This action might not be possible to undo. Are you sure you want to continue?
The banking system in India is significantly different from that of other Asian nations because of the country’s unique geographic, social, and economic characteristics. India has a large population and land size, a diverse culture, and extreme disparities in income, which are marked among its regions. There are high levels of illiteracy among a large percentage of its population but, at the same time, the country has a large reservoir of managerial and technologically advanced talents. Between about 30 and 35 percent of the population resides in metro and urban cities and the rest is spread in several semi-urban and rural centers. The country’s economic policy framework combines socialistic and capitalistic features with a heavy bias towards public sector investment. India has followed the path of growth-led exports rather than the “exportled growth” of other Asian economies, with emphasis on self-reliance through import substitution. These features are reflected in the structure, size, and diversity of the country’s banking and financial sector. The banking system has had to serve the goals of economic policies enunciated in successive five year development plans, particularly concerning equitable income distribution, balanced regional economic growth, and the reduction and elimination of private sector monopolies in trade and industry. In order for the banking industry to serve as an instrument of state policy, it was subjected to various nationalization schemes in different phases (1955, 1969, and 1980). As a result, banking remained internationally isolated (few Indian banks had presence abroad in international financial centers) because of preoccupations with domestic priorities, especially massive branch expansion and attracting more people to the system. Moreover, the sector has been assigned the role of providing support to other economic sectors such as agriculture, small-scale industries exports, and banking activities in the developed commercial centers (i.e., metro, urban, and a limited number of semi-urban centers). The banking system’s international isolation was also due to strict branch licensing controls on foreign banks already operating in the country as well as entry restrictions facing new foreign banks. A criterion of reciprocity is required for any Indian bank to open an office abroad. These features have left the Indian banking sector with weaknesses and strengths. A big challenge facing Indian banks is how, under the current ownership structure, to attain operational efficiency suitable for modern financial intermediation. On the other hand, it has been relatively easy for the public sector banks to recapitalize, given the increases in nonperforming assets (NPAs), as their Government dominated ownership structure has reduced the conflicts of interest that private banks would face.
Financial Structure The Indian financial system comprises the following institutions: 1. Commercial banks a. Public sector b. Private sector c. Foreign banks d. Cooperative institutions (i) Urban cooperative banks (ii) State cooperative banks (iii) Central cooperative banks 2. Financial institutions a. All-India financial institutions (AIFIs) b. State financial corporations (SFCs) c. State industrial development corporations (SIDCs) 3. Nonbanking financial companies (NBFCs) 4. Capital market intermediaries About 92 percent of the country’s banking segment is under State control while the balance comprises private sector and foreign banks. The public sector commercial banks are divided into three categories. State bank group (eight banks): This consists of the State Bank of India (SBI) and Associate Banks of SBI. The Reserve Bank of India (RBI) owns the majority share of SBI and some Associate Banks of SBI.1 SBI has 13 head offices governed each by a board of directors under the supervision of a central board. The boards of directors and their committees hold monthly meetings while the executive committee of each central board meets every week. Nationalized banks (19 banks): In 1969, the Government arranged the nationalization of 14 scheduled commercial banks in order to expand the branch network, followed by six more in 1980. A merger reduced the number from 20 to 19. Nationalized banks are wholly owned by the Government, although some of them have made public issues. In contrast to the state bank group, nationalized banks are centrally
governed, i.e., by their respective head offices. Thus, there is only one board for each nationalized bank and meetings are less frequent (generally, once a month). The state bank group and nationalized banks are together referred to as the public sector banks (PSBs). Tables 1 and 2 provide details of public issues and post-issue shareholdings of these PSBs.
Regional Rural Banks (RRBs): In 1975, the state bank group and nationalized banks were required to sponsor and set up RRBs in partnership with individual states to provide low-cost financing and credit facilities to the rural masses. Table 3 presents the relative scale of these public sector commercial banks in terms of total assets. The table clearly shows the importance of PSBs.
More than 40,000 NBFCs exist, 10,000 of which had deposits totaling Rs1,539 billion as of March 1996. After public frauds and failure of some NBFCs, RBI’s supervisory power over these high-growth and high-risk companies was vastly strengthened in January 1997. RBI has imposed compulsory registration and maintenance of a specified percentage of liquid reserves on all NBFCs. Reserve Bank of India and Banking and Financial Institutions RBI is the banker to banks—whether commercial, cooperative, or rural. The relationship is established once the name of a bank is included in the Second Schedule to the Reserve Bank of India Act, 1934. Such bank, called a scheduled bank, is entitled to facilities of refinance from RBI, subject to fulfillment of the following conditions laid down in Section 42 (6) of the Act, as follows:
The classification of commercial banks into scheduled and nonscheduled categories that was introduced at the time of establishment of RBI in 1935 has been extended during the last two or three decades to include state cooperative banks. primary urban cooperative banks. while UTI. and Small Industries Development Bank of India (SIDBI). The same year saw the founding of the first mutual fund in the country. RBI has given in principle clearance to five applicants. goes into liquidation or ceases to carry on banking activities. (DFHI) in partnership with SBI and other banks to deal 4 . RBI also set up in April 1988 the Discount and Finance House of India Ltd. having been given suitable opportunity to increase the value of paid-up capital and improve deficiencies. and was followed by SFCs at state level set up under a special statute. Export Import Bank of India (Exim Bank). Examples include the National Bank for Agriculture and Rural Development (NABARD). and ICICI. The first DFI to be established was the Industrial Finance Corporation of India (IFCI) in 1948. IFCI. This was followed in 1964 by Industrial Development Bank of India (IDBI) set up as a subsidiary of RBI. conducts similar operations.• it must have paid-up capital and reserves of an aggregate value of not less than an amount specified from time to time. Specialized development financial institutions (DFIs) were established to resolve market failures in developing economies and shortage of long-term investments. A wide variety of financial institutions (FIs) has been established. Industrial Credit and Investment Corporation of India (ICICI) was set up in the private sector with foreign equity participation. and RRBs. Subsidiaries of GIC also provide substantial equity and loan assistance to the industrial sector. The three institutions that dominate the termlending market in providing financial assistance to the corporate sector are IDBI. the Unit Trust of India (UTI). National Housing Bank (NHB). which serve as apex banks in their specified areas of responsibility and concern. The Government owns insurance companies. including Life Insurance Corporation of India (LIC) and General Insurance Corporation (GIC). RBI is authorized to exclude the name of any bank from the Second Schedule if the bank. In 1955. though a mutual fund. and • it must satisfy RBI that its affairs are not being conducted in a manner detrimental to the interests of its depositors. A system of local area banks announced by the Government in power until 1997 has not yet taken root.
000 reporting NBFCs (out of more than 40. RBI initially limited their powers. communication. 5 . IDFC will work on commercial orientation. It regulated the NBFCs under the provisions of Chapter IIIB of the RBI Act of 1963. More than 10. Liberalization of economic policy since 1991 has highlighted the urgent need to improve infrastructure in order to provide services of international standards. NBFCs undertake a wide spectrum of activities ranging from hire purchase and leasing to pure investments.539 billion in 1995/96. This rendered the regulatory framework inadequate to control NBFCs.000 NBFCs operating) had deposits of Rs1. innovations in financial products. For meeting specialized financing needs. Major shares of DFHI are held by SBI. which were confined solely to deposit acceptance activities of NBFCs and did not cover their functional diversity and expanding intermediation. To nurture growth of private capital flows. (IDFC) was set up in 1997. the Infrastructure Development Finance Company Ltd.with money market instruments and to provide liquidity to money markets by creating a secondary market for each instrument. etc. power generation. rationalizing the legal and regular framework. The RBI Working Group on Financial Companies recommended vesting RBI with more powers for more effective regulation of NBFCs. creation of a long-term debt market. IDFC will seek to unbundle and mitigate the risks that investors face in infrastructure and to create an efficient financial structure at institutional and project levels. and best global practices on governance and risk management in infrastructure projects. aiming to moderate deposit mobilization in order to provide depositors with indirect protection. A system of registration was introduced in April 1993 for NBFCs with net owned funds (NOF) of Rs5 million or above. Infrastructure is woefully inadequate for the efficient handling of the foreign trade sector.
In some countries such as Japan.Policy Issues in the Banking Sector The Nonperforming Asset Problem The NPAs of public sector banks were recorded at about Rs457 billion in 1998 (Table 11). the governments concerned have been forced to securitize the debt through debt underwriting and recapitalization of the banks. guarantees were established for all or part of the bad loans with the banking system. The Indian banking system also makes full provisions and not net of collaterals as practiced in other countries. Most of these are backed by securities. the banks are State owned so the final responsibility of resolving the problem lies with the respective national government. and loss assets. NPAs in Indian banks as a percentage of total assets is quite low. and shareholders (Government and private). By 1997/98 banks had managed to recover Rs250 billion and provisioned for Rs181. The NPA problem of banking institutions in India is exaggerated by deriving NPA figures based on percentage against risk assets instead of total earning assets. individual banks. For instance. Nevertheless. This ensures that the cost of resolving the NPA problem is borne by the banks themselves. the absolute figures could be increasing. recoverable. Narasimham Committee (II) noted the danger of opaque balance sheets and inefficient auditing systems resulting in an underrating of NPAs. banks have been encouraged to write off bad loans with retained earnings or new capital or both. But these are pending either in courts or with the Board for Industrial and Financial Reconstruction (BIFR). while in Poland. in Hungary. and. About 70 percent of gross NPAs are locked up in “hard-core” doubtful. But since new sets of loans go bad every year. Considerable attention is being devoted to this problem by RBI. therefore. However. governments and central banks have typically reacted to the problem differently depending on the politico-economic system under which the banks operate. In these cases. loans have been consolidated with the help of long-term restructuring bonds. With the increasing focus internationally on NPAs during the 1990s affecting the risk-taking behavior of banks. 6 . there is a general feeling that the NPA problem is manageable. this policy is not suitable for countries such as India where the banks neither have adequate reserves nor the ability to raise new capital. accumulated over years.39 billion. In some countries.
Most of these countries have emphasized efforts to recover the bad loans from the borrowers, usually in conjunction with one or both the measures mentioned above. If direct sale of the assets of defaulting firms was deemed nonviable, banks were encouraged to coerce these firms to restructure. The former Czechoslovakia and Poland, for example, consolidated all NPAs into one or more “hospital” banks, which were then vested with the responsibility to recover the bad loans. In Poland, this centralization of the recovery process was supplemented by regulations that authorized the loan recovery agency to force the defaulting industrial units to either restructure or face liquidation. Other countries such as Bulgaria created “hospital” banks and legalized swap of debt for equity that gave banks stakes in the defaulting firms, and hence provided them with the incentive and the power to restructure the enterprises. In India, conversion of loans into equity is an option that should be seriously considered instead of attempting recovery solely through either or both legal means and an asset reconstruction company (ARC). Unlike NPAs, the substitute asset of equity will be an intangible investment ready for sale to potential buyers. The DFIs have a formal conversion clause for debt to be exchanged for equity that ought to be exercised not only if it is an NPA but also if the equity is appreciating. This clause has not been so far much exercised. MAIN CAUSES OF NONPERFORMING ASSETS One of the main causes of NPAs in the banking sector is the directed loans system under which commercial banks are required to supply a prescribed percentage of their credit (40 percent) to priority sectors. Table 12 shows that credit supply of PSBs to the priority sectors has increased gradually to a little more than 40 percent of total advances as of March 1998. Loans to weaker sections of society under state subsidy schemes have led borrowers to expect that like a nonrefundable state subsidy, bank loans need not be repaid. Directed loans supplied to the “micro sector” are problematic of recoveries especially when some of its units become sick or weak. Table 13 shows PSB loans to sick/weak industrial units. Nearly 7 percent of PSB’s net advances was directed to these units. Clearly, these units are one of the most significant sources of NPAs, rather than bank mismanagement on the scale that has been seen in Japan and some Southeast Asian countries. The weakness of the banking sector revealed by the accumulated NPAs stems more from
the fact that Indian banks have to serve social functions of supporting economically weak sectors with loans at subsidized rates. The Narasimham Report (II) recommended that the directed credit component should be reduced from 40 to 10 percent. As the directed credit component of the priority sectors arises from loan schemes requiring Government approval of beneficiaries, banks’ selection standards with regard to eligible borrowers are being interfered with. The nexus of subsidies should be eliminated from bank loan schemes. Targets or prescribed percentages of credit allocation toward the priority sectors should not be confused with directed credit. Government subsidy schemes were intended originally to prompt bankers to lend to weaker sectors. But as the directed credit component became partly politicized and bureaucratized, the realization has grown that priority sector bank credit should operate with the required degree of risk management. However, the dangers of the priority credit system to sound banking should not be exaggerated. The shackles of “directed lending” have been removed and replaced by tests of commercial viability. Economic activities classified under priority sector have undergone a metamorphosis and upgrade since 1969 when banks were first nationalized and assigned the role of financing the sector. The expansion of the definition of the priority sector, upgrade in the value limit to determine small-scale industry (SSI) status, and provision for indirect lending through placement of funds with NABARD and SIDBI have lightened the performance load of banks. Thus, priority sector financing is no longer a drag on banks. But in the long term, Indian banks should be freed from subsidized lending. The scope in India for branch expansion in rural and semi-urban areas is vast and also necessary. Increasingly, NBFCs operating at such places are coming under regulatory pressure and are likely to abandon their intermediation role. Banks will have to move in to fill the void and these branches will ind priority sector financing as the main business available especially in rural/semi-urban centers. Operational restructuring of banks should ensure that NPAs in the priority sectors are reduced, but not priority sector lending. This will remain a priority for the survival of banks. Any decisions about insulating Indian banks from priority sector financing should not be reached until full-scale research is undertaken, taking into account several sources including records of credit guarantee schemes.
PRUDENTIAL NORMS RBI is considering changes in asset classification, income recognition, and provisioning norms in line with recommendations of the Basle Committee on Banking Supervision that were made public in October 1998. It remains to be seen if RBI will give banks and FIs discretion in the classifications of assets, partially replacing the prevailing rigid norms and redefining provisioning norms taking into account collateral. According to current practice, banks and FIs are required to make 10 percent provisioning on substandard assets and 20 percent on doubtful assets, even if the assets are backed by collateral. The Basle Committee on Banking Supervision circulated a consultative paper entitled “Sound Practices for Loan Accounting, Credit Risk Disclosure, and Related Matters,” complementing the Basle core principles in the fields of accounting, and disclosure for banks’ lending business and related credit risk. RBI has already taken steps to implement the Basle core principles, which broadly deal with risk management, prudential regulations relating to capital adequacy, and various internal control requirements. Banks and FIs have been insisting that existing asset classification rules are rigid leaving no scope for discretion, while the Basle Committee has said that recognition and measurement of impairment of a loan cannot be based only on specific rules. The committee has also indicated that banks should identify and recognize impairment in a loan when the chances of recovery are dim. It also stated that the focus of assessment of each loan asset should be based on the ability of the borrower to repay the loan. The value of any underlying collateral factors also plays a major role in this assessment. Another major difference between the Basle Committee recommendations and the existing asset classification norms in India relates to “restructured” loans. According to the Basle Committee norms, a restructured troubled loan would not automatically be classified as an impaired loan. In India, however, any restructuring automatically classifies the assets as impaired. Banks and institutions are required to classify the restructured loans as substandard for two years and are prohibited from booking interest during this period. The “relaxation” in asset classification norms will mean little in the Indian context. In developed financial systems, it is beneficial to have flexibility in determining weights for NPAs. However, liberal measures should be introduced only when all local players employ greater ransparency in the asset classification process. It is necessary to first ensure that companies and orrowers follow norms of
The condition of Indian banks under the present norms has improved. therefore.disclosure and transparency. mostly management driven. the quality of loan/risk assets can become suspect. Given the recommendation of the arasimham Committee (I) in 1991 on the BIS standard of capital adequacy. the time required for meeting bank capital adequacy must be shortened to a minimum. PSBs are owned by the Government. CAPITAL ADEQUACY Capital adequacy is a self-regulatory discipline and cannot save banks that are distressed. The CAMEL rating system clearly recognizes the strength of bank capital as just one requirement and also an end product of other processes. The borrowers must respond with better performance. Much needs to be done in this respect by the nstitute of Chartered Accountants of India. As such. resulting in the lack of capital adequacy ratio (CAR) norm. Twenty-six out of 27 PSBs had complied with this requirement as of March 1998. a CAR of 8 percent was to be achieved by March 1996. 10 . they have implicit guarantees from the Government. When the earnings component becomes volatile and susceptible to sharp growth that is not sustainable. It is essential to amplify the quality of earnings as it is the first thing that catches shareholders’ attention. contributing to a better culture of recovery. History shows that banking problems germinate during years of economic boom.
6 percent as of March 1998).Narasimham Committee (II) recommended CAR targets of 9 percent by 2000 and 10 percent by 2002. However. a balance of 50 percent of the provisions should be made in addition to the provisions needed by 31 March 2001. • Government-guaranteed advances that have turned sticky are to be classified as NPAs as per the existing prudential norms effective 1 April 2000. such targets could be attained. Despite the higher mark-to-market ratio. RBI has decided to implement certain recommendations of Narasimham Committee (II). Banks may make provisions in two phases. many banks increased investments in approved securities to comply with CAR. with capital markets sluggish. RBI has introduced a calculation method that 60 percent of approved securities should be markto-market. • An asset will be treated as doubtful if it has remained substandard for 18 months instead of 24 months. A proposal to introduce a norm of 12 months will be announced later. and the ratio will be raised to 100 percent in a few years. risk assets are not preferred. Moreover. Decisions on further enhancement will be made thereafter. The banks will have difficulties raising more capital in the near future. Provisions on these advances should be made over a period of four years such that existing/old Government-guaranteed advances that would become NPAs on account of new asset classification norms should be fully provided for 11 . • On 31 March 2002. • Banks are to achieve a minimum of 9 percent CAR by 31 March 2000. and bank issues unpopular with investors. As many PSBs have already high CARs (some indicated an average CAR of about 9. coupled with investment in Government guaranteed bonds. as 35 percent of deposits are allocated to CRR and SLR. investor confidence low. The need for general provisioning on standard assets increases the pressure on profitability of banks as Government-guaranteed securities are prone to default. On 31 March 2001 provisioning will be at not less than 50 percent on the assets that have become doubtful on account of the new norms.
• PSBs shall be encouraged to raise their tier-2 capital. and NPAs. • Arrangements should be put in place for regular updating of instruction manuals. To start with.5 percent risk weight is to be assigned to Government/approved securities by March 2000.25 percent for the year ending 31 March 2000. Instructions on further disclosures such as maturity pattern of assets and liabilities. Compliance has to be reported to RBI by 30 April 1999. banks should make a general provision of a minimum of 0. and avoid the practice of evergreening. • Banks are advised to take effective steps for reduction of NPAs and also put in place risk management systems and practices to prevent reemergence of fresh NPAs. etc. • • A 2. foreign currency assets andliabilities. movements in provision account. • Banks and financial institutions should adhere to the prudential norms on asset classification. Risk weights to be assigned for Government guaranteed advances sanctioned effective 1 April 1999 are as follows: 12 . • Banks are advised to establish a formal ALM system beginning 1 April 1999. but Government guarantee to bond issues for such purpose is deemed inappropriate. provisioning. will be issued in due course.during the next four years from the year ending March 1999 to March 2002 with a minimum of 25 percent each year.. The decision to raise further the provisioning requirement on standard assets shall be announced in the process. • Banks are to ensure a loan review mechanism for large advances soon after their sanction and continuously monitor the weaknesses developing in the accounts in order to initiate corrective measures in time.
banks will have to start planning for capital issues. The size of bank issues. additional returns to inject better profitability in the short run have to come from (already shrunk) avenues of short-term financing and not from new industrial and infrastructure projects. seven banks—Canara Bank. Most PSBs have comfortable CARs but once the accounts are recast in conformity with the forthcoming provisioning norms. However. Indian Overseas Bank.78-11. the total amount of tier-2 borrowing (primarily debentures and bonds as against equity shares.98 percent in 1998-1999. with the top of the line FIs raising five-year funds at 14 percent. – governments that remained defaulters as of 31 March 2000: 20 percent. these banks will have to offer 13 . The funds will be raised in the form of bonds from the domestic private placement markets in 1998/99. sequencing. – state government: 0 percent. and – governments that continue to be defaulters after 31 March 2001: 100 percent. TIER-2 CAPITAL FOR BANKS To meet CAR requirements. This raises a question on how far banks will actively support growth through new financing initiatives. Federal Bank (private sector). The time frame allowed for adjustments seem to be insufficient since profitability cannot be raised rapidly enough to accommodate additional provisioning and still be considered attractive by investors. which qualifies as tier-2 capital. Punjab National Bank. none of these banks can hope to find market interest at such fine rates.– central Government: 0 percent. While RBI regulations have capped the coupon rate on bank offerings to 200 basis points (bp) above the coupon rate on similar Government securities. which entail long gestation periods. A five. Central Bank of India. and readiness of the capital market to absorb all public offerings will pose tremendous challenges to bank management. Clearly. and Vijaya Bank—are finalizing plans to raise about Rs20 billion worth of subordinated debt. which are considered tier-1 capital) planned in November 1998 to February 1999 might have exceeded Rs150 billion.to six-year bank borrowing will have to be capped at about 14 percent as similar Government borrowing was effected at a coupon of 11. With this. United Bank of India.
debt mutual funds and other fixed income securities will not be deemed to be part of PD business. trading in securities market has improved in terms of turnover and the range of maturities dealt with. ii. asset classification and provisioning requirements. Bank as Broker With the introduction of prudential norms on capital adequacy. the sale transaction will settle either in the same settlement cycle as the preceding purchase contract. Reserve Bank of India has issued guidelines on classification. valuation and operation of investment portfolio by banks from time to time as detailed below: Investment Policy i) Banks should frame Internal Investments Policy Guidelines and obtain the Board’s approval. Within the overall framework of the investment policy. the PD business undertaken by the bank will be limited to dealing. Public issue timing and pricing is a new challenge for PSBs. Certificate of Deposits. income recognition. provided: i. While framing the investment policy. underwriting and market – making in Government Securities. iii. The investment policy guidelines should be implemented to ensure that operations in securities are conducted in accordance with sound and acceptable business practices.more incentives to investors. the purchase contract is guaranteed by CCIL or the security is contracted for purchase from the Reserve Bank and. In view of these developments and taking into consideration the evolving international practices. the purchase contract is confirmed prior to the sale. it can be 14 . the following guidelines are to be kept in view by the banks: (a) Banks may sell a government security already contracted for purchase. the financial position of banks in India has improved in the last few years. The investment policy may be suitably framed/amended to include PD activities also. Commercial Papers. There are reports that some banks have invested in tier-2 capital issues of other banks and it remains to be seen how it will affect their CAR. or in a subsequent settlement cycle so that the delivery obligation under the sale contract is met by the securities acquired under the purchase contract (e.g. when a security is purchased on T+0 basis. Investments in Corporate/PSUs/FIs bonds. Simultaneously.
the NDS-OM members have been permitted to transact on ‘When Issued’ basis in Central Government dated securities. broker-wise. subject to the above. The settlement of all outright secondary market transactions in Government Securities will be done on a standardized T+1 basis effective May 24. accordingly. including brokers. (c). subject to the guidelines specified. (d) All the transactions put through by a bank. 2005. 15 . it can be sold on T+1 basis on the day of purchase or on T+0 or T+1 basis on the next day). if however it is purchased on T+1 basis. (f) For issue of BRs. could issue BRs covering their own sale transactions only and should not issue BRs on behalf of their constituents. (if the deal was put through with the help of a broker) should be clearly indicated on the notes/ memoranda put up to the top management seeking approval for putting through the transaction and a separate account of brokerage paid. if any. may enter into contracts for sale of the allotted securities in accordance with the terms and conditions.sold on either T+0 or T+1 basis on the day of the purchase. either on outright basis or ready forward basis and whether through the mechanism of Subsidiary General Ledger (SGL) Account or Bank Receipt (BR). In addition to the above. should be reflected on the same day in its investment account and. Further. no sale transactions should be contracted prior to receiving the confirmation of the deal/advice of allotment from the Reserve Bank. the Scheduled Commercial Banks (other than RRBs and LABs) and Primary Dealers have been permitted to short sell Government securities. (e) The brokerage on the deal payable to the broker. For purchase of securities from the Reserve Bank through Open Market Operations (OMO). for SLR purpose wherever applicable. The banks. the banks should adopt the format prescribed by the Indian Banks' Association (IBA) and strictly follow the guidelines prescribed by them in this regard. (b) Banks successful in the auction of primary issue of government securities. should be maintained.
ii. with the approval of the Board. Build up adequate expertise in equity research by establishing a dedicated equity research department.. The decision in regard to direct investment in shares. as warranted by their scale of operations. banks should clearly lay down the broad investment objectives to be followed while undertaking transactions in securities on their own investment account and on behalf of clients. procedure to be followed for obtaining the sanction of the appropriate authority. While laying down such investment policy guidelines. various prudential exposure limits and the reporting system. (h) Any instance of return of SGL form from the Public Debt Office of the Reserve Bank for want of sufficient balance in the account should be immediately brought to Reserve Bank's notice with the details of the transactions.(g) The banks should be circumspect while acting as agents of their broker clients for carrying out transactions in securities on behalf of brokers. Formulate a transparent policy and procedure for investment in shares. ii) With the approval of respective Boards. The Investment Committee should be held accountable for the investments made by the bank. procedure to be followed while putting through deals. clearly define the authority to put through deals. convertible bonds and debentures should be taken by the Investment Committee set up by the bank's Board. etc. (i) Banks desirous of making investment in equity shares/ debentures should observe the following guidelines: i. iii. banks should strictly observe Reserve Bank's detailed instructions on the following aspects: 16 .
specific regulations of Securities and Exchange Board of India and Reserve Bank of India governing their operations.(a) Ready Forward (buy back) deals (b) Transactions through Subsidiary General Ledger A/c (c) Use of Bank Receipts (d) Retailing of Government securities (e) Internal Control System (f) Dealings through Brokers (g) Audit. The terms and conditions subject to which ready forward contracts (including reverse ready forward contracts) may be entered into. except where they are contrary to or inconsistent with. Ready Forward Contracts in Government Securities. are as under: (a) Ready forward contracts may be undertaken only in (i) Dated Securities and Treasury Bills issued by Government of India and (ii) Dated Securities issued by State Governments. to the subsidiaries and mutual funds established by banks. 17 . Review and Reporting (h) Non.SLR investments iii) The aforesaid instructions will be applicable mutatis mutandis.
e) Any housing finance company registered with the National Housing Bank. Mumbai and ii) the following categories of entities who do not maintain SGL accounts with the Reserve Bank of India but maintain gilt accounts (i. (c) All persons or entities specified at (ii) above can enter into ready forward transactions among themselves subject to the following restrictions: . having a gilt account with a scheduled commercial bank. c) Any non-banking financial company registered with the Reserve Bank of India. h) Any listed company. the custodian through which the repo transaction is settled should block these securities in the gilt account and ensure that these securities are not further sold or re-repoed during the repo period but are held for delivery under the second leg.e gilt account holders) with a bank or any other entity (i. However. listed companies can borrow funds through repo for shorter periods including overnight. and (3) The counterparty to the listed companies for repo / reverse repo transactions should be either a bank or a Primary Dealer maintaining SGL Account with the Reserve Bank. other than Government companies as defined in Section 617 of the Companies Act. d) Any mutual fund registered with the Securities Exchange Board of India. b) Any primary dealer authorised by the Reserve Bank of India. g) Any non-scheduled Urban Co-operative bank.e. the custodian) permitted by the Reserve Bank of India to maintain Constituent Subsidiary General Ledger (CSGL) account with its Public Debt Office. lender of funds). (1) The minimum period for Reverse Repo (lending of funds) by listed companies is seven days.(b) Ready forward contracts in the above mentioned securities may be entered into by: i) persons or entities maintaining a Subsidiary General Ledger (SGL) account with Reserve Bank of India.e. Mumbai: a) Any scheduled bank. and f) Any insurance company registered with the Insurance Regulatory and Development Authority. 1956. (2) Where the listed company is a 'buyer' of securities in the first leg of the repo contract (i. subject to the following conditions.
ii) all such transactions are promptly reported on the NDS.e. (d) All ready forward contracts shall be reported on the Negotiated Dealing System (NDS).e. . the custodian (i. ii) Any two gilt account holders maintaining their gilt accounts with the same custodian (i. This restriction would not apply to repo transactions between Urban Co-operative banks and authorised Primary Dealers in Government Securities. (e) All ready forward contracts shall be settled through the SGL Account / CSGL Account maintained with the Reserve Bank of India.. the CSGL account holder) with whom the gilt accounts are maintained will be responsible for reporting the deals on the NDS on behalf of the constituents (i. the CSGL account holder) may not enter into ready forward contracts with each other. Mumbai.i) An SGL account holder may not enter into a ready forward contract with its own constituent. (g) The RBI regulated entities can undertake ready forward transactions only in securities held in excess of the prescribed Statutory Liquidity Ratio (SLR) requirements. and iii) other terms and conditions referred to above have been complied with. with the Clearing Corporation of India Ltd.. In respect of ready forward contracts involving gilt account holders. the gilt account holders).e. That is. ready forward contracts should not be undertaken between a custodian and its gilt account holder. (f) The custodians should put in place an effective system of internal control and concurrent audit to ensure that: i) ready forward transactions are undertaken only against the clear balance of securities in the gilt account. (CCIL) acting as the central counter party for all such ready forward transactions. and iii) Cooperative banks may not enter into ready forward contracts with the non-banking financial companies.
In all cases. the settlement has to be only on 'spot' delivery basis as per Section 2(i) of the Securities Contract Act. ii) Under no circumstances.e. without actually holding the securities in the portfolio. bye laws and regulations.Transactions through SGL account The following instructions should be followed by banks for purchase/ sale of securities through SGL A/c under the Delivery Versus Payment (DVP) System wherein the transfer of securities takes place simultaneously with the transfer of funds.(h) No sale transaction shall be put through. in the first leg of a ready forward transaction by CSGL constituent entities. a SGL transfer form issued by a bank in favour of another bank should bounce for want of sufficient balance of securities in the SGL A/c of seller or for want of sufficient balance of funds in the current a/c of the buyer. immediately i. necessary for both the selling bank and the buying bank to maintain current account with the RBI. i) All transactions in Govt. (i) Securities purchased under the ready forward contracts shall not be sold during the period of the contract except by entities permitted to undertake short selling. settlement should be within the delivery period as per their rules. (j) Double ready forward deals in any security are strictly prohibited (k) The guidelines for uniform accounting for Repo / Reverse Repo transactions are furnished in paragraph 4. It is. participants must indicate the deal/trade/contract date in Part C of the SGL Form under 'Sale date'. the date of lodgement of the SGL Form with RBI shall be within one working day after the date of signing of the Transfer Form. iii) The SGL transfer form received by purchasing banks should be deposited in their SGL A/cs. As no Overdraft facility in the current account would be extended. While in cases of OTC trades. . in cases of deals on the recognised Stock Exchanges. Where this is not completed the SGL Form will not be accepted by the Reserve Bank of India (RBI). securities for which SGL facility is available should be put through SGL A/cs only. therefore. 1956. adequate balance in current account should be maintained by banks for effecting any purchase transaction.
the bank will be permanently debarred from the use of the SGL facility in all the PDOs of the Reserve Bank. vi) The SGL transfer forms should be in the standard format prescribed by the Reserve Bank and printed on semi-security paper of uniform size. v) SGL transfer forms should be signed by two authorised officials of the bank whose signatures should be recorded with the respective PDOs of the Reserve Bank and other banks. after restoration of the facility. They should be serially numbered and there should be a control system in place to account for each SGL form. vii) If a SGL transfer form bounces for want of sufficient balance in the SGL A/c. b) In the event of an overdraft arising in the current account following such a debit. as stipulated in the Reserve Bank's interest rate directive in force. d) The bouncing on account of insufficient balance in the current account of the buying bank would be reckoned (against the buying bank concerned) for the purpose of debarment from the use of SGL facility on par with the bouncing on account of insufficient balance in SGL a/c. if the DFHI's closing call money rate is lower than the prime lending rate of banks. the (selling) bank which has issued the form will be liable to the following penal action against it : a) The amount of the SGL form (cost of purchase paid by the purchaser of the security) would be debited immediately to the current account of the selling bank with the Reserve Bank. However. penal interest would be charged by the Reserve Bank on the amount of the overdraft at a rate of 3 percentage points above the Discount and Finance House of India's (DFHI) call money lending rate on the day in question.e SGL a/c and current a/c) will be reckoned together . If. the applicable penal rate to be charged will be 3 percentage points above the prime lending rate of the bank concerned. and c) If the bouncing of the SGL form occurs thrice. any SGL form of the concerned bank bounces again.iv) No sale should be effected by way of return of SGL form held by the bank. of the selling bank (against selling bank). Instances of bouncing in both the accounts (i. the bank will be debarred from trading with the use of the SGL facility for a period of 6 months from the occurrence of the third bouncing.
including brokers. in the standard format (prescribed by IBA). under the following circumstances: i.) Use of Bank Receipt (BR) i) The banks should follow the following instructions for issue of BRs : (a) No BR should be issued under any circumstances in respect of transactions in Govt. The security has been lodged for transfer / interest payment and the bank is holding necessary records of such lodgements and will be in a position to give physical delivery of the security within a short period. (c) No BR should be issued on the basis of a BR (of another bank) held by the bank and no transaction should take place on the basis of a mere exchange of BRs held by the bank. (e) No BR should remain outstanding for more than 15 days. The scrips are yet to be issued by the issuer and the bank is holding the allotment advice. ii. for permanent debarment. the BR should be deemed as dishonoured and the bank which has issued the BR should refer the case to the RBI. The security is physically held at a different centre and the bank is in a position to physically transfer the security and give delivery thereof within a short period. (f) A BR should be redeemed only by actual delivery of scrips and not by cancellation of the transaction/set off against another transaction. serially . (b) Even in the case of other securities.e three in a half-year for temporary suspension and any bouncing after restoration of SGL facility. (d) BRs could be issued covering transactions relating to banks' own Investments Accounts only. (g) BRs should be issued on semi-security paper. BR may be issued for ready transactions only. and no BR should be issued by banks covering transactions relating to either the Accounts of Portfolio Management Scheme (PMS) Clients or Other Constituents' Accounts.against the SGL account holder concerned for the purpose of debarment (i. If a BR is not redeemed by delivery of scrips within the validity period of 15 days. securities for which SGL facility is available. explaining the reasons under which the scrips could not be delivered within the stipulated period and the proposed manner of settlement of the transaction. iii.
which could include raising of reserve requirements. (j) Any violation of the instructions relating to BRs would invite penal action. Internal Control System i) The banks should observe the following guidelines for internal control system in respect of investment transactions: (a) There should be a clear functional separation of (i) trading.R. among others. Retailing of Government Securities The banks may undertake retailing of Government securities with non-bank clients subject to the following conditions: i) Such retailing should be on outright basis and there is no restriction on the period between sale and purchase.numbered and signed by two authorised officials of the bank. Portfolio Management Scheme (PMS) Clients' Accounts and . whose signatures are recorded with other banks. Similarly. monitoring and control and (iii) accounting. there should be a control system in place to account for each BR form. 1949. (ii) settlement. by the statutory auditors and a certificate to this effect may be forwarded every year to the Regional Office of DBS. The existence and operations of these controls at the concerned offices/ departments of the bank should be reviewed. The Reserve Bank may also levy such other penalty as it may deem fit in accordance with the provisions of the Banking Regulation Act. (h) Separate registers of BRs issued and BRs received should be maintained and arrangements should be put in place to ensure that these are systematically followed up and liquidated within the stipulated time limit. under whose jurisdiction the Head Office of the bank is located. withdrawals of refinance facility from the Reserve Bank and denial of access to money markets. there should be a functional separation of trading and back office functions relating to banks' own Investment Accounts. (i) The banks should also have a proper system for the custody of unused B. Forms and their utilisation. As in the case of SGL forms. ii) The retailing of Government securities should be on the basis of ongoing market rates/ yield curve emerging out of secondary market transactions.
The timely receipt of requisite written confirmation from the counterparty. the security sold/purchased in the deal should not be substituted by another security. price. (b) For every transaction entered into. For each deal there must be a system of issue of confirmation to the counterparty. In view of the above. (e) On the basis of vouchers passed by the back office (which should be done after verification of actual contract notes received from the broker/ counterparty and confirmation of the deal by the counterparty). should be monitored by the back office. exposure of any counterparty for a trade is only to CCIL and not to the entity with whom a deal matches. name of the broker. as hitherto. through whom the deal has been entered into. likewise. PMS Clients Accounts should be subjected to a separate audit by external auditors. details of security.3. amount. and if through a broker. (c) With respect to transactions matched on the NDS-OM module. the dealer should immediately pass on the deal slip to the back office for recording and processing. will continue to be physically confirmed by the back offices of the counterparties. Once the deal is concluded. the need for counterparty confirmation of deals matched on NDS-OM does not arise. whether it is a direct deal or through a broker. However. (d) Once a deal has been concluded. all the relative records should give a clear indication that the transaction belongs to PMS Clients/ other constituents and does not belong to bank's own Investment Account and the bank is acting only in its fiduciary/ agency capacity. subject to strictly following the guidelines in regard thereto (covered in paragraph 1. other than those matched on NDS. The deal slips should be serially numbered and controlled separately to ensure that each deal slip has been properly accounted for.3). . Besides. the trading desk should prepare a deal slip which should contain data relating to nature of the deal.other Constituents (including brokers') accounts. since CCIL is the central counterparty to all deals. The Portfolio Management service may be provided to clients. which must include all essential details of the contract. Further.OM. name of the counter-party. there should not be any substitution of the counter party bank by another bank by the broker. all government securities transactions. details of all deals on NDSOM are available to the counterparties as and when required by way of reports on NDS-OM itself. contract date and time. the Accounts Section should independently write the books of account. (f) In the case of transaction relating to PMS Clients' Accounts (including brokers).
If the number of transactions so warrant. (h) Banks should put in place a reporting system to report to the top management. including inter-bank transactions. (l) In order to avoid any possible conflict of interest. (iv) A record of BRs issued/ received should be maintained. etc. which shall review in each of its meetings. should immediately be brought to the notice of the Regional Office of Department of Banking Supervision of RBI by the buying bank. or advances against shares.. (j) In case of investment in shares. do not involve themselves in any manner with the Investment Committee or in the decisions in regard to making investments in shares. should be maintained. it should be ensured that the stockbrokers as directors on the Boards of banks or in any other capacity. adequacy of risk management and internal control systems. (ii) Balances as per bank's books should be reconciled at quarterly intervals with the balances in the books of PDOs. the details of transactions in securities. details of bouncing of SGL transfer forms issued by other banks and BRs outstanding for more than one month and a review of investment transactions undertaken during the period. This reconciliation should be periodically checked by the internal audit department. (i) Banks should not draw cheques on their account with the Reserve Bank for third party transactions. . bankers' cheques/ pay orders should be issued. For such transactions. in different forms as stated above and ensure that the guidelines issued by RBI are complied with and adequate risk management and internal control systems are in place. the compliance with the RBI and Board guidelines. the surveillance and monitoring of investment should be done by the Audit Committee of the Board. (k) The Audit Committee should keep the Board informed about the overall exposure to capital market. on a weekly basis.(g) (i) Records of SGL transfer forms issued/ received. the total exposure of the bank to capital market both fund based and non-fund based. the reconciliation should be undertaken more frequently. (iii) Any bouncing of SGL transfer forms issued by selling banks in favour of the buying bank. say on a monthly basis. (v) A system for verification of the authenticity of the BRs and SGL transfer forms received from the other banks and confirmation of authorised signatories should be put in place.
if any (if the deal was put through with the help of a broker). It should also be ensured by the bank that the broker note contains the exact time of the deal. should be maintained. broker-wise. settlement of deals between banks. both fund settlement and delivery of security should be directly between the banks and the . The banks should get compliance in key areas certified by their statutory auditors and furnish such audit certificate to the Regional Office of Department of Banking Supervision of RBI under whose jurisdiction the HO of the bank falls.(m) The internal audit department should audit the transactions in securities on an on going basis. (n) The banks' managements should ensure that there are adequate internal control and audit procedures for ensuring proper compliance of the instructions in regard to the conduct of the investment portfolio. should be clearly indicated on the notes/memorandum put up to the top management seeking approval for putting through the transaction and separate account of brokerage paid. Engagement of brokers i) For engagement of brokers to deal in investment transactions. the broker is not obliged to disclose the identity of the counterparty to the deal. he should disclose the counterparty and his contract note should clearly indicate the name of the counterparty. The banks should institute a regular system of monitoring compliance with the prudential and other guidelines issued by the RBI. Their back offices may ensure that the deal time on the broker note and the deal ticket is the same. the banks should observe the following guidelines: (a) Transactions between one bank and another bank should not be put through the brokers' accounts. The brokerage on the deal payable to the broker. viz. On conclusion of the deal. The bank should also ensure that their concurrent auditors audit this aspect. monitor the compliance with the laid down management policies and prescribed procedures and report the deficiencies directly to the management of the bank. (b) If a deal is put through with the help of a broker. the role of the broker should be restricted to that of bringing the two parties to the deal together (c) While negotiating the deal. (d) On the basis of the contract note disclosing the name of the counterparty.
(g) The concurrent auditors who audit the treasury operations should scrutinise the business done through brokers also and include it in their monthly report to the Chief Executive Officer of the bank. with the reasons therefor. by the authority empowered to put through the deals. post facto. etc. Besides. However. including verification of their creditworthiness. These instructions also apply to subsidiaries and mutual funds of the banks. A record of broker-wise details of deals put through and brokerage paid. A limit of 5% of total transactions (both purchase and sales) entered into by a bank during a year should be treated as the aggregate upper contract limit for each of the approved brokers. the business put through any individual broker or brokers in excess of the limit. the board should be informed of this. However. . Further. the norm of 5% would not be applicable to banks' dealings through Primary Dealers. (f) A disproportionate part of the business should not be transacted through only one or a few brokers. should be covered in the half-yearly review to the Board of Directors/ Local Advisory Board. This limit should cover both the business initiated by a bank and the business offered/ brought to the bank by a broker. the specific reasons therefor should be recorded.broker should have no role to play in the process. if for any reason it becomes necessary to exceed the aggregate limit for any broker. Clear-cut criteria should be laid down for empanelment of brokers. in writing. should be maintained. (e) With the approval of their top managements. Banks should ensure that the transactions entered into through individual brokers during a year normally did not exceed this limit. market reputation. ii) Inter-bank securities transactions should be undertaken directly between banks and no bank should engage the services of any broker in such transactions. Banks should fix aggregate contract limits for each of the approved brokers. banks should prepare a panel of approved brokers which should be reviewed annually or more often if so warranted. Explanation: Certain clarifications on the instructions are furnished in the Annexure II.
Exceptions: Note (i) Banks may undertake securities transactions among themselves or with non bank clients through members of the National Stock Exchange (NSE). OTCEI or BSE. Note (ii) Although the Securities Contracts (Regulation) Act. If such transactions are not undertaken on the NSE. apart from other operational aspects of investment portfolio. and put up the same before their respective Boards within a month. However. b) A copy of the review report put up to the Bank's Board. Banks need not forward copies of the above mentioned concurrent audit reports to Reserve Bank of India. review and reporting of investment transactions The banks should follow the following instructions in regard to audit. should be forwarded to the Reserve Bank (concerned Regional Office of DBS) by 15 November and 15 May respectively. review and reporting of investment transactions: a) Banks should undertake a half-yearly review (as of 30 September and 31 March) of their investment portfolio. treasury transactions should be separately subjected to concurrent audit by internal auditors and the results of their audit should be placed before the CMD of the bank once every month. the same should be undertaken by banks directly. OTC Exchange of India (OTCEI) and the Stock Exchange. without engaging brokers. 1956 defines the term `securities' to mean corporate shares. clearly indicate amendments made to the Investment Policy and certify adherence to laid down internal investment policy and procedures and Reserve Bank guidelines. i. . will be outside the purview of the expression `non-bank clients' for the purpose of note (i) above. c) In view of the possibility of abuse. Audit.e by end-April and end-October. Govt. 1882. the term `securities' would exclude corporate shares. debentures. securities and rights or interest in securities. the major irregularities observed in these reports and the position of compliance thereto may be incorporated in the half yearly review of the investment portfolio. which should. The Provident/ Pension Funds and Trusts registered under the Indian Trusts Act. Mumbai(BSE).
corporate bonds.Non. in certain cases. The details of the Group’s recommendations are given in the Annexure III and banks may introduce with immediate effect a suitable format of disclosure requirements on the lines of the recommendations of the Technical Group with the approval of their Board. While assessing such investment proposals on private not be in a position to conduct proper due diligence to take an investment decision. in bonds issued by corporates who are not their borrowers. (iii) Internal assessment With a view to ensuring that the investments by banks in issues through private placement. (b) Investment proposals should be subjected to the same degree of credit risk analysis as any loan proposal. The appraisal should be more stringent in . the methods of acquiring. The Group had designed a format containing the minimum disclosure requirements as well as certain conditionalities regarding documentation and creation of charge for private placement issues. in particular.SLR investments i) Banks have made significant investment in privately placed unrated bonds and. there could be deficiencies in the appraisal of privately placed issues. In this connection. and to suggest measures for regulating these investments. interalia. issuer ceiling. Reserve Bank of India had constituted a Technical Group comprising officials drawn from treasury departments of a few banks and experts on corporate finance to study. which may serve as a 'best practice model' for the banks. it is necessary that banks should ensure that their investment policies duly approved by the Board of Directors are formulated after taking into account the following aspects: (a) The Boards of banks should lay down policy and prudential limits on investments in bonds and debentures including cap and on private placement basis. both of the borrower customers and non-borrower customers. by banks. Banks should make their own internal credit analysis and rating even in respect of rated issues and should not entirely rely on the ratings of external agencies. ii) Disclosure requirements in offer documents The risk arising from inadequate disclosure in offer documents should be recognised and banks should prescribe minimum disclosure standards as a policy with Board approval. guaranteed bonds. etc. Thus. sub limits for PSU bonds. do not give rise to systemic concerns. of non-SLR investments in general and private placement route.
including. of companies. which have been restructured under extant RBI guidelines. exercise due caution while taking any investment decision to subscribe to bonds. (iv) Some banks / FIs have not exercised due precaution by reference to the list of defaulters circulated / published by RBI while investing in bonds. (e) The banks should put in place proper risk management systems for capturing and analysing the risk in respect of these investments and taking remedial measures in time. 2003 and December 10. the banks have been reported to be reluctant to extend further finance. issuer-wise etc. duration-wise. like textiles. FIs and State and Central Government sponsored institutions. capital gains bonds. banks. debentures.. maturity-wise. banks should stipulate entry level minimum ratings/ quality standards and industry-wise. shares etc. Some of the companies may be undergoing adverse financial position turning their accounts to sub. The guidelines will apply to investments both in the primary market as well as the secondary market.respect of investments in instruments issued by non-borrower customers. bonds eligible for priority sector status. Banks may not refuse proposals for such investments in companies whose director’s name(s) find place in the defaulter companies list circulated by RBI at periodical intervals and particularly in respect of those loan accounts. therefore. and refer to the ‘Defaulters List’ to ensure that investments are not made in companies / entities who are defaulters to banks / FIs. provided the proposal is viable and satisfies all parameters for such credit extension. The guidelines on listing and rating pertaining to non-SLR securities issued vide Circulars dated November 12. 2003 are not applicable to banks’ investments in : . Prudential guidelines on investment in Non-SLR securities Coverage These guidelines cover banks’ investments in non-SLR securities issued by corporates. SPVs etc.standard category due to recession in their industry segment. (c) Strengthen their internal rating systems which should also include building up of a system of regular (quarterly or half-yearly) tracking of the financial position of the issuer with a view to ensuring continuous monitoring of the rating migration of the issuers/issues. limits to mitigate the adverse impacts of concentration and the risk of illiquidity. debentures. Banks may. Despite restructuring facility provided under RBI guidelines.. etc. (d) As a matter of prudence. though considered warranted on merits of the case.
Banks should undertake usual due diligence in respect of investments in non-SLR securities. (b) Equity shares (c) Units of equity oriented mutual fund schemes. making issue of debt securities on a private placement basis and listed on a stock exchange. Present RBI regulations preclude banks from extending credit facilities for certain purposes. Banks should ensure that such activities are not financed by way of funds raised through the non. banks should ensure that such investment are made only in listed debt securities of companies which comply with the requirements of the . those schemes where any part of the corpus can be invested in equity (d) Equity/debt instruments issued by Venture capital funds (e) Commercial Paper (f) Certificates of Deposit Regulatory requirements Banks should not invest in Non-SLR securities of original maturity of less than one-year. for making issue of debt securities on a private placement basis and listed on a stock exchange. which are not reckoned for SLR purposes. 2000 and the Listing Agreement with the exchanges.(a) Securities directly issued by the Central and State Governments. Furthermore. has to make full disclosures (initial and continuing) in the manner prescribed in Schedule II of the Companies Act 1956. the debt securities shall carry a credit rating of not less than investment grade from a Credit Rating Agency registered with the SEBI. 2003 have stipulated requirements that listed companies are required to comply with. viz. According to this circular any listed company. other than Commercial Paper and Certificates of Deposits which are covered under RBI guidelines. SEBI (Disclosure and Investor Protection) Guidelines. The Securities Exchange Board of India (SEBI) vide their circular dated September 30. Listing and rating requirements Banks must not invest in unrated non-SLR securities. while making fresh investments in non-SLR debt securities. Accordingly.SLR securities.
2003. However. except to the extent indicated in paragraphs 1. (ii) Investment in Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS) which are rated at or above the minimum investment grade. of the previous year. With effect from January 1. Investment in the following will not be reckoned as ‘unlisted non-SLR securities’ for computing compliance with the prudential limits prescribed in the above guidelines: (i) Security Receipts issued by Securitisation Companies / Reconstruction Companies registered with RBI. there will be close monitoring of exposures to ABS on a bank specific basis based on monthly reports to be submitted to RBI as per proforma being separately advised by the Department of Banking Supervision. Bank’s investment in unlisted non-SLR securities may exceed the limit of 10 per cent. In other words investment exclusively in securities specified in this paragraph could be up to the maximum permitted limit of 20 per cent of non-SLR investment.2.17 and 1. provided the investment is on account of investment in securitisation papers issued for infrastructure projects. 2005 only investment in units of such mutual fund schemes which have an exposure to unlisted securities of less than 10 per cent of the corpus of the fund will be treated on par with . Fixing of prudential limits Bank’s investment in unlisted non-SLR securities should not exceed 10 per cent of its total investment in non-SLR securities as on March 31.SEBI circular dated September 30. The investments in RIDF / SIDBI Deposits may not be reckoned as part of the numerator for computing compliance with the prudential limit of 10 per cent of its total non-SLR securities as on March 31.2. of the previous year. The unlisted non-SLR securities in which banks may invest up to the limits specified above.18 below. by an additional 10 per cent. 2002 and registered with RBI. should comply with the disclosure requirements as prescribed by the SEBI for listed companies. and bonds/debentures issued by Securitisation Companies and Reconstruction Companies set up under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
a copy of all . e) Extent of non performing investments in the non-SLR category. 'bonds & debentures'. the denominator viz. 'subsidiaries/joint ventures' and 'others'. Boards of banks should review the following aspects of non-SLR investment at least at quarterly intervals: a) Total business (investment and divestment) during the reporting period. While computing the exposure to the unlisted securities for compliance with the norm of less than 10 percent of the corpus of the mutual fund scheme. d) Rating migration of the issuers/ issues held in the bank’s books and consequent diminution in the portfolio quality. For the purpose of the prudential limits prescribed in the guidelines. Banks whose investment in unlisted non-SLR securities are within the prudential limit of 10 per cent of its total non-SLR securities as on March 31.. Treasury Bills. c) Compliance with the prudential guidelines issued by Reserve Bank on non-SLR securities.listed securities for the purpose of compliance with the prudential limits prescribed in the above guidelines. Repo/Reverse Repo and Bank Fixed Deposits may not be included in the numerator.SLR securities. of the previous year may make fresh investment in such securities and up to the prudential limits.. would include investment under the following four categories in Schedule 8 to the balance sheet viz. Banks should put in place proper risk management systems for capturing and analysing the risk in respect of non-SLR investment and taking remedial measures in time. Disclosures In order to help in the creation of a central database on private placement of debt. Collateralised Borrowing and Lending Obligations (CBLO). 'shares'. b) Compliance with the prudential limits prescribed by the Board for non-SLR investment. 'non-SLR investments'. Banks should also put in place appropriate systems to ensure that investment in privately placed instruments is made in accordance with the systems and procedures prescribed under respective bank’s investment policy. Role of Boards Banks should ensure that their investment policies duly approved by the Board of Directors are formulated after taking into account all the relevant issues specified in these guidelines on investment in non.
offerdocuments should be filed with the Credit Information Bureau (India) Ltd. Trading and settlement in debt securities As per the SEBI guidelines. Solo Basis The aggregate exposure of a bank to the capital markets in all forms (both fund based and non-fund based) should not exceed 40 per cent of its net worth as on March 31 of the previous year. the bank’s direct investment in shares. units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) [both registered and unregistered] should not exceed 20 per cent of its net worth. any default relating to interest/ instalment in respect of any privately placed debt should also bereported to CIBIL by the investing banks along with a copy of the offer document. Limits on Banks' Exposure to Capital Markets A. all trades with the exception of the spot transactions. In addition to complying with the SEBI guidelines. (CIBIL) by the investing banks. banks should ensure that all spot transactions in listed and unlisted debt securities are reported on the NDS and settled through the CCIL from a date to be notified by RBI. in a listed debt security. . convertible bonds / debentures.Further.Banks should disclose the details of the issuer composition of non-SLR investments and the non-performing non-SLR investments in the ‘Notes on Accounts’ of the balance sheet. Within this overall ceiling. as indicated in Annexure V. shall be executed only on the trading platform of a stock exchange.
Banks should also issue suitable instructions in this regard to the department/office undertaking the custodial functions on behalf of their subsidiaries. The statement should reach the Regional Office of the Department of Banking Supervision under whose jurisdiction the bank’s head office is located within one month from the close of the accounting year. securities. Transactions in securities . General Reconciliation of holdings of Govt. as also under PMS) as at the end of every accounting year duly certified by the bank's auditors. keeping in view its overall risk profile and corporate strategy. Within this overall ceiling. The above-mentioned ceilings are the maximum permissible and a bank’s Board of Directors is free to adopt a lower ceiling for the bank. units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) [both registered and unregistered] should not exceed 20 per cent of its consolidated net worth. full particulars should be available with the subsidiaries of banks of the manner in which the transactions have been executed. Portfolio Management on behalf of clients i) The general powers vested in banks to operate PMS and similar schemes have been withdrawn. Accordingly. these functions should be subject to the same procedures and safeguards as would be applicable to other constituents. in future. No bank . the aggregate direct exposure by way of the consolidated bank’s investment in shares. etc.B Consolidated Basis The aggregate exposure of a consolidated bank to capital markets (both fund based and non-fund based) should not exceed 40 per cent of its consolidated net worth as on March 31 of the previous year. The aforementioned requirement of reconciliation may be suitably included by banks in the letters of appointment which may be issued to the bank's external auditors. The format for the statement and the instructions for compiling thereto are given in Annexure VI. convertible bonds / debentures. Banks should furnish to the Reserve Bank the statement of the reconciliation of bank's investments (held in own Investment account.Custodial functions While exercising the custodial functions on behalf of their merchant banking subsidiaries.
(e) Bank's own investments and investments belonging to PMS clients should be kept distinct from each other. either directly or indirectly. and any transactions between the bank's investment account and client's portfolio account should be strictly at market rates. on a case to case basis. World Trade Centre. therefore.should. Applications in this regard should be submitted to the Department of Banking Operations and Development. apart from prohibiting the banks from undertaking PMS activity. v) Further. withdrawal of facility of refinance from the Reserve Bank and denial of access to money markets. . bank-sponsored NBFCs are allowed to offer discretionary PMS to their clients. ii) The following conditions are to be strictly observed by the banks operating PMS or similar scheme with the specific prior approval of RBI: (a) PMS should be entirely at the customer's risk. Mumbai – 400 005. However. 1993 and those issued from time to time. restart or introduce any new PMS or similar scheme in future without obtaining specific prior approval of the Reserve Bank. without guaranteeing. iv) Banks should note that violation of RBI's instructions will be viewed seriously and will invite deterrent action against the banks which will include raising of reserve requirements. to the subsidiaries of banks except where they are contrary to specific regulations of the Reserve Bank or the Securities and Exchange Board of India. mutatis mutandis. governing their operations. the aforesaid instructions will apply. (f) There should be a clear functional separation of trading and back office functions relating to banks’ own investment accounts and PMS clients' accounts. (b) Funds should not be accepted for portfolio management for a period less than one year. iii) PMS clients' accounts should be subjected by banks to a separate audit by external auditors. (d) Banks should maintain client wise account/record of funds accepted for management and investments made there against and the portfolio clients should be entitled to get a statement of account. a predetermined return. vi) Banks/ merchant banking subsidiaries of banks operating PMS or similar scheme with the specific prior approval of the RBI are also required to comply with the guidelines contained in the SEBI (Portfolio Managers) Rules and Regulations. (c) Portfolio funds should not be deployed for lending in call/notice money. inter-bank term deposits and bills rediscounting markets and lending to/placement with corporate bodies.
(iii) The entities maintaining the gilt / designated funds accounts will be required to ensure availability of clear funds in the designated funds accounts for purchases and of sufficient securities in the gilt account for sales before putting through the transactions. c) Shares. ‘Held to Maturity’. (iv) No transactions by the bank should be undertaken in physical form with any broker. in the balance sheet. ii) Banks should decide the category of the investment at the time of acquisition and the decision should berecorded on the investment proposals. Mutual Fund Units. Classification i) The entire investment portfolio of the banks (including SLR securities and non-SLR securities) should be classified under three categories viz. etc. it has been decided to accelerate the measures for further reducing the scope of trading in physical forms. Held to Maturity .Investment Portfolio of bank .). These measures are as under: (i) For banks which do not have SGL account with RBI. a) Government securities. only one gilt account can be opened. (v) Banks should ensure that brokers approved for transacting in Government securities are registered with the debt market segment of NSE/BSE/OTCEI. ‘Available for Sale’ and ‘Held for Trading’. the account holder has to open a designated funds account (for all gilt account related transactions) with the same bank. (ii) In case the gilt accounts are opened with a scheduled commercial bank. b) Other approved securities. d) Debentures & Bonds.transactions in Government Securities In the light of fraudulent transactions in the guise of Government securities transactions in physical format by a few co-operative banks with the help of some broker entities. the investments will continue to be disclosed as per the existing six classifications: viz. e) Subsidiaries/ joint ventures and f) Others (CP. However.
. (a) Re-capitalisation bonds received from the Government of India towards their re-capitalisation requirement and held in their investment portfolio. and (b) the total SLR securities held in the HTM category is not more than 25 percent of their DTL as on the last Friday of the second preceding fortnight. holds more than 25 percent of the equity). 2004 may remain in that category. This will not include re-capitalisation banksacquired for investment purposes. which are deemed to be in the nature of advance. allowed since September 24. (b) Fresh investment in the equity of subsidiaries and joint ventures. iii) Banks are. except the following: (a) Fresh re-capitalisation bonds received from the Government of India towards their re-capitalisation requirement and held in their investment portfolio. along with its subsidiaries. 2004 to exceed the limit of 25 percent of total investment under HTM category provided: (a) the excess comprises only of SLR securities. (c) RIDF / SIDBI deposits bonds of other v) To sum up. iv)The non-SLR securities held as part of HTM as on September 24. (c) The investments in debentures/bonds. (b) Investment in subsidiaries and joint ventures ( A Joint Venture would be one in which the bank. This will not include re-capitalisation bonds of other banks acquired for investment purposes. banks may hold the following securities under HTM category” . No fresh non-SLR securities are permitted to be included in the HTM category. ii) Banks are allowed to include investments included under ‘Held to Maturity’ category upto 25 percent of their total investments The following investments are required to be classified under “Held to Maturity’ but are not counted for the purpose of ceiling of 25 percent specified for this category. however.i) The securities acquired by the banks with the intention to hold them up to maturity will be classified under Held to Maturity (HTM).
(vii) Banks were advised that debentures/ bonds must be treated in the nature of an advance when: The debenture/bond is issued as part of the proposal for project finance and the tenure of the debenture is for a period of three years and above Or The debenture/bond is issued as part of the proposal for working capital finance and the tenure of the debenture/ bond is less than a period of one year and the bank has a significant stake i. the borrower has approached the bank/FI and not part of a public issue where the bank/FI has subscribed in response to an invitation. .(a) SLR Securities upto 25 percent of their DTL as on the last Friday of the second preceding fortnight. along with its subsidiaries. i. holds more than 25 percent of the equity). They would be subjected to prudential norms for identification of non performing investment and provisioning as applicable to investments.e. Loss on sale will be recognised in the Profit & Loss Account. (c) Fresh re-capitalisation bonds received from the Government of India towards their re-capitalisation requirement and held in Investment portfolio. (d) Fresh investment in the equity of subsidiaries and joint ventures ( A Joint Venture would be one in which bank.e. These investments would be subject to mark to market discipline. (b) Non-SLR securities included under HTM as on September 24. (e) RIDF/SIDBI deposits. (vi) Profit on sale of investments in this category should be first taken to the Profit & Loss Account and thereafter be appropriated to the ‘Capital Reserve Account’.10% or more in the issue and the issue is part of a private placement. no fresh non-SLR securities are permitted to be included in the HTM category. these investments should not be held under HTM category. 2004. Since.
tax planning. ii) Banks may shift investments from Available for Sale category to Held for Trading category with the approval of their Board of Directors/ ALCO/ Investment Committee. iv) The investments classified under Held for Trading category would be those from which the bank expects to make a gain by the movement in the interest rates/ market rates. ii) The securities which do not fall within the above two categories will be classified under Available for Sale iii) The banks will have the freedom to decide on the extent of holdings under Available for Sale and Held for Trading categories. These securities are to be sold within 90 days. v) Profit or loss on sale of investments in both the categories will be taken to the Profit & Loss Account. it will be permitted only under exceptional circumstances like not being able to sell the security within 90 days due to tight liquidity conditions. such shifting may be done with the approval of the Chief Executive of the bank/ Head of the ALCO. trading strategies. risk management capabilities.Available for Sale & Held for Trading i) The securities acquired by the banks with the intention to trade by taking advantage of the short-term price/ interest rate movements will be classified under Held for Trading. Shifting among categories i) Banks may shift investments to/from Held to Maturity category with the approval of the Board of Directors once a year. Such shifting will normally be allowed at the beginning of the accounting year. but should be ratified by the Board of Directors/ ALCO. or extreme volatility. In case of exigencies. manpower skills. capital position. iii) Shifting of investments from Held for Trading category to Available for Sale category is generally not allowed. or market becoming . This will be decided by them after considering various aspects such as basis of intent. However. No further shifting to/ from this category will be allowed during the remaining part of that accounting year.
for arriving at the depreciation requirement on shifting of securities. Such diminution should be determined and provided for each investment individually. Valuation Held to Maturity i) Investments classified under Held to Maturity category need not be marked to market and will be carried at acquisition cost. Such transfer is permitted only with the approval of the Board of Directors/ ALCO/ Investment Committee. shall be provided for. and the depreciation. iv) Transfer of scrips from one category to another. whichever is the least. unless it is more than the face value. Net depreciation required to be provided for in any one classification should not be reduced on account of net appreciation in any other classification. if any. under all circumstances. Banks may apply the values as on the date of transfer and in case. banks have the option of applying the values as on the previous working day. if any. there are practical difficulties in applying the values as on the date of transfer. The book value of the individual securities would not undergo any change after the marking of market. if any. Net appreciation. ii) Banks should recognise any diminution. in the value of their investments in subsidiaries/ joint ventures which are included under Held to Maturity category and provide therefor.unidirectional. should be done at the acquisition cost/ book value/ market value on the date of transfer. Available for Sale The individual scrips in the Available for Sale category will be marked to market at quarterly or at more frequent intervals. in which case the premium should be amortised over the period remaining to maturity. should be ignored. Held for Trading The individual scrips in the Held for Trading category will be marked to market at monthly or at more . on such transfer should be fully provided for. Net depreciation. Securities under this category shall be valued scrip-wise and depreciation/ appreciation shall be aggregated for each classification referred to in item 2(i) above. other than temporary.
(ii) To ensure smooth transition to Basel II norms. and (b) In respect of securities included in the AFS category by March 31. open gold position limit. Banks satisfying the above were allowed to transfer the amount in excess of the said 5 per cent in the IFR to Statutory Reserve. open foreign exchange position limit. (iii) With a view to encourage banks for early compliance with the guidelines for maintenance of capital charge for market risks. banks were advised in June 24. banks were advised to build up Investment Fluctuation Reserve (IFR) of a minimum 5 per cent of the investment portfolio within a period of 5 years. trading positions in derivatives and derivatives entered into for hedging trading book exposures by March 31. 2004 to maintain capital charge for market risk in a phased manner over a two year period.frequent intervals and provided for as in the case of those in the Available for Sale category. as under: (a) In respect of securities included in the HFT category. 2006. . Investment Fluctuation Reserve (i) With a view to building up of adequate reserves to guard against any possible reversal of interest rate environment in future due to unexpected developments. in the IFR. Consequently. the book value of the individual securities in this category would also not undergo any change after marking to market. it was advised in April 2005 that banks which have maintained capital of at least 9 per cent of the risk weighted assets for both credit risk and market risks for both HFT (items as indicated at (a) above) and AFS category may treat the balance in excess of 5 per cent of securities included under HFT and AFS categories. as Tier I capital. 2005.
and net of consequent reduction in the transfer to Statutory Reserve). In other words. The amount transferred from the Investment Reserve Account to the P&L .100. (vii) The amounts debited to the P&L Account for provision should be debited under the head "Expenditure Provisions & Contingencies". banks may draw down from the IRA to the extent of provision made during the year towards depreciation in investment in AFS and HFT categories (net of taxes. the excess should be credited to the Profit & Loss account and an equivalent amount ( net of taxes. Investment Reserve Account (v) In the event. if the provision made for depreciation in investments included in the AFS and HFT categories is Rs. can draw down Rs. they would be permitted to treat the entire balance in the IFR as Tier I capital. provisions created on account of depreciation in the ‘Available for Sale’ or ‘Held for Trading’ categories are found to be in excess of the required amount in any year.50 from the Investment Reserve Account.25 per cent of total Risk Weighted Assets prescribed for General Provisions/ Loss Reserves. (vi) Banks may utilise Investment Reserve Account as follows: The provisions required to be created on account of depreciation in the AFS and HFT categories should be debited to the P&L Account and an equivalent amount (net of tax benefit. Illustratively. 2006.(iv) Banks were advised in October 2005 that. may be transferred from the Investment Reserve Account to the P&L Account.52. if any. if any. if they have maintained capital of at least 9 per cent of the risk weighted assets for both credit risk and market risks for both HFT (items as indicated at (a) above) and AFS category as on March 31. For this purpose. a bank which pays a tax of 30% and should appropriate 25% of the net profits to Statutory Reserves. if any and net of transfer to Statutory Reserves as applicable to such excess provision) should be appropriated to an Investment Reserve Account in Schedule 2 – “Reserves & Surplus” under the head “Revenue and other Reserves” and would be eligible for inclusion under Tier II within the overall ceiling of 1. and net of transfer to Statutory Reserves as applicable to such excess provision). banks may transfer the balance in the Investment Fluctuation Reserve ‘below the line’ in the Profit and Loss Appropriation Account to Statutory Reserve. General Reserve or balance of Profit & Loss Account.
above the line). not be available to a bank for payment of dividend among the shareholders. In respect of unquoted securities. (viii) In terms of our guidelines on payment of dividend by banks. dividends should be payable only out of current year's profit. SGL account transactions. (d) Hence none of the above options are permissible. Provision towards any erosion in the value of an asset is an item of charge on the profit and loss account and hence should appear in that account before arriving at the profit for the accounting period.. the procedure as detailed below should be adopted. The amount drawn down from the Investment Reserve Account (IRA) will. General Reserve or balance of Profit & Loss Account would be eligible to be reckoned as Tier I capital. prices declared by Primary Dealers Association of India (PDAI) jointly with the Fixed Income Money Market and Derivatives Association of India (FIMMDA) periodically. However. therefore. Adoption of the following would not only be adoption of a wrong accounting principle but would. OR (b) a bank is allowed to draw down from the Investment Reserve Account before arriving at the profit for the accounting period (i.e. after arriving at the profit for the period.Account should be shown as "below the line" item in the Profit and Loss Appropriation Account after determining the profit for the year. . price list of RBI. the balance in the Investment Reserve Account transferred ‘below the line’ in the Profit and Loss Appropriation Account to Statutory Reserve. also result in a wrong statement of the profit for the accounting period: (a) the provision is allowed to be adjusted directly against an item of Reserve without being shown in the profit and loss account. OR (c) a bank is allowed to make provisions for depreciation on investment as a below the line item. Market value The ‘market value’ for the purpose of periodical valuation of investments included in the Available for Sale and Held for Trading categories would be the market price of the scrip as available from the trades/ quotes on the stock exchanges.
State Government Securities State Government securities will be valued applying the YTM method by marking it up by 25 basis points above the yields of the Central Government Securities of equivalent maturity put out by PDAI/ FIMMDA periodically. These will be valued with appropriate mark-up over the YTM rates for Central Government securities as put out by PDAI/ FIMMDA periodically. (b) The rate used for the YTM for unrated debentures/ bonds should not be less than the rate applicable to . iii) Treasury Bills should be valued at carrying cost.Unquoted SLR securities Central Government Securities i) Banks should value the unquoted Central Government securities on the basis of the prices/ YTM rates put out by the PDAI/ FIMMDA at periodical intervals. Unquoted Non-SLR securities Debentures/ Bonds All debentures/ bonds other than debentures/ bonds which are in the nature of advance should be valued on the YTM basis. Such debentures/ bonds may be of different companies having different ratings. Other ‘approved’ Securities Other approved securities will be valued applying the YTM method by marking it up by 25 basis points abovethe yields of the Central Government Securities of equivalent maturity put out by PDAI/ FIMMDA periodically. The mark-up will be graded according to the ratings assigned to the debentures/ bonds by the rating agencies subject to the following: (a) The rate used for the YTM for rated debentures/ bonds should be at least 50 basis points above the rate applicable to a Government of India loan of equivalent maturity.
c) Investments in preference shares as part of the project finance may be valued at par for a period of two . b) The rate used for the YTM for unrated preference shares should not be less than the rate applicable to rated preference shares of equivalent maturity. In case the bank is still carrying the zero coupon bonds at acquisition cost. Preference Shares The valuation of preference shares should be on YTM basis. The mark-up will be graded according to the ratings assigned to the preference shares by the rating agencies subject to the following: a) The YTM rate should not be lower than the coupon rate/ YTM for a GOI loan of equivalent maturity. In the absence of market value. (c) Where the debenture/ bonds is quoted and there have been transactions within 15 days prior to the valuation date. The mark-up for the unrated preference shares should appropriately reflect the credit risk borne by the bank. i. The mark-up for the unrated debentures/ bonds should appropriately reflect the credit risk borne by the bank. These will be valued with appropriate mark-up over the YTM rates for Central Government securities put out by the PDAI/FIMMDA periodically. the zero coupon bonds may be marked to market with reference to the present value of the zero coupon bond. the value adopted should not be higher than the rate at which the transaction is recorded on the stock exchange. which may be marked to market with reference to the market value. before marking it to market. The present value of the zero coupon bonds may be calculated by discounting the face value using the Zero Coupon Yield Curve with appropriate mark up as per the zero coupon spreads put out by FIMMDA periodically. acquisition cost plus discount accrued at the rate prevailing at the time of acquisition.rated debentures/ bonds of equivalent maturity. Zero coupon bonds Zero coupon bonds should be shown in the books at carrying cost.e. The preference shares will be issued by companies with different ratings.. the discount accrued on the instrument should be notionally added to the book value of the scrip.
Equity Shares The equity shares in the bank's portfolio should be marked to market preferably on a daily basis. Investment in un. In case the latest balance sheet is not available the shares are to be valued at Re. if any) which is to be ascertained from the company’s latest balance sheet (which should not be more than one year prior to the date of valuation). e) Where preference dividends are in arrears. till the end of the lock-in period. and more if arrears are for more than one year. should be valued at break-up value (without considering ‘revaluation reserves’. no credit should be taken for accrued dividends and the value determined on YTM should be discounted by at least 15% if arrears are for one year. The depreciation/provision requirement arrived at in the above manner in respect of non-performing shares where dividends are in arrears shall not be allowed to be set-off against appreciation on other performing preference shares. d) Where investment in preference shares is as part of rehabilitation. but at least on a weekly basis. where repurchase price/ market quote is not available. If NAV is not available. g) When a preference share has been traded on stock exchange within 15 days prior to the valuation date. f) The preference share should not be valued above its redemption value. Units could be valued at NAV. the YTM rate should not be lower than 1. then these could be valued at cost. Mutual Funds Units Investment in quoted Mutual Fund Units should be valued as per Stock Exchange quotations. Wherever the re-purchase price is not available the .5% above the coupon rate/ YTM for GOI loan of equivalent maturity. the value should not be higher than the price at which the share was traded.years after commencement of production or five years after subscription whichever is earlier. Equity shares for which current quotations are not available or where the shares are not quoted on the stock exchanges. In case of funds with a lock-in period.quoted Mutual Fund Units is to be valued on the basis of the latest re-purchase price declared by the Mutual Fund in respect of each particular Scheme.1 per company.
the sale shall be recognised in books of the banks / FIs at the lower of: • the redemption value of the security receipts / pass through certificates. Investments in RRBs Investment in RRBs is to be valued at carrying Cost (i. book value) on consistent basis. . and • the NBV of the financial asset. Investment in securities issued by SC/RC When banks / FIs invest in the security receipts / pass-through certificates(PTCs) issued by Securitisation Company (SC) / Reconstruction Company (RC) in respect of the financial assets sold by them to the SC / RC.e.Units could be valued at the NAV of the respective scheme. Commercial Paper Commercial paper should be valued at the carrying cost.
classification and other norms applicable to investment in non-SLR instruments prescribed by RBI from time to time would be applicable to bank’s / FI’s investment in debentures / bonds / security receipts / PTCs issued by SC / RC. but at least on a weekly basis in line with valuation norms for other equity shares as per existing instructions.e issuance of guidelines on valuation. For this purpose. Accordingly. transfer of all securities which have completed three years as mentioned above will be effected at the beginning of the next accounting year in . However. However. the excess provision will not be reversed but will be utilised to meet the shortfall / loss on account of sale of other financial assets to SC / RC. for valuation of such investments. the shortfall should be debited to the profit and loss account of that year. classification of investments in VCFs) will be classified under Held to Maturity (HTM) category for initial period of three years and will be valued at cost during this period. and on such sale or realisation. the valuation. the classification would be done as per the existing norms. For the investments made before issuance of these guidelines. Book value less provisions held). if any of the above instruments issued by SC / RC is limited to the actual realisation of the financial assets assigned to the instruments in the concerned scheme the bank / FI shall reckon the Net Asset Value (NAV). the period of three years will be reckoned separately for each disbursement made by the bank to VCF as and when the committed capital is called up. Valuation and classification of banks’ investment in VCFs The quoted equity shares / bonds/ units of VCFs in the bank's portfolio should be held under Available for Sale (AFS) category and marked to market preferably on a daily basis. 2006 (i.The above investment should be carried in the books of the bank / FI at the price as determined above until its sale or realisation. to ensure conformity with the existing norms for transferring securities from HTM category. obtained from SC / RC from time to time. All instruments received by banks / FIs from SC / RC as sale consideration for financial assets sold to them and also other instruments issued by SC / RC in which banks / FIs invest will be in the nature of non-SLR securities. the loss or gain must be dealt with as under: (i) if the sale to SC /RC is at a price below the net book value (NBV) (ie. Banks’ investments in unquoted shares/bonds/units of VCFs made after August 23. (ii) If the sale is for a value higher than the NBV.
the . the units should be valued based on the audited results. the valuation will be done at the Net Asset Value (NAV) shown by the VCF in its financial statements. However. if any. on the units based on NAV has to be provided at the time of shifting the investments to AFS category from HTM category as also on subsequent valuations which should be done at quarterly or more frequent intervals based on the financial statements received from the VCF. should be valued as per prudential norms for classification. the unquoted units/shares/bonds should be transferred to AFS category and valued as under: i) Units: In the case of investments in the form of units. if any) which is to be ascertained from the company’s (VCF’s) latest balance sheet (which should not be more than 18 months prior to the date of valuation). At least once in a year.00 per company. the shares are to be valued at Rupee. After three years. Depreciation. if any on the shares has to be provided at the time of shifting the investments to AFS category as also on subsequent valuations which should be done at quarterly or more frequent intervals. ii) Equity: In the case of investments in the form of shares. the investments are to be valued at Rupee 1. the valuation can be done at the required frequency based on the break-up value (without considering ‘revaluation reserves’. valuation and operation of investment port.00 per VCF. Depreciation.folio by banks issued by RBI from time to time. (iii) Bonds: The investment in the bonds of VCFs.1. if any. Non performing investments In respect of securities included in any of the three categories where interest/ principal is in arrears. If the latest balance sheet available is more than 18 months old.one lot to coincide with the annual transfer of investments from HTM category. if the audited balance sheet/ financial statements showing NAV figures are not available continuously for more than 18 months as on the date of valuation.
including those in the nature of deemed advance’. if interest and/or principal orany other amount due to the bank remains overdue for more than 180 days. The banks should not set-off the depreciation requirement in respect of these non-performing securities against the appreciation in respect of other performing securities. which are deemed to be in the nature of advance would also be subjected to NPI norms as applicable to investments. those equity shares would also be reckoned as NPI. similar to a non performing advance (NPA).BC. Uniform accounting for Repo / Reverse Repo transactions.32/ 21. State Government guaranteed investments For the year ending March 31.banks should not reckon income on the securities and should also make appropriate provisions for the depreciation in the value of the investment. will attract prudential norms for identification of non performing investments and provisioning.048/ 2000-01 dated October 16. when interest/ instalment of principal (including maturity proceeds) or any other amount due to the bank remains unpaid for more than 90 days. investment in State Government guaranteed securities. (iii) In the case of equity shares. 2005. (v) The investments in debentures / bonds. investment in State Government guaranteed securities would attract prudential norms for identification of non performing investments and provisioning. In order to ensure uniform accounting treatment for accounting repo /reverse repo transactions and to . 2006.04.1 per company on account of the non availability of the latest balance sheet in accordance with the instructions contained in paragraph 28 of the Annexure to circular DBOD. A non performing investment (NPI).BP. (ii) The above would apply mutatis-mutandis to preference shares where the fixed dividend is not paid. 2000. investment in any of the securities issued by the same issuer would also be treated as NPI and vice versa. is one where : (i) Interest/ instalment (including maturity proceeds) is due and remains unpaid for more than 90 days. in the event the investment in the shares of any company is valued at Re. With effect from the year ending March 31. (iv) If any credit facility availed by the issuer is NPA in the books of the bank.
uniform accounting principles. viz. The market participants may undertake repos from any of the three categories of investments.impart an element of transparency. The uniform accounting principles were made applicable from the financial year 2003-04. for the present. Since the buyer of the securities will not hold it till maturity. the buyer can reckon the approved securities acquired under reverse repo transaction for the purpose of Statutory Liquidity Ratio (SLR) during the period of the repo. The first leg of the repo should be contracted at prevailing market rates. The securities sold under repo (the entity selling referred to as “seller”) are excluded from the Investment Account of the seller of securities and the securities bought under reverse repo (the entity buying referred to as “buyer”) are included in the Investment Account of the buyer of securities. Available For Sale and Held to Maturity. these norms would not apply to repo / reverse repo transactions under the Liquidity Adjustment Facility (LAF) with RBI. total cash consideration less accrued interest) should be accounted for separately and distinctly. Further. However. have been laid down for repo / reverse repo transactions undertaken by all the regulated entities. Held for Trading.. Further. the securities purchased under reverse repo by banks should not be classified under Held to Maturity category. At present repo transactions are permitted in Central Government securities including Treasury Bills and dated State Government securities.e. the accrued interest received / paid in a repo / reverse repo transaction and the clean price (i. .
the seller will not accrue the coupon during the period of the repo. the coupons received by the buyer of the security should be passed on to the seller on the date of receipt as the cash consideration payable by the seller in the second leg does not include any intervening cash flows. the seller will continue to accrue the discount at the original discount rate during the period of the repo. Any repo income / expenditure for the subsequent period in respect of the outstanding transactions should be reckoned for the next accounting period. (b) the difference between the accrued interest paid between the two legs of the transaction should be shown as Repo Interest Income/ Expenditure account. In the case of discounted instruments like Treasury Bills.The other accounting principles to be followed while accounting for repos / reverse repos will be as under: Coupon In case the interest payment date of the security offered under repo falls within the repo period. since there is no coupon. only the accrued income / expenditure till the balance sheet date should be taken to the Profit and Loss account. (a) the difference in the clean price of the security between the first leg and the second leg should be reckoned as Repo Interest Income / Expenditure in the books of the buyer / seller respectively. As regards repo / reverse repo transactions outstanding on the balance sheet date. Repo Interest Income / Expenditure After the second leg of the repo / reverse repo transaction is over. and (c) the balance outstanding in the Repo interest Income / Expenditure account should be transferred to the Profit and Loss account as an income or an expenditure. The buyer will not therefore accrue the discount during the period of the repo. as the case may be. While the buyer will book the coupon during the period of the repo . .
(b) the seller will provide for the price difference in the Profit & Loss account and show this difference under “Other Assets” in the balance sheet if the sale price of the security offered under repo is lower than the book value. . then the mark to market valuation for such securities should be done at least once a quarter. In respect of the repo transactions outstanding as on the balance sheet date (a) the buyer will mark to market the securities on the balance sheet date and will account for the same as laid down in the extant valuation guidelines issued by the respective regulatory departments of RBI. To illustrate.Marking to Market The buyer will mark to market the securities acquired under reverse repo transactions as per the investment classification of the security. the valuation for securities acquired under reverse repo transactions may be in accordance with the valuation norms followed by them in respect of securities of similar nature. for banks. For entities who do not follow any investment classification norms. in case the securities acquired under reverse repo transactions have been classified under Available for Sale category.
While market participants. having different accounting systems. viz. For operational ease the weighted average cost method whereby the investment is carried in the books at their weighted average cost may be adopted. The securities sold/ purchased under repo should be accounted for as an outright sale / purchase. iv) Repo Interest Expenditure Account. may use accounting heads different from those used in the illustration. vi) Reverse Repo Account. Accounting methodology The accounting methodology to be followed are given below and illustrations are furnished in Annexure VIII. v) Repo Interest Income Account. vii) Reverse Repo Price Adjustment Account. the participants may consider entering into bilateral Master Repo Agreement as per the documentation finalized by FIMMDA. i) Repo Account. a. if the sale price of the security offered under repo is higher than the book value.(c) the seller will ignore the price difference for the purpose of Profit & Loss account but show the difference under “Other Liabilities” in the Balance Sheet. iii) Repo Interest Adjustment Account. c. Further. ii) Repo Price Adjustment Account. Book value on re-purchase The seller shall debit the repo account with the original book value (as existing in the books on the date of the first leg) on buying back the securities in the second leg. . The following accounts may be opened. The securities should enter and exit the books at the same book value. and viii) Reverse Repo Interest Adjustment Account. b. to obviate disputes arising out of repo transactions. and (d) similarly the accrued interest paid / received in the repo / reverse repo transactions outstanding on balance sheet dates should be shown as "Other Assets" or "Other Liabilities" in the balance sheet. there should not be any deviation from the accounting principles enunciated above.
In a reverse repo transaction. The security purchased in a reverse repo will enter the books at the market price (excluding broken period interest). In a repo transaction. Reverse repo g. The difference between the derived price and the book value in the second leg of the reverse repo should be booked in the Reverse Repo Price Adjustment Account Other aspects relating to Repo / Reverse Repo j. In case the interest payment date of the security offered under repo falls within the repo period. The balances in the Repo Account should be netted from the bank's Investment Account for balance sheet purposes. The balances in the Reverse Repo Account should be part of the Investment Account for balance sheet purposes and can be reckoned for SLR purposes if the securities acquired under reverse repo transactions are approved securities. e. The sale and repurchase should be accounted in the Repo Account. Similarly the difference between the derived price and the book value in the second leg of the repo should be booked in the Repo Price Adjustment Account. .Repo d. h. the securities should be sold in the first leg at market related prices and repurchased in the second leg at the derived price. the securities should be purchased in the first leg at prevailing market prices and sold in the second leg at the derived price. The purchase and sale should be accounted for in the Reverse Repo Account. The difference between the market price and the book value in the first leg of the repo should be booked in Repo Price Adjustment Account. f. i. the coupons received by the buyer of the security should be passed on to the seller on the date of receipt as the cash consideration payable by the seller in the second leg does not include any intervening cash flows.
as the case may be. o. . m. To reflect the accrual of interest in respect of the outstanding repo/ reverse repo transactions at the end of the accounting period. Such entries passed should be reversed on the first working day of the next accounting period. In respect of repos in discount instruments like Treasury Bills. The broken period interest accrued in the first and second legs will be booked in Repo Interest Adjustment Account or Reverse Repo Interest Adjustment Account. p. The difference between the amounts booked in the first and second legs in the Repo / Reverse Repo Price Adjustment Account should be transferred to the Repo Interest Expenditure Account or Repo Interest Income Account. appropriate entries should be passed in the Profit and Loss account to reflect Repo Interest Income / Expenditure in the books of the buyer / seller respectively and the same should be debited /credited as an income / expenditure accrued but not due. l. as the case may be.k. as the case may be. the buyer would accrue interest during the period of repo. In respect of repos in interest bearing (coupon) instruments.'Others' under Schedule 11 . for outstanding repos . Since the debit balances in the Repo Price Adjustment Account at the end of the accounting period represent losses not provided for in respect of securities offered in outstanding repo transactions. as the case may be . it will be necessary to make a provision therefor in the Profit & Loss Account. At the end of the accounting period the. the seller would accrue discount during the period of repo based on the original yield at the time of acquisition. the balances in the Repo / Reverse Repo Price Adjustment Account and Repo / Reverse repo Interest Adjustment account should be reflected either under item VI .'Other Assets' or under item IV 'Others (including Provisions)' under Schedule 5 . Consequently the difference between the amounts booked in this account in the first and second legs should be transferred to the Repo Interest Expenditure Account or Repo Interest Income Account.'Other Liabilities and Provisions' in the Balance Sheet . n.
provided interest is serviced regularly and as such is not in arrears. the debit balances (excluding balances for repos which are still outstanding) in the Repo / Reverse Repo Price Adjustment Account should be transferred to the Repo Interest Expenditure Account and the credit balances (excluding balances for repos which are still outstanding) in the Repo / Reverse Repo Price Adjustment Account should be transferred to the Repo Interest Income Account. At the end of the accounting period the debit balances (excluding balances for repos which are still outstanding) in the Repo Interest Adjustment Account and Reverse Repo Interest Adjustment Account should be transferred to the Repo Interest Expenditure Account and the credit balances (excluding balances for repos which are still outstanding) in the Repo Interest Adjustment Account and Reverse Repo Interest Adjustment Account should be transferred to the Repo Interest Income Account. iii) Banks may book income from Government securities and bonds and debentures of corporate bodies on accrual basis. Similarly. where interest rates on these instruments are pre-determined and provided interest is serviced regularly and is not in arrears.q. ii) Banks may book income from dividend on shares of corporate bodies on accrual basis provided dividend on the shares has been declared by the corporate body in its Annual General Meeting and the owner's right to receive payment is established. at the end of accounting period. . iv) Banks should book income from units of mutual funds on cash basis. r. General Income recognition i) Banks may book income on accrual basis on securities of corporate bodies/ public sector undertakings in respect of which the payment of interest and repayment of principal have been guaranteed by the Central Government or a State Government.
PDs and SDs would be permitted to make fresh investments and hold bonds and debentures. 2004. banks were r quired to convert all their equity holding in scrip form into dematerialised form by December 31. with effect from October 31. FIs. privately placed or otherwise. it was decided that. only in dematerialized form. Banks were also advised that after the commencement of mandatory trading in demat form. debentures and equities. In order to extend the demat form of holding to other instruments like bonds. 2002. they would not be able to sell the shares of listed companies if they were held in physical form. 2001.Broken Period Interest Banks should not capitalise the Broken Period Interest paid to seller as part of cost. As regards equity instruments. It is to be noted that the above accounting treatment does not take into account taxation implications and hence the banks should comply with the requirements of Income Tax Authorities in the manner prescribed by them. 59 . but treat it as an item of expenditure under Profit and Loss Account in respect of investments in Government and other approved securities. Outstanding investments in scrip forms would have to be converted into dematerialised form by June 30. banks. Dematerialised Holding Banks have been advised to settle the transactions in securities as notified by Securities and Exchange Board of India (SEBI) only through depositories.
While different types of organisations – such as production companies and service organisations might have differing channels in the conduct of their businesses. instead IT is the way of business. from the inroads made by IT Traditionally. 60 . In fact. The Fourth Wave. And no other sector has benefited to such a large extent as the financial sector. we have now reached a stage where it may be difficult to even imagine how a business or an industry would even survive without IT.Technology Driven Indian Banking (ATM & E-Banking) The banks could exist across centuries with a shining presence if they are able to provide the service expected by customers – by adopting the key word of ‘change’ and adopting to changing requirements of the customers in particular. IT. however. as Alvin Toffler had predicted years ago. No other facilitating service has resulted in such large scale benefits as Information Technology. The two letters which have changed the way businesses operate has been IT as an acronym for Information Technology. with the Banking sector in particular. has. business strategies have all focused on meeting the objectives of the business with greater impetus being laid on the channels involved – to achieve the broad goals. however. if I may add. has re-positioned itself as the basic backbone for most businesses. And those businesses which have not joined the bandwagon of exploiting the benefits ushered in by IT may have to face a rough ride if not stare at the prospects of possible extinction. the banking industry in general and the economy at large. submerged theories relating to maximizing output using IT. IT has become such an essential ingredient of one’s way of life in today’s world that it is difficult to imagine a world without IT. the ultimate objective of any business strategy would be to maximise the returns relating to the very purpose of existence of the businesses. the winds of change wrought by IT have necessitated a paradigm shift where IT does not merely provide value added support services. Today.
One of the major challenges faced by banks is the impact of competition and the falling margins in the transactions undertaken by them. 61 . But today this is the reality – which owes its credit to the rampant exploit of IT by banks. It is widely recognised that the core banking functions alone do not add to the bottom line of banks – value added services are slowly but steadily emerging as a substantial opportunity for banks to exploit and customers would not hesitate to use such services in view of the convenience they offer. The single biggest advantage of these banks is the large scale deployment of IT in their business endeavours. It would be beyond anybody’s imagination to even think about conducting banking business anywhere in the country or using a powerful yet simple medium such as the Internet even from roadside kiosks. It is well recognized that technology holds the key to the future success of Indian Banks since it is Information technology which has brought in a sea change in the way banking is being conducted today – which is but an indication of the morrow. In the case of the older banks. however. as also Internet Banking and Mobile Banking.The Banking sector is no exception to this changing scenario which is sweeing across the world. Prime factors necessitating these changes relate to the forces of competition.liability management. It is in this context that there is an imperative need for not mere technology upgradation but also integration of technology with the general way of functioning of banks. And concepts such as ‘Anywhere Banking’ or ‘Automated Teller Machines’ are but offshoots of technology implementation by banks. the solution to this would lie in increasing volumes well beyond a critical mass so as to result in better operating results for banks. Such innovations have had a positive impact on customer service – but the fundamental benefit that is derived by banks relates to reduced costs of operation – such as in handling cash and in servicing customers efficiently and accurately over the counters of branches. it is paradoxical to note that even now IT drives the way the organisation functions and not vice versa. productivity and efficiency of operations. Their business processes have necessitated that IT should provide solutions to various bottlenecks and problems and the result has been that IT has transcended well as an integral part of their regular operations. The changes staring at the face of bankers all relate to the fundamental way of banking – which is undergoing a rapid transformation in the world of today. This is best achieved by exploiting the benefits of technology which facilitates handling increased volumes at higher levels of efficiency. Most of the banks have already started to feel the impact of the operations of the new banks in the country. reduced operating margins and the need for better asset . With wafer thin profit margins being the order of the day.
storage of information in a secure and tamper-proof manner like smart cards all assume significance and have to be part of the practices and procedures in the day-to-day functioning of banks of tomorrow. at any time and using delivery channels more suitable for them. It is this area which is a big challenge to banks. The competition is not just from organisations performing funds transfer services but from other seemingly unrelated channels such as service providers for message transfer. quick delivery of instruments and the like who all facilitate the movement of funds based messages at speeds faster than before. One of the most significant areas where IT has had a positive impact is on substitutes for traditional funds movement services.The large scale proliferation of IT in the Banking sector has also brought into focus many challenges which have to be overcome by us. Another option to achieve this is objective is to have clustered solutions in a bank with data of customers residing in these systems. This is now possible thanks to the usage of IT in a large scale whereby centralised data bases are possible in a bank with decentralised access. These are frontiers which would add value to the services offered to customers and at the same time act as a means for increasing the profits for banks too. certification. Various concepts such as digital signatures. banks need to treat the customer as a customer of the whole bank and not as a customer of any particular branch. The most prominent challenge among the above relates to the concept of security. Many new players are entering into the arena of funds transfer services and the pride of place enjoyed by bankers is under severe threat. With the delivery channels relating to funds based services – such as movement of funds electronically between different accounts of customers – taking place with the use of technology. electronic funds transfer and other similar products. the requirements relating to security also need to undergo metamorphosis at a rapid pace. I must hasten to add at this stage that all these would be added requirements and the well established practices of 62 . Banks need to constantly look for innovative services which offer customers the convenience of transacting from anywhere. A major attitudinal change which is required is the need for a change in the concept relating to treatment of customers of banks – with the collapse of geographical distances. funds transfers across different constituents is now easily possible – within time frames which would have appeared impossible a few years ago. With the advent of electronic banking. The lines between corporate communication carriers and banks are now blurred so that doubts arise where one ends and another begins.
They need a human face to interact with banks and back office processing done elsewhere. this network is already being used by a large number of banks for funds and non-funds based message transfers. 63 . Yet another factor which is the driving force behind the use of technology in Banking relates to the benefits that technology offers – not only for the banks but for the customers as well. monitoring and auditing to detect unusual usage patterns and deficiencies. This has to be supplemented by education and training in these areas and reinforced by the actions and concerns of the top management so that a culture of security can be created. If technology has to be harnessed by banks to reap the benefits it offers. the economic value of the organisation. 2000. The Reserve Bank of India has taken upon itself the setting up of a safe. Named the INFINET (for the Indian Financial Network). The INFINET provides for inter-bank communication – which implies that banks have to now function as a group and at the same time competing with one another too. Inculcating greater levels of computer awareness among the operative staff at branches of banks by means of training and other means of exposure is a vital requirement.. which is not only robust but also well within the legal requirements of the Information Technology Act. An effective security policy which would offer a shared vision of how the controls in the workplace should be implemented with the objective of protecting data. it is essential that the people who use technology are also adept in handling business using technology. These controls have to be supplemented by surveillance.today may also have to not only continue but also co-exist along with the new requirements. While this is being achieved by means of programmes conducted at the various training establishments of banks. secure and efficient communications network for the exclusive use of the banking sector. additional inputs from professional technical organisations would bridge the gap which may arise between the levels of technology inputs offered by banks’ own training institutions and the developments the world over. and is made available by the IDRBT here in Hyderabad. information and eventually. Customers of rural India must get the benefit through tailor-made technology solutions with different level of sophistication. I may even add that the INFINET is perhaps one of the very few networks in the world which uses the latest in technology and security called Public key Infrastructure – PKI.
However. there are about 20. About two crore people use these ATMs. It says it aims to expand the network to 25-35 machines within 18 months with a target customer base of About 50. Citigroup is rolling out a network of biometric automatic cash machines aimed at illiterate Indian slum dwellers. a Citigroup business manager in India. "The phenomenal growth of ATMs in India is a striking example of the vigorous campaign by banks aimed at customer convenience and satisfaction. one near a slum district in Bandra.000. MITR. and will have colour-coded screen instructions and voiceovers to help guide them through transactions." it adds. India's financial capital." said PS Jayakumar. Citigroup has already installed two biometric automatic teller machines. The machines will recognise account holders' thumbprints. using the latest technology to woo the country's millions of "unbanked" poor. For example. The RBI is pushing banks to that situation. a neighbourhood of Mumbai. United Bank of India and Indian Bank. formed by a group of banks pooling their ATMs through a common switch. 64 . "Tremendous progress has been achieved by a number of banks in improving customer service and access to banking products and services through these channels. Union Bank of India. But the ideal situation is when a person could use any ATM anywhere in the country. "This is the first time we have used biometric technology for this segment of customers. no matter which bank's customer he is. Cashtree is a network of ATMs of Bank of India.000 ATMs in India and this number is expected to go up to 30.000 by December. At present." notes IDRBT. there are networks of ATMs (Cashtree. Syndicate Bank. "We see this as having the potential for global application in countries that The venture by the world's largest financial group comes as banks start to appreciate the enormous market potential of India's lower income groups and also begin to target the poor in big emerging market countries. eliminating the need for a personal identification number. and the other in Hyderabad. Dena Bank. Bancs). south-east India.Today. today not all ATMs are accessible to customers of all banks.
However.Though India's population exceeds 1bn. Citigroup estimates that there are only about 300m bank accounts in the country. 65 . loan repayment rates among the poorest borrowers in micro-finance schemes are about 98 per cent – among the highest in the banking sector.
growth and value creation.Conclusion The last decade has seen many positive developments in the Indian banking sector. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period. and in feebased income and investment banking on the wholesale banking side. These require new skills in sales & marketing. This is reflected in their market valuation. A few banks have established an outstanding track record of innovation. have made several notable efforts to improve regulation in the sector. The policy makers. competition from foreign banks will only intensify. consumer finance and wealth management on the retail side. • With increased interest in India. which comprise the Reserve Bank of India (RBI). credit and operations. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. Four challenges must be addressed before success can be achieved: • The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards. The sector now compares favorably with banking sectors in the region on metrics like growth. asset quality and profitability with other regional banks over the last few years. This will expose the weaker banks. These changes include strengthening prudential norms. • Banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. profitability and nonperforming assets (NPAs). Indian banks have compared favorably on growth. 66 . enhancing the payments system and integrating regulations between commercial and co-operative banks. Ministry of Finance and related government and financial sector regulatory entities.
The last. • New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/ HNI segments.• Given the demographic shifts resulting from changes in age profile and household income. strengthening human capital will be the single biggest challenge.. consumers will increasingly demand enhanced institutional capabilities and service levels from banks. developing and retaining more leadership capacity would be key to achieving this and would pose the biggest challenge. risk management and the overall organisational performance ethic. 67 . Maintaining a fundamentally long-term value-creation mindset will be their greatest challenge. service operations. actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms.e. Management imperatives differ by bank. they should stay in the game for potential acquisition opportunities as and when they appear in the near term. i. • Foreign banks committed to making a play in India will need to adopt alternative approaches to win the “race for the customer” and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. even more imperative is their need to examine their participation in the Indian banking sector and their ability to remain independent in the light of the discontinuities in the sector. there will be common themes across classes of banks: • PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing. • Old private sector banks also have the need to fundamentally strengthen skill levels. At the same time. Attracting. However. However.