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LATEST BANKING & FINANCIAL AWARENESS

JOURNAL OF A.K. GUPTA’S

BANKERS TRAINING INSTITUTE (BTI) VOLUME –VIII JULY 2016 ISSUE – 01

BANKERS TRAINING INSTITUTE 75, BLOCK BG-I, PASCHIM VIHAR, DELHI 110063

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RBI NOTIFICATIONS – JUNE 2016: 02 SUSTAINTABLE STRUCTURING OF STRESSED ASSETS: 05 FOREIGN CURRENCY ACCOUNTS BY RESIDENTS: 8 SECOND BI MONTHLY MONETARY POLICY STATEMENT: 13 FINANCIAL STABILITY REPORT – JUNE 2016: 14 CYBER SECURITY FRAMEWORK IN BANKS: 15 RESOLVING STRESS IN THE BANKING SYTEM: 16 PAYMENT & SETTLEMENT SYSTEMS – VISION 2018: 18 BREXIT & ITS IMPACT: 20

HIGHLIGHTS

Latest Banking & Financial Awareness: July 2016 2

RBI GUIDELINES: JUNE 16

PRE-2005 SERIES OF BANKNOTES REVISION OF EXCHANGE FACILITY

From January 2014, Pre-2005 banknotes are being withdrawn from circulation and a large percentage of these notes have since been withdrawn. A small percentage of these notes, however, still remains in circulation. RBI has now decided (June 30, 2016) that from July 01, 2016 onwards, the facility for the members of Public to exchange the pre-2005 banknotes will be available only at the following offices of Reserve Bank of India: Ahmedabad, Bengaluru, Belapur, Bhopal, Bhubaneswar, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, New Delhi, Patna, Thiruvananthapuram and Kochi. Pre-2005 banknotes will continue to remain legal tender.

PERFORMANCE AUDIT - CROP INSURANCE SCHEMES The Comptroller and Auditor General is conducting a performance audit of agricultural crop insurance schemes to examine the efficacy of crop insurance in providing succour to farmers who suffer damage to their crops. This audit is proposed to be conducted in the States of Andhra Pradesh, Assam, Gujarat, Haryana, Himachal Pradesh, Orissa, Maharashtra, Rajasthan and Telangana with the help of the Offices of the Principal Accountant General/Accountant General (Audit) in the respective States. The Performance Audit will include examination of records of Department of Agriculture Cooperation and Farmers Welfare, Agriculture Insurance Company of India Limited, State Agriculture Department and other related departments. Further, as crop insurance schemes are being implemented with the help of various banks, insurance companies and co-operative institutions, examination of the records of these banks/insurance companies/cooperative institutions is necessary to ascertain whether crop insurance schemes were being implemented effectively and delivering benefits to the targeted beneficiaries. RBI has advised banks (June 30, 2016) to facilitate access to records pertaining to crop insurance schemes to the audit teams deputed by the Offices of the Principal Accountant General/Accountant General (Audit) in the respective States.

EXTERNAL COMMERCIAL BORROWINGS (ECB) APPROVAL ROUTE CASES

As per extant guidelines on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers, cases coming under the approval route are required to be considered by an Empowered Committee set up by the Reserve Bank based on certain parameters. RBI has now decided (June 30, 2016) that ECB proposals received in RBI above a certain threshold limit (refixed from time to time) be placed before the Empowered Committee and RBI will take a final decision in the cases considering the recommendation of the Empowered Committee.

INFORMATION ON INVESTMENT IN COMMERCIAL PAPERS & UNHEDGED FOREIGN CURRENCY

EXPOSURES OF THE BORROWERS TO CREDIT INFORMATION COMPANIES

RBI had advised banks vide circular dated June 27, 2014, to implement certain recommendations of the Committee on Data Format for Furnishing of Credit Information to Credit Information Companies (Chairman: Shri Aditya Puri). The recommendations that remain to be implemented relate

to reporting of information concerning (i) investment of banks in Commercial Papers (CPs) and (ii) Unhedged Foreign Currency Exposures (UFCE) of borrowers of banks and AIFIs. Now, RBI has decided (June 23, 2016) to capture the information on CPs and UFCE. 2. The information on CPs issued by the companies shall be reported on a monthly basis to all the four credit information companies (CICs) by the bank which has been designated as the Issuing and Payment Agent (IPA) for the particular CP issue. However, if there are multiple IPAs for a single CP issue, they shall report to the CICs the details pertaining to the portion of the issue which is with them. This information shall be reported in the Commercial Data format. The IPA shall also report any default in the redemption of the relevant CP issue. The investing credit institutions need not report the information on CPs to the CICs. 3. The information regarding UFCE of individual borrowers shall be reported on a quarterly basis to all the four CICs by the lending bank (in the case of solo lenders) /consortium leader (in the case of consortium arrangements)/largest lender (in the case of multiple lending arrangements). This information shall be reported in the Credit Facility (CR) Segment of Commercial Data format. 4. The reporting requirements set out above shall be effective from July 1, 2016 i.e. from the credit information reports showing the position for the month of June 2016.

PERMITTING WRITING OF OPTIONS AGAINST CONTRACTED EXPOSURES BY INDIAN RESIDENTS

In order to encourage participation in the Over the Counter (OTC) currency options market and improve its liquidity, RBI has decided (June 23, 2016) to permit resident exporters and importers of goods and services to write (sell) standalone plain vanilla European call and put option contracts against their contracted exposure, i.e. covered call and covered put respectively, to any AD Cat-I bank in India subject to the following guidelines: 1. Participants: Market-makers: AD Category-I banks in India who have Reserve Bank’s approval to run cross-currency and foreign currency-Indian Rupee options books; Users: Listed companies and their subsidiaries/joint ventures/associates having common treasury and consolidated balance sheet or unlisted companies with a minimum net worth of Rs. 200 crore provided appropriate disclosures are made in the financial statements as prescribed by the Institute of Chartered Accountants of India (ICAI). 2. Product: Covered Call: A resident exporter may write (sell) a standalone plain vanilla European call option contract to an bank in India against the cover of contracted exposure arising out of exports of goods and services from India. Covered Put: A resident importer may write (sell) a standalone plain vanilla European put option contract to an bank in India against the cover of contracted exposure arising out of imports of goods and services into India. The use of Covered option shall not be considered as a hedging strategy. Being a combination of an underlying cash instrument and a generic derivative product, covered call and covered put options shall be treated as structured derivative products. 3. Operational guidelines, terms and conditions: 1. All the guidelines governing derivative products in

general and structured products in particular will apply, to covered options.


2. AD Category-I banks may enter into covered options with their exporter or importer constituents only after obtaining specific approval in this regard from their competent authority (Board / Risk Committee / ALCO) and as per the terms and conditions prescribed by RBI, on running Cross Currency and Foreign Currency – INR options book.

3. The responsibility of assessing the strength of risk management systems, financial soundness of the option writer shall rest with the concerned AD Cat-I bank. AD Category I banks may stipulate safeguards, such as, continuous profitability, higher net worth, turnover, etc. depending on the scale of forex operations and risk profile of the option writers.

4. Covered options may be written against either a portion or the full value of the underlying.

5. AD Cat-I banks shall treat the exposures against which a covered option has been written as an “unhedged exposure”. Accordingly, the guidelines on Capital and Provisioning Requirements for Exposures to entities with Unhedged Foreign Currency Exposure shall apply.

6. Covered option contracts may be written for a period up to the maturity of the underlying subject to a maximum maturity period of 12 month.

7. Covered options may be freely cancelled and rebooked subject to the verification of the underlying by the AD Cat-I bank concerned.

8. For eligible underlying contracted exposures, the option seller may write the covered option either as a single FCY-INR option or as separate options for the FCY-USD and USD-INR legs.

9. Except as mentioned in these guidelines, covered options shall not be undertaken in combination with any other derivative or cash instrument.

10. Authorised dealers may maintain cash margin / liquid collateral in respect of covered options sold to them by exporters and importers, if necessary.

11. AD Cat-I banks entering into covered options with their constituents may report the same to CCIL’s reporting platform for OTC foreign exchange derivatives

FOREIGN CURRENCY ACCOUNTS BY A PERSON RESIDENT IN INDIA

In line with the Government of India’s startup initiative, RBI has decided (June 23, 2016) that an Indian startup, having an overseas subsidiary, may open a foreign currency account with a bank outside India for the purpose of crediting to the account the foreign exchange earnings out of exports/sales made by the said startup or its overseas subsidiary. The balances held in such accounts, to the extent they represent exports from India, shall be repatriated to India within the period prescribed for realization of exports. In addition, payments received in foreign exchange by an Indian startup arising out of sales/ export made by the startup or its overseas subsidiaries will be a permissible credit to the Exchange Earners Foreign Currency (EEFC) account maintained in India by the startup. 2. Further, the existing facility of opening foreign currency account outside India, available to the Life Insurance Corporation of India or the General Insurance Corporation of India and their subsidiaries for the purpose of meeting the expenditure incidental to the insurance business carried on by them has now been liberalised. Accordingly, any insurance/ reinsurance company registered with the Insurance Regulatory and Development Authority of India (IRDA) may open a foreign currency account with a bank outside India to carry out insurance/ reinsurance business.

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INDIAN ACCOUNTING STANDARDS (IND AS) RBI had advised banks vide circular dated February 11, 2016 to be in preparedness to submit Proforma Ind AS Financial Statements to the Reserve Bank from the half-year ended September 30, 2016, onwards. Banks shall submit (June 23, 2016) Proforma Ind AS Financial Statements, for the half year ended September 30, 2016 latest by November 30, 2016. Banks shall be guided by the Ind ASs notified by the Ministry of Corporate Affairs, Government of India. The Proforma Ind AS Financial Statements shall include the following:- (a) Balance Sheet including Statement of Changes in Equity. (b) Profit and Loss Account. (c) Notes.

2. RBI has clarified that banks shall continue to be guided by the extant instructions (February 6, 1992) with respect to the preparation and presentation of financial statements for the financial years 2016-17 and 2017-18.

3. To begin with, banks which are not in a position to submit both standalone and consolidated proforma Ind AS financial statements for the half year ended September 30, 2016 are permitted to submit only standalone financial statements. However, banks shall submit both proforma Ind AS standalone and consolidated financial statements in the subsequent periods.

4. Banks shall disclose significant accounting policies including, inter alia, the following: (i) financial assets and financial liabilities, including use of fair value option in designating financial assets or financial liabilities at Fair Value Through Profit or Loss (FVTPL) upon initial recognition. (ii) impairment of financial assets, with the following details: a) Methodology for computation of expected credit losses

(ECL); b) Level of segmentation in the portfolio used; c) Criteria used for determination of movement from

Stage 1 (12 month ECL) to Stage 2 and Stage 3 (lifetime ECL);

d) The method used to compute lifetime ECL; e) The manner in which the forward looking information

has been incorporated in the ECL estimates; f) The treatment for non-fund based facilities; g) The methodology for computation of ECL for revolving

credit facilities; h) The areas where the bank intends to refine work on in

this ECL estimate and the work plan / timeline to achieve it.

i) The impact of movement from the current approach to the ECL approach- reconciliation of the stock of provisions under the current reporting requirements with the opening Ind AS 109 allowance. A comparison of the impairment allowance under ECL for the half-year ended September 30, 2016 with the corresponding provisions under the extant Prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP) norms shall also be disclosed.

Ind AS 109 is not specific in terms of the approach to be followed when measuring expected credit losses. The Reserve Bank expects banks to adopt sound expected credit loss methodologies commensurate with the size, complexity, and risk profile specific to individual banks. The Reserve Bank shall finalise the policy on expected credit loss provisioning, taking into account the impairment requirements under Ind AS 109. Banks should maintain

flexibility while designing the systems and processes in this regard. (iii) derivatives and hedge accounting. (iv) derecognition of financial assets and financial liabilities. (v) employee benefits. (vi) offsetting financial instruments. (vii) income taxes. (viii) significant areas of estimation uncertainty , critical judgements and assumptions in applying accounting policies. (ix) Approach on exemptions under Ind AS 101 First Time Adoption of Indian Accounting Standards.

5. For the purpose of preparation of proforma Ind AS financial statements for the half year ending September 30, 2016, the notional date of transition to Ind ASs shall be the beginning of business as on April 01, 2016 (or equivalently close of business as on March 31, 2016). This however, does not change the date of transition for the purpose of preparation of Ind AS financial statements for the accounting periods beginning April 1, 2018, which shall be as per the provisions of Ind AS 101 First Time Adoption of Indian Accounting Standards.

6. The Proforma Ind ASs Financial Statements shall also include: (i) (a) reconciliation of equity reported in accordance with the existing financial reporting requirements as at April 1, 2016 to its equity in accordance with Ind ASs as on the same date. (b) reconciliation of equity reported in accordance with the existing financial reporting requirements as at September 30, 2016 to its equity in accordance with Ind ASs as on the same date. (ii) reconciliation of the total comprehensive income in accordance with Ind AS for the half year ended September 30, 2016 with the profit or loss under the existing financial reporting requirements.

7. The reconciliations required by paragraph above shall be given in sufficient detail to understand the material adjustments to the Balance Sheet and Statement of Profit and Loss, thereby explaining how the transition from the existing financial reporting to Ind ASs affected the reported Balance Sheet and financial performance. The detail shall be such as to enable RBI to understand the significant adjustments to equity that will impact regulatory capital. The Reserve Bank does not require the proforma Ind AS financial statements to be audited and understands that this information, while being a fair estimate of the impact to opening equity, is subject to change.

8. The submission of proforma Ind AS financial statements to the Reserve Bank shall not be construed as validation, in any form, of the financial statements, by the Reserve Bank.

SETTLEMENT UNDER ASIAN CLEARING UNION (ACU)

As per extant guidelines (December 26, 2008), participants in ACU mechanism have been given the option to settle their transactions either in ‘ACU Dollar’ or in ‘ACU Euro’. The 'ACU Dollar' and 'ACU Euro' is equivalent in value to one US Dollar and one Euro, respectively. RBI has temporarily suspended (June 30, 2016) operations in ‘ACU Euro’ with effect from July 01, 2016. Accordingly, all eligible current account transactions including trade transactions in ‘Euro’ are permitted to be settled outside the ACU mechanism until further notice.


SCHEME FOR SUSTAINABLE STRUCTURING OF STRESSED ASSETS

Resolution of large borrowal accounts which are facing severe financial difficulties may, inter-alia, require co-ordinated deep financial restructuring which often involves a substantial write-down of debt and/or making large provisions. The Strategic Debt Restructuring (SDR) mechanism provides 18 months for banks to make prescribed provisions for the residual debt and mark-to-market (MTM) provisions on their equity holding arising from conversion of debt. Banks had represented for allowing more time to write down the debt and make the required provisions in cases of resolution of large accounts. Therefore, to ensure that adequate deep financial restructuring is done to give projects a chance of sustained revival, RBI has decided (June 13, 2016) to facilitate the resolution of large accounts, which satisfy the following conditions.

2. Eligible Accounts: For being eligible under the scheme, the account should meet all the following conditions: (i) The project has commenced commercial operations; (ii) The aggregate exposure (including accrued interest) of all institutional lenders in the account is more than Rs.500 crore (including Rupee loans, Foreign Currency loans/External Commercial Borrowings,); (iii) The debt meets the test of sustainability as given below.

3. Debt Sustainability: A debt level will be deemed sustainable if the Joint Lenders Forum (JLF)/Consortium of lenders/bank conclude through independent techno-economic viability (TEV) that debt of that principal value amongst the current funded/non-funded liabilities owed to institutional lenders can be serviced over the same tenor as that of the existing facilities even if the future cash flows remain at their current level. For this scheme to apply, sustainable debt should not be less than 50 percent of current funded liabilities.

4. Sustainable Debt 4.1 The resolution plan may involve one of the following options with regard to the post-resolution ownership of the borrowing entity: (a) The current promoter continues to hold majority of the shares or shares required to have control; (b) The current promoter has been replaced with a new promoter, in one of the following ways: Through conversion of a part of the debt into equity under SDR mechanism which is thereafter sold to a new promoter; In the manner contemplated as per Prudential Norms on Change in Ownership of Borrowing Entities (Outside SDR Scheme); (c) The lenders have acquired majority shareholding in the entity through conversion of debt into equity either under SDR or otherwise and allow the current management to continue or hand over management to another agency/professionals under an operate and manage contract.

Where malfeasance on the part of the promoter has been established, through a forensic audit or otherwise, this scheme shall not be applicable if there is no change in promoter or the management is vested in the delinquent promoter. 4.2 In any of the circumstances mentioned above, the JLF/consortium/bank shall, after an independent TEV, bifurcate the current dues of the borrower into Part A and Part B as described below;

(a) Determine the level of debt (including new funding required to be sanctioned within next six months and non-funded credit facilities crystallising within next 6 months) that can be serviced (both interest and principal) within the respective residual maturities of existing debt, from all sources, based on the cash flows available from the current as well as immediately prospective (not more than six months) level of operations. For this purpose, free cash flows (i.e., cash flow from operations minus committed capital expenditure) available for servicing debt as per latest audited/reviewed financial statement will be considered. Where there is more than one debt facility, the maturity profile of each facility shall be that which exists on the date of finalising this resolution plan. For the purpose of determining the level of debt that can be serviced, the assessed free cash flow shall be allocated to servicing each existing debt facility in the order in which its servicing falls due. The level of debt so determined will be referred to as Part A in these guidelines. (b) The difference between the aggregate current outstanding debt, from all sources, and Part A will be referred to as Part B in these guidelines. (c) The security position of lenders will, however, not be diluted and Part A portion of loan will continue to have at least the same amount of security cover as was available prior to this resolution.

5. The Resolution Plan 5.1 The Resolution Plan shall have the following features: a) There shall be no fresh moratorium granted on interest

or principal repayment for servicing of Part A. b) There shall not be any extension of the repayment

schedule or reduction in the interest rate for servicing of Part A, as compared to repayment schedule and interest rate prior to this resolution.

c) Part B shall be converted into equity/redeemable cumulative optionally convertible preference shares. However, in cases where the resolution plan does not involve change in promoter, banks may, at their discretion, also convert a portion of Part B into optionally convertible debentures. All such instruments will continue to be referred to as Part B instruments.

5.2 Valuation and marking to market: For the purpose of this scheme, the fair value for Part B instruments will be arrived at as per the following methodologies: Equity - The equity shares in the bank's portfolio should be marked to market preferably on a daily basis, but at least on a weekly basis. Equity shares for which current quotations are not available or where the shares are not

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listed on the stock exchanges, should be valued at the lowest value arrived using the following valuation methodologies:

a) Break-up value (without considering 'revaluation reserves', if any) which is to be ascertained from the company's latest audited balance sheet (which should not be more than one year prior to the date of valuation). In case the latest audited balance sheet is not available the shares are to be valued at Re.1 per company. The independent TEV will assist in ascertaining the break-up value.

b) Discounted cash flow method where the discount factor is the actual interest rate charged to the borrower plus 3%, subject to floor of 14%. Further, cash flows ( cash flow available from the current as well as immediately prospective (not more than six months) level of operations) occurring within 85% of the useful economic life of the project only shall be reckoned.

Redeemable cumulative optionally convertible preference shares/optionally convertible debentures - The valuation should be on discounted cash flow (DCF) basis. These will be valued with a discount rate of a minimum mark up of 1.5% over the weighted average actual interest rate charged to the borrower for the various facilities. Where preference dividends are in arrears, no credit should be taken for accrued dividends and the value determined as above on DCF basis should be discounted further by at least 15% if arrears are for one year, 25% if arrears are for two years, so on and so forth (i.e., with 10% increments).

5.3 Where the resolution plan does not involve a change in promoter or where existing promoter is allowed to operate and manage the company as minority owner by lenders, the principle of proportionate loss sharing by the promoters should be met. In such cases, lenders shall, therefore, require the existing promoters to dilute their shareholdings, by way of conversion of debt into equity /sale of some portion of promoter’s equity to lenders, at least in the same proportion as that of part B to total dues to lenders. JLF/Consortium/bank should also obtain promoters’ personal guarantee in all such cases, for at least the amount of Part A.

5.4 The upside for the lenders will be primarily through equity/quasi equity, if the borrowing entity turns around. The terms for exercise of option for the conversion of preference shares/debentures to equity shall be clearly spelt out. The existing promoter or the new promoter, as the case may be, may have the right of first refusal in case the lenders decide to sell the share, at a price beyond some predetermined price. The lenders may also include appropriate covenants to cover the use of cash flows arising beyond the projected levels having regard to quasi-equity instruments held in Part B

5.5 Other important principles for this scheme are the following: a) The JLF/Consortium/bank shall engage the services of

credible professional agencies to conduct the TEV and prepare the resolution plan. While engaging professional agencies, the JLF/Consortium/bank shall ensure that the agency is reputed, truly independent/free from any conflict of interest, has proven expertise and will be in a position to safeguard the interest of lenders while preserving the economic value of the assets. Further, from a risk management

perspective, lenders should avoid concentration of such assignments in any one particular professional agency.

b) The resolution plan shall be agreed upon by a minimum of 75 percent of lenders by value and 50 percent of lenders by number in the JLF/consortium/bank.

c) At individual bank level, the bifurcation into Part A and part B shall be in the proportion of Part A to Part B at the aggregate level.

6. Overseeing Committee: An Overseeing Committee (OC), comprising of eminent persons, will be constituted by IBA in consultation with RBI. The members of OC cannot be changed without the prior approval of RBI. The resolution plan shall be submitted by the JLF/consortium/bank to the OC. The OC will review the processes involved in preparation of resolution plan, etc. for reasonableness and adherence to the provisions of these guidelines, and opine on it. The OC will be an advisory body. 7. Asset Classification and Provisioning (A) Where there is a change of promoter– In case a change of promoter takes place, i.e. a new promoter comes in, the asset classification and provisioning requirement will be as per the ‘SDR’ scheme or ‘outside SDR’ scheme as applicable. (B) Where there is no change of promoters – Asset classification as on the date of lenders’ decision to resolve the account under these guidelines (reference date) will continue for a period of 90 days from this date. This standstill clause is permitted to enable JLF/consortium/bank to formulate the resolution plan and implement the same within the said 90 day period. If the resolution is not implemented within this period, the asset classification will be as per the extant asset classification norms, assuming there was no such ‘stand-still’.

(a) In respect of an account that is ‘Standard’ as on the reference date, the entire outstanding (both Part A and part B) will remain Standard subject to provisions made upfront by the lenders being at least the higher of 40 percent of the amount held in part B or 20 percent of the aggregate outstanding (sum of Part A and part B). For this purpose, the provisions already held in the account can be reckoned.

(b) In respect of an account that is classified as non-performing asset on the date of this resolution, the entire outstanding (both Part A and part B) shall continue to be classified and provided for as a non-performing asset as per extant IRAC norms.

(c) Lenders may upgrade Part A and Part B to standard category after one year of satisfactory performance of Part A loans. In case of any pre-existing moratorium in the account, the upgrade will be permitted one year after completion of the longest moratorium, subject to satisfactory performance of Part A debt during this period. However, lenders will continue to mark to market Part B instruments as per the norms stated herein.

(d) Any provisioning requirement on account of difference between the book value of Part B instruments and their fair value as indicated above, in excess of the minimum requirements prescribed as per the above paras shall be made within four quarters commencing with the quarter in which the resolution plan is actually implemented in the lender’s books, such that the MTM provision held is not less than 25 percent of the required provision in the first quarter, not less than 50 percent in the second quarter and so on. For this purpose, the provision already held in the account can be reckoned.


(e) If the provisions held by the bank in respect of an account prior to this resolution are more than the cumulative provisioning requirement prescribed above, the excess can be reversed only after one year from the date of implementation of resolution plan (i.e. when it is reflected in the books of the lender, hereinafter referred to as ‘date of restructuring’), subject to satisfactory performance during this period.

(f) The resolution plan and control rights should be structured in such a way so that the promoters are not in a position to sell the company/firm without the prior approval of lenders and without sharing the upside, if any, with the lenders towards loss in Part B.

(g) If Part A subsequently slips into NPA category, the account will be classified with slippage in category with reference to the classification obtaining on the reference date and necessary provisions should be made immediately.

(h) Where a bank/NBFC/AIFI chooses to make the prescribed provisions/write downs over more than one quarter and this results in the full provisioning/write down remaining to be made as on the close of a financial year, banks/NBFCs/AIFIs should debit 'other reserves' [i.e., reserves other than the one created in terms of Section 17(2) of the Banking Regulation Act 1949] by the amount remaining un-provided/not written down at the end of the financial year, by credit to specific provisions. However, bank/NBFC/AIFI should proportionately reverse the debits to ‘other reserves’ and complete the provisioning/write down by debiting profit and loss account, in the subsequent quarters of the next financial year. Banks shall make suitable disclosures in Notes to Accounts with regard to the quantum of provision made during the year under this scheme and the quantum of unamortised provisions debited to ‘other reserves’ as at the end of the year.

8. Fees and Charges: The IBA will collect a fee from the lenders as a prescribed percentage of the outstanding debt of the borrowal entity to the consortium/ JLF/ consortium/ bank and create a corpus fund. This fund will be used to meet the expenses of the OC.

9. Mandatory Implementation: Once the resolution plan prepared/presented by the lenders is ratified by the OC, it will be binding on all lenders. They will, however, have the option to exit as per the extant guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP).

PRUDENTIAL NORMS ON INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING

PERTAINING TO ADVANCES – SPREAD OVER OF SHORTFALL ON SALE OF NPAS TO SCS/RCS

As an incentive for early sale of non-performing assets (NPAs) to Securitisation Companies/Reconstruction Companies (SCs/RCs) created under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, RBI, vide circular dated February 26, 2014, allowed banks to spread over any shortfall, if the sale value is lower than the net book value (NBV), over a period of two years for NPAs sold up to March 31, 2015. Later on, vide RBI circular dated May 21, 2015, this facility of spreading over the shortfall was extended for NPAs sold up to March 31, 2016. Now, RBI has decided (June 13, 2016) to extend the dispensation of amortising the shortfall on sale of NPAs to SCs/RCs up to March 31, 2017. However, for assets sold from April 1, 2016 to March 31, 2017, banks will be allowed to amortise the shortfall over a period of only four quarters from the quarter in

which the sale took place. Further, where a bank chooses to make the necessary provisions over more than one quarter and this results in the full provisioning remaining to be made as on the close of a financial year, banks should debit 'other reserves' [i.e., reserves other than the one created in terms of Section 17(2) of the Banking Regulation Act 1949] by the amount remaining un-provided at the end of the financial year, by credit to specific provisions. However, banks should proportionately reverse the debits to ‘other reserves’ and complete the provisioning by debiting profit and loss account, in the subsequent quarters of the next financial year. Banks shall make suitable disclosures in Notes to Accounts with regard to the quantum of provision made during the year to meet the shortfall in sale of NPAs to SCs/RCs and the quantum of unamortised provision debited to ‘other reserves’ as at the end of the year.

REPORTING REQUIREMENTS UNDER BASEL III CAPITAL REGULATIONS

As per extant guidelines on Basel III Capital Regulations, banks are permitted to raise perpetual non-cumulative preference shares (PNCPS) and perpetual debt instruments (PDI) for inclusion in Additional Tier 1 capital. Further, banks are also allowed to raise debt capital instruments, perpetual cumulative preference shares (PCPS) / redeemable non-cumulative preference shares (RNCPS) / redeemable cumulative preference shares (RCPS) for inclusion in Tier 2 capital.

2. Further, banks are required to submit a report to RBI, giving the details of the debt raised, including the terms of the issue with a copy of the offer document soon after the issue is completed. Now, RBI has decided (June 23, 2016) that banks need not submit a copy of the offer document to RBI. Banks shall however, report the details of the debt raised as per the prescribed format duly certified by the compliance officer of the bank.

CREDIT INFORMATION REPORTING IN RESPECT OF SELF HELP GROUP (SHG) MEMBERS

RBI, vide its circular dated January 14, 2016 had advised banks to put in place necessary systems and procedures including making necessary changes to their systems software so as to be able to begin collection of the relevant information from the SHG members and the reporting of the required information to Credit Information Companies (CICs). Now, RBI has decided (June 16, 2016) to incorporate the SHG member level data into the existing Microfinance data sharing file format.

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) The Rules for Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) have been reviewed by the Government of India and it has been decided by the Competent Authority to incorporate a lien clause in the rules of PMJJBY with effect from June 1, 2016 whereby claims for deaths which occur during the first 45 days from the date of enrolment will not be paid, effectively meaning that the risk cover will commence only after the completion of 45 days from the date of enrolment into the scheme by the member. However, deaths due to accidents will be exempt from the Lien Clause.

RBI to shortly circulate ₹ 10 Coins to commemorate “Birth Centenary of Swami Chinmayananda”:

The Reserve Bank of India will shortly put in circulation ₹ 10 coins minted by the Government of India to commemorate Birth Centenary of Swami Chinmayananda.


FOREIGN CURRENCY ACCOUNTS BY A PERSON RESIDENT IN INDIA - REGULATIONS

1. 'Foreign Currency Account' means an account held or maintained in currency other than the currency of India or Nepal or Bhutan;

2. Restriction on holding foreign currency account by a person resident in India: No person resident in India shall open or hold or maintain a foreign currency account except as provided in FEMA or rules or regulations made there under. RBI may permit a person resident in India to open or hold or maintain a Foreign Currency Account.

3. Opening, holding and maintaining Foreign Currency Accounts in India:

(A) Exchange Earners’ Foreign Currency Account 1. A person resident in India may open, hold and maintain with an authorised dealer in India, a Foreign Currency Account to be known as Exchange Earners’ Foreign Currency (EEFC) Account.

2. Limit up to which foreign currency may be credited to EEFC account: A person resident in India may credit to the EEFC Account with an Authorised Dealer in India 100 percent of the foreign exchange earnings as specified here under:

i) inward remittance through banking channel, other than the remittance received pursuant to any undertaking given to the Reserve Bank or which represents foreign currency loan raised or investment received from outside India or those received for meeting specific obligations by the account holder; ii) payments received in foreign exchange by a 100 per cent Export Oriented Unit or a unit in (a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology Park for supply of goods to similar such unit or to a unit in Domestic Tariff Area and also payments received in foreign exchange by a unit in Domestic Tariff Area for supply of goods to a unit in Special Economic Zone (SEZ); iii) payments received by an exporter from an account maintained with an authorised dealer for the purpose of counter trade; iv) advance remittance received by an exporter towards export of goods or services; v) payment received for export of goods and services from India, out of funds representing repayment of State Credit in U.S. dollar held in the account of Bank for Foreign Economic Affairs, Moscow, with an authorised dealer in India; (vi) Professional earnings including director’s fees, consultancy fees, lecture fees, honorarium and similar other earnings received by a professional by rendering services in his individual capacity. (vii) Payments received in foreign exchange by an Indian startup, or any other entity as may be notified by RBI, arising out of exports/ sales made by the said entity or its overseas subsidiaries, if any.

Payment received through an international credit card for which reimbursement will be provided in foreign exchange may be regarded as a remittance through banking channels.

3. Permissible credits to EEFC account: Following credits may be made to an EEFC Account, namely – i) Inward remittance/ payment received by the recipient in foreign exchange; ii) Interest earned on the funds held in the account;

iii) Re-credit of unutilised foreign currency earlier withdrawn from the account; iv) Amount representing repayment by the account holder's importer customer, of loan/ advances granted; v) Representing the disinvestment proceeds received by the resident accountholder on conversion of shares held by him to ADRs/ GDRs;

4. Permissible debits to the EEFC account: Following debits may be made to an EEFC Account, namely - i) Payment outside India towards a current account transaction and towards a capital account transaction permissible under FEMA; i) Payment in foreign exchange towards cost of goods purchased from a 100 percent Export Oriented Unit or a Unit in (a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology Park iii) Payment of customs duty iv) Trade related loans/ advances, by an exporter holding such account to his importer customer outside India; v) Payment in foreign exchange to a person resident in India for supply of goods/ services including payments for air fare and hotel expenditure.

5. Miscellaneous: i) There is no restriction on withdrawal in rupees of funds held in an EEFC account. However, the amount so withdrawn in rupees cannot be re-credited to the account. ii) Authorised dealer may issue cheque books of separate series with the superscription "EEFC Account" to the account holders maintaining such accounts, and also satisfy himself while honouring the cheques that the payment made by the account holder by issue of a cheque is permissible under these Regulations. iii) Resident individuals are permitted to include resident relative(s) as a joint holder(s) in their EEFC account on ‘former or survivor’ basis. However, such resident Indian relative(s) shall not be eligible to operate the account during the life time of the resident account holder.

(B) Resident Foreign Currency Account A person resident in India may open, hold and maintain with an authorised dealer in India a Foreign Currency Account, to be known as a Resident Foreign Currency (RFC) Account, out of foreign exchange -

a) received as pension or any other superannuation or other monetary benefits from his employer outside India; or

b) realised on conversion of the assets and repatriated to India; or

c) received or acquired as gift or inheritance from a person abroad or

d) received as the proceeds of life insurance policy claims/ maturity/ surrender values settled in foreign currency from an insurance company in India permitted to undertake life insurance business by the Insurance Regulatory and Development Authority.

The funds in a Resident Foreign Currency Account opened or held or maintained shall be free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form, by whatever name called, outside India. Resident individuals are permitted to include resident relative(s) as joint holder(s) in their Resident Foreign Currency account on ‘former or survivor’ basis. However, such resident Indian relative joint account holder shall not be eligible to operate the account


during the life time of the resident account holder. Relative shall have the same meaning as assigned to it under section 2(77) of the Companies Act, 2013.

(C) Resident Foreign Currency (Domestic) Account A resident Individual may open, hold and maintain with an Authorised Dealer in India a foreign currency account, to be known as Resident Foreign Currency (Domestic) Account, out of foreign exchange acquired in the form of currency notes, bank notes and travellers’ cheques as under: a) by way of payment for services not arising from any

business in or anything done in India while on a visit to any place outside India; or

b) from any person not resident in India and who is on a visit to India, as honorarium or gift or for services rendered or in settlement of any lawful obligation; or

c) by way of honorarium or gift while on a visit to any place outside India; or

d) in the form of unspent amount of foreign exchange acquired by him from an authorised person for travel abroad; or

e) as gift from a relative. Relative shall have the same meaning as assigned to it under section 2(77) of the Companies Act, 2013.

f) by way of earning through export of goods/ services, or as royalty, honorarium or by any other lawful means;

g) representing the disinvestment proceeds received by the resident account holder on conversion of shares held by him to ADRs/ GDRs under the DR Scheme, 2014 approved by the Government of India.

h) by way of earnings received as the proceeds of life insurance policy claims/ maturity/ surrender values settled in foreign currency from an insurance company in India permitted to undertake life insurance business by the Insurance Regulatory and Development Authority

(2) Debits to the account shall be for payments towards a current account transaction as per the provisions of FEMA and towards a capital account transaction permissible under FEMA. (3) The account shall be maintained in the form of Current Account and shall not bear any interest. (4) There shall be no ceiling on the balances in the account

(D) A Unit in a Special Economic Zone (SEZ) A unit located in a Special Economic Zone may open hold and maintain a Foreign Currency Account with an authorized dealer in India provided that, a) all foreign exchange funds received by the unit in the

Special Economic Zone (SEZ) are credited to such account,

b) no foreign exchange purchased in India against rupees shall be credited to the account without prior permission from RBI,

c) the funds held in the account shall be used for bona fide trade transactions of the unit in the SEZ with the person resident in India or otherwise,

The funds held in these accounts shall not be lent or made available in any manner to any person or entity resident in India not being a unit in Special Economic Zones.

(E) Diamond Dollar Accounts (DDAs) An Authorized Dealer Category-I bank in India may allow firms and companies who comply with the eligibility criteria stipulated in the Foreign Trade Policy of Government of India, and the directions issued by RBI to open, hold and maintain Diamond Dollar Accounts (DDAs) in India.

Diamond Dollar Account (DDA) Scheme

1. Under the scheme of Government of India, firms and companies dealing in purchase / sale of rough or cut and polished diamonds / precious metal jewellery plain, minakari and / or studded with / without diamond and / or other stones, with a track record of at least 2 years in import / export of diamonds / coloured gemstones / diamond and coloured gemstones studded jewellery / plain gold jewellery and having an average annual turnover of Rs. 3 crores or above during the preceding three licensing years (licensing year is from April to March) are permitted to transact their business through Diamond Dollar Accounts.

2. Firms and companies may open and maintain DDA with AD Category–I banks, subject to the following terms and conditions:- a) The exporter should comply with the eligibility criteria

stipulated in the Foreign Trade Policy of the Government;

b) The DDA shall be opened in the name of the exporter and maintained in US Dollars only.

c) The account shall only be in the form of current account and no interest should be paid on the balance held in the account.

d) No intra-account transfer should be allowed between the DDAs maintained by the account holder.

e) An exporter firm/ company shall be permitted to open and maintain not more than 5 DDAs.

f) The balances held in the accounts shall be subject to CRR and SLR requirements.

g) Exporter firms and companies maintaining foreign currency accounts, excluding EEFC accounts, with banks in India or abroad, are not eligible to open Diamond Dollar Accounts.

3. Permissible Credits:- i. Amount of pre-shipment and post-shipment

finance availed in US Dollars. ii. Realisation of export proceeds from shipments of

rough, cut, polished diamonds and diamond studded jewellery.

iii. Realisation in US Dollars from local sale of rough, cut and polished diamonds.

4. Permissible Debits: i. Payment for import/ purchase of rough diamonds

from overseas/ local sources. ii. Payment for purchase of cut and polished

diamonds, coloured gemstones and plain gold jewellery from local sources.

iii. Payment for import/ purchase of gold from overseas/ nominated agencies and repayment of US Dollars loans availed from the bank.

iv. Transfer to rupee account of the exporter.

5. Procedure: Eligible firms and companies may apply for permission to their AD Category – I banks in the format prescribed. Banks should assess the track record of the firm / company at the end of every licensing year (April-March). In case any firm/ company fails to meet the eligibility criteria, the account may be closed immediately.

6. Reporting: AD Category-I banks are required to submit quarterly reports to RBI giving details of name and address of the firm / company in whose name the Diamond Dollar Account is opened, along with the date of opening / closing the Diamond Dollar Account, by the 10th of the month following the quarter to which it relates.


(F) Exporters A person resident in India, being an exporter who has undertaken a construction contract or a turnkey project outside India or who is exporting services or engineering goods from India on deferred payment terms may open, hold and maintain a Foreign Currency Account with a bank in India, provided approval as required under the FEMA (Export of goods and services) Regulations, 2015 has been obtained for undertaking the contract/ project/ export of goods or services.

(G) Other cases (1) The Indian agent of a shipping or an airline company incorporated outside India, may open, hold and maintain a Foreign Currency Account with an authorized dealer in India for meeting the local expenses in India of such airline or shipping company. The credits to such accounts should be only by way of freight or passage fare collections in India or from his principal outside India. (2) An authorized dealer in India may, allow ship-manning/ crew managing agencies in India to open and maintain non-interest bearing foreign currency accounts in India for the purpose of undertaking transactions in the ordinary course of their business. (3) An authorized dealer in India may, allow Project Offices set up in India by foreign companies to open, hold and maintain non-interest bearing one or more foreign currency accounts in India for the projects to be executed in India. (4) An Indian company receiving foreign investment under FDI route may open and maintain a foreign currency account with an Authorized Dealer in India provided the Indian investee company has impending foreign currency expenditure and the account shall be closed immediately after the requirements are completed and in no case shall be operational for more than six months from the date of opening of such account. (5) An authorized dealer in India may, allow opening temporary foreign currency accounts by organisers of international seminars, conferences, conventions etc. for holding such events in India for the receipt of the delegate fees and payment towards expenses including payment to special invitees from abroad.

Opening, holding and maintaining a Foreign Currency Account outside India:

(A) Accounts of authorised dealers or their branches: An authorised dealer in India may open, hold and maintain with his branch or head office or correspondent outside India, a Foreign Currency Account for the purpose of transacting foreign exchange business and other matters incidental thereto. A branch outside India of a bank incorporated or constituted in India may open, hold and maintain with a bank outside India, a Foreign Currency Account for the purpose of carrying on normal banking business outside India. (B) Account by a company/ firm in the name of its office/ branch/ representative outside India: A firm or a company or a body corporate registered or incorporated in India may open, hold and maintain in the name of its office (trading or non-trading) or its branch set up outside India or its representative posted outside India, a foreign currency account with a bank outside India by making remittances from India for the purpose of normal business operations of the office/ branch or representative provided - (a) the overseas branch/ office has been set up or representative is posted overseas for conducting normal business activities of the Indian entity;

(b) the total remittances made the Indian entity, to all such accounts in an accounting year shall not exceed (i) 15% of the average annual sales/ income or turnover of the Indian entity during the last two financial years or up to 25% of the net worth, whichever is higher, where the remittances are made to meet initial expenses of the branch or office or representative; and (ii) 10% of such average annual sales/ income or turnover during the last financial year where the remittances are made to meet recurring expenses of the branch or office or representative; (c) the account so opened, held or maintained shall be closed, (i) if the overseas branch/ office is not set up within six months of opening the account, or (ii) within one month of closure of the overseas branch/ office, or (iii) where no representative is posted for six months, and the balance held in the account shall be repatriated to India;

The restriction contained in clause (b) above shall not apply in a case where – (i) the remittances to the account maintained are made out of funds held in EEFC account of the Indian entity, or (ii) the overseas branch/ office is set up or representative posted by a 100% Export Oriented Unit (EOU) or a unit in Export Processing Zone (EPZ) or in a Hardware Technology Park or in a Software Technology Park, within two years of establishment of the Unit.

Purchase or acquisition of office equipment and other assets required for normal business operations of the overseas branch/ office/ representative will not be deemed as a capital account transaction. Transfer or acquisition of immovable property outside India, other than by way of lease not exceeding five years, by the overseas branch/ office/ representative will be subject to rules framed for Acquisition and Transfer of Immovable Property outside India.

(C) Exporters: A person resident in India, being an exporter who has undertaken a construction contract or a turnkey project outside India or who is exporting services or engineering goods from India on deferred payment terms may open, hold and maintain a Foreign Currency Account with a bank outside India.

(D) For making Overseas Direct Investment: An Indian party may open, hold and maintain Foreign Currency Account abroad for the purpose of making overseas direct investments subject to the following terms and conditions: a) The Indian party is eligible for making overseas direct

investment; b) The host country regulations stipulate that the

investment into the country is required to be routed through a designated account.

c) The account shall be opened, held and maintained as per the regulation of the host country.

d) The remittances sent to the account by the Indian party should be utilized only for making overseas direct investment into the Joint Venture/ Wholly Owned Subsidiary (JV/ WOS) abroad.

e) Any amount received in the account by way of dividend and/ or other entitlements from the subsidiary shall be repatriated to India within 30 days from the date of credit.

f) The Indian party should submit the details of debits and credits in the account on yearly basis to the designated AD bank.

g) The account so opened shall be closed immediately or within 30 days from the date of disinvestment from JV/ WOS or cessation thereof.


(E) Accounts in respect of Startups: An Indian startup or any other entity as may be notified by RBI, having an overseas subsidiary, may open a foreign currency account with a bank outside India for the purpose of crediting to it foreign exchange earnings out of exports/ sales made by the said entity and/ or the receivables, arising out of exports/ sales, of its overseas subsidiary provided the balances in the account shall be repatriated to India within the period prescribed in FEMA Regulations. (F) Other Cases: (1) The funds raised through External Commercial Borrowings (ECB) or American Depository Receipts (ADRs) or Global Depository Receipts (GDRs), may, be held in deposits in foreign currency accounts with a bank outside India pending their utilisation or repatriation to India. (2) A shipping or airline company incorporated in India may open, hold and maintain with a bank outside India, a Foreign Currency Account for the purpose of undertaking transactions in the ordinary course of its business. (3) Insurance/ reinsurance companies registered with IRDAI to carry out insurance/ reinsurance business may open, hold and maintain a Foreign Currency Account with a bank outside India for the purpose of meeting the expenditure incidental to the insurance/ reinsurance business carried on by them and for that purpose, credit to such account the insurance/reinsurance premia received by them outside India. (4) Resident individuals may open, maintain and hold foreign currency accounts with a bank outside India for making remittances under the Liberalised Remittance Scheme. The account may be used for putting though all transactions connected with or arising from remittances eligible under this Scheme. (5) A person resident in India who has gone out of India to participate in an exhibition/ trade fair outside India may open, hold and maintain a Foreign Currency Account with a bank outside India for crediting the sale proceeds of goods on display in the exhibition/ trade fair. The balance in the account should be repatriated to India through normal banking channels within a period of one month from the date of closure of the exhibition/ trade fair. (6) A person resident in India who has gone abroad for studies may open, hold and maintain a Foreign Currency Account with a bank outside India during his stay outside India. On his return to India, after completion of studies, such an account will deemed to have been opened under the Liberalised Remittance Scheme. (7) A person resident in India who is on a visit to a foreign country may open, hold and maintain a Foreign Currency Account with a bank outside India during his stay outside India, provided that on his return to India, the balance in the account is repatriated to India. (8) (i) A citizen of a foreign State, resident in India, being an employee of a foreign company or a citizen of India, employed by a foreign company outside India and in either case on deputation to the office/ branch/ subsidiary/ joint venture/ group company in India of such foreign company may open, hold and maintain a foreign currency account with a bank outside India and receive the whole salary payable to him for the services rendered to the office/ branch/ subsidiary/ joint venture/ group company in India of such foreign company, by credit to such account, subject to payment of taxes, as applicable in India. (ii) A citizen of a foreign State resident in India being in employment with a company incorporated in India may open, hold and maintain a foreign currency account with a

bank outside India and remit the whole salary received in India in Indian Rupees, to such account, for the services rendered to such an Indian company, subject to payment of taxes, as applicable in India. The expression ‘company’ shall include a ‘Limited Liability Partnership.

5. Types of accounts: Except for restrictions as stated above, a Foreign Currency Account with an authorised dealer in India may be opened, held and maintained in the form of current or savings or term deposit account in cases where the account holder is an individual, and in the form of current account or term deposit account in all other cases. However, the EEFC account shall be opened as Current account only. Account shall be opened singly or jointly in the name of person eligible to open, hold and maintain such account.

6. Remittances out of the account after the account holder's death: On the death of a foreign currency account holder, the authorised dealer may remit to a nominee being a person resident outside India, funds to the extent of his share or entitlement from the account of the deceased account holder. A nominee being a person resident in India, who is desirous of remitting funds outside India out of his share for meeting the liabilities abroad of the deceased, may apply to RBI for such remittance. A resident nominee of an account held outside India shall close the account and bring back the proceeds to India through banking channels.

NATIONAL RURAL LIVELIHOODS MISSION (NRLM) – AAJEEVIKA

As per extant guidelines on Interest Subvention Scheme under NRLM, bank is required to submit a certificate that loans to women SHGs up-to 3 lakhs were charged Interest @ 7% per annum on the above disbursement/outstanding in the year 2015-16. The above claimed amount and the accounts are from the Category-I districts only and all the accounts claimed are eligible for interest subvention as per RBI guidelines. There is no duplication in the claims and there is no human intervention while submitting the regular claim or additional interest subvention claim from the branch level onwards. In partial modification of the Scheme, Ministry of Rural Development, Government of India, has advised that the clause “there is no human intervention” of the Scheme may be replaced by the clause “with minimal human intervention” in the Interest Subvention claim certificates.

RELIEF MEASURES BY BANKS IN AREAS AFFECTED BY NATURAL CALAMITIES

As per extant guidelines, while restructuring the loans in the areas affected by natural calamities, banks are required to adjust the insurance proceeds, if any, receivable from the Insurance Company to ‘restructured accounts’ in cases where they have granted fresh loans to the borrowers. RBI has now advised (June 30, 2016) banks to act with empathy and consider restructuring and granting fresh loans without waiting for the receipt of the insurance claims, in cases where there is reasonable certainty of receipt of the claim.

QUARTERLY REPORTING SYSTEM FOREIGN BRANCHES/ SUBSIDIARIES/ JOINT VENTURES/ ASSOCIATES OF INDIAN BANKS

As per extant guidelines, banks are required to submit quarterly return for reporting of profit and asset size of overseas operations of the bank. RBI has decided (June 30, 2016) to discontinue the submission of the said return with effect from June 30, 2016.


RELIEF MEASURES BY BANKS IN AREAS AFFECTED BY NATURAL CALAMITIES

During the hearing of the Writ Petition by Swaraj Abhiyan against Union of India and others, the Hon'ble Supreme Court has directed the concerned authorities in the Union of India, the State Governments and RBI and other banks to religiously implement their policies since they are ultimately intended for the benefit of the people of our country and not for the benefit of any stranger. RBI has advised (June 2, 2016) all the Scheduled Commercial Banks to ensure implementation of RBI guidelines on Relief Measures by banks in areas affected by Natural Calamities.

FOREIGN CURRENCY ACCOUNTS BY A PERSON RESIDENT IN INDIA

RBI has made the following amendments (June 01, 2016) in the rules relating to Foreign Currency Accounts by a person resident in India: 1. Insurance/reinsurance companies registered with Insurance Regulatory and Development Authority of India (IRDA) to carry out insurance/reinsurance business may open, hold and maintain a Foreign Currency Account with a bank outside India for the purpose of meeting the expenditure incidental to the insurance/reinsurance business carried on by them and for that purpose, credit to such account the insurance/reinsurance premia received by them outside India.

2. An Indian startup or any other entity as may be notified by the Reserve Bank in consultation with the Central Government, having an overseas subsidiary, may open a foreign currency account with a bank outside India for the purpose of crediting to it foreign exchange earnings out of exports/ sales made by the said entity and/ or the receivables, arising out of exports/ sales, of its overseas subsidiary. The balances in the account shall be repatriated to India within the period prescribed in FEMA regulations on Export of Goods and Services. for realization of export proceeds.

3. Payments received in foreign exchange by an Indian startup, or any other entity as may be notified by RBI arising out of exports/ sales made by the said entity or its overseas subsidiaries, if any.

India’s External Debt as at the end of March 2016 India's external debt statistics for the quarters ending March and June are released by RBI with a lag of one quarter and those for the quarters ending September and December by the Ministry of Finance, Government of India. The major developments relating to India’s external debt as at end-March 2016 are presented below.

1. India’s external debt at end-March 2016 was placed at US$ 485.6 billion, recording an increase of US$ 10.6 billion over its level at end-March 2015.

2. India’s external debt at end-March 2016 witnessed an increase of 2.2 per cent over its level at end-March 2015, primarily on account of a rise in outstanding NRI deposits.

3. The increase in the magnitude of external debt was partly offset by valuation gain resulting from the appreciation of the US dollar vis-a-vis the Indian rupee and other major currencies.

4. Valuation gain, due to appreciation of the US dollar against the Indian rupee and other major currencies, was placed at US$ 5.9 billion. Excluding the valuation effect, the increase in external debt would have been

higher by US$ 16.4 billion at end-March 2016 over the level at end-March 2015.

5. Commercial borrowings continued to be the largest component of external debt with a share of 37.3 per cent, followed by NRI deposits (26.1 per cent) and short-term trade credit (16.5 per cent).

6. The share of short-term debt (original maturity) in total debt witnessed a decline over the corresponding quarter of the previous year. Similarly, the ratio of short-term debt (original maturity) to foreign exchange reserves declined to 23.1 per cent as at end-March 2016 (25.0 per cent as at end-March 2015).

7. On residual maturity basis, short-term debt constituted about 42.6 per cent of total external debt at end-March 2016 (38.2 per cent at end-March 2015) and stood at 57.4 per cent of total foreign exchange reserves (53.2 per cent at end-March 2015). The rise in short-term debt (residual maturity) mainly reflects payments due on account of maturing of FCNR(B) deposits mobilised under the special swap scheme in 2013.

8. US dollar denominated debt continued to be the largest component of India’s external debt with a share of 57.1 per cent at end-March 2016, followed by Indian rupee (28.9 per cent), SDR (5.8 per cent), Japanese Yen (4.4 per cent) and Euro (2.5 per cent). Across borrower categories, the outstanding debt of Government as well as non-Government debt increased and their shares in total external debt were 19.2 per cent and 80.8 per cent, respectively, at end-March 2016 (Table 3).

9. Debt service payments increased to 8.8 per cent of current receipts at end-March 2016 as compared to 7.6 per cent at end-March 2015.

10. The external debt to GDP ratio stood at 23.7 per cent at end-March 2016, a shade lower than its level of 23.8 per cent at end-March 2015.

March 16 External Debt (US$ billion) 485.6 Ratio of External Debt to GDP (%) 23.7 Debt Service Ratio (%) 8.8 Ratio of Foreign Exchange Reserves to Total Debt

74.2

Ratio of Concessional Debt to Total Debt (%) 9.0 Ratio of Short-Term Debt to Foreign Exchange Reserves (%)

23.1

Ratio of Short-Term Debt to Total Debt (%) 17.2

PRICING OF CREDIT BY NBFC-MFIS APPLICABLE AVERAGE BASE RATE FOR THE

QUARTER BEGINNING JULY 01, 2016: As per extant guidelines, issued vide circular dated Feb 7, 2014, the interest rates charged by an NBFC-MFI to its borrowers will be the lower of the following:

i. The cost of funds plus margin; or ii. The average base rate of the five largest commercial banks by assets multiplied by 2.75.

The average of the base rates of the five largest commercial banks shall be advised by the Reserve Bank on the last working day of the previous quarter, which shall determine interest rates for the ensuing quarter. RBI has now advised that the applicable rate for the quarter beginning July 01, 2016 is 9.44 per cent.


SECOND BI-MONTHLY MONETARY POLICY STATEMENT, 2016-17

Monetary and Liquidity Measures: RBI has decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5 per cent; keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL); and continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality. Consequently, the reverse repo rate under the LAF will remain unchanged at 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 7.0 per cent.

Assessment: Global: Global growth is uneven and struggling to gain traction. World trade remains muted in an environment of weak demand. GDP growth slowed sequentially in China in Q1, with retail sales, industrial production and fixed investment showing signs of weakness in recent months amidst still rising levels of indebtedness among households and corporations.

Domestic: Provisional estimate of gross value added (GVA) for 2015-16 scaled down the annual growth rate to 7.2%. The index of industrial production decelerated in 2015-16, mainly pulled down by weak manufacturing in an environment of subdued investment demand and weak rural consumption. In May 2016, the manufacturing purchasing managers’ index (PMI) remained subdued on account of slowing output and export orders. However, except for natural gas and crude oil, the core sector registered strong growth in April 2016. Public investment, especially in roads and railways, is gaining strength.

Inflation: The ebbing of inflation pressures for two consecutive months to March, after a period of steady rise, was interrupted once again in April. Retail inflation measured by the consumer price index (CPI) rose more sharply than expected due to a more-than-seasonal jump in food prices. Within the food group, inflation in respect of vegetables, fruits, sugar, meat and fish rose sizably from previous month. Inflation in respect of pulses remained elevated. Production of pulses has fallen for the second consecutive year. Cereal inflation, remained subdued, reflecting supply management efforts that expanded offtake from food stocks. Three-months-ahead inflation expectations of households moved up marginally in May. CPI inflation excluding food and fuel was sticky and above 5 per cent.

Foreign Trade: Exports declined for the seventeenth consecutive month in April in US dollar terms in spite of a modest increase in volume. The fall in crude oil prices led to lower export realisations from petroleum products (POL). Among non-oil items, exports of gems and jewellery, drugs and pharmaceuticals, chemicals and electronic goods improved over their levels a year ago. By contrast, exports of engineering goods declined for the ninth straight month while readymade garments recorded a fall for the fourth successive month. Imports fell sharply and across constituents – 25 items accounting for a share of 87 per cent in total imports recorded a decline; POL imports also declined, essentially reflecting lower prices. Accordingly, the trade deficit narrowed and was less than half its level a year

ago. The level of foreign exchange reserves rose to US $ 360 billion by May 27, 2016.

Policy Stance and Rationale: The expectations of a normal monsoon along with various supply management measures and the introduction of the electronic national agriculture market (e-NAM) trading portal, should moderate unanticipated flares of food inflation. Nonetheless, there are upside risks – firming international commodity prices, particularly of crude oil; the implementation of the 7th Central Pay Commission awards; the upturn in inflation expectations of households and of corporates; and the stickiness in inflation excluding food and fuel. The inflation projections given in the April policy statement are retained, though with an upside bias.

GDP growth: Domestic conditions for growth are improving gradually, mainly driven by consumption demand, which is expected to strengthen with a normal monsoon and the implementation of the Seventh Pay Commission award. The GVA growth projection for 2016-17 has been retained at 7.6 per cent with risks evenly balanced.

Interest Rates: The data show a sharper-than-anticipated upsurge in inflationary pressures emanating from a number of food items (beyond seasonal effects), as well as a reversal in commodity prices. A strong monsoon, continued astute food management, as well as steady expansion in supply capacity, especially in services, could help offset these upward pressures. Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative. More monetary transmission to support the revival of growth continues to be critical. The Reserve Bank will shortly review the implementation of the Marginal Cost Lending Rate framework by banks. Timely capital infusions into constrained public sector banks will also aid credit flow. SECTORAL DEPLOYMENT OF BANK CREDIT – MAY 16

Highlights of the Data on sectoral deployment of bank credit collected on a monthly basis from select 46 scheduled commercial banks, accounting for about 95 per cent of the total non-food credit deployed by all scheduled commercial banks, for the month of May 2016 are given below:

1. On a year-on-year (y-o-y) basis, non-food bank

credit increased by 8.4 per cent in May 2016 as compared with the increase of 9.0 per cent in May 2015.

2. Credit to agriculture and allied activities increased by 15.6 per cent in May 2016 as compared with the increase of 11.0 per cent in May 2015.

3. Credit to industry increased by 0.9 per cent in May 2016 as compared with the increase of 5.2 per cent in May 2015. Credit declined to several sub-sectors, some of which include food processing, infrastructure and vehicles, vehicle parts & transport equipment.

4. Credit to the services sector increased by 9.3 per cent in May 2016 as compared with the increase of 9.1 per cent in May 2015.

5. Personal loans increased by 19.1 per cent in May 2016, up from the increase of 16.6 per cent in May 2015.


FINANCIAL STABILITY REPORT – JUNE 2016 RBI has released the Financial Stability Report (FSR) June 2016. Highlights of FSR- June 2016 are summarised below: Overall assessment of systemic risks: India’s financial system remains stable, even though the banking sector is facing significant challenges. As global uncertainties and transiting geopolitical risks impact India, continuation of sound domestic policies and structural reforms remain the key for macroeconomic stability. Global and domestic macro-financial risks: The global recovery remains fragile amidst weak and uneven growth, a slowdown in world trade and prevailing uncertainties in financial and commodities markets. The unintended side effects of current ultra-easy monetary policies being pursued in many advanced economies - without any clear signs of an exit strategy, are becoming evident. Indian economy at this juncture stands out in terms of growth and investment potential. With the Government’s commitment to continue on the path of fiscal discipline, the efforts on containing the revenue deficit and rationalising subsidies need to be reinforced, even as gross fixed capital formation needs a fillip. India’s external sector indicators show a relatively stronger position. However, a faster growth in India’s oil import in terms of volume in recent years makes it imperative to be alert to the risks of commodity cycle reversals. Agriculture: The prediction of a normal monsoon augurs well for agriculture sector growth in 2016-17, although the spatial and temporal distribution matter as much as the total quantum of rainfall. Given its large impact on broader political economy, the agriculture sector needs coherent policy measures to address sustained food price pressures and the overall rural distress. Corporates: While stress in the corporate sector showed some signs of moderation in 2015-16, the risks of lower demand and weaker debt servicing capacity continue. Financial Institutions: Performance and risks: 1. The business of scheduled commercial banks

(SCBs) slowed significantly during 2015-16. 2. The gross non-performing advances (GNPAs)

ratio increased sharply to 7.6 per cent from 5.1 per cent between September 2015 and March 2016, largely reflecting reclassification of restructured standard advances as non-performing due to asset quality review (AQR).

3. The restructured standard advances ratio declined but with a marginal increase in the overall stressed advances ratio from 11.3 per cent in September 2015 to 11.5% in March 2016.

4. The capital to risk-weighted assets ratio (CRAR) of SCBs showed some improvement bank-groups.

5. However, the profitability of SCBs declined significantly and the public sector banks (PSBs) recorded losses during 2015-16.

6. Asset quality of scheduled urban co-operative banks (SUCBs) as well as non-banking financial companies (NBFCs) improved.

7. The performance of NBFC sector in general is relatively better than that of PSBs.

8. From the perspective of the larger financial system, the flow of funds among various types of financial institutions assume importance. The asset management companies managing mutual funds (AMC-MFs) followed by insurance companies are the biggest fund providers in the system, while SCBs followed by NBFCs are the biggest receiver of funds.

Financial sector regulation 1. Internationally, apart from the focus on the

measures related to improving the capital and liquidity position of banks, the policies aimed at promoting public confidence and upholding the safety and soundness of the banking system with emphasis on issues of transparency and accountability assume a greater degree of significance.

2. As Indian banks are currently focusing on cleaning their balance sheets in the wake of the AQR, various measures taken by the Government to address the issues related to distressed industrial sectors are expected to help the process and improve the credit growth.

3. The regulatory steps taken by the Reserve Bank are aimed at improving banks’ ability to deal with stressed assets.

4. While the proposed ‘Large Exposures’ framework will help in mitigating the risk posed to the banking system on account of large aggregate lending to a single corporate entity, the recent guidelines on a ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’ will help in putting real assets back on track through another avenue for reworking the financial structure of entities facing genuine difficulties, while providing upside to the lenders when the borrower turns around.

5. SEBI’s framework providing an electronic book mechanism for issuance of debt securities on private placement basis is expected to result in improved efficiency, transparency in price discovery as well as reduction in cost and time taken for such issuances.

6. With the regulatory impetus, the commodity derivatives market is poised to evolve with new products and new categories of participants leading to better liquidity and more efficient price discovery, further aided by recent initiative of Government in setting up the National Agriculture Market (NAM).

7. There is a need to assess the resilience of reinsurance companies in the face of increasing concentration of contingent liabilities in a few reinsurance entities.

8. The move towards adopting risk based supervision by the pension sector regulator is expected to ensure efficient allocation of supervisory resources.


CYBER SECURITY FRAMEWORK IN BANKS The Reserve Bank, had, provided guidelines on Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds (G.Gopalakrishna Committee) vide Circular dated April 29, 2011. In view of the low barriers to entry, evolving nature, growing scale/velocity, motivation and resourcefulness of cyber-threats to the banking system, it is essential to enhance the resilience of the banking system by improving the current defences in addressing cyber risks. These would include, but not limited to, putting in place an adaptive Incident Response, Management and Recovery framework to deal with adverse incidents/disruptions, if and when they occur. RBI has now advised banks (June 2, 2016) to immediately put in place a cyber-security policy elucidating the strategy containing an appropriate approach to combat cyber threats given the level of complexity of business and acceptable levels of risk. The strategy should deal with the following broad aspects: Cyber Security Policy to be distinct from the broader IT policy / IS Security Policy of a bank: so that it can highlight the risks from cyber threats and the measures to address / mitigate these risks. The size, systems, technological complexity, digital products, stakeholders and threat perception vary from bank to bank and hence it is important to identify the inherent risks and the controls in place to adopt appropriate cyber-security framework. While identifying and assessing the inherent risks, banks are required to reckon the technologies adopted, alignment with business and regulatory requirements, connections established, delivery channels, online / mobile products, technology services, organisational culture and internal & external threats. Arrangement for continuous surveillance: Testing for vulnerabilities at reasonable intervals of time is very important. The nature of cyber-attacks are such that they can occur at any time and in a manner that may not have been anticipated. Hence, it is mandated that a SOC (Security Operations Centre) be set up at the earliest. It is also essential that this Centre ensures continuous surveillance and keeps itself regularly updated on the latest nature of emerging cyber threats. IT architecture should be conducive to security: The same needs to be reviewed by the IT Sub Committee of the Board and upgraded, if required, as per their risk assessment in a phased manner. The risk cost/potential cost trade off decisions which a bank may take should be recorded in writing to enable an appropriate supervisory assessment subsequently. Banks should proactively initiate the process of setting up of and operationalising a Security Operations Centre (SOC) to monitor and manage cyber risks in real time. Comprehensively address network and database security: Recent incidents have highlighted the need to thoroughly review network security in every bank. In addition, it has been observed that many times connections to networks/databases are allowed for a specified period of time to facilitate some business or operational requirement. However, the same do not get closed due to oversight making the network/database vulnerable to cyber-attacks. It is essential that unauthorized access to networks and databases is not allowed and wherever permitted, these are through well-defined processes which are invariably followed. Ensuring Protection of customer information: Banks depend on technology very heavily not only in their smooth functioning but also in providing cutting-edge digital products to their consumers and in the process collect

various personal and sensitive information. Banks, as owners of such data, should take appropriate steps in preserving the Confidentiality, Integrity and Availability of the same, irrespective of whether the data is stored/in transit within themselves or with customers or with the third party vendors; the confidentiality of such custodial information should not be compromised at any situation and to this end, suitable systems and processes across the data/information lifecycle need to be put in place by banks. Cyber Crisis Management Plan: A Cyber Crisis Management Plan (CCMP) should be immediately evolved and should be a part of the overall Board approved strategy. Considering the fact that cyber-risk is different from many other risks, the traditional BCP/DR arrangements may not be adequate and hence needs to be revisited keeping in view the nuances of the cyber-risk. In India, CERT-IN (Computer Emergency Response Team – India, a Government entity) has been taking important initiatives in strengthening cyber-security by providing proactive & reactive services as well as guidelines, threat intelligence and assessment of preparedness of various agencies across the sectors, including the financial sector. CERT-IN also have come out with National Cyber Crisis Management Plan and Cyber Security Assessment Framework. CERT-In/NCIIPC/RBI/ IDRBT guidance may be referred to while formulating the CCMP. CCMP should address the following four aspects: (i) Detection (ii) Response (iii) Recovery and (iv) Containment. Banks need to take effective measures to prevent cyber-attacks and to promptly detect any cyber-intrusions so as to respond / recover / contain the fall out. Banks should be prepared to face emerging cyber-threats such as ‘zero-day’ attacks, remote access threats, and targeted attacks. Cyber security preparedness indicators: The adequacy of and adherence to cyber resilience framework should be assessed and measured through development of indicators to assess the level of risk/preparedness. The awareness among the stakeholders including employees may also form a part of this assessment. Sharing of information on cyber-security incidents with RBI: Banks need to report all unusual cyber-security incidents (whether they were successful or were attempts which did not fructify) to the Reserve Bank. Banks are also encouraged to actively participate in the activities of their CISOs’ Forum coordinated by IDRBT and promptly report the incidents to Indian Banks – Center for Analysis of Risks and Threats (IB-CART) set up by IDRBT. Supervisory Reporting framework: RBI has decided to collect both summary level information as well as details on information security incidents including cyber-incidents. An immediate assessment of gaps in preparedness to be reported to RBI. Organisational arrangements: Banks should review the organisational arrangements so that the security concerns are appreciated, receive adequate attention and get escalated to appropriate levels in the hierarchy to enable quick action. Cyber-security awareness among stakeholders / Top Management / Board: Managing cyber risk requires the commitment of the entire organization to create a cyber-safe environment. This will require a high level of awareness among staff at all levels. Banks should proactively promote, among their customers, vendors, service providers and other relevant stakeholders an understanding of the bank’s cyber resilience objectives, and require and ensure appropriate action to support their synchronised implementation and testing.


RESOLVING STRESS IN THE BANKING SYSTEM (Excerpts from speech by Dr. Raghuram G. Rajan,

Governor, RBI – June 22, 2016) The slowdown in credit growth has been largely because of stress in the public sector banking and not because of high interest rates. As such, what is required is a clean-up of the balance sheets of public sector banks, which is what is underway and needs to be taken to its logical conclusion. Public Sector Lending vs Private Sector Lending: Public sector bank non-food credit growth has been falling relative to credit growth from the new private sector banks (Axis, HDFC, ICICI, and IndusInd) since early 2014. This is reflected not only in credit to industry, but also in micro and small enterprise credit. The relative slowdown in credit growth, albeit not so dramatic, is also seen in agriculture, though growth is picking up once again. Whenever one sees a slowdown in lending, one could conclude there is no demand for credit – firms are not investing. But what we have seen is a slowdown in lending by public sector banks vis a vis private sector banks. The immediate conclusion one should draw is that this is something affecting credit supply from the public sector banks specifically, perhaps it is the lack of bank capital. Yet if we look at personal loan growth, and specifically housing loans, public sector bank loan growth approaches private sector bank growth. The lack of capital therefore cannot be the culprit. Rather than an across-the-board shrinkage of public sector lending, there seems to be a shrinkage in certain areas of high credit exposure, specifically in loans to industry and to small enterprises. The more appropriate conclusion then is that public sector banks were shrinking exposure to infrastructure and industry risk right from early 2014 because of mounting distress on their past loans. Private sector banks, many of which did not have these past exposures, were more willing to service the mounting demand from both their traditional borrowers, as well as some of those corporates denied by the public sector banks. Given, however, that public sector banks are much bigger than private sector banks, private sector banks cannot substitute fully for the slowdown in public sector bank credit. We absolutely need to get public sector banks back into lending to industry and infrastructure, else credit and growth will suffer as the economy picks up. Another argument is made that stress in the corporate world is because of high interest rates. Interest rates set by private banks are usually equal or higher than rates set by public sector banks. Yet their credit growth does not seem to have suffered. The logical conclusion therefore must be that it is not the level of interest rates that is the problem. Instead, stress is because of the loans already on PSB balance sheets, and their unwillingness to lend more to those sectors to which they have high exposure. Sources of distressed loans: There are two sources of distressed loans – the fundamentals of the borrower not being good, and the ability of the lender to collect being weak. Both are at work in the current distress. The Sources of Lending Distress: Bad Fundamentals: Why have bad loans been made? A number of these loans were made in 2007-2008. Economic growth was strong and the possibilities limitless. Deposit growth in public sector banks was rapid, and a number of infrastructure projects such as power plants had been completed on time and within budget. It is at such times that banks make mistakes. They extrapolate past growth and performance to the future. So they are willing to accept higher leverage in projects, and less promoter equity. Sometimes banks signed up to lend

based on project reports by the promoter’s investment bank, without doing their own due diligence. This is the historic phenomenon of irrational exuberance, common across countries at such a phase in the cycle. The problem is that growth does not always take place as expected. The years of strong global growth before the global financial crisis were followed by a slowdown, which extended even to India, showing how much more integrated we had become with the world. Strong demand projections for various projects were shown to be increasingly unrealistic as domestic demand slowed down. Moreover, a variety of governance problems coupled with the fear of investigation slowed down bureaucratic decision making in Delhi, and permissions for infrastructure projects became hard to get. Project cost overruns escalated for stalled projects and they became increasingly unable to service debt. The Sources of Lending Distress: Poor Monitoring and Collection: The truth is, even sensible lending will entail default. A banker who lends with the intent of never experiencing a default is probably over-conservative and will lend to too few projects, thus hurting growth. But sensible lending means careful assessment up front of project prospects. Deficiencies in evaluation can be somewhat compensated for by careful post-lending monitoring, including careful documentation and perfection of collateral, as well as ensuring assets backing promoter guarantees are registered and tracked. Unfortunately, too many projects were left weakly monitored, even as costs increased. Banks may have expected the lead bank to exercise adequate due diligence, but this did not always happen. Moreover, as a project went into distress, private banks were sometimes more agile in securing their positions with additional collateral from the promoter, or getting repaid, even while public sector banks continued supporting projects with fresh loans. Promoters astutely stopped infusing equity, and sometimes even stopped putting in effort, knowing the project was unlikely to repay given the debt overhang. The process for collection, despite laws like SARFAESI intended to speed up secured debt collection, has been prolonged and costly, especially when banks face large, well-connected promoters. Knowing that banks would find it hard to collect, some promoters encouraged them to “double-up” by expanding the scale of the project, even though the initial scale was unable to service debt. Of course, the unscrupulous among the promoters continued to divert money from the expanded lending, increasing the size of the problem on bank balance sheets. The inefficient loan recovery system then gives promoters tremendous power over lenders. Not only can they play one lender off against another by threatening to divert payments to the favored bank, they can also refuse to pay unless the lender brings in more money, especially if the lender fears the loan becoming a Non-Performing Asset. Sometimes promoters can offer miserly one-time settlements (OTS) knowing that the system will ensure the banks can collect even secured loans only after years. Effectively, loans in such a system become implicit equity, with a tough promoter enjoying the upside in good times, and forcing banks to absorb losses in bad times, even while he holds on to his equity. Cleaning Up the Banks: Principles: The world over, there are three cardinal rules when faced with incipient distress. 1) Viability does not depend on the debt outstanding, but on economic value. Debt may have to be written down to correspond to what is viable. Because of changed circumstances, demand may be lower and project cash flows may be significantly lower than projected earlier. The


project has economic value when completed – in the sense that operating cash flows are positive, but much less than the interest on the debt it carries. If the debt is not written down, the project continues as an NPA, even while the promoter, knowing it cannot repay, loses interest. If neglected, the project may stop generating any cash flows and the assets may depreciate rapidly. 2) Complete projects that are viable, even if it requires additional funds infusion. Stalled projects do not get any better over time. If there are small investments needed to complete the project, and the promoter has no funds, it may still make sense to lend to it, even while writing down the overall debt. Essentially, the new loan makes it possible to generate operating cash flows to service some debt, even if not all the outstanding debt. 3) Don’t throw good money after bad money simply because there is an unreliable promise that debt will become serviceable. This is the opposite of (2). If the project is unviable, doubling its size does not make it any more viable. Perhaps it would be better for the bank to write down its loans to the initial project, rather than going deeper into the hole because the promoter may incur new cost-overruns as he expands. An incompetent or unreliable promoter will remain so even when scale expands. Bank Moral Hazard: Unfortunately, the incentives built into the public sector banking system have made it more difficult for public sector bank executives to follow these principles. The short tenure of managers means they are unwilling to recognize losses immediately, and more willing to postpone them into the future for their successors to deal with. Such distorted incentives lead to overlending to or “ever-greening” unviable projects. Unfortunately, also, the taint of NPA immediately makes them reluctant to lend to a project even if it is viable, for fear that the investigative agencies will not buy their rationale for lending. The absence of sound and well documented loan evaluation and monitoring practices by banks makes such an outcome more likely. So excessive lending to bad projects and too little lending to viable ones can coexist. The Regulator’s Dilemma: For regulator who wants the banking system to clean up so it can start lending again, this creates a variety of objectives, which can be somewhat conflicting. First, we (RBI) want banks to recognize loan distress and disclose it, not paper over it by ever-greening unviable projects. Second, we want them to be realistic about the project’s cash generating capacity, and structure lending and repayment to match that. Third, we want them to continue lending to viable projects, even if they had to be restructured in the past and are NPAs. The problem is that any forbearance in labeling loans NPAs on restructuring makes it easier to avoid disclosure and indulge in ever-greening. On the other hand, strict disclosure and classification rules could imply a cessation of lending to even viable projects. The RBI’s Approach: RBI created a large loan database (CRILC) that included all loans over Rs. 5 crore, which was shared with all the banks. The CRILC data included the status of each loan – reflecting whether it was performing, already an NPA or going towards NPA. That database allowed banks to identify early warning signs of distress in a borrower such as habitual late payments to a segment of lenders. The next step was to coordinate the lenders through a Joint Lenders' Forum (JLF) once such early signals were seen. The JLF was tasked with deciding on an approach for resolution, much as a bankruptcy forum does.

Incentives were given to banks for reaching quick decisions. RBI ended the ability of banks to restructure projects without calling them NPA in April 2015. Because promoters were often unable to bring in new funds, and because the judicial system often protects those with equity ownership, together with SEBI, RBI introduced the Strategic Debt Restructuring (SDR) scheme so as to enable banks to displace weak promoters by converting debt to equity. RBI did not want banks to own projects indefinitely, so RBI indicated a time-line by which they had to find a new promoter. All these new tools, effectively created a resolution system that replicated an out-of-court bankruptcy. Banks now had the power to resolve distress. As a result, banks have classified existing distressed loans appropriately, and since March 2016 are looking at their weak-but-not-yet-distressed portfolio for necessary actions. There is a change in culture, and banks have been quite willing to get into the spirit of the Asset Qualify Review. Once the banks have properly classified a non-performing loan and provisioned against it, their incentive to evergreen or avoid writing down the debt to appropriate levels is diminished. Nevertheless, clean-up is ongoing work. The SDR scheme dealt with weak promoters. But some promoters are competent even while their projects are overly indebted. The ‘Scheme for Sustainable Structuring of Stressed Assets’ (S4A) is an optional framework for the resolution of large stressed accounts. The S4A envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around. Thus capable-but-over-indebted promoters have some incentive to perform, and because the project is not deemed an NPA if adequate provisions are made, public sector banks continue lending to it if necessary. Bank Risk Aversion: Bankers often accuse the vigilance authorities of excessive zeal when loans go bad, of immediately suspecting bankers of malfeasance when the bad loan could be an unintended consequence of sensible risk taking. While the vigilance authorities continuously attempt to reassure bankers that they are not vigilantes, the bankers themselves know that their own enthusiasm and deficiencies can expose them to unwarranted accusations of corruption. Another part of the solution is to not label a banker based on the outcome of a single loan but instead look for a pattern across loans. A banker who makes an excessive number of bad loans compared to his cohort deserves, at the very least, to be questioned. But the banker who makes the occasional bad loan amidst a lot of good ones probably needs to be rewarded. Such pattern-based monitoring by bank authorities, with serious punishment through vigilance action only if there is evidence of money changing hands, could control malfeasance while rewarding risk taking. This does require some changes in the current system, including de-emphasizing the committee based approach to loan approval in banks, which appears to diffuse responsibility for loan decisions. What Responsibility does the RBI have?: In sum, to the question of what comes first, clean up or growth, the answer is unambiguously “Clean up!”. Indeed, this is the lesson from every other country that has faced financial stress. Easier monetary policy is no answer to serious distress, contrary to widespread belief.


PAYMENT AND SETTLEMENT SYSTEMS IN INDIA: VISION-2018

Background: RBI has presented the Payment and Settlement Systems in India: Vision-2018. RBI has periodically put forth its vision for payment and settlement systems in India, which enunciates RBI’s objective to migrate to electronic payments and to ensure that the payment systems in India are safe, secure, uthorized, efficient and accessible. The previous Vision document covered the period 2012 to 2015.

Vision Statement: Building best of class payment and settlement systems for a ‘less-cash’ India through responsive regulation, robust infrastructure, effective supervision and customer centricity.

Objective: The objective is to facilitate provision of a payment system for the future that combines the much-valued attributes of safety, security and universal reach with technological solutions which enable faster processing, enhanced convenience, and the extraction and use of valuable information that accompanies payments. Since 2012-13, all segments of electronic payments, particularly retail electronic payments, have shown healthy growth both in terms of volume and value of usage. For example, RTGS and NEFT volumes increased almost threefold between 2013 and 2016 reflecting greater adoption of the system by all segments of users. Similarly, with increasing number of banks offering mobile banking services and driven by the growth in e-commerce and use of mobile payment applications, the volume of mobile banking transactions has increased nearly seven-fold and the value of transactions has shown a steep rise. The volume and value in Immediate Payment Service (IMPS) has also grown significantly with the development of the IMPS as a multi-channel system providing various options to customers to originate transactions. Cheque payments, on the other hand, are showing a declining trend in terms of volume as well as value between 2013 and 2016.

Broad contours of Vision-2018: • Coverage – by enabling wider access to a variety of

electronic payment services • Convenience – by enhancing user experience through

ease of use and of products and processes • Confidence – by promoting integrity of systems,

security of operations and customer protection • Convergence – by ensuring interoperability across

service providers • Cost – by making services cost effective for users as

well as service providers

Strategic initiatives: Vision 2018 focuses on four initiatives viz., responsive regulation, robust infrastructure, effective supervision and customer centricity. • Firstly, RBI, in consultation with all the stakeholders,

will continue its efforts to create a regulatory framework to promote twin objectives of enhanced coverage with interoperability of the payments system and convenience with security for the end-users in sync with emerging developments and innovations.

• Secondly, building a robust payments infrastructure in the country to increase the accessibility, availability, interoperability and security of the payment systems will continue to remain a key objective.

• Thirdly, Vision-2018 will focus on effectiveness of supervisory mechanisms to strengthen the resilience of the Financial Market Infrastructures (FMIs) and System

Wide Important Payment Systems (SWIPS) in the country besides setting up appropriate oversight framework for new systems, and augmenting the data reporting and fraud monitoring systems.

• Finally, Vision-2018 will adopt a customer centric approach to streamline the customer grievance redressal mechanism, focus on building customer awareness and education, and initiate customer protection measures.

Expected outcomes of Vision-2018 • Continued decrease in the share of paper-based

clearing instruments; • Consistent growth in individual segments of retail

electronic payment systems viz. NEFT, IMPS, Card transactions, mobile banking, etc.;

• Increase in registered customer base for mobile banking;

• Significant growth in acceptance infrastructure; and • Accelerated use of Aadhaar in payment systems

Robust Infrastructure: The key focus areas for building a robust payments infrastructure would be as outlined below:

1 Facilitating faster payment services: The measures that will be initiated will include: a. National Electronic Funds Transfer (NEFT): The growing adoption of NEFT by individuals, businesses and government agencies/departments, necessitate a review of the system to enable faster payment processing through introduction of more frequent settlement cycles. Similarly, the feasibility of adopting ISO messaging format for NEFT will be explored. b. Mobile Banking: The high mobile density in the country is being increasingly leveraged to offer payment services by a wide range of payment service providers so as to enable an on-the-go, faster payment experience to the customers. In addition to the efforts to on-board or increase customer registration level for mobile banking through simplified registration process and increasing the access points for same (through authorised ATM networks), the policy efforts will also focus on ensuring that access to mobile banking services is seamlessly provided to the large number of users of non-smartphone handsets in multiple languages. c. Service providers will be encouraged to adopt technology to provide innovative easy to use mobile based payment solutions in an interoperable environment without compromising on security.

2 Improving accessibility: In order to improve access to more electronic payment channels, Vision-2018 will give priority to the following:

a. Increasing acceptance infrastructure for electronic payments : The large number of bank accounts opened under the Prime Minister Jan Dhan Yojana (PMJDY) as well as the large number of cards issued to these account holders, particularly in rural and semi-urban areas, necessitate that the access to electronic payment services to these customers are quickly augmented. Hence, a policy framework will be put in place for setting up necessary acceptance infrastructure including ATMs and POS, across all geographical and industry segments such as groceries, education, transport, utilities, government services, healthcare, etc. in the country.

b. Implementation of the Bharat Bill Payment System (BBPS): BBPS, which is being set up to provide an accessible multi-tier infrastructure facilitating anytime, anywhere, any bill payment, will be made operational.


Based on the progress in BBPS and its activities, the scope of payments covered under the system will also be gradually widened to include other types of services, in addition to the repetitive payments for everyday utility services such as electricity, water, gas, telephone and Direct-to-Home (DTH) planned for the present.

c. Implementation of the Trade Receivables Discounting System (TReDS): TReDS, which is an institutional mechanism for facilitating the financing of trade receivables of MSMEs from corporate buyers through multiple financiers, will be made fully operational. RBI would pursue with other authorities/Government to amend their regulatory framework for speedier implementation and wider coverage of TReDS.

3. Promoting interoperability: The ability of customers to use and re-use a set of payment instruments seamlessly across different segments to meet a variety of payment requirements should not be constrained by a “silo‟ approach to developments in the payments eco-system. The requirement of users for seamless payment experience are met only when the payment systems are inter-operable and are able to communicate within their own segments on the basis of common standards adopted by all providers of these services. Vision-2018 envisages promoting interoperability in areas which have a high potential for driving electronic payments, including for small value transactions, such as the following:

a. Unified Payment Interface (UPI): At present although a large number of banks are offering mobile banking services these are not completely inter-operable, especially for merchant transactions. This, in turn, has impacted the use of mobile payments for merchant / P2B (Person to Business) transactions. Full operationalisation of UPI, which aims at this customer convenience, will provide the standard interface for communication across different mobile-banking applications of banks thus facilitating inter-operability in P2B payments.

b. Toll Collections: Collection of toll, largely done in the form of cash payments, is another segment where efforts to migrate to electronic payments have been sporadic and isolated. Such disparate developments have led to the propagation of different systems across different parts of the country, not only causing confusion and inconvenience to the customers, but also pushing them further into cash payments. Hence, electronification of the toll collection systems on a pan-India basis in an interoperable environment will be encouraged.

c. Payments for Mass Transit Systems: Another segment which has a huge potential for migrating large number of small value cash transactions to electronic payments, is in the area of mass transit (road transport, metro rail, etc.). Though there have been developments in recent times in different parts of the country to put in place automated fare collection for mass transit systems all of them work on proprietary systems and standards, thus coming in the way of inter-operability. Hence, the focus will be to ensure that the payment mechanisms being put in place in this segment are interoperable and built on open standards, preferably using open system payment instruments.

4. Enhancing Safety and Security: Safety and security of payment systems and transactions is an important factor that helps in boosting the trust and confidence of the customers in using electronic payment mechanisms. Towards this end, RBI will continue to adopt and implement

international standards and best practices that enhance payment systems security. Some of the measures envisaged include:

a. Migration of cards to EMV Chip and PIN: Banks have been advised that all new cards issued by them should be EMV Chip and PIN cards. A roadmap for migration of all existing magnetic stripe cards to EMV Chip and PIN cards has also been laid down. RBI will continue monitoring the progress made by the banks so as to ensure adherence to the timelines.

b. EMV card processing at ATMs: Presently the ATMs in the country read and process the card transactions only on the basis of data contained in the magnetic stripe, even though the card may be a Chip and PIN card. With the roadmap in place for issuance of EMV Chip and PIN cards, the aim will be to ensure that all the ATMs in the country migrate to processing of EMV Chip and PIN cards on the basis of Chip data rather than magnetic stripe data.

c. Security of ATM transactions: Although ATM infrastructure is widely used for meeting cash requirements of the customers, it is increasingly being used as a channel for carrying out other non-financial transactions and delivering value-added services. As such, the operational and logical access security aspects of ATMs assume significance, and any shortcomings in these areas make the systems vulnerable to attacks by fraudsters, thus impairing customer confidence and trust. RBI will, therefore, examine holistically the physical and logical safety and security requirements of ATMs infrastructure and issue necessary guidelines to strengthen them.

d. Aadhaar-based authentication: Examine the technical, operational and business feasibility of using Aadhaar as a factor of authentication for payment transactions.

5. Measures for cheque clearing systems: As cheques continue to be used for limited purposes by certain segments of users, it is sought to enhance the efficiency of cheque clearing systems in the following ways:

a. Working towards eliminating paper-to-follow arrangement for cheques issued by the State Governments so that clearing of such cheques is also based on cheque images. b. Promoting use of positive pay mechanism, wider use of national archive of cheque images etc. c. Encouraging complete migration of cheques to CTS-2010 standards for better fraud detection and more effective risk mitigation d. Decreasing the frequency of clearing for instruments not complying with CTS-2010 cheque standards.

ABBREVIATIONS AFS Available for Sale AML Anti-Money Laundering BCBS Basel Committee on Banking Supervision

BC-ICT Business Correspondent-Information Communication Technology

BSBDAs Basic Savings Bank Deposit Accounts CCIL Clearing Corporation of India Limited CCP Central Counter Party

CERSAI Central Registry of Securitisation Asset Reconstruction and Security Intt of India

CGFSEL Credit Guarantee Fund Scheme for Educational Loans

CGFSSD Credit Guarantee Fund Scheme for Skill Development


BREXIT AND ITS IMPACT What is Brexit?: Brexit is the term coined for Britain’s referendum to exit the European union. A referendum was held on, June 23, 2016 to decide whether Britain should exit or remain in the European Union. A little more than 50% (52%) voted for exit reducing the politico-economic bloc to 27 members from 28. While England and Wales opted to leave the EU, Scotland, Northern Ireland and the city of London were strongly in favour of the Great Britain remaining a part of the EU. Arguments in favour of Stay: The persons who were in favour of 'Stay', argued that (a) the UK has been enjoying long-term economic benefits from being part of one of world's largest free-trade zones. The process of leaving the EU could be highly disruptive, leading to short-term but intense economic pain; (b) Cutting the amount of benefits for low paid migrant workers from EU nations will dissuade them from flocking to UK in large numbers. Migrant workers, however, will still be able to send child benefit payments back to their home country; (c) Britain will never join the euro and has secured assurances that the euro zone countries will not discriminate against Britain for having a its own currency; (d) Safeguards for Britain's large financial services industry to prevent euro zone regulations being imposed on it; (e) There will be a clear commitment that Britain is not part of a move towards 'ever closer union' with other EU member states - one of the core principles of the EU Arguments in favour of ‘Leave’: The argument behind the EU exit was to end central control by Brussels and give Britain the freedom to manage its own affairs. There should be more powers to the people of Britain in decision making of their country, rather than being the implementer of the policies made in Brussels (headquarters of European Union). Moreover, there were issues relating to migration from other countries. Impact on UK & other economies: 1. The immediate effect was a drastic fall of the pound. It was at its lowest in 30 years post the decision of the voting. Japan's Nikkei 255 tumbled by 7.9% while Mumbai's Sensex dropped by 3.6%. The looming uncertainty is prompting investors to take their money out of the UK and put it into safe assets like gold. 2. EU citizens in Britain and Brits living in other EU nations would have to update their immigration statuses. Companies operating in both the UK and the EU would have to verify that they are compliant with two sets of laws. 3. The UK government estimates say that Brexit could cause the country's economy to be between 3.8 and 7.5 per cent smaller by 2030; 4. Since one of the major reasons behind the exit was to control immigration and have a tighter border control, more than anything, skilled migration to Britain would take a hit. 5. Britain will probably spend another year or more trying to negotiate the exit. The resultant uncertainty is likely to damage growth, dent the pound sterling, and slow down investment decisions in Britain. 6. Brexit could encourage England, Wales, Scotland, or Northern Ireland to appeal for quitting United Kingdom. 8. Britain trade rules are bound by the European law, but post-Brexit Britain can negotiate the terms and conditions of the trade with different countries. The process is more complex and involves lot of interdependent variables, like which country trades more with Britain, which one exports more to it or buys its goods etc.

7. Britain has been more of an importer than exporter. With a big economy and low resources it is dependent on Europe, China and India for its imports. Europe being a free trade area has been providing the free access to markets for Britain until now. But in case of a Brexit, Britain needs to look into other markets like India and China and other emerging economies for trade. Impact on India: Reactions of RBI Governor to Brexit: State of economy: The Indian economy has good fundamentals, low short term external debt, and sizeable foreign exchange reserves. These should stand the country in good stead in the days to come. Impact on Indian banks who have operations abroad, particularly in the UK: The changes in currency values does affect them based on what kinds of net exposures they have to different currencies. But broadly because there have been movements up and movements down, unless you are overly exposed to one particular currency, immediately there is no cause for worry. As regards FCNR(B) deposits, RBI is prepared in terms of the outflows. Volatility of Rupee: India is less exposed to the external sector than many other countries. India is not a significant commodity exporter, which is going to be hurt by a significant slowdown in global growth. India is a commodity exporter in a number of areas where we might benefit, especially if the price of oil comes down. The economy itself is on a stronger growth path than elsewhere. Therefore, after the initial worries about the consequences of Brexit, people will look around for places which are relatively less affected. Volatility in terms of external trade: There is a two year period over which the exit is negotiated, so immediately nothing is affected. Investment into the UK is likely to be effected as people see that the ease of entry into the European Union is more difficult. Unhedged exposure on the part of corporates: The rupee has been relatively well-behaved compared to many other currencies. The corporates, over time having experienced higher volatility, have made two kinds of adjustments – the amount of external borrowing has come down in the last few quarters as well as after early warnings about hedging, the amount of hedging had gone up. If the loans they have taken are five-six years in duration, the issue of repayment in a stronger currency will not arise for some time, by which time hopefully currencies re-establish into a new equilibrium which is not based on just immediate reactions. Reaction by Moody’s Investors Service: Indian financial markets will experience limited impact from Britain exiting the European Union (EU). Factors such as subdued global demand, weak rural incomes, higher food inflation and high leverage for some large corporates are likely to have a more immediate effect on the economy. Exports to the U.K. and the rest of the European Union account for 0.4 per cent and 1.7 per cent of India’s GDP respectively. Only a very large and prolonged slump in imports from these regions, would markedly dent India’s exports.

VARIOUS RATES AT GLANCE Bank Rate 7.00% 05.04.2016 CRR 4.00% 09.02.2013 SLR 21.25% 02.04.2016 Repo Rate 6.50% 05.04.2016 Reverse Repo Rate 6.00% 05.04.2016 MSF Rate 7.00% 05.04.2016

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