Reserve Bank of India                   Monetary Policy Statement 2010-11                                       By        ...
Part A. Monetary Policy                          I. The State of the EconomyGlobal Economy                                ...
global financial crisis played an important        12.     Growth in monetary and creditrole, first in mitigating the adve...
14.     Financial markets functioned               of active liquidity management measuresnormally through the year. Surpl...
forward, private credit demand is expected         the corresponding period last year.to pick up further. Meanwhile, infla...
Inflation                                                    business expectation index (BEI) showed                      ...
firmed up in the second half of the year. It                         of seasonal moderation in food prices,accelerated fro...
31.     It would be the endeavour of the           policy purposes, M3 growth for 2010-11Reserve Bank to ensure price stab...
Third, from the perspective of both              markets, are getting increasinglydomestic demand and inflation           ...
terminating some sector-specific liquidity          can complicate the inflation outlookfacilities and restoring the statu...
41.     Against this backdrop, the stance           ∑   Actively manage liquidity to ensureof monetary policy of the Reser...
Part B. Developmental and Regulatory Policies51.     The global financial crisis has             maintain financial stabil...
during normal times to detect and mitigate        forward, the Financial Stability Reportsany incipient signs of instabili...
Introduction of Credit Default Swaps                 ∑   to permit the recognised stock(CDS)                              ...
Limited (ICCL) have been permitted                  years under the held to maturity    to maintain transitory pooling    ...
transparency in the secondary market                regulation, surveillance and transparencytrades. In order to promote t...
(Chairman: Shri T.K.A. Nair) to consider            Co-operative Credit Institutionsvarious issues raised by micro, small ...
the strengths of the well-functioning                over 2,000. The Reserve Bank will discusssocieties and their potentia...
District Consultative Committees (DCCs)            ∑   to expand the terms of reference ofto draw up a roadmap by March 20...
also required to be included in their annual         to follow for their dealing with individualbusiness plan. In order to...
V. Regulatory and Supervisory Measures for                             Commercial BanksStrengthening the Resilience of the...
93.     However, with regard to UCBs and                preparing banks and other entities toNBFCs, a gradualist approach ...
withdrawal of limits on banks’ unsecured              the one-mode presence criterion. Theexposures (the provisioning requ...
through branch or WOS by September              conglomerates and better insulation of a    2010.                         ...
Mpsa200410
Mpsa200410
Mpsa200410
Mpsa200410
Mpsa200410
Mpsa200410
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Mpsa200410

  1. 1. Reserve Bank of India Monetary Policy Statement 2010-11 By Dr. D. Subbarao Governor The Monetary Policy for 2010-11 turnaround after the crisis inducedis set against a rather complex economic slowdown evidences the resilience of ourbackdrop. Although the situation is more economy and our financial sector.reassuring than it was a quarter ago, However, this should not divert us fromuncertainty about the shape and pace of the need to bring back into focus the twinglobal recovery persists. Private challenges of macroeconomic stabilityspending in advanced economies and financial sector development.continues to be constrained and inflation 3. This statement is organised in tworemains generally subdued making it parts. Part A covers Monetary Policy andlikely that fiscal and monetary stimuli is divided into four Sections: Section Iin these economies will continue for an provides an overview of global andextended period. Emerging market domestic macroeconomic developments;economies (EMEs) are significantly Section II sets out the outlook andahead on the recovery curve, but some projections for growth, inflation andof them are also facing inflationary monetary aggregates; Section III explainspressures. the stance of monetary policy; and Section2. India’s growth-inflation dynamics IV specifies the monetary measures.are in contrast to the overall global Part B covers Developmental andscenario. The economy is recovering Regulatory Policies and is organised intorapidly from the growth slowdown but six sections: Financial Stability (Sectioninflationary pressures, which were I), Interest Rate Policy (Section II),triggered by supply side factors, are now Financial Markets (Section III), Creditdeveloping into a wider inflationary Delivery and Financial Inclusion (Sectionprocess. As the domestic balance of risks IV), Regulatory and Supervisoryshifts from growth slowdown to inflation, Measures for Commercial Banks (Sectionour policy stance must recognise and V) and Institutional Developmentsrespond to this transition. While global (Section VI).policy co-ordination was critical in 4. Part A of this Statement should bedealing with a worldwide crisis, the exit read and understood together with theprocess will necessarily be differentiated detailed review in Macroeconomic andon the basis of the macroeconomic Monetary Developments releasedcondition in each country. India’s rapid yesterday by the Reserve Bank.
  2. 2. Part A. Monetary Policy I. The State of the EconomyGlobal Economy production (IIP) recorded a growth of 17.6 per cent in December 2009, 16.7 per cent5. The global economy continues to in January 2010 and 15.1 per cent inrecover amidst ongoing policy support and February 2010. The recovery has alsoimproving financial market conditions. become more broad-based with 14 out ofThe recovery process is led by EMEs, 17 industry groups recording acceleratedespecially those in Asia, as growth growth during April 2009-February 2010.remains weak in advanced economies. The sharp pick-up in the growth of theThe global economy continues to face capital goods sector, in double digits sinceseveral challenges such as high levels September 2009, points to the revival ofof unemployment, which are close to investment activity. After a continuous10 per cent in the US and the Euro area. decline for eleven months, importsDespite signs of renewed activity in expanded by 2.6 per cent in Novembermanufacturing and initial improvement in 2009, 32.4 per cent in December 2009,retail sales, the prospects of economic 35.5 per cent in January 2010 andrecovery in Europe are clouded by the 66.4 per cent in February 2010. Theacute fiscal strains in some countries. acceleration in non-oil imports since6. Core measures of inflation in November 2009 further evidencesmajor advanced economies are still recovery in domestic demand. Aftermoderating as the output gap persists and contracting for twelve straight months,unemployment remains high. Inflation exports have turned around since Octoberexpectations also remain well-anchored. 2009 reflecting revival of externalIn contrast, core measures of inflation in demand. Various lead indicators of serviceEMEs, especially in Asia, have been sector activity also suggest increasedrising. This has prompted central banks economic activity. On the whole, thein some EMEs to begin phasing out their economic recovery, which began aroundaccommodative monetary policies. the second quarter of 2009-10, has since shown sustained improvement.Domestic Economy 9. A sharp recovery of growth during7. The Reserve Bank had projected 2009-10 despite the worst south-westthe real GDP growth for 2009-10 at 7.5 monsoon since 1972 attests to theper cent. The advance estimates released resilience of the Indian economy. Onby the Central Statistical Organisation the demand side, the contribution of(CSO) in early February 2010 placed various components to growth in 2009-10the real GDP growth during 2009-10 at was as follows: private consumption7.2 per cent. The final real GDP growth (36 per cent), government consumptionfor 2009-10 may settle between 7.2 and (14 per cent), fixed investments7.5 per cent. (26 per cent) and net exports (20 per cent).8. The uptrend in industrial activity The monetary and fiscal stimuluscontinues. The index of industrial measures initiated in the wake of the 2
  3. 3. global financial crisis played an important 12. Growth in monetary and creditrole, first in mitigating the adverse impact aggregates during 2009-10 remainedfrom contagion and then in ensuring that broadly in line with the projections set outthe economy recovered quickly. in the Third Quarter Review in January10. However, the developments on 2010. Non-food bank credit expandedthe inflation front are worrisome. steadily during the second half of the year.The headline inflation, as measured by Consequently, the year-on-year non-foodyear-on-year variation in Wholesale Price credit growth recovered from its intra-yearIndex (WPI), accelerated from 0.5 per cent low of 10.3 per cent in October 2009 toin September 2009 to 9.9 per cent in 16.9 per cent by March 2010. The increaseMarch 2010, exceeding the Reserve in bank credit was also supplemented byBank’s baseline projection of higher flow of financial resources from8.5 per cent for March 2010 set out in the other sources. Reserve Bank’s estimatesThird Quarter Review. Year-on-year WPI show that the total flow of financialnon-food manufactured products (weight: resources from banks, domestic non-bank52.2 per cent) inflation, which was (-) 0.4 and external sources to the commercialper cent in November 2009, turned sector during 2009-10 at Rs.9,71,000marginally positive to 0.7 per cent in crore, was higher than the amount ofDecember 2009 and rose sharply Rs.8,34,000 crore in the previous year.thereafter to 3.3 per cent in January 2010 13. Scheduled commercial banksand further to 4.7 per cent in March 2010. (SCBs) raised their deposit rates byYear-on-year fuel price inflation also 25-50 basis points between February andsurged from (-) 0.7 per cent in November April 2010 so far, signalling a reversal in2009 to 5.9 per cent in December 2009, the trend of reduction in deposit rates. Onto 8.1 per cent in January 2010 and further the lending side, the benchmark primeto 12.7 per cent in March 2010. Despite lending rates (BPLRs) of SCBs havesome seasonal moderation, food price remained unchanged since July 2009inflation remains elevated. following reductions in the range of11. Clearly, WPI inflation is no longer 25-100 basis points between March anddriven by supply side factors alone. The June 2009. However, data from selectcontribution of non-food items to overall banks suggest that the weighted averageWPI inflation, which was negative yield on advances, which is a proxyat (-) 0.4 per cent in November 2009 rose measure for effective lending rates, issharply to 53.3 per cent by March 2010. projected to decline from 10.8 per cent inConsumer price index (CPI) based March 2009 to 10.1 per cent by Marchmeasures of inflation were in the range of 2010. The Base Rate system of loan14.9-16.9 per cent in January/February pricing, which will replace the BPLR2010. Thus, inflationary pressures have system with effect from July 1, 2010, isaccentuated since the Third Quarter expected to facilitate better pricing ofReview in January 2010. What was loans, enhance transparency in lendinginitially a process driven by food prices rates and improve the assessment ofhas now become more generalised. monetary policy transmission. 3
  4. 4. 14. Financial markets functioned of active liquidity management measuresnormally through the year. Surplus such as front-loading of the borrowingliquidity that prevailed throughout the calendar, unwinding of securities underyear declined towards the end of the year the market stabilisation scheme (MSS)consistent with the monetary policy and open market operation (OMO)stance. The Reserve Bank absorbed about purchases.Rs.1,00,000 crore on a daily average basis 17. The Union Budget for 2010-11under the liquidity adjustment facility has begun the process of fiscal(LAF) during the current financial year up consolidation by budgeting lower fiscalto February 12, 2010, i.e., before the first deficit (5.5 per cent of GDP in 2010-11 asstage of increase in the cash reserve ratio(CRR) came into effect. During February compared with 6.7 per cent in 2009-10)27- March 31, 2010, the average daily and revenue deficit (4.0 per cent of GDPabsorption of surplus liquidity declined to in 2010-11 as compared with 5.3 per centaround Rs. 38,200 crore reflecting the in 2009-10). As a result, the net marketincrease in the CRR, year-end advance tax borrowing requirement of the Centraloutflows and higher credit demand from Government in 2010-11 is budgeted lowerthe private sector. However, as the overall at Rs.3,45,010 crore as compared with thatliquidity remained in surplus, overnight in the previous year.interest rates generally stayed close to the 18. Historically, fiscal deficits havelower bound of the LAF rate corridor. been financed by a combination of15. The large market borrowing by the market borrowings and other sources.Government put upward pressure on the However, in 2009-10 and 2010-11,yields on government securities during reliance on market borrowings for2009-10. However, this was contained by financing the fiscal deficit increased inactive liquidity management by the relative terms. The large marketReserve Bank. Lower credit demand by borrowing in 2009-10 was facilitated bythe private sector also cushioned the yield. the unwinding of MSS securities andEquity markets generally remained firm OMO purchases, as a result of which freshduring the year with intermittent issuance of securities constituted 63.0 percorrections in line with the global pattern. cent of the total budgeted marketResource mobilisation through public borrowings. However in 2010-11, almostissues increased sharply. Housing prices the entire budgeted borrowings will berebounded during 2009-10. According to funded by fresh issuance of securities.the Reserve Bank’s survey, they surpassed Therefore, notwithstanding the lowertheir pre-crisis peak levels in Mumbai. budgeted net borrowings, fresh issuance16. During 2009-10, the Central of securities in 2010-11 will beGovernment raised Rs.3,98,411 crore (net) Rs.3,42,300 crore, higher than thethrough the market borrowing programme corresponding figure of Rs.2,51,000 crorewhile the state governments mobilised last year. The large government borrowingRs.1,14,883 crore (net). This large in 2009-10 was also facilitated by sluggishborrowing was managed in a non- private credit demand and comfortabledisruptive manner through a combination liquidity conditions. However, going 4
  5. 5. forward, private credit demand is expected the corresponding period last year.to pick up further. Meanwhile, inflationary Consequently, on a balance of paymentspressures have also made it imperative for basis (i.e., excluding valuation effects),the Reserve Bank to absorb surplus foreign exchange reserves increased byliquidity from the system. Thus, managing US$ 11 billion as against a decline of US$the borrowings of the Government during 20 billion during the corresponding period2010-11 will be a bigger challenge than it a year ago. Foreign exchange reserveswas last year. stood at US$ 279 billion as on March 31, 2010. The six-currency19. The current account deficit during trade-based real effective exchange rateApril-December 2009 was US$ 30 billion (REER) (1993-94=100) appreciated byas compared with US$ 28 billion for the 15.5 per cent during 2009-10 up tocorresponding period of 2008. Net capital February as against 10.4 per centinflows at US$ 42 billion were also depreciation in the corresponding periodsubstantially higher than US$ 7 billion in of the previous year. II. Outlook and ProjectionsGlobal Outlook commercial real estate is declining.Growth Growth in the euro area, on a quarter-on- quarter basis, was 0.1 per cent in Q4 of20. In its World Economic Outlook 2009. It may remain moderate in 2010Update for January 2010, the International because of the ongoing process of balanceMonetary Fund (IMF) projected sheet adjustment in various sectors,that global growth will recover from (-) 0.8 dampened investment, low capacityper cent in 2009 to 3.9 per cent in 2010 utilisation and low consumption. Thoughand further to 4.3 per cent in 2011. exports are improving and the decline inOrganisation for Economic Co-operation business fixed investment is moderating,and Development’s (OECD) composite several euro-zone governments are facedleading indicators (CLIs) in February with high and unsustainable fiscal2010 continued to signal an improvement imbalances which could have implicationsin economic activity for the advanced for medium and long-term interest rates.economies. Three major factors that havecontributed to the improved global In Japan, improved prospects on accountoutlook are the massive monetary and of exports have been offset by thefiscal support, improvement in confidence levelling off of public investment and riseand a strong recovery in EMEs. in unemployment.21. US GDP rose by 5.6 per cent on 22. Amongst EMEs, China continuesan annualised basis during Q4 of 2009. to grow at a rapid pace, led mainly byHowever, household spending remains domestic demand. Malaysia and Thailandconstrained by high unemployment at have recovered to register positive growth9.7 per cent. Though business fixed in the second half of 2009. Indonesiainvestment is turning around and housing recorded positive growth throughoutstarts are picking up, investment in 2009. 5
  6. 6. Inflation business expectation index (BEI) showed seasonal moderation from 120.6 in Q4 of23. Globally, headline inflation rates 2009-10 to 119.8 in Q1 of 2010-11, it wasrose between November 2009 and January much higher in comparison with the level2010, softened in February 2010 on of 96.4 a year ago. The improvedaccount of moderation of food, metal and performance of the industrial sector is alsocrude prices and again rose marginally in reflected in the improved profitability insome major economies in March 2010. the corporate sector. Service sectorCore inflation continued to decline in the activities have shown buoyancy,US on account of substantial resource especially during the latter half ofslack. Inflation expectations in advanced 2009-10. The leading indicators of variouscountries also remain stable. Though sectors such as tourist arrivals,inflation has started rising in several commercial vehicles production andEMEs, India is a significant outlier with traffic at major ports show significantinflation rates much higher than in other improvement. A sustained increase in bankEMEs. credit and in the financial resources raisedDomestic Outlook by the commercial sector from non-bankGrowth sources also suggest that the recovery is gaining momentum.24. The Indian economy is firmly onthe recovery path. Exports have been 26. On balance, under the assumptionexpanding since October 2009, a trend of a normal monsoon and sustenance of good performance of the industrial andthat is expected to continue. The industrial services sectors on the back of risingsector recovery is increasingly becoming domestic and external demand, for policybroad-based and is expected to take firmer purposes the baseline projection of realhold going forward on the back of rising GDP growth for 2010-11 is placed at 8.0domestic and external demand. per cent with an upside bias (Chart 1).25. Surveys generally support the Inflationperception of a consolidating recovery.According to the Reserve Bank’s quarterly 27. Headline WPI inflation, whichindustrial outlook survey, although the moderated in the first half of 2009-10, Chart 1: Projection of GDP Growth for 2010-11 10 GDP Growth (%) 9 8 7 6 2010-11 2009-102005-06 2006-07 2007-08 2008-09 Baseline Projection 50 Per cent CI 70 Per cent CI 90 Per cent CI CI - confidence interval 6
  7. 7. firmed up in the second half of the year. It of seasonal moderation in food prices,accelerated from 1.5 per cent in October overall food inflation continues at an2009 to 9.9 per cent by March 2010. The elevated level. It is likely that structuraldeficient south-west monsoon rainfall shortage of certain agriculturalaccentuated the pressure on food prices. commodities such as pulses, edible oilsThis, combined with the firming up of and milk could reduce the pace of foodglobal commodity prices from their low price moderation. Second, the firming uplevels in early 2009 and incipient demand of global commodity prices poses upsideside pressures, led to acceleration in the risks to inflation. Third, the Reserveoverall inflation rate – both of the WPI Bank’s industrial outlook survey showsand the CPIs. that corporates are increasingly regaining their pricing power in many sectors. As28. The Reserve Bank’s baseline the recovery gains further momentum,projection of WPI inflation for March the demand pressures are expected to2010 was 8.5 per cent. However, some accentuate. Fourth, the Reserve Bank’ssubsequent developments on both supply quarterly inflation expectations survey forand demand sides pushed up inflation. households indicates that householdEnhancement of excise duty and inflation expectations have remained at anrestoration of the basic customs duty on elevated level.crude petroleum and petroleum productsand the increase in prices of iron ore and 30. Going forward, three majorcoal had a significant impact on WPI uncertainties cloud the outlook forinflation. In addition, demand side inflation. First, the prospects of thepressures also re-emerged as reflected in monsoon in 2010-11 are not yet clear.the sharp increase in non-food Second, crude prices continue to bemanufactured products inflation from 0.7 volatile. Third, there is evidence of demand side pressures building up. Onper cent to 4.7 per cent between December balance, keeping in view domestic2009 and March 2010. demand-supply balance and the global29. There have been significant trend in commodity prices, the baselinechanges in the drivers of inflation in recent projection for WPI inflation for Marchmonths. First, while there are some signs 2011 is placed at 5.5 per cent (Chart 2). Chart 2: Projected Path of Y-o-Y WPI Inflation 15.0 12.5 Inflation Rate (%) 10.0 7.5 5.0 2.5 0.0 Mar-11 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 -2.5 Mar-10 Jun-10 Sep-10 Dec-10 Baseline Projection 50 Per cent CI 70 Per cent CI 90 Per cent CI CI - confidence interval 7
  8. 8. 31. It would be the endeavour of the policy purposes, M3 growth for 2010-11Reserve Bank to ensure price stability and is placed at 17.0 per cent. Consistent withanchor inflation expectations. In pursuit this, aggregate deposits of SCBs areof these objectives, the Reserve Bank projected to grow by 18.0 per cent. Thewill continue to monitor an array of growth in non-food credit of SCBs ismeasures of inflation, both overall and placed at 20.0 per cent. As always, thesedisaggregated components, in the context numbers are provided as indicativeof the evolving macroeconomic situation projections and not as targets.to assess the underlying inflationarypressures. Risk Factors32. Notwithstanding the current 35. While the indicative projections ofinflation scenario, it is important to growth and inflation for 2010-11 mayrecognise that in the last decade, the appear reassuring, the following majoraverage inflation rate, measured both in downside risks to growth and upside risksterms of WPI and CPI, had moderated to to inflation need to be recognised:about 5 per cent from the historical trend First, uncertainty persists about the pacerate of about 7.5 per cent. Against this and shape of global recovery. Fiscalbackground, the conduct of monetary stimulus measures played a major role inpolicy will continue to condition and the recovery process in many countries bycontain perception of inflation in the range compensating for the fall in privateof 4.0-4.5 per cent. This will be in line demand. Private demand in majorwith the medium-term objective of 3.0 advanced economies continues to be weakper cent inflation consistent with India’s due to high unemployment rates, weakbroader integration into the global income growth and tight credit conditions.economy. There is a risk that once the impact ofMonetary Aggregates public spending wanes, the recovery process will be stalled. Therefore, the33. During 2009-10, money supply prospects of sustaining the recovery hinge(M 3) growth decelerated from over 20.0per cent at the beginning of the financial strongly on the revival of privateyear to 16.4 per cent in February 2010 consumption and investment. Whilebefore increasing to 16.8 per cent by recovery in India is expected to be drivenMarch 2010, slightly above the Reserve predominantly by domestic demand,Bank’s indicative projection of 16.5 significant trade, financial and sentimentper cent. This was reflected in non-food linkages indicate that a sluggish andcredit growth of 16.9 per cent, above the uncertain global environment canindicative projection of 16.0 per cent. adversely impact the Indian economy.34. Keeping in view the need to Second, if the global recovery does gainbalance the resource demand to meet momentum, commodity and energy prices,credit offtake by the private sector and which have been on the rise during the lastgovernment borrowings, monetary one year, may harden further. Increase inprojections have been made consistent global commodity prices could, therefore,with the growth and inflation outlook. For add to inflationary pressures. 8
  9. 9. Third, from the perspective of both markets, are getting increasinglydomestic demand and inflation concerned about the external sectormanagement, the 2010 south-west dynamics.monsoon is a critical factor. The current 36. Our exchange rate policy is notassessment of softening of domestic guided by a fixed or pre-announced targetinflation around mid-2010 is contingent or band. Our policy has been to retain theon a normal monsoon and moderation in flexibility to intervene in the market tofood prices. Any unfavourable pattern in manage excessive volatility andspatial and temporal distribution of disruptions to the macroeconomicrainfall could exacerbate food inflation. situation. Recent experience hasIn the current context, an unfavourable underscored the issue of large and oftenmonsoon could also impose a fiscal volatile capital flows influencingburden and dampen rural consumer and exchange rate movements against theinvestment demand. grain of economic fundamentals andFourth, it is unlikely that the large current account balances. There is,monetary expansion in advanced therefore, a need to be vigilant against theeconomies will be unwound in the near build-up of sharp and volatile exchangefuture. Accommodative monetary policies rate movements and its potentiallyin the advanced economies, coupled with harmful impact on the real economy.better growth prospects in EMEs 37. The resumption of the process ofincluding India, are expected to trigger fiscal consolidation has been a significantlarge capital flows into the EMEs. While positive development. This will help avoidthe absorptive capacity of the Indian crowding out of private sector crediteconomy has been increasing, excessive demand and facilitate better monetaryflows pose a challenge for exchange rate management. However, the overall size ofand monetary management. The rupee has the government borrowing programme isappreciated sharply in real terms over the still very large and can exert pressure onpast one year. Pressures from higher interest rates. Going forward, fiscalcapital flows combined with the prevailing consolidation has to shift from one-offrate of inflation will only reinforce that gains to structural improvements on bothtendency. Both exporters, whose prospects tax and expenditure sides, and focusare just beginning to turn, and producers, increasingly on the quality of fiscalwho compete with imports in domestic consolidation. III. The Policy Stance38. In the wake of the global economic economy and ensured that the economycrisis, the Reserve Bank pursued started recovering ahead of most otheran accommodative monetary policy economies. However, in view of the risingbeginning mid-September 2008. This food inflation and the risk of it impingingpolicy instilled confidence in market on inflationary expectations, the Reserveparticipants, mitigated the adverse impact Bank embarked on the first phase of exitof the global financial crisis on the from the expansionary monetary policy by 9
  10. 10. terminating some sector-specific liquidity can complicate the inflation outlookfacilities and restoring the statutory and impair inflationary expectations,liquidity ratio (SLR) of scheduled particularly given the recent escalation incommercial banks to its pre-crisis level in the prices of non-food manufacturedthe Second Quarter Review of October items. Despite the increase of 25 basis2009. points each in the repo rate and the reverse39. The process was carried forward repo rate, our real policy rates are stillby the second phase of exit when the negative. With the recovery now firmly inReserve Bank announced a 75 basis points place, we need to move in a calibratedincrease in the CRR in the Third Quarter manner in the direction of normalising ourReview of January 2010. As inflation policy instruments.continued to increase, driven significantly Second, inflationary pressures haveby the prices of non-food manufactured accentuated in the recent period. Moregoods, and exceeded the Reserve Bank’s importantly, inflation, which was earlierbaseline projection of 8.5 per cent for driven entirely by supply side factors, isMarch 2010 (made in the Third Quarter now getting increasingly generalised.Review), the Reserve Bank responded There is already some evidence that theexpeditiously with a mid-cycle increase pricing power of corporates has returned.of 25 basis points each in the policy repo With the growth expected to acceleraterate and the reverse repo rate under the further in the next year, capacityLAF on March 19, 2010. constraints will re-emerge, which are40. The monetary policy response expected to exert further pressure onin India since October 2009 has prices. Inflation expectations also remainbeen calibrated to India’s specific at an elevated level. There is, therefore, amacroeconomic conditions. Accordingly, need to ensure that demand side inflationour policy stance for 2010-11 has been does not become entrenched.guided by the following three major Third, notwithstanding lower budgetedconsiderations: government borrowings in 2010-11 thanFirst, recovery is consolidating. The quick in the year before, fresh issuance ofrebound of growth during 2009-10 despite securities will be 36.3 per cent higher thanfailure of monsoon rainfall suggests that in the previous year. This presents athe Indian economy has become resilient. dilemma for the Reserve Bank. WhileGrowth in 2010-11 is projected to be monetary policy considerations demandhigher and more broad-based than in that surplus liquidity should be absorbed,2009-10. In its Third Quarter Review in debt management considerations warrantJanuary 2010, the Reserve Bank had supportive liquidity conditions. Theindicated that our main monetary policy Reserve Bank, therefore, has to do ainstruments are at levels that are more fine balancing act and ensure that whileconsistent with a crisis situation than with absorbing excess liquidity, thea fast recovering economy. In the government borrowing programme is notemerging scenario, lower policy rates hampered. 10
  11. 11. 41. Against this backdrop, the stance ∑ Actively manage liquidity to ensureof monetary policy of the Reserve Bank that the growth in demand for creditis intended to: by both the private and public sectors is satisfied in a non-disruptive∑ Anchor inflation expectations, way. while being prepared to respond appropriately, swiftly and effectively ∑ Maintain an interest rate regime to further build-up of inflationary consistent with price, output and pressures. financial stability. IV. Monetary Measures42. On the basis of the current (NDTL) effective the fortnightassessment and in line with the policy beginning April 24, 2010.stance as outlined in Section III, the 47. As a result of the increase in theReserve Bank announces the following CRR, about Rs. 12,500 crore of excesspolicy measures: liquidity will be absorbed from the system.Bank Rate 48. The Reserve Bank will continue to43. The Bank Rate has been retained monitor macroeconomic conditions,at 6.0 per cent. particularly the price situation, closely and take further action as warranted.Repo Rate Expected Outcomes44. It has been decided to: 49. The expected outcomes of the∑ increase the repo rate under the actions are: Liquidity Adjustment Facility (LAF) by 25 basis points from 5.0 per cent (i) Inflation will be contained and to 5.25 per cent with immediate inflationary expectations will be effect. anchored.Reverse Repo Rate (ii) The recovery process will be sustained.45. It has been decided to: (iii) Government borrowing requirements∑ increase the reverse repo rate under and the private credit demand will be the LAF by 25 basis points from 3.5 met. per cent to 3.75 per cent with immediate effect. (iv) Policy instruments will be further aligned in a manner consistent withCash Reserve Ratio the evolving state of the economy.46. It has been decided to: First Quarter Review of Monetary∑ increase the cash reserve ratio (CRR) Policy 2010-11 of scheduled banks by 25 basis points 50. The First Quarter Review of from 5.75 per cent to 6.0 per cent of Monetary Policy for 2010-11 will be their net demand and time liabilities announced on July 27, 2010. 11
  12. 12. Part B. Developmental and Regulatory Policies51. The global financial crisis has maintain financial stability. This processunderscored the importance of pursuing has now become more intensive with afinancial sector policies in the broader focus on drawing appropriate lessons fromcontext of financial stability and to serve the global financial crisis and putting inthe interests of the real economy. A major place a regulatory regime that is alert tolesson is that no indicator or action is possible build-up of financial imbalances.foolproof, which points to the need for The focus of the Reserve Bank’scontinuous monitoring, regular review of regulation will continue to be to improveprocesses, proactive oversight and the efficiency of the banking sectorpre-emptive actions. Thus, periodic while maintaining financial stability.assessment of regulatory comforts and Simultaneously, it will vigorously pursueeffective supervision are critical elements the financial inclusion agenda to makefor developing the financial sector on a financial sector development moresound footing. inclusive.52. Over the last several years, the 53. A synopsis of the action taken onReserve Bank has undertaken the past policy announcements togetherwide-ranging financial sector reforms to with a list of fresh policy measures is setimprove financial intermediation and out below. I. Financial StabilityFinancial Stability Report stability standpoint. The FSR observed that the banks remained well-capitalised54. As announced in the Annual Policy with higher core capital and sustainableStatement of April 2009, the Reserve Bank financial leverage. Further, stress tests forestablished a Financial Stability Unit in credit and market risk confirmed banks’August 2009 for carrying out periodic resilience to withstand high stress. Thestress testing and for preparing financial FSR also emphasised the need forstability reports. evolving a stronger supervisory regime for55. The first Financial Stability Report systemically important non-deposit taking(FSR) was released on March 25, non-banking financial companies2010. This Report is an attempt at (NBFCs-ND-SI) and strengthening theinstitutionalising the focus on financial monitoring and oversight framework forstability and making it an integral part of systemically important financialthe policy framework. The first FSR conglomerates. Overall risk to financialmakes an assessment of the strength of the stability was found to be limited.financial sector, with particular focus on However, the recent financial turmoil hasbanks, and has raised some concerns, clearly demonstrated that financialincluding rising inflation, high stability cannot be taken for granted, andgovernment borrowings and likely surge that the maintenance of financial stabilityin capital flows, from the financial requires constant vigilance, especially 12
  13. 13. during normal times to detect and mitigate forward, the Financial Stability Reportsany incipient signs of instability. Going will be published half-yearly. II. Interest Rate PolicyBase Rate: Introduction Group and the suggestions from various stakeholders, the draft guidelines on Base56. As indicated in the Annual Policy Rate were placed on the Reserve Bank’sStatement of April 2009, the Reserve Bank website in February 2010.constituted a Working Group onBenchmark Prime Lending Rate 57. In the light of the comments/(Chairman: Shri Deepak Mohanty) to suggestions received, it has been decidedreview the present benchmark prime to mandate banks to switch over to thelending rate (BPLR) system and suggest system of Base Rate from July 1, 2010.changes to make credit pricing more Guidelines on the Base Rate system weretransparent. The Working Group issued on April 9, 2010. It is expected thatsubmitted its report in October 2009 and the Base Rate system will facilitate betterthe same was placed on the Reserve pricing of loans, enhance transparency inBank’s website for public comments. lending rates and improve the assessmentBased on the recommendations of the of transmission of monetary policy. III. Financial MarketsFinancial Market Products Regulation of Non-ConvertibleInterest Rate Futures Debentures (NCDs) of Maturity of Less than One Year58. The Interest Rate Futures contracton 10-year notional coupon bearing 59. As indicated in the Second QuarterGovernment of India security was Review of October 2009, the draftintroduced on August 31, 2009. Based guidelines on the regulation ofon the market feedback and the non-convertible debentures (NCDs)recommendations of the Technical of maturity of less than one yearAdvisory Committee (TAC) on the Money, were placed on the Reserve Bank’sForeign Exchange and Government website on November 3, 2009 forSecurities Markets, it is proposed: comments/feedback. The comments/ feedback received were examined and also∑ to introduce Interest Rate Futures on deliberated by the TAC on the Money, 5-year and 2-year notional coupon Foreign Exchange and Government bearing securities and 91-day Securities Markets. Accordingly, it is Treasury Bills. The RBI-SEBI proposed: Standing Technical Committee will finalise the product design ∑ to issue the final guidelines on and operational modalities for the issuance of NCDs of maturity less introduction of these products on the than one year by end-June 2010. exchanges. 13
  14. 14. Introduction of Credit Default Swaps ∑ to permit the recognised stock(CDS) exchanges to introduce plain vanilla60. As indicated in the Second Quarter currency options on spot US Dollar/Review of October 2009, the Reserve Rupee exchange rate for residents.Bank constituted an internal Working 63. The risk management andGroup to finalise the operational operational guidelines will be finalised byframework for introduction of plain the RBI-SEBI Standing Technicalvanilla over-the-counter (OTC) single- Committee.name CDS for corporate bonds for Separate Trading for Registered Interestresident entities subject to appropriate and Principal of Securities (STRIPS):safeguards. The Group is in the process Statusof finalising a framework suitable for theIndian market, based on consultations with 64. As indicated in the Annual Policymarket participants/experts and study of Statement for 2009-10, the draftinternational experience. Accordingly, it guidelines on stripping/reconstitution ofis proposed: government securities prepared in∑ to place the draft report of the internal consultation with market participants were Working Group on the Reserve placed on the Reserve Bank’s website on Bank’s website by end-July 2010. May 14, 2009 for comments and feedback. Taking into consideration the feedbackGuidelines on Forex Derivatives received on the draft guidelines, the final61. As indicated in the Second Quarter guidelines on stripping/reconstitution ofReview of October 2009, the draft government securities were issued onguidelines on OTC foreign exchange March 25, 2010. The guidelines, whichderivatives were placed on the Reserve came into effect from April 1, 2010, willBank’s website on November 12, 2009 for enable market participants to strip/public comments. The feedback received reconstitute eligible Government of Indiafrom stakeholders and industry dated securities through the negotiatedassociations was discussed in the meeting dealing system (NDS) subject to certainof the TAC on the Money, Foreign terms and conditions.Exchange and Government Securities Corporate Bond MarketMarkets. On the basis of the discussions,it is proposed: 65. In the recent period, the Reserve Bank initiated several measures to develop∑ to issue final guidelines by end-June the corporate bond market as detailed 2010. below:Introduction of Exchange-Traded (i) To facilitate settlement of secondaryCurrency Option Contracts market trades in corporate bonds62. Currently, residents in India are on a delivery versus payment-1permitted to trade in futures contracts in (DVP-1) basis on the Real Time Grossfour currency pairs on two recognised Settlement (RTGS) system,stock exchanges. In order to expand the the National Securities Clearingmenu of tools for hedging currency risk, Corporation Limited (NSCCL) andit has been decided: the Indian Clearing Corporation 14
  15. 15. Limited (ICCL) have been permitted years under the held to maturity to maintain transitory pooling (HTM) category. accounts with the Reserve Bank. Investment in Unlisted Non-SLR Further, guidelines have been issued Securities to all Reserve Bank regulated entities to mandatorily clear and settle all 67. In terms of extant instructions, OTC trades in corporate bonds using banks’ investments in unlisted non-SLR the above arrangement with effect securities should not exceed 10 per cent from December 1, 2009. of their total investments in non-SLR securities as on March 31 of the previous(ii) To facilitate the development of an year. Since there is a time lag between active repo market in corporate bonds, issuance and listing of security, banks may the guidelines for repo transactions in not be able to participate in primary issues corporate debt securities were issued of non-SLR securities, which are proposed on January 8, 2010. The guidelines, to be listed but not listed at the time of which came into force with effect subscription. In view of the above, it is from March 1, 2010, will enable repo proposed that: in listed corporate debt securities rated ‘AA’ or above. Fixed Income ∑ investment in non-SLR debt securities Money Market and Derivatives (both primary and secondary market) Association of India (FIMMDA) is by banks where the security is working on the development of proposed to be listed on the reporting platform and also on the Exchange(s) may be considered as Global Master Repo Agreement to investment in listed security at the operationalise the repo in corporate time of making investment. bonds. 68. If such security, however, is notNon-SLR Bonds of companies engaged in listed within the period specified, the sameinfrastructure: Valuation will be reckoned for the 10 per cent limit specified for unlisted non-SLR securities.66. At present, banks’ investments in In case such investment included undernon-SLR bonds are classified either under unlisted non-SLR securities lead to aheld for trading (HFT) or available for sale breach of the 10 per cent limit, the bank(AFS) category and subjected to ‘mark to would not be allowed to make furthermarket’ requirements. Considering that investment in non-SLR securities (boththe long-term bonds issued by companies primary and secondary market, includingengaged in infrastructure activities are unrated bonds issued for financinggenerally held by banks for a long period infrastructure activities) till such time theand not traded and also with a view to limit is reached.incentivising banks to invest in such Financial Market Infrastructurebonds, it is proposed: Reporting Platform for Certificates of∑ to allow banks to classify their Deposit (CDs) and Commercial Papers investments in non-SLR bonds (CPs) issued by companies engaged in infrastructure activities and having a 69. Although there is a large CD and minimum residual maturity of seven CP market, there is currently little 15
  16. 16. transparency in the secondary market regulation, surveillance and transparencytrades. In order to promote transparency purposes, it is necessary to extend thein the secondary market transactions for existing reporting arrangement in respectCDs and CPs, it is proposed: of IRS to all OTC interest rate and forex derivatives. Accordingly, it is proposed:∑ to introduce a reporting platform for all secondary market transactions in ∑ to set up a Working Group consisting CDs and CPs. of members of the Reserve Bank, the CCIL and market participants to work70. FIMMDA has been requested to out the modalities for an efficient,start work on developing a platform single point reporting mechanism forsimilar to its existing platform for all OTC interest rate and forexcorporate bonds. Eventually, once the derivative transactions.reporting system stabilises, a settlementmechanism similar to the one introduced Revision of Repo Accounting: Statusfor the OTC corporate bonds may be put 72. As indicated in the Annual Policyin place. Statement of April 2009, the revisedReporting of OTC Derivative guidelines for accounting of repo/reverseTransactions repo transactions were issued by the Reserve Bank on March 23, 2010. The71. The issue of transparency and the revised accounting guidelines captureneed for information repositories for the economic essence of repo as atransactions in OTC derivatives have collateralised lending and borrowingassumed sharper focus in the post-crisis instrument and not as outright sale andscenario. In India, centralised reporting of purchase. The revised accountingOTC trades in interest rate derivatives guidelines have been made applicable to[interest rate swap (IRS)/forward rate market repo transactions with effect fromagreements (FRAs)] commenced in April 1, 2010. These accounting normsAugust 2007 on the Clearing Corporation will, however, not apply to repo/reverseof India Limited (CCIL) platform. To repo transactions conducted under thecapture the trade data pertaining to all Liquidity Adjustment Facility (LAF) withOTC derivative transactions for the Reserve Bank. IV. Credit Delivery and Financial InclusionCredit Flow to the MSE Sector ∑ to mandate banks not to insist on collateral security in case of loans upCredit Guarantee Scheme for MSEs to Rs.10 lakh as against the present73. Following the recommendations of limit of Rs.5 lakh extended to all unitsthe Working Group (Chairman: Shri V. K. of the micro and small enterprisesSharma) on credit guarantee scheme of the (MSEs) sector.Credit Guarantee Fund Trust for Micro High Level Task Force on MSMEsand Small Enterprises (CGFTMSE), it is 74. A High Level Task Force wasproposed: constituted by the Government of India 16
  17. 17. (Chairman: Shri T.K.A. Nair) to consider Co-operative Credit Institutionsvarious issues raised by micro, small (Chairman: Prof.A.Vaidyanathan) and inand medium enterprises (MSMEs) and consultation with the state governments,draw up an agenda for action. The Task the Government of India had approved aForce submitted its Report on January 30, package for revival of the short-term2010 to the Government of India. The Task rural co-operative credit structure. AsForce recommended several measures envisaged in the package, so far 25 Stateshaving a bearing on the functioning of have entered into MemorandaMSMEs, viz., credit, marketing, labour, of Understanding (MoU) with theexit policy, infrastructure/technology/skill Government of India and the Nationaldevelopment and taxation. In particular, Bank for Agriculture and Ruralit recommended that: (i) all scheduled Development (NABARD). Fourteencommercial banks should achieve a 20 per States have made necessary amendmentscent year-on-year growth in credit to to their respective Co-operative Societiesmicro and small enterprises to ensure Acts. As on December 31, 2009, anenhanced credit flow; (ii) any shortfall in aggregate amount of about Rs.7,000 crorethe achievement of sub-target of 60 per was released by the NABARD ascent for lending to micro enterprises of Government of India’s share under thethe total advances granted to the micro and package to primary agricultural creditsmall enterprises, would also be taken into societies (PACS) in 11 States.account for the purpose of allocating Financial Inclusion through Grass-rootamounts for contribution to rural Co-operativesinfrastructure development fund (RIDF)or any other Fund with other financial 77. There is a need for betterinstitutions as specified by the Reserve understanding of the grass-root levelBank, with effect from April 1, 2010; and rural co-operatives, which can play a(iii) all scheduled commercial banks more effective role as vehicles ofshould achieve a 15 per cent annual financial inclusion. Besides, a largegrowth in the number of micro enterprise number of PACS, large adivasi multi-accounts. purpose co-operative societies (LAMPS) and farmers’ service societies (FSS), a75. Banks are urged to keep in number of thrift and credit co-operativeview the recommendations made by the societies have been set up under theTask Force and take effective steps to parallel Self-Reliant Co-operativeincrease the flow of credit to the MSE Societies Acts in some States. There is asector, particularly to micro enterprises. need to understand the operations ofThe Reserve Bank will monitor the these co-operative societies withperformance of banks in this regard. reference to their membership profile,Rural Co-operative Banks management structure, range of services being offered by them, savings mobilisedRevival of Rural Co-operative Credit from members/non-members, percentageStructure of non-borrower members, credit76. Based on the recommendations extended to tenant farmers, oral lesseesof the Task Force on Revival of Rural and agricultural labourers to appreciate 17
  18. 18. the strengths of the well-functioning over 2,000. The Reserve Bank will discusssocieties and their potential as an FIPs with individual banks and monitoreffective vehicle of financial inclusion. their implementation.It is, therefore, proposed: Business Correspondents: Relaxations∑ to constitute a Committee 79. Under the extant guidelines on the comprising representatives from the business correspondent (BC) model, only Reserve Bank, the NABARD and a certain select categories of individuals are few State Governments to study the permitted to be engaged as BCs. With a functioning of well-run PACS, view to providing more flexibility to LAMPS, FSS and thrift and credit co- banks, it is proposed: operative societies set up under the parallel Self-Reliant Co-operative ∑ to permit banks to engage any Societies Acts to gather information individual, including those operating on their working and assess their Common Service Centres (CSCs), as potential to contribute to financial BC, subject to banks’ comfort level inclusion. and their carrying out suitable due diligence.Financial Inclusion Plan for Banks 80. Operational guidelines to banks in78. With a view to increasing banking this regard will be issued separately.penetration and promoting financialinclusion, domestic commercial banks, 81. Furthermore, a suggestion hasboth in the public and private sectors, were been received from various quarters toadvised to take some specific actions. consider ‘for profit’ companies (other thanFirst, banks were required to put in place NBFCs) as BCs of banks. Keeping in viewa Board-approved Financial Inclusion the ramifications of the suggestion, it isPlan (FIP) in order to roll them out over proposed:the next three years and submit the same ∑ to prepare a discussion paper on theto the Reserve Bank by March 2010. subject which will be placed on theBanks were advised to devise FIPs Reserve Bank’s website. Based on thecongruent with their business strategy and feedback, a final view will be takento make it an integral part of their in the matter.corporate plans. The Reserve Bank hasdeliberately not imposed a uniform model High Level Committee on Lead Bankso that each bank is able to build its own Schemestrategy in line with its business model 82. On the basis of theand comparative advantage. Second, recommendations of the High Levelbanks were required to include criteria on Committee on Lead Bank Schemefinancial inclusion in the performance (Chairperson: Smt. Usha Thorat), the Stateevaluation of their field staff. Third, banks Level Bankers’ Committee (SLBC)were advised to draw up a roadmap by convenor banks were advised onMarch 2010 to provide banking services November 27, 2009 that the lead banksin every village having a population of should constitute a sub-committee of the 18
  19. 19. District Consultative Committees (DCCs) ∑ to expand the terms of reference ofto draw up a roadmap by March 2010 to the Working Group to also review theprovide banking services through a pros and cons of inclusion of bankbanking outlet in every village having a lending to micro-finance institutionspopulation of over 2,000. Such banking (MFIs) under priority sector lending.services need not necessarily be extended The Group is expected to submit itsthrough a brick and mortar branch but Report by end-June 2010.through any of the various forms of Urban Co-operative Banksinformation and communicationtechnology (ICT)-based models, including Establishment of New Urbanthrough business correspondents (BCs). Co-operative BanksBased on the other recommendations of 84. Taking into account the systemicthe Committee, the lead banks/scheduled financial health of urbancommercial banks were advised on co-operative banks (UCBs), it wasMarch 2, 2010 to (i) strengthen various decided in 2004 not to set up any newfora under the Lead Bank Scheme; UCBs. With a view to improving the(ii) discuss specific issues enabling and financial soundness of the UCB sector,inhibiting financial inclusion in the SLBC/ memoranda of understanding (MoU) wereDCC machinery; (iii) set up separate signed with all State Governments.sub-committees to work intensively on Following the consolidation, the financialspecific issues; and (iv) prepare district condition of the UCB sector has improvedcredit plans/annual credit plans linked considerably and UCBs have also beenwith the business plans of the banks. For allowed to enter into new areas ofthis purpose, it is proposed: business. With a view to increasing the∑ to put in place an appropriate coverage of banking services amongst monitoring mechanism of the working local communities, it is proposed: of the SLBCs/DCCs. ∑ to set up a Committee comprisingPriority Sector Lending Certificates: all stakeholders for studyingWorking Group the advisability of granting new urban co-operative banking licences83. In pursuance of the announcement under Section 22 of the Bankingmade in the Second Quarter Review of Regulation Act, 1949 [as applicableOctober 2009, a Working Group on to co-operative societies (AACS)].Introduction of Priority Sector LendingCertificates (PSLCs) (Chairman: Liberalisation of Off-site ATMs byShri V. K. Sharma) was constituted by the UCBsReserve Bank in November 2009 to 85. Under the extant policy of branchexamine the pros and cons of the authorisation, UCBs, which arerecommendation made by the Committee well-managed and meet the regulatoryon Financial Sector Reforms (Chairman: criteria, are required to submit annualDr. Raghuram G. Rajan) relating to PSLCs business plans, based on which centres areand make suitable recommendations on its allotted to them according to their choiceintroduction and their trading in the open for opening of branches. Centres wheremarket. In this context, it is proposed: UCBs desire to open off-site ATMs are 19
  20. 20. also required to be included in their annual to follow for their dealing with individualbusiness plan. In order to further improve customers.the banking infrastructure, it has been 89. However, within the domain ofdecided to liberalise the approach to necessary freedom to banks to choosesetting up of off-site ATMs by UCBs. the types of services to be offered to theAccordingly, it is proposed: customers and related costs, concerted∑ to allow well-managed UCBs to set efforts need to be made to further up off-site ATMs without seeking d e v e l o p a c r e d i b l e a n d e ff e c t i v e approval through the annual business f u n c t i o n a l s y s t e m o f a t t e n d i n g to customer complaints. In particular, plans. banks’ internal structure needs to be86. Detailed guidelines in this regard made functionally effective and scaledwill be issued by mid-May 2010. up to attend to not only basic customer needs, but the special needs ofCustomer Service disadvantaged groups such as87. The issue of ‘treating customers pensioners and small borrowers,fairly’ is assuming critical importance as including farmers. Though there existsthe experience shows that consumer’s a tiered mechanism for customerinterests are often not accorded full grievance redressal in the banks, itsprotection and properly attended to. e ff i c a c y i n t e r m s o f a t t e n d i n g t oCustomer service in the banking industry customer complaints is far fromis increasingly becoming important as satisfactory. Taking into account all these considerations, it is proposed:banks are privileged institutions andbanking is a special public utility service. ∑ to set up a Committee to look intoThe Reserve Bank and the Banking banking services rendered to retailOmbudsman’s offices have been receiving and small customers, includingseveral complaints regarding levying of pensioners. The Committee will alsoexcessive interest rates and charges on look into the system of grievancecertain loans and advances. redressal mechanism prevalent in banks, its structure and efficacy, and88. The Reserve Bank has, over the suggest measures for expeditiousyears, undertaken a number of initiatives resolution of complaints. Thefor ensuring fair treatment to customers. Committee will also examine theThis has taken the form of both regulatory international experiences in thisfiats (such as reining in of recovery agents, regard.introduction of comprehensive display ∑ to further strengthen the mechanism,board, banking facilities for the visually for implementing the Reserve Bank’schallenged, rationalisation of service guidelines on customer service,charges on collection of outstation through on-site and off-sitecheques and free use of ATMs) as also inspections.moral suasion and class action. The Code ∑ to require banks to devote exclusiveof Bank’s Commitment to Customers was time in a Board meeting once everyintroduced in July 2006 to set a minimum six months to review and deliberatestandard of banking practices for banks on customer service. 20
  21. 21. V. Regulatory and Supervisory Measures for Commercial BanksStrengthening the Resilience of the implementation of enhancements andBanking Sector revisions to Basel-II framework finalised by the Basel Committee in July 2009.90. In December 2009, the Basel Accordingly, the Reserve Bank issuedCommittee on Banking Supervision guidelines to banks in February 2010.(BCBS) had issued two consultative These guidelines require banks to makedocuments for public comments. The specified valuation adjustments fordocument on ‘Strengthening the various risks/costs in their portfoliosResilience of the Banking Sector’ contains including derivatives, which are subjectproposals for raising the quality, to ‘mark to market’ requirement and alsoconsistency and transparency of the for illiquidity of these positions. Thesecapital base, enhancing risk coverage, guidelines also permit banks to follow anyprescribing leverage ratio and containing recognised models/methods for computingpro-cyclicality. The second document on the amount of valuation adjustment. In‘International Framework for Liquidity order to ensure that a consistentRisk Measurement Standards and methodology is adopted by banks for theMonitoring’ focuses on measures for purpose, it is proposed:further elevating the resilience ofinternationally active banks to liquidity ∑ to constitute a Working Group withstress across the globe as well as members from the Reserve Bank,increasing international harmonisation of FIMMDA, the IBA and a few banksliquidity risk supervision. The Basel to recommend an appropriateCommittee is presently undertaking a framework in this regard.Quantitative Impact Study (QIS) of these Convergence of Indian Accountingproposals. The QIS will form the basis for Standards with International Financialcalibrating reforms proposed in the above Reporting Standardstwo documents to arrive at an appropriate 92. As part of the efforts to ensurelevel and quality of capital and liquidity. convergence of the Indian AccountingThe fully calibrated set of standards is Standards (IASs) with the Internationalexpected to be developed by end-2010 Financial Reporting Standards (IFRSs),with the aim of implementation by the roadmap for banking companies andend of 2012. Ten large Indian banks are non-banking financial companiesparticipating in the QIS. (NBFCs) has been finalised by theWorking Group on Valuation Ministry of Corporate Affairs inAdjustment and Treatment of Illiquid consultation with the Reserve Bank. AsPositions per the roadmap, all scheduled commercial banks will convert their91. In the Second Quarter Review of opening balance sheet as at April 1, 2013October 2009, it was proposed to issue in compliance with the IFRS convergedappropriate guidelines to banks for IASs. 21
  22. 22. 93. However, with regard to UCBs and preparing banks and other entities toNBFCs, a gradualist approach is adhere to the roadmap.considered appropriate. The roadmapenvisages UCBs having net worth in Infrastructure Financingexcess of Rs. 300 crore and NBFCs which 95. With a view to meeting theare part of NSE-Nifty 50 and BSE-Sensex increasing financing needs of30 as well as those NBFCs having net infrastructure development, the Reserveworth in excess of Rs.1,000 crore to Bank has taken a number of measures toconverge with IFRSs in tandem with the facilitate adequate flow of bank credit totime schedule given for scheduled this sector. In order to give a further thrustcommercial banks. UCBs having net to infrastructure financing by banks, someworth in excess of Rs. 200 crore but not further measures are felt necessary.exceeding Rs. 300 crore and other listed 96. In terms of extant instructions,NBFCs as well as unlisted NBFCs having rights, licenses and authorisations ofa net worth in excess of Rs. 500 crore shall borrowers, charged to banks as collateralconvert their opening balance sheets as on in respect of project loans (includingApril 1, 2014 in compliance with the IFRS infrastructure projects) are not eligible forconverged IASs. Remaining UCBs, being reckoned as tangible security for theunlisted NBFCs not falling in the above purpose of classifying an advance ascategories and regional rural banks secured loan. As toll collection rights and(RRBs) need to follow only the notified annuities in the case of road/highwayIASs which are not converged with IFRSs. projects confer certain material benefits94. Considering the amount of work to lenders, it is proposed:involved in the convergence process, it is ∑ to treat annuities under build-operate-expected that banks and other entities transfer (BOT) model in respect ofconcurrently initiate appropriate measures road/highway projects and tollto upgrade their skills, management collection rights, where there areinformation system (MIS) and information provisions to compensate the projecttechnology (IT) capabilities to manage the sponsor if a certain level of traffic iscomplexities and challenges of IFRSs. The not achieved, as tangible securitiesimplementation poses additional subject to the condition that banks’challenge as certain aspects of IFRSs, right to receive annuities and tollespecially the standards on financial collection rights is legally enforceableinstruments, are under review and would and irrevocable.take some time before they are finalised.In order to facilitate smooth migration to 97. Till June 2004, the Reserve BankIFRSs, it is proposed: had prescribed a limit on banks’ unsecured exposures. As a step towards deregulation,∑ to undertake a study of the the above limit was withdrawn to enable implications of the IFRSs banks’ Boards to formulate their own convergence process and also to issue policies on unsecured exposures. The operational guidelines as appropriate. provisioning requirement for unsecured∑ to disseminate information through sub-standard exposures, however, was learning programmes with a view to increased to 20 per cent consequent to the 22
  23. 23. withdrawal of limits on banks’ unsecured the one-mode presence criterion. Theexposures (the provisioning requirement WOS was to be treated on par with thefor secured sub-standard exposures stands existing branches of foreign banks forat 10 per cent). In view of certain branch expansion in India. No foreignsafeguards such as escrow accounts bank, however, applied to establish itselfavailable in respect of infrastructure as a WOS or to convert to a WOS duringlending, it is proposed that: the first phase.∑ infrastructure loan accounts classified 99. When the revision of presence of as sub-standard will attract a foreign banks in India was due in April provisioning of 15 per cent instead of 2009, the global financial markets were the current prescription of 20 per cent. in turmoil and there were uncertainties To avail of this benefit of lower surrounding the financial strength of provisioning, banks should have in banks around the world. Accordingly, the place an appropriate mechanism to Annual Policy Statement of April 2009 indicated the intent to continue with the escrow the cash flows and also have current policy and procedures governing a clear and legal first claim on such the presence of foreign banks in India and cash flows. to review its roadmap after duePresence of Foreign Banks consultation with the stakeholders once98. In February 2005, the Reserve there was greater clarity regardingBank had released the ‘roadmap for stability and recovery of the globalpresence of foreign banks in India’ laying financial system.out a two-track and gradualist approach 100. While global financial marketsaimed at increasing the efficiency and have been improving, variousstability of the banking sector in India. The international fora have been engaged infirst track was the consolidation of the setting out policy frameworksdomestic banking system, both in the incorporating the lessons learnt from theprivate and public sectors, and the second crisis. Some of the lessons from crisis aretrack was the gradual enhancement of to avoid organisational structures whichforeign banks in a synchronised manner. become (i) too big to fail and (ii) tooThe roadmap was divided into two phases, complex to fail. Furthermore, while therethe first phase spanning the period March is a realisation that as international2005 – March 2009, and the second phase agreement on cross-border resolutionbeginning after a review of the experience mechanism for internationally activegained in the first phase. In the first phase, banks is not likely to be reached in theforeign banks wishing to establish near future, there is considerable meritpresence in India for the first time could in subsidiarisation of significanteither choose to operate through branch cross-border presence. Apart from easingpresence or set up a 100 per cent the resolution process, this will alsowholly-owned subsidiary (WOS), provide greater regulatory control andfollowing the one-mode presence comfort to the host jurisdictions. Drawingcriterion. Foreign banks already operating lessons from the crisis, it is proposed:in India were also allowed to convert their ∑ to prepare a discussion paper on theexisting branches to WOS while following mode of presence of foreign banks 23
  24. 24. through branch or WOS by September conglomerates and better insulation of a 2010. bank from the reputational and other risks of the subsidiaries/affiliates within theLicensing of New Banks group. The Committee on Financial Sector101. The Finance Minister, in his Assessment (CFSA), in its report issuedbudget speech on February 26, 2010 in March 2009, observed that given theannounced that the Reserve Bank lack of clarity in the existing statuteswas considering giving some additional relating to the regulation and supervisionbanking licenses to private sector players. of financial holding companies, theNBFCs could also be considered, holding company structure as prevalent inif they meet the Reserve Bank’s the US for financial conglomerates is noteligibility criteria. In line with the above currently in use in India. The Committeeannouncement, it is proposed: noted that the absence of the holding company structure in financial∑ to prepare a discussion paper conglomerates exposes investors, marshalling the international depositors and the parent company to practices, the Indian experience as risks, strains the parent company’s ability also the extant ownership and to fund its own core business and could governance (O&G) guidelines and restrict the growth of the subsidiary place it on the Reserve Bank’s business. Considering the complexity of website by end-July 2010 for wider the issues involved and implications of the comments and feedback. BHC/FHC model for the financial system in general and banking system in102. Thereafter, detailed discussions particular, it is proposed:will be held with all stakeholders on thediscussion paper and guidelines will be ∑ to constitute a Working Group withfinalised based on the feedback. All the representatives from theapplications received in this regard would Government, the Reserve Bank, thebe referred to an external expert group for SEBI, the IRDA and the IBA toexamination and recommendations to the recommend a roadmap for theReserve Bank for granting licenses. introduction of a holding company structure together with the requiredIntroduction of Bank Holding legislative amendment/framework.Company (BHC)/Financial Holding Conversion of Term Deposits, DailyCompany (FHC) in India Deposits or Recurring Deposits for103. The Reserve Bank placed a Reinvestment in Term DepositsDiscussion Paper on Holding Companies 104. As per extant guidelines, banksin Banking Groups on its website in should allow conversion of term deposits,August 2007 for public comments. The daily deposits or recurring deposits tofeedback received on the Discussion Paper enable depositors to immediately reinvestunderscored the need for introduction of the amount lying in the aforesaid depositsbank holding companies (BHCs)/financial with the same bank in another termholding companies (FHCs) in India to deposit. Banks are required to pay interestensure an orderly growth of financial in respect of such term deposits without 24

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