RBI NEWS FEBRUARY 2014

T he Reserve Bank, on February 11, 2014, issued guidelines
on Intra-Group Transactions and Exposures (ITEs) for banks.
The guidelines are exclusively meant for banks’ transactions and
exposures to entities belonging to the bank’s own group (group
entities). The guidelines contain quantitative limits on financial
ITEs and prudential measures for the non-financial ITEs to
ensure that banks engage in ITEs in a safe and sound manner
in order to contain concentration and contagion risks arising out
of ITEs. These measures are aimed at ensuring that banks, at
all times, maintain arm’s length relationship in dealings with their
own group entities, meet minimum requirements with respect to
group risk management and group-wide oversight, and adhere to
prudential limits on intra-group exposures.
The guidelines will become effective from October 1, 2014.
Banks should accordingly submit data on intra-group exposures
to the Reserve Bank (Department of Banking Supervision, Central
Office), from the quarter ending December 31, 2014.
In case a bank’s current intra-group exposure is more than
the limits stipulated in the guidelines, it should bring down the
exposure within the limits at the earliest but not later than March
31, 2016. The exposure beyond permissible limits subsequent to
March 31, 2016, if any, would be deducted from Common Equity
Tier 1 capital of the bank.
The Reserve Bank may review the guidelines as and when
guidance on ITEs is issued by the Basel Committee on Banking
Supervision.
Guidelines on Management of
Intra-Group Transactions and Exposures
FEMA
Import of Gold/Gold Dore - Clarifications
The Reserve Bank has issued the following clarifications on
Advance Authorisation (AA)/Duty Free Import Authorisation (DFIA)
which come into force with immediate effect:
a) In case of AA/DFIA issued before August 14, 2013, the
condition of sequencing imports prior to exports shall not
be insisted upon even in case of entities/units in the Special
Economic Zone and Export Oriented Units, Premier and Star
Trading Houses.
b) The imports made as part of the AA/DFIA scheme will be
outside the purview of the 20:80 scheme. Such Imports will
be accounted for separately and will not entitle the Nominated
Agency/ Banks/Entities for any further import.
c) The Nominated Banks/Agencies/Entities may make available
gold to the exporters (other than AA/DFIA holders) operating
under the Replenishment Scheme. They can resort to import
of gold for the purpose, if considered necessary. However,
such import will be accounted for separately and will not
entitle them for any further import.
d) Import of gold in the third lot onwards will be lesser of the two:
i. Five times the export for which proof has been
submitted; or
ii. Quantity of gold permitted to a Nominated Agency in
the first or second lot.
2 Monetary and Credit Information Review, February 2014
Further with reference to import of Gold Dore, the Reserve
Bank has clarified that:
i) The refiners can import Gold Dore of 15% of their
licence for each of the first two months.
ii) In case, the quantity has already been identified by
Director General of Foreign Trade (DGFT) for first two
lots, import of such quantity will be in compliance with
the guidelines issued on December 31, 2013 in this
regard.
iii) DGFT, through a notification, may include new refiners,
and fix licence quantity for them.
Limits for G-sec Investments for SEBIregistered
Long Term Investors doubled
The existing sub-limit of USD 5 billion available to Long term
investors registered with SEBI - Sovereign Wealth Funds (SWFs),
Multilateral Agencies, Pension/Insurance/Endowment Funds and
Foreign Central Banks - for investment in Government dated
securities has been enhanced to USD 10 billion. This would,
however, be within the total limit of USD 30 billion available to
them for foreign investments in Government securities. The limit
so far was USD 5 billion. The decision, which has taken effect
immediately, has been taken to enhance the limit on a review in
consultation with Government of India.
Limits for Investment in Corporate Debt reduced
Foreign Institutional Investors, Qualified Financial Institutions
and long term investors registered with SEBI, such as, Sovereign
Wealth Funds (SWFs), Multilateral Agencies, Pension/Insurance/
Endowment Funds, Foreign Central Banks, can now invest only
upto USD 2 billion in commercial paper. The sub-limit has been
reduced from USD 3.5 billion with immediate effect.
Applicable Interest on FCNR(B)/NRE Deposits from March 1
It has been decided that interest rate ceilings on Foreign
Currency Non-Resident (B) deposits for maturity period of one
year to less than three years and three to five years, respectively
will continue till February 28, 2014. They will revert to the ceiling
prior to August 14, 2013, as under:
Maturity Period Existing From March 1,
2014
1 year to less than
3 years
LIBOR/Swap plus
200 basis points
No change
3-5 years LIBOR/Swap plus
400 basis points
LIBOR/SWAP plus
300 basis points
All other instructions in this regard, as amended from time
to time, will remain unchanged.
It has been also been decided that the freedom to offer
interest rates on incremental deposits with maturity of 3 years
and above without any ceiling be extended till February 28,
2014. With effect from March 1, 2014, the interest rate ceiling
will also revert to the position prior to August 14, 2013. That is,
banks cannot offer higher interest rates on NRE deposits than
what they offer on comparable domestic rupee deposits. All other
instructions in this regard, as amended from time to time, will
remain unchanged.
FCNR(B)/NRE Deposits and Exemptions from CRR/SLR
It has been decided that the exemption granted on
incremental Foreign Currency Non-Resident (B)/Non Resident
(External) deposits from maintenance of Cash Reserve Ratio
(CRR)/Statutory Liquidity Ratio (SLR) will be withdrawn with
effect from reporting fortnight beginning March 8, 2014. From
this date, only the eligible amount of incremental FCNR(B) and
NRE deposits of maturities of three years and above from the
base date of July 26, 2013, and outstanding as on March 7,
2014, would qualify for CRR/SLR exemption till their maturities/
pre-mature withdrawals.
Further, for computation of priority sector lending targets,
advances extended in India against the incremental FCNR(B)/
NRE deposits qualifying for exemption from CRR/SLR
requirements, will be eligible for exclusion from Adjusted Net
Bank Credit (ANBC) till their repayment.
NBFCs
RBI eases Pricing of Credit Directions for NBFC-MFIs
It has been decided that 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.
The above instructions will come into effect from the quarter
beginning April 01, 2014. The Reserve Bank will announce the
applicable average base rate on March 31, 2014 and every
quarter end thereafter.
Other
Withdrawal of Old Series of Banknotes issued
prior to 2005
The Reserve Bank of India has clarified that the rationale
behind its move to withdraw banknotes printed prior to 2005 is
to remove these banknotes from the market because they have
fewer security features compared to banknotes printed after 2005.
It is standard international practice to withdraw old series notes.
The Reserve Bank has already been withdrawing these
bank notes from the market in a routine manner through banks.
In Reserve Bank’s view, the volume of the banknotes printed
prior to 2005 today, still in circulation, is not significant enough to
impact the general public in a large way.
However, it has advised members of public to start
exchanging these notes at bank branches at their convenience.
Further, even July 1, 2014 onwards, members of public can
exchange any number of these old series notes from the bank
branches where they have their accounts.
The Reserve Bank has assured that it would continue to
monitor and review the process of withdrawal of old series notes
so that the public is not inconvenienced in any manner.
Regardless of the above, the Reserve Bank has reiterated
that the notes printed prior to 2005 would continue to be
legal tender.
Monetary and Credit Information Review, February 2014 3
The Reserve Bank of India announced the Third Quarter
Review of the Monetary Policy Statement 2013-14 on January
28, 2014.
On the basis of an assessment of the current and evolving
macroeconomic situation, the following policy actions were
taken:
• policy repo rate under the liquidity adjustment facility (LAF)
increased by 25 basis points - from 7.75 per cent to 8.00
per cent; and
• cash reserve ratio (CRR) of scheduled banks kept
unchanged at 4.0 per cent of net demand and time liability
(NDTL).
Consequently, the reverse repo rate under the LAF stands
at 7.0 per cent, and the marginal standing facility (MSF) rate as
well as the Bank Rate at 9.0 per cent.
Third Quarter Monetary Policy Review
Expert Committee to Revise and Strengthen the
Monetary Policy Framework
The Expert Committee to Revise and Strengthen the
Monetary Policy Framework submitted its report to the Governor
on January 21, 2014. The Expert Committee was appointed
on September 12, 2013 by Dr. Raghuram G Rajan. The main
objective of the Committee was to recommend what needs to
be done to revise and strengthen the current monetary policy
framework with a view to, inter alia, making it transparent and
predictable.
Highlights of Recommendations
(1) Inflation should be the nominal anchor for the monetary
policy framework. This nominal anchor should be set by the
Reserve Bank as its predominant objective of monetary policy
in its policy statements.
(2) The Reserve Bank should adopt the new CPI (combined) as
the measure of the nominal anchor for policy communication.
The nominal anchor should be defined in terms of headline
CPI inflation, which closely reflects the cost of living and
influences inflation expectations relative to other available
metrics.
(3) The nominal anchor or the target for inflation should be set at
4 per cent with a band of +/- 2 per cent around it (a) in view
of the vulnerability of the Indian economy to supply/external
shocks and the relatively large weight of food in the CPI;
and (b) the need to avoid a deflation bias in the conduct of
monetary policy.
(4) In view of the elevated level of current CPI inflation and
hardened inflation expectations, supply constraints and
weak output performance, the transition path to the target
zone should be graduated to bringing down inflation from the
current level of 10 per cent to 8 per cent over a period not
exceeding the next 12 months and to 6 per cent over a period
not exceeding the next 24 month period before formally
adopting the recommended target of 4 per cent inflation with
a band of +/- 2 per cent. The Committee is also of the view
that this transition path should be clearly communicated to
the public.
Reports (5) Since food and fuel account for more than 57 per cent of
the CPI on which the direct influence of monetary policy is
limited, the commitment to the nominal anchor would need
to be demonstrated by timely monetary policy response to
risks from second round effects and inflation expectations in
response to shocks to food and fuel.
(6) Monetary policy decision-making should be vested in a
monetary policy committee (MPC).
(7) As an overarching prerequisite, the operating framework
has to subserve stance and objectives of monetary policy.
Accordingly, it must be redesigned around the central premise
of a policy rule.
(8) A phased refinement of the operating framework is necessary
to make it consistent with the conduct of monetary policy
geared towards the establishment and achievement of the
nominal anchor.
(9) To support the operating framework, the Committee
recommends that some new instruments be added to the
toolkit of monetary policy.
Committee on Financial Benchmarks
The Reserve Bank of India released the Report of the
Committee on Financial Benchmarks on February 7, 2014. The
Reserve Bank had announced the constitution of the Committee
on Financial Benchmarks (Chairman: Shri P. Vijaya Bhaskar,
Executive Director) on June 28, 2013 with a mandate to study
various issues relating to financial benchmarks in India and to
submit the Report by December 31, 2013. The Draft Report of
the Committee was placed on Reserve Bank website on January
3, 2014 for public comments. The Committee has finalised its
report after taking into account the feedback received from market
participants and other stakeholders.
Highlights of Recommendations
• FIMMDA and FEDAI may be designated as administrators for
all the Rupee interest rate and foreign exchange benchmarks
respectively, with primary responsibility for the entire
benchmark setting process;
• The benchmark calculation may be based on observable
transactions, wherever available, as first layer of inputs subject
to appropriate threshold criteria. The executable bids and
offers, wherever available, subject to appropriate threshold
and polled submissions may be used as second and third
layer of inputs respectively in terms of hierarchy of inputs;
• The Benchmark Administrator may publicly disclose individual
submissions after a suitable lag;
• The Administrators may periodically review each benchmark
and undertake necessary changes;
• New benchmarks may be registered with the concerned
Administrator before being introduced in the market;
• Credible contingency provision may be put in place and there
should be written policies and procedure to handle possible
cessation of a benchmark;
• Overnight MIBID-MIBOR setting may be shifted from existing
polling method to volume weighted average of trades
executed between 9 AM to 10 AM on NDS-CALL operated
by CCIL;
• FIMMDA may coordinate the transition of legacy contracts
referenced to NSE MIBID-MIBOR through multilateral and
bilateral amendment agreement, as appropriate;
Edited and published by Alpana Killawala for the Reserve Bank of India, Department of Communication, Central Office, Shahid Bhagat Singh
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Monthly Subscription : ` 1. 4 Monetary and Credit Information Review, February 2014
Published on 26th day of the month Posted at MUMBAI PATRIKA CHANNEL SORTING OFFICE - on last two working days of every month. Regd. No. MH/MR/South-30/2012-14
• Construction of the G-sec yield curve may use volume
weighted average rate of the trades executed over longer
time window in place of last traded yields;
• Transaction data may be used for calculation of INBMK, T-Bill,
CP, and CD Curves as the first layer of data inputs;
• The threshold trades/bids and offers specified for setting
of G-sec yield curve, spread for FRBs, prices of SDL and
corporate bonds may be subjected to periodic resetting at a
well-defined time intervals, for keeping them at reasonably
higher level taking into account the overall liquidity and
developments in the respective market segments. In the
absence of required trading volume in SDL, the spread
discovered in the last two SDL auctions, subject to
appropriate qualifying criteria, may be used in place of
existing fixed 25bps spread;
• The Reserve Bank may continue with the existing system
of fixation of Reference Rates, keeping in view the recent
international moves where the official sector is assuming
greater role in fixation of financial benchmarks and also
the fact that several central banks in developed as well as
emerging economies publish such reference rates;
• Reserve Bank reference rates may be based on volume
weighted average of actual transactions executed during a
sufficiently longer time window in place of existing polling
method;
• The benchmark/benchmark tenors that are not used in
the interbank/PD transactions may be phased-out subject
to FIMMDA ascertaining the extent of outstanding client
transactions referenced to those benchmarks/benchmark
tenors (MIFOR- 1-month, 2-month and 1-year; MITOR,
INBMK–all tenors except 1-year) and facilitate suitable
transition arrangements, if required;
• FEDAI may stop publishing spot fixings, if it is not used for
any meaningful purpose by corporates and other clients;
• Banks may strive to develop the USD/INR basis swaps and
USD/INR forwards (beyond 1 year) so as to obviate the need
to use MIFOR;
• MIOIS and MIOCS may be uniformly used for valuation of
outstanding OIS and MIFOR swap trades respectively.
Technical Committee on Mobile Banking
The Reserve Bank of India released, for public comments,
the “Report of the Technical Committee on Mobile Banking” on
February 7, 2014.
The Reserve Bank of India had, in October 2013, constituted
a Technical Committee on Mobile Banking under the chairmanship
of Shri B. Sambamurthy, Director, Institute for Development
and Research in Banking Technology, to examine the options/
alternatives including the feasibility of using encrypted SMS based
funds transfer using an application that can run on any type of
handset for expansion of mobile banking in the country.
The Committee, cognisant of the fact that the country
has a subscriber base of 870 million, around 450 million bank
accounts but only 22 million active mobile banking customers,
has attempted to identify the challenges faced by banks in filling
this gap. Mobile banking transaction is considered economical
and has capability of last mile delivery.
The Committee has identified the challenges faced
by the banks in providing mobile banking to customers in
general (customer enrolment and technical issues) and further
highlighted the challenges faced in providing SMS/Unstructured
Supplementary Service Data (USSD)/application based mobile
banking and recommended solutions for the same. The major
challenges identified are registration, M-PIN generation, concerns
related to security, bank staff training and customer education.
The report emphasises the need for a standardised and
simplified procedure for registration/authentication of customers
for mobile banking services, a cohesive awareness programme
to be put in place, adoption of common application platform
(with necessary level of security through encryption) across all
banks. The issuance of necessary guidelines by the Telecom
Regulatory Authority (TRAI) of India which has prescribed the
optimum service parameters as also ceiling on transactional cost
for extension of the USSD services by telecom operators to the
banks and their agents has been highlighted and the Committee
recommends that the implementation of the TRAI regulations
must be expedited by all the stakeholders.
Technical Committee on Enabling PKI in
Payment System
The Reserve Bank of India released, for public comments,
the Report of the Technical Committee on Enabling Public Key
Infrastructure (PKI) in Payment System Applications on February
7, 2014.
The Reserve Bank of India had, in September 2013,
constituted a group to prepare an approach paper for enabling
PKI for Payment Systems in India comprising members from
banks (State Bank of India and ICICI bank), Institute for
Development and Research in Banking Technology-Certifying
Authority (IDRBT-CA), Controller of Certifying Authority (CCA),
New Delhi and Reserve Bank of India [(Department of Technology
(DIT), Department of Payment and Settlement Systems (DPSS),
Department of Government and Bank Accounts (DGBA) - Core
Banking Solution (CBS) and Chief Information Security Officer
(CISO)].
Cognisant of the fact that non-PKI enabled payment
systems, such as, clearing (MICR/Non MICR), electronic credit
system, credit card and debit cards contributed 75 per cent in
volume terms but only 6.3 per cent in value terms in the year
2012-13, the Group has suggested that in order to ensure a
safe, secure payment system in the country and to ensure legal
compliance, digital technology, such as, PKI may be used.
The report also highlights, among other things, security
features in existing payment system applications and feasibility in
implementing PKI in all payments system applications. The Group
has also recommended that banks may carry out in phases PKI
implementation for authentication and transaction verification.