thpresent set of guidelines. With a limited number of insurers in operation, it was becoming difficult for bankto find bancassurance partners under the present rules for bancassurance tie-up.

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Low credit offtake pushes banks to mutual funds22

ndAugust, 2009. Hindu Business Line

Banks collectively invested over Rs 50,000 crore in liquid and ultra-short-term mutual fund schemes in Ju2009 alone; their total investments in mutual funds as at July 2009 end stood at Rs 1.4 lakh crore,according to the RBI data. Fund managers said this is the highest amount ever that banks have parked wthem, and that lacklustre loan off-take had forced the banks to seek out mutual funds. For mutual funds,their returns or portfolios could get impacted if a chunk of the current investments is redeemed once thecredit offtake begins. All banks have similar risk profiles. In a tight liquidity environment, once bankswithdraw money for disbursing credit, corporates too, would redeem their investments.

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Smaller banks unaffected by free ATM usage22nd


Smaller banks have remained unaffected by free ATM usage, despite a smaller network. Following an RBdirective, all bank customers are able to transact on ATMs of any other bank (in which he/she may not bean accountholder) for free from April 2009. Officials of City Union Bank, which has 125 ATMs, said theynoticed a 25-30 per cent jump in the usage of their ATM by clients of other banks. Karur Vysya Bank whichas 336 ATMs has recorded a daily hit rate of 1.15 lakh across all its ATMs.

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Finmin asks PSBs to help RRBs cut bad loans24


The finance ministry has asked public sector banks (PSBs) and the National Bank for Agriculture & Rural

Development (Nabard) to play an active role in containing non-performing assets (NPAs) of regional rurabanks (RRBs). The PSBs are key promoters of RRBs, which is why, the ministry feels sponsor banksshould take more responsibilities. With a view to clean their balance sheets, the ministry has directed allRRBs to reduce their gross non-performing assets (NPA) ratio below 5% by 2010. At present, as many as13 of them have the ratio over 10%.

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23

Banks to hit bond street for capital ahead of festive season24


Softer interest rates and expectation on credit buying in the busy season are likely to ensure hectic activitin the bond market in the coming week (starting 28th August, 2009). A host of state-run banks have linedup issues of about Rs 3,000 crore over the next week (starting 28th August, 2009) to 10 days to shore uptheir capital base. Likely to raise funds are Bank of India, Allahabad Bank, Oriental Bank of Commerce anState Bank of Hyderabad.

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Banks approach firms for loan default by employees24


If anyone has defaulted on a loan taken in your personal capacity, there is a chance that he might hear from the human resources department of the company he work for. This is because private sector banksare opting for soft-touch loan collection strategies, after having faced public censure a few years ago for using heavy-handed tactics to recover loans. One of these includes approaching the employer of acustomer who has defaulted on a retail loan to act as an intermediary between the bank and the client.Private sector banks such as the country‘s second largest lender ICICI Bank and the third largest privatesector lender Axis Bank have adopted this practice which enables them to simultaneously touch alldefaulters who share an employer.

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Banks looking at tech-based financial inclusion25


Kolkata-based banks will look at adopting technology-based financial inclusion model and appoint businecorrespondents and business facilitators in order to make banking facility accessible in every village by2011, according to the recommendations of a high-level committee set up by the RBI. Mr T.M. Bhasin,Executive Director, United Bank of India, said, ―Banks will adopt a multi-pronged approach by openingbranches in the unbanked gram panchayats (GPs), issue biometric cards to connect to the customers inrural areas apart from appointing business correspondents to enhance banking reach in these areas.‖

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Banks see pick-up in mobile banking25


Banks have seen an increase in the number of customers opting for mobile banking services in the last twmonths due to a steep rise in small-value transactions. Country‘s largest lender, State Bank of India (SBIhas added more than 20,000 customers in mobile banking in the last two months and expects the numbeto rise further in the future, a senior SBI official said. Both customers and bank branches have realised thimmense potential of this service, especially when it comes to small value transactions. At present,customers are allowed to transfer funds up to Rs 5,000 and can make purchases worth up to Rs 10,000through mobile banking. The bank‘s mobile banking customer -base rose to 11,508 in August 2009 from1,700 two months ago, a major portion of the new customers being youngsters.

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Banks may see rise in NPAs from micro-finance25


With the monsoon in deficit in most parts of the country, public sector banks have braced themselves for rise in stressed accounts (delays in repayments of principal and/or interest). Top bank officials, however,said that stressed accounts are not necessarily going to be from farm loans or crop loans. Stressed assetare expected from the refinance extended to self-help groups (SHG) and micro-finance institutions (MFIsOutstanding credit to the SHG sector is currently estimated at Rs 12,000 crore. The low stress in farmcredit is partly on account of the farm loan waiver extended last year. This year, the stress in the assets hcome largely on account of the drought-hit farm sector. It was largely the rural areas that had availed credfrom MFIs/SHGs.

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24

Checking money laundering tough25

thAugust, 2009. UTVi

Money laundering laws in India are not adequate. Thats what a survey by the BMR group shows. Antimoney laundering laws have been implemented in India, yet enforcing these laws still remains a hugeproblem. The Swiss Banks hold $1500 billion of tainted money under Indian Accounts and this staggeringfigure which is 13 times the size of India's foreign debt has prompted reform in the Anti Money laundering(AML) regulation. India's banks are constrained as they can only operate under PMLA. Compare PMLA tothe global standard maintained by the financial Action Task force and youll know where the loopholes areBanks say that identifying the right customer is the biggest problem. KYC protocol is not defined, today an

individual without credentials can open a bank account with just a photo ID & a copy of the passport.

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Bank credit down by Rs 4,814 cr 27


Bank credit fell by Rs 4,814 crore to Rs 28,82,919 crore for the fortnight ended 14th

August, 2009, from R28,87,733 crore in the fortnight ended 31

stJuly, 2009, according to the latest figures released by the

Reserve Bank of India. Credit demand has been slack with only some sectors showing growth, saidbankers. In the same period last year, bank credit was at Rs 25,23,130 crore. Deposits for the fortnight aldeclined by Rs 8,739 crore from Rs 41,99,765 crore.

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E-transactions gain ground; cheque clearances dip 5%28


As a sign of people moving to electronic mode of fund transfer, the number of cheques processed in 200809 fell 5 per cent after growing at 7 per cent and 11 per cent in the past two years, respectively. Accordingto data released by the Reserve Bank of India (RBI) in its annual report, 1.14 billion cheques wereprocessed in 2008-09, using Magnetic Ink Character Recognition (MICR) compared to 1.20 billion in 200809. According to RBI, apart from migrating to electronic means of fund transfer, the general slowdown in teconomy was also responsible for the lower volume of cleared cheques.

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Indian banks pass stress test28


MTM risks to the Indian banking sector are limited and manageable. The Indian banking system is resilieto the shocks that may arise due to higher non-performing assets (NPAs) and the global economic crisis,the Reserve Bank of India‘s (RBI‘s) stress test has shown. RBI‘s Annual Report-2008-09 said the test wadone to assess the capital adequacy of the banks to sustain losses from deteriorating asset quality,primarily due to falling external demand in the wake of the global recession a subsequent slowing of domestic private demand. A similar test was done to assess the risks associated with the mark-to-market(MTM) losses on the banks‘ overseas exposure. The exercise tested the banks‘ exposure to seven sectowhose prospects have dampened due to the slowdown in external demand.

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Bank-sponsored PE, VC funds face capital adequacy norms28


In a move that could affect private equity (PE) and venture capital (VC) funds being set up by banks, theReserve Bank of India (RBI) said it was planning to lay down a risk management and capital adequacyframework for bank-sponsored private pools of capital. The move, a part of the new set of prudential normbeing discussed by financial sector regulators across the globe in the wake of the credit crisis, was beingdiscussed in view of the reputational risk arising from undertaking such activities, RBI said in its annualreport for 2008-09. Laying emphasis on the macro-prudential dimension of the systemic risk assessment,the banking regulator said it was also in the process of revising the guidelines on stress testing and liquidrisk management and would factor in the new guidance issued by the Basel Committee on BankingSupervision in March 2009.

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25

As demand stagnates, Kerala banks face a money pile28


It would be the dream of a private money-lender, but not quite so for commercial banks. Aggregate deposin commercial banks in Kerala have topped Rs 1,34,764 crore at the end of June 2009, without a matchingrowth in credit demand, leading to a significant dip in the credit-deposit ratio. More than any hesitation othe part of banks to lend, it has to do with a dip in the consumption demand in the state‖, says VA Josephmanaging director of the Thrissur-based South Indian Bank. Sectors in which credit off-take has beensignificantly hit include realty, education and even expensive consumer goods. Earlier, NRIs from the statwere investing in real estate, largely with speculative interest, but that has reduced considerably now. Asimilar situation is seen in the education loan segment, where off-take is less.

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RBI to ensure regular supply of fresh bank notes29


Besides examining options to enhance the life of bank notes, the Reserve Bank of India has initiated a mpronged approach involving regular supply of fresh bank notes, speedier disposal of soiled bank notes anextended mechanisation of cash processing activity to ensure that good quality bank notes are in circulatin the system. The challenges to managing currency have increased over time given the expansion of theeconomy and the growing needs for bank notes, the task of currency management has becomeincreasingly complex.

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Savers plump for bank deposits30


Indian households slowed their saving spree in 2008-09, though they continued to put their money in safeinvestment avenues such as bank deposits. That is the key take-away from the RBI‘s latest Annual Reporeleased this week. Savings increased marginally by 4.3 per cent for the year, according to the AnnualReport. Apart from lower consumption, the Sixth Pay Commission arrears and increased income levels ofthe public sector employees probably flowed into savings. One highlight of the household savings patternis the massive Rs 4,09,678-crore accretion to bank deposits in 2008-09. In recent years, banks seem tohave even attracted funds that were earlier earmarked for small savings schemes. Apart from banks,NBFCs too witnessed a surge in deposits, with an inflow of almost Rs 13,400 crore in 2008-09.

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Drop in housing loans slows retail credit growth31st


Retail credit, which was until a couple of years ago, viewed as a big growth driver for banks, has seensteep moderation in the recent past, data from the RBI Annual Report released this week show. Housingloans, the dominant category of retail loans, grew at just 9 per cent annually during 2007-09, after a 31 pecent annual growth in the previous 3 years. Housing loans constitute almost half of the retail creditoutstandings, with almost 73 per cent of this falling under priority lending – below Rs 20 lakh loans. Thesubdued growth can be traced to the disproportionate increase in property prices and rising interest ratesuntil recently. Credit card loans and education loans, the two fastest growing categories, have bothincreased their share in retail credit in recent years.

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Some banks, PDs likely to steer clear of bond futures

31st

August, 2009. The Economic Times

A section of banks and primary dealerships may stay away from participating in interest rate futures on 3 August, 2009, due to an ambiguity in the final RBI circular that states entities will have to take permissionfrom a relevant department of the central bank before trading. Many bankers and officials at bond housestold ET that the innocuous looking clause had led to some confusion and they would await a clarificationfrom the central bank before getting into transactions. Exchange-traded Interest rate futures (IRFs) are seto be launched on the National Stock Exchange (NSE) on 31st August, 2009.

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26

Cerdit card scam: Shopkeepers under scanner 31

stAugust, 2009. The Times of India

The economic offences wing of the Mumbai police has busted a credit and debit card racket in which somshopkeepers had cloned the cards and showed fake transactions. According to sources, some Nigeriansused to supply the accused with cloned cards through which they showed huge purchases to get moneyfrom the banks. Hukumsingh Prithviraj Rao (29), who runs Welcome Electronic Shop in Mira Road, wasarrested from Panjim in Goa after he fled fearing arrest. Rao has been booked for cheating, criminal breaof trust and forgery. The ICICI Bank had lodged a complaint with the Samata Nagar police after it gotseveral complaints from the credit and debit card holders showing huge bills of purchases which they nev

did. Based on this, the bank sent executives to check the gaps in the system and were shocked to find outhat some shopkeepers were misusing the Electronic Data Capturing (EDC) machines which the bank hagiven them.

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Section V: On the Watch

Banks may take 3 months to cap free 3rd-party ATM deals28


Customers can avail themselves of unhindered, free third-party ATM transactions for some more timedespite the Reserve Bank of India (RBI) capping such deals at a maximum of five per month. Reason: Toimplement the cap, banks will need to make various technological changes in the machines and that willtake quite some time.

Sources said the Indian Banks‘ Association (IBA) had tentatively decided to bring the modified rules intoforce from October 15 this year. However, bankers said they would require at least two-three months toprepare for the modifications. The matter is likely to be taken up tomorrow at the managing committeemeeting of IBA in Mumbai.

―Banks will have to make modifications in their ATM operations so that every time a user exceeds his quoof five transactions, an alert is conveyed to him. For subsequent transactions, the interchange fee will bedebited from the user‘s account. Banks are not yet ready for these modifications and will take some time make the necessary technological changes,‖ said a senior executive of a bank.

Technically, banks are allowed to impose the cap on free third-party transactions since they have thepermission of RBI. But they will only do so once IBA finalises guidelines for the same.

―A lot of preparations will have to be made. Apart from the technological changes, customers will have to intimated at least one month in advance. Banks will take a minimum of two-three months to implementthese rules,‖ said a senior executive of a private sector bank.

From April 1 this year, RBI had allowed free use of third-party ATMs. However, following a surge in third-party transactions, banks had petitioned RBI to put a cap on the number of such deals, which the centralbank recently agreed to.

Accordingly, RBI capped free third-party ATM withdrawals to five per month and fixed an upper withdrawlimit of Rs 10,000 per transactions. It also agreed to banks imposing a charge on withdrawals carried outthrough current accounts. However, a suggestion from IBA to put a floor on third-party transactions wasstruck down by RBI.

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Miscellaneous Articles [Extracts]

Banks' fee income may come down13


The imminent cap on Unit-linked insurance plan (Ulip) charges and the recently instituted ban on entry lofees levied by mutual funds is likely to adversely impact fee-based income of banks. Income fromdistribution of third-party products such as insurance policies and mutual fund (MF) schemes is alreadyunder pressure due to the unfavourable economic climate. For banks, a major chunk of revenues from saof third-party products comprises income from selling insurance policies and the move will put a squeezeon commissions paid to banks as distribution charges. Bank of India Executive Director M Narendra saidthere might be some reduction in the income from services. However, since banks cannot provide its



27

branch network free of charge for third-party products, MFs will have to provide clarity on arrangements inlight of the regulatory changes on charges.

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'RBI may suck out excess liquidity in a year'13


The apex bank‘s intervention could also happen in the next 3-6 months exerting more pressure on bankshike rates in the near future, it said. The survey also said that non-performing assets of banks in the systeare likely to increase in the medium term. ―Thirty-six per cent of the corporate respondents expect RBI to

intervene in the medium term. As a corollary, 28 per cent of all respondents feel that interest rates are setto harden within the next 6-12 months‖, the survey, prepared by J P Morgan Asset Management andValuenotes, said. Corporates also expected their profits and employment opportunities to improve with anexpected recovery in the medium term. The survey — investment confidence index, was conducted amorespondents from corporate and retail segments in eight Indian cities in July and will be published on aquarterly basis.

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Corporate borrowing from banks continues to remain sluggish27


Corporate borrowing from banks continues to remain sluggish indicating that recovery in investments is snot underway. Deposits also dipped as borrowers withdrew funds for festive purchases and banks shedexpensive bulk deposits. Reserve Bank of India (RBI) data for the first half of August 2009 showsoutstanding loans to corporates, individuals and farmers have dipped by over Rs 5,000 crore in the fortnigfollowing 31st July, 2009. Similarly deposits mobilised by banks fell Rs 9,337 crore. The RBI data showsthat credit has dipped from Rs 28,07,032.62 crore on 31st July, 2009 to Rs 28,01,970 crore on 14th Augu2009, a dip of Rs 5,062 crore. The drop in credit follows a Rs 29,471 crore rise in the proceeding fortnighthat ended on 31st July, 2009.

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Bankers see no upward movement in interest rates28


Amidst ample liquidity, bankers do not see interest rates moving up and State Bank of India Chairman O Bhatt expects the cost to even fall in the next few months.While inflation has stayed in the negative territofor past several weeks, analysts are wondering whether the interest rates has bottomed out with signs of

economic recovery. The Reserve Bank left the benchmark rates unchanged in its July 2009‘s credit polic

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