Foreign Money Changing Activities

 Bringing in and taking out of Foreign Exchange

(i) Foreign exchange in any form can be brought into India freely without limit provided it is declared on the Currency Declaration Form (CDF) on arrival to the Custom Authorities. When foreign exchange brought in the form of currency notes or travellers' cheques does not exceed US$ 10,000/- or its equivalent and / or the value of foreign currency notes does not exceed US$ 5,000/- or its equivalent, declaration thereof on CDF is not insisted upon.

(ii) Taking out foreign exchange in any form, other than foreign exchange obtained from an authorized dealer or a money changer is prohibited unless it is covered by a general or special permission of the Reserve Bank. Non-residents, however, have general permission to take out an amount not exceeding the amount originally brought in by them, subject to compliance with the provisions of sub-para (i) above.

 Purchases of Foreign Currency from Public

(i) Authorised Money Changers (AMCs) / franchisees may freely purchase foreign currency notes, coins and travellers cheques from residents as well as non-residents. Where the foreign currency was brought in by declaring on form CDF, the tenderer should be asked to produce the same. The AMC should invariably insist on production of declaration in CDF.

While making payments in Indian Rupees to resident customers towards purchase of foreign currency notes and/ or Travellers’ Cheques payment can be made in cash / by way of 'Account Payee' cheque / demand draft/ loading in INR debit cards, as per prescribed limits.

Encashment Certificate

(i) AMCs may issue certificate of encashment when asked for in cases of purchases of foreign currency notes, coins and travellers cheques from residents as well as non-residents. These certificates bearing authorized signatures should be issued on the letter head of the money changer and proper record should be maintained.

(ii) In cases where encashment certificate is not issued, attention of the customers should be drawn to the fact that unspent local currency held by non-residents will be allowed to be converted into foreign currency only against production of a valid encashment certificate.

Borrowing and Lending in Foreign currency by persons other than authorised dealer

 Borrowing and Lending in Foreign currency by persons other than authorised dealer:::

1 Borrowing in foreign currency by persons other than an authorised dealer: The circumstances and the conditions regarding borrowing in foreign currency by persons other than an authorised dealer are mentioned below:

i. For execution of projects outside India and for exports on deferred payment terms: A person resident in India may borrow, whether by way of loan or overdraft or any other credit facility, from a bank situated outside India, for execution outside India of a turnkey project or civil construction contract or in connection with exports on deferred payment terms, provided the terms and conditions stipulated by the authority which has granted the approval to the project or contract or export is in accordance with the Foreign Exchange Management (Export of Goods and Services) Regulations, 2000.

ii. For imports: An importer in India may, for import of goods into India, avail of foreign currency credit for a period not exceeding six months extended by the overseas supplier of goods, provided the import is in compliance with the Export Import Policy of the Government of India in force.

iii. Borrowing by resident individual: An individual resident in India may borrow a sum not exceeding US$ 250,000/- or its equivalent from his close relative outside India, subject to the conditions that:

1. the minimum maturity period of the loan is one year;
2. the loan is free of interest; and
3. the amount of loan is received by inward remittance in free foreign exchange through normal banking channels or by debit to the NRE/FCNR account of the non-resident lender.

Raising of loans as Trade Credit-(updated)

Raising of loans as Trade Credit

5.1 Trade Credit: Trade Credits refer to the credits extended by the overseas supplier, bank and financial institution for maturity up to five years for imports into India. Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit. Suppliers’ credit relates to the credit for imports into India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports into India arranged by the importer from overseas bank or financial institution. Imports should be as permissible under the extant Foreign Trade Policy of the Director General of Foreign Trade (DGFT).

5.2 Routes and Amount of Trade Credit: The available routes of raising Trade Credit are mentioned below:

5.2.1 Automatic Route: ADs are permitted to approve trade credit for import of non-capital and capital goods up to USD 20 million or equivalent per import transaction.

5.2.2 Approval Route: The proposals involving trade credit for import of non-capital and capital goods beyond USD 20 million or equivalent per import transaction are considered by the RBI.

5.3 Maturity prescription: Maturity prescriptions for trade credit are same under the automatic and approval routes. While for the non-capital goods, the maturity period is up to one year from the date of shipment or the operating cycle whichever is less, for capital goods, the maturity period is up to five year from the date of shipment. For trade credit up to five years, the ab-initio contract period should be 6 (six) months. No roll-over/extension will be permitted beyond the permissible period.

5.4 Cost of raising Trade Credit: The all-in-cost ceiling for raising Trade Credit is 350 basis points over 6 months LIBOR (for the respective currency of credit or applicable benchmark). The all-in-cost include arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any.

5.5 Guarantee for Trade Credit: AD Category I banks are permitted to issue guarantee/ Letters of Undertaking /Letters of Comfort in favour of overseas supplier, bank or financial institution up to USD 20 million per import transaction for a maximum period up to one year in case of import of non-capital goods (except gold, palladium, platinum, rhodium, silver, etc). For import of capital goods, the period of guarantee/ Letters of Credit/ Letters of Undertaking by AD can be for a maximum period up to three years. The period is reckoned from the date of shipment and the guarantee period should be co-terminus with the period of credit. Further, issuance of guarantees will be subject to prudential guidelines issued by the RBI from time to time.

CHANGES IN DEFINITION OF CLOSE RELATIVES-{‘Close relative’ Defined under the Companies Act, 1956/2013}

The term ‘Close relative’ means a relative as defined under the Companies Act, 1956/2013:

A person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:- 

1. Father: 

Provided that the term “Father” includes step-father.

 

2. Mother: 

Provided that the term “Mother” includes step-mother.

3. Son: 

Provided that the term “Son” includes step-son. 

4. Son’s Wife. 

5. Daughter. 

6. Daughter’s husband. 

7. Brother: 

Provided that the term “Brother” includes step-brother. 

8. Sister: 

Provided that the term “Sister” includes step-sister.

The list given as above is very crystal clear. However, following needs to be understood. 

Father, mother, son, brother and sister include the step-counterparts but there is no specific mention about step-daughter.  Plain interpretation of the section indicates that step daughter is not a relative. 

We get one more surprising thing here. In one case, a person can be relative of another in one way, but the reverse way, the person is not a relative. 

For example, Mr. A has a step daughter Ms. B. So for Ms. B, Mr. A, being a step-father, is a relative. However, for Mr. A, Ms. B is not a relative as step-daughter is not a relative. 

It is worth considering that son’s wife includes step son’s wife. However, daughter’s husband does not include step daughter’s husband. 

On division of a Hindu Undivided Family, the members of the family, except included in the above list of relatives, cease to be relatives. Also, if we compare with Companies Act, 1956, the list of relatives is drastically cut short. The following table will show the comparison of respective acts.

Act of 1956	Act of 2013
U/s 6: MEANING OF "RELATIVE" A person shall be deemed to be a relative of another, if, and only if, (a) they are members of a Hindu undivided family ; or (b) they are husband and wife ; or (c) the one is related to the other in the manner indicated in Schedule IA.	U/s 2(77) ‘‘relative’’, with reference to any person, means anyone who is related to another, if— (i) they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) one person is related to the other in such manner as may be prescribed.
Schedule IA	As prescribed
Father	Father (including step-father)
Mother (including step-mother)	Mother (including step-mother)
Son (including step-son)	Son (including step-son)
Son's wife	Son's wife
Daughter (including step-daughter)	Daughter
Father's father	Daughter's husband
Father's mother	Brother (including step-brothers)
Mother's mother	Sister (including step-sister)
Mother's father	-x-
Son's son	-x-
Son's son's wife	-x-
Son's daughter	-x-
Son's daughter's husband	-x-
Daughter's husband	-x-
Daughter's son	-x-
Daughter's son's wife	-x-
Daughter's daughter	-x-
Daughter's daughter's husband	-x-
Brother (including step-brothers)	-x-
Brother's wife	-x-
Sister (including step-sister)	-x-
Sister's husband	-x-

To conclude on a lighter note, the Companies Act, 1956 considered the joint family size concept, whereas, the Companies Act, 2013 as taken into account the modern family size, i.e. the nuclear family and has reduced the list of relatives from the long list to a small list.

Master Circular on Penalties for bank branches including currency chests based on performance in rendering customer service.

Master Circular on the Scheme of Penalties for bank branches including currency chests based on performance in rendering customer service to members of public

1. The scheme of Penalties for bank branches including currency chests has been formulated in order to ensure that all bank branches provide better customer service to members of public with regard to exchange of notes and coins, in keeping with the objectives of Clean Note Policy.

2. Penalties

Penalties to be imposed on banks for deficiencies in exchange of notes and coins/remittances sent to RBI/operations of currency chests etc. are as follows:

Sr.No.	Nature of Irregularity	Penalty
i.	Shortages in soiled note remittances and currency chest balances	For notes in denomination upto ₹.50  ₹.50/- per piece in addition to the loss For notes in denomination of ₹.100 & above Equal to the value of the denomination per piece in addition to the loss. Shortages of 100 pieces and above per remittance shall be debited immediately. Penalty may be levied on reaching a limit of 100 pieces in a cumulative manner.
ii.	Counterfeit notes detected in soiled note remittances and currency chest balances.	Penalty on account of detection of counterfeit notes by RBI from soiled note remittance of banks and in currency chest balances shall be levied in terms of the instructions issued by DCM (FNVD) No.G-4/16.01.05/2017-18 dated July 20, 2017.
iii.	Mutilated notes detected in soiled note remittances and currency chest balances	₹ 50/- per piece irrespective of the denomination Mutilated notes of 100 pieces and above per remittance shall be debited immediately. Penalty may be levied on reaching a limit of 100 pieces in a cumulative manner.
iv.	Non-compliance with operational guidelines by currency chests detected by RBI officials a) Non-functioning of CCTV b) Branch cash/documents kept in strong room c) Non-utilization of NSMs for sorting of notes (NSMs not used for sorting of high denomination notes received over the counter or not used for sorting notes remitted to chest/RBI)	Penalty of ₹ 5000 for each irregularity. Penalty will be enhanced to ₹.10,000 in case of repetition. Penalty will be levied immediately.
v.	Violation of any term of agreement with RBI (for opening and maintaining currency chests) or deficiency in service in providing exchange facilities, as detected by RBI officials e.g.. a) Non-issue of coins over the counter to any member of public despite having stock. b) Refusal by any bank branch to exchange soiled notes / refusal by any currency chest branch to adjudicate mutilated notes tendered by any member of public c) Non conduct of surprise verification of chest balances, at least at bimonthly intervals, by officials unconnected with the custody thereof and by the officials from the Controlling Office once in six months. d) Denial of facilities/services to linked branches of other banks. e) Non acceptance of lower denomination notes (i.e. denomination of ₹ 50 and below) tendered by members of public and linked bank branches. f) Detection of mutilated /counterfeit notes in re-issuable packets prepared by the currency chest branches.	₹ 10,000 for any violation of agreement or deficiency of service. ₹ 5 lakh in case there are more than 5 instances of violation of agreement/deficiency in service by the branch. The levy of such penalty will be placed in public domain. Penalty will be levied immediately.

Facility for Exchange of Notes and Coins-

1. Facility for exchange of notes and coins at bank branches-(as per RBI Circular July17)

(a) All branches of banks in all parts of the country are mandated to provide the following customer services, more actively and vigorously to the members of public so that there is no need for them to approach the RBI Regional Offices for this purpose:

(i) Issuing fresh / good quality notes and coins of all denominations on demand,

(ii) Exchanging soiled / mutilated / defective notes, and

(iii) Accepting coins and notes either for transactions or exchange. In terms of section 6 (1) of The Coinage Act, 2011, the coins issued under the authority of section 4 shall be a legal tender in payment or on account, in case of :-

1. a coin of any denomination not lower than one rupee, for any sum not exceeding one thousand rupees;
2. a half-rupee coin, for any sum not exceeding ten rupees:

Provided that the coin has not been defaced and has not lost weight so as to be less than such weight as may be prescribed in its case.

Liberalized definition of a Soiled Note

 A ‘soiled note’ means a note which has become dirty due to normal wear and tear and also includes a two piece note pasted together wherein both the pieces presented belong to the same note and form the entire note with no essential feature missing. These notes should be accepted over bank counters in payment of Government dues and for credit to accounts of the public maintained with banks. However, in no case, these notes should be issued to the public as re-issuable notes and shall be deposited in currency chests for onward transmission to RBI offices as soiled note remittances for further processing.

4. Mutilated Notes – Presentation and Passing

A mutilated note is a note of which a portion is missing or which is composed of more than two pieces. Mutilated notes may be presented at any of the bank branches. The notes so presented shall be accepted, exchanged and adjudicated in accordance with Reserve Bank of India (Note Refund) Rules 2009.

5. Extremely brittle, burnt, charred, stuck up Notes

Notes which have turned extremely brittle or are badly burnt, charred or inseparably stuck up together and, therefore, cannot withstand normal handling, shall not be accepted by the bank branches for exchange. Instead, the holders may be advised to tender these notes to the concerned Issue Office where they will be adjudicated under a Special Procedure.

Interest Subvention Scheme for Short Term Crop Loans during the year 2017-18

Interest Subvention Scheme for Short Term Crop Loans during the year 2017-18

Salient Features/points : 

1.  In order to provide short-term crop loans upto ₹ 3 lakh to farmers at an interest rate of 7% p.a. during the year 2017-18, it has been decided to offer interest subvention of 2% per annum to lending institutions viz. Public Sector Banks (PSBs), Private Sector Commercial Banks (in respect of loans given by their rural and semi-urban branches only) on use of their own resources. This interest subvention of 2% will be calculated on the crop loan amount from the date of its disbursement/ drawal up to the date of actual repayment of the crop loan by the farmer or up to the due date of the loan fixed by the banks whichever is earlier, subject to a maximum period of one year.

2.  To provide an additional interest subvention of 3% per annum to such of those farmers repaying in time i.e. from the date of disbursement of the crop loan upto the actual date of repayment by farmers or upto the due date fixed by the banks for repayment of crop loan, whichever is earlier, subject to a maximum period of one year from the date of disbursement. This also implies that the farmers paying promptly as above would get short term crop loans @ 4% per annum during the year 2017-18.

3.   In order to discourage distress sale and to encourage them to store their produce in warehouses, the benefit of interest subvention will be available to small and marginal farmers having Kisan Credit Card for a further period of upto six months post the harvest of the crop at the same rate as available to crop loan against negotiable warehouse receipts issued on the produce stored in warehouses accredited with Warehousing Development Regulatory Authority (WDRA).

4..To provide relief to farmers affected by natural calamities, an interest subvention of 2 percent per annum will be made available to banks for the first year on the restructured loan amount. Such restructured loans will attract normal rate of interest from the second year onwards.

5..To avoid multiple loaning and to ensure that only genuine farmers avail concessional crop loan through the mechanism of gold loans, the lending institutions may conduct due diligence and ensure proper documentation including recording of land details even when the farmer avails gold loans for such purposes.

6..To ensure hassle-free benefits to farmers under Interest Subvention Scheme, the banks are advised to make Aadhar linkage mandatory for availing short-term crop loans in 2017-18.

Export Data Processing and Monitoring System (EDPMS) Issuance of Electronic Bank Realisation Certificate (eBRC)

AD Category-I banks are directed to update the EDPMS with data of export proceeds on “as and when realised basis” and, with effect from October 16, 2017 generate Electronic Bank Realisation Certificate (eBRC) only from the data available in EDPMS, to ensure consistency of data in EDPMS and consolidated eBRC.

What is prompt corrective action? PCA

What is prompt corrective action? 

To ensure that banks don't go bust, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled. The process or mechanism under which such actions are taken is known as Prompt Corrective Action, or PCA. 

2. Why the need for PCA 
The 1980s and early 1990s were a period of great stress and turmoil for banks and financial institutions all over the globe. In USA, more than 1,600 commercial and savings banks insured by the Federal Deposit Insurance Corporation (FDIC) were either closed or given financial assistance during this period. The cumulative losses incurred by the failed institutions exceeded US $100 billion. These events led to the search for appropriate supervisor.. Strategies to avoid bank failures as they can have a destabilising effect on the economy. 

3. Too big to fail? 
Due to the adverse impact on the economy, medium sized or large banks are rarely closed and the governments try to keep them afloat. Bank rescues and mergers are far more common than outright closures. If banks are not to be allowed to fail, it is essential that corrective action is taken well in time when the bank still has adequate cushion of capital to minimise the losses. 

4. What does the RBI stipulate? 
RBI has set trigger points on the basis of CRAR (a metric to measure balance sheet strength), NPA and ROA. Based on each trigger point, the banks have to follow a mandatory action plan. Apart from this, the RBI has discretionary action plans too. The rationale for classifying the rule-based action points into “mandatory“ and “discretionary“ is that some of the actions are essential to restore the financial health of banks while other actions will be taken at the discretion of RBI depending upon the profile of each bank. 
5. What will a bank do if PCA is triggered? 
Banks are not allowed to renew or access costly deposits or take steps to increase their fee-based income. Banks will also have to launch a special drive to reduce the stock of NPAs and contain generation of fresh NPAs. They will also not be allowed to enter into new lines of business. RBI will also impose restrictions on the bank on borrowings from interbank market etc. 

Issuance of Rupee denominated bonds overseas

On a review of the laid down framework for issuance of Rupee denominated bonds overseas (Masala Bonds) and with a view to harmonize the various elements of the ECB framework, it has been decided that any proposal of borrowing by eligible Indian entities by issuance of these bonds will be examined at the Foreign Exchange Department, Central Office, Mumbai. Further, it has also been decided to revise the provisions in respect of maturity period, all-in-cost ceiling and recognized lenders (investors) of Masala Bonds as under:

1. Maturity period: Minimum original maturity period for Masala Bonds raised upto USD 50 million equivalent in INR per financial year should be 3 years and for bonds raised above USD 50 million equivalent in INR per financial year should be 5 years.
2. All-in-cost ceiling: The all-in-cost ceiling for such bonds will be 300 basis points over the prevailing yield of the Government of India securities of corresponding maturity.
3. Recognised investors: Entities permitted as investors under the provisions of paragraph 3.3.3 of the Master Direction but should not be related party within the meaning as given in Ind-AS 24.

Master Direction - Deposits and Accounts

Indian startup, having an overseas subsidiary, may open a foreign currency account with a bank outside India for the purpose of crediting to the account the foreign exchange earnings out of exports/ sales made by the said startup or its overseas subsidiary. The balances held in such accounts, to the extent they represent exports from India, shall be repatriated to India within the period prescribed for realization of exports, in Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 dated January 12, 2016, as amended from time to time.

Crystallization of Inoperative Foreign Currency Deposits

Crystallization of Inoperative Foreign Currency Deposits – Reserve Bank (Depositor Education and Awareness Fund) Scheme, 2014

With the objective of aligning the instructions in respect of foreign currency accounts with the Reserve Bank (Depositor Education and Awareness Fund) Scheme, 2014, Authorised Dealer banks are required to crystallise, that is, convert the credit balances in any inoperative foreign currency denominated deposit into Indian Rupee, in the manner indicated below:

(a) In case a foreign currency denominated deposit with a fixed maturity date remains inoperative for a period of three years from the date of maturity of the deposit, at the end of the third year, the authorised bank shall convert the balances lying in the foreign currency denominated deposit into Indian Rupee at the exchange rate prevailing as on that date. Thereafter, the depositor shall be entitled to claim either the said Indian Rupee proceeds and interest thereon, if any, or the foreign currency equivalent (calculated at the rate prevalent as on the date of payment) of the Indian Rupee proceeds of the original deposit and interest, if any, on such Indian Rupee proceeds.

(b) In case of foreign currency denominated deposit with no fixed maturity period, if the deposit remains inoperative for a period of three years (debit of bank charges not to be reckoned as operation), the authorised bank shall, after giving a three month notice to the depositor at his last known address as available with it, convert the deposit from the foreign currency in which it is denominated to Indian Rupee at the end of the notice period at the prevailing exchange rate. Thereafter, the depositor shall be entitled to claim either the said Indian Rupee proceeds and interest thereon, if any, or the foreign currency equivalent (calculated at the rate prevalent as on the date of payment) of the Indian Rupee proceeds of the original deposit and interest, if any, on such Indian Rupee proceeds.

Regularisation of assets held abroad by a person resident in India under Foreign Exchange Management Act, 1999.

To effectively deal with assets held abroad by persons resident in India in violation of the Foreign Exchange Management Act, 1999 (FEMA) for which declarations have been made and taxes and penalties have been paid under the provisions of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, it is clarified that:

a) No proceedings shall lie under the Foreign Exchange Management Act, 1999 (FEMA) against the declarant with respect to an asset held abroad for which taxes and penalties under the provisions of Black Money Act have been paid.

b) No permission under FEMA will be required to dispose of the asset so declared and bring back the proceeds to India through banking channels within 180 days from the date of declaration.

c) In case the declarant wishes to hold the asset so declared, she/ he may apply to the Reserve Bank of India within 180 days from the date of declaration if such permission is necessary as on date of application. Such applications will be dealt by the Reserve Bank of India as per extant regulations. In case such permission is not granted, the asset will have to be disposed of within 180 days from the date of receipt of the communication from the Reserve Bank conveying refusal of permission or within such extended period as may be permitted by the Reserve Bank and proceeds brought back to India immediately through the banking channel.

Operating framework for facilitating Outward Remittance services by non-bank entities through Authorized Dealer (Category I) banks in India

The non-bank entities may obtain an approval from the Reserve Bank for facilitating outward remittance services through Authorized Dealer (Category I) banks in India to effect outward remittances.

The governing conditions for this arrangement are as under:

1. The Authorized Dealer (Category I) bank through which the service is being offered shall be responsible for ensuring that each outward remittance transaction is in compliance with the provisions of governing regulations in India.
2. The said Authorized Dealer (Category I) bank shall be responsible for ensuring compliance to KYC/ AML standards/ CFT issued by the Reserve Bank.
3. The remittances facilitated under this model shall comprise small value transactions, not exceeding USD 5000 per transaction. Remittances by resident individuals will be subject to the limit prescribed under the Liberalised Remittance Scheme (LRS).
4. Only current account transactions, in the nature of personal remittances, shall be permitted under this model. The transactions permitted are as follows:
1. Private Visits,
2. Remittance by tour operators / travel agents to overseas agents / principals / hotels,
3. Business Travel,
4. Fee for participation in global conferences and specialized training,
5. Remittance for participation in international events / competitions (towards training, sponsorship and prize money).
6. Film shooting,
7. Medical Treatment abroad,
8. Disbursement of crew wages,
9. Overseas Education,
10. Remittance under educational tie up arrangements with universities abroad,
11. Remittance towards fees for examinations held in India and abroad and additional score sheets for GRE, TOEFL etc.,
12. Employment and processing, assessment fees for overseas job applications,
13. Emigration and Emigration Consultancy Fees,
14. Skills/ credential assessment fees for intending migrants,
15. Visa fees,
16. Processing fees for registration of documents as required by the Portuguese/ other Governments,
17. Registration/ Subscription/ Membership fees to International Organizations.
5. Trade transactions are permitted subject to limits and other conditions prescribed for imports under Online Payment Gateway Service Providers (OPGSP)
6. The remittances shall be permitted only for fund transfers from one bank account to another bank account.
7. Remittances shall be only made to beneficiaries in jurisdictions which are FATF compliant.
8. The remitting service provider shall be a duly licensed entity by regulator of destination jurisdictions to facilitate remittances to beneficiaries in such jurisdictions.
9. The remitter’s moneys should be kept distinct from service provider’s operating account and such moneys should be duly protected from insolvency risks of the facilitating service provider.
10. The Authorized Dealer (Category I) bank may submit to the Reserve Bank every year a certificate stating that the conditions prescribed in the approval are adhered to.

Revised Prompt Corrective Action (PCA) issued by RBI

Salient guidelines of revised PCA Capital, Asset Quality and profitability would be the basis on which the banks would be monitored. 

Banks would be placed under PCA framework depending upon the audited annual financial results and RBI’s supervisory assessment.

 RBI may also impose PCA on any bank including migration from one threshold to another if circumstances so warrants. RBI has defined three kinds of risk thresholds and the PCA will depend upon the type of risk threshold that was breached. If a bank breaches the risk threshold, then mandatory actions include the restriction on dividend payment/remittance of profits, restriction on branch expansion, higher provisions, restriction on management compensation and director’s fees. Specifically, the breach of ‘Risk Threshold 3’ of CET1 (common equity tier 1) by a bank would call for resolution through tools like amalgamation, reconstruction, winding up among others. 

RBI in its discretion can also carry out the following actions: 

Recommend the bank owner be it government/promoters/parent of foreign bank branch to bring in new management/board. 

Advise bank’s board to activate the recovery plan as approved by the supervisor. Advise bank’s board to carry out a detailed review of business model, the profitability of business lines and activities, assessment of medium and long-term viability, balance sheet projections among others. Review short term strategies and medium-term business plans and carry out any other corrective actions like the removal of officials and supersession or suppression of the board.

Virtual Currencies

Virtual Currencies, also called as digital/ crypto-currencies,  are a type of unregulated digital money that is neither issued by a central bank/public authority, nor is necessarily attached to a fiat currency, but is used and accepted among the members of a specific virtual community. They are capable of being transferred, stored or traded electronically. The examples of virtual currencies are Bitcoin, Litecoin, Darkcoin, Peercoin, Dogecoin, Primecoin etc.

BASEL III Norms - Brief Explanation.

All You Need to Know About BASEL III Norms

The Basel committee on Banking Supervision (BCBS) was formed in 1974 by a group of central bank governors of G-10 countries. Later on the committee was expanded to include members from nearly 30 countries. BCBS in 1988 released Basel-I accords and subsequently to overcome the loopholes in it Basel–II was released in 2004.

BCBS released a comprehensive reform package in Dec 2010, which is called as Basel–III, a global regulatory framework for more resilient banks and banking systems. These recommendations cover almost all the nations. And it amend the Basel-2 guidelines, also introduces some new concepts and recommendations.

The question now arises when we already have defined norms in place then what is the need for new norm? Let’s discuss it in detail.

Need For BASEL-3 Worldwide:

Banks mainly deals with three kind of risks. These are

1. Credit risk

2. Market risk

3. Operational risk

What is Credit risk?

It is basically the risk of loss, arising when a borrower is not capable of paying back the loan as promised. Such borrowers are also known as Sub-prime borrowers.

Now lets go back to the year 2008 ,when all of us observed /witnessed the Global financial crisis ,which originated in US because of these Subprime borrowers and this crisis thereafter spilled over in the other markets as well. It created financial crisis throughout the world.

Thus a need was felt for more stringent banking regulation worldwide.

Now In India what is the need to adopt such norms when we saw our banking system standing firm even during the crisis.

Need for Basel–III in INDIA

1. Firstly, The most important reason is that as India connects with the rest of the world, and as increasingly Indian banks go abroad and foreign banks come on to our shores, we cannot afford to have a regulatory deviation from global standards. Any deviation will hurt us.

2. Secondly, if we ought to maintain a low standard regulatory regime this will put Indian banks at a disadvantage in global competition.

Therefore, It is becomes important that Indian banks have the cushionprovided by this risk management system to withstand shocks from external systems, especially as we deepen our links with the global financial system.

In India, Basel III regulations has been implemented from April 1, 2013 in phases

and it will be fully implemented as on March 31, 2019.

The pillars of BASEL norms:

1. Capital adequacy requirements

2. Supervisory review

3. Market discipline

Recommendations of Basel–III

Firstly, Basel-3 recommended that the Capital Adequacy ratio (CAR) be increased to 8% internationally, while in INDIA it is 9%.

Capital Adequacy ratio(CAR), also known as

Capital to Risk (weighted) Assets Ratio (CRAR),

is a ratio of a bank’s capital to its risk.

Capital is the money a bank receives in exchange for issuing shares. This capital is further classified into two – Tier 1 and Tier 2 capital.

Out of the 9% (of RWA) capital adequacy requirement, 7%(of RWA) has to be met by Tier 1 capital while the remaining 2%(of RWA) by Tier 2 capital.

Risk weighted assets- Every bank assigns its assets some weight-age based on the risk involved.Thus apply a weight percentage to each of its assets.

For example–

Lets say a bank lends Rs 100 to a person for home loan and Rs 100 to a person to start a new company.

Bank's total asset = Rs 100 + Rs 100 = Rs 200

Let's imagine home loan has high probability of being repaid than the loan to person to start a company.

i.e. Risk Weight of Home Loan = 50% and Risk Weight of loan for company = 90%

Risk Weighted Assets of Bank = 50% of 100 + 90% of 100 = 50 + 90 = Rs. 140. So out of total assets worth Rs. 200, Rs. 140 are risk weighted assets.

Bank need 9% of RWA as Capital.

Bank need 9% of 140 = Rs. 12.6 as Capital.

Means, out of Rs. 200 that a bank lends, Rs. 12.6 must be funded with Capital. Rest, Rs. 187.4 can be from the money that bank borrowed.

Secondly it also introduces the concept of leverage ratio, it measures the ratio of banks total assets to bank’s capital. Under the new set of guidelines, RBI has set the leverage ratio at 4.5% (3% under Basel III).

Leverage Ratio = Capital/Total Asset

Concept of leverage – for e.g.

If you have Rs. 100 and you invest them and earns a profit of 10% i.e. you have profit of Rs. 10 on Rs. 100. This is called non leverage profit.

Now again you have Rs. 100 and you borrow Rs. 400 and invest Rs. 500, earns a profit of 10% i.e. you earn Rs. 50 on your Rs. 100. This is called leverage profit.

With Higher leverage, Bank's Profit/Loss = Higher = Higher Risk also!

So now leverage ratio of 4.5% means for every Rs bank funds itself with, it can lend up to 22.22 Rs.

Challenges For It's Implementation In India

1. Capital- Since nearly 2.4 lakh crore rupees are required for its implementation in India.

2. Liquidity- During the global crisis 2008, the apparently strong banks of the world ran into difficulties when the inter bank wholesale funding market witnessed a seizure. Thus in Indian context, it would mean an additional burden of maintaining liquidity along with the SLR requirement.

3. Technology- BCBS is in the process of making significant changes in standard approach for computing RWAs for all three risk areas. Banks may need to upgrade their systems and processes to be able to compute capital requirements based on revised standard approach.

4. Skill development- Implementation of the new capital accord requires higher specialized skills in banks.

5. Governance- One can have the capital, the liquid assets and the infrastructure. But corporate governance will be the deciding factor in the ability of a bank to meet the challenges. Strong capital gives financial strength, it cannot assure good performance unless backed by good corporate governance.

Steps Taken by Government

(i) GOI has allowed banks to access markets to raise capital while maintaining a minimum 52% shareholding.

(ii) Govt. also launched a scheme called INDRADHANUSH to revamp PSBs. This scheme seeks to improve the efficiency and functioning of banks thereby reducing the bad assets. And also plans to infuse Rs 70,000 crore in the banking system over next 5 years.

In this regard government also announced two banks as DSIBs(Domestic Systemically Important Banks) i.e. SBI and ICICI, based on the criteria of size, interconnectedness, complexity and substitutability.

Note: According to new Basel-III norms, which kick in from March 2019,Indian banks need to maintain a minimum capital adequacy ratio (CAR) of 9 per cent (7 % for Tier I + 2% on Tier II Capital), in addition to a capital conservation buffer, which would be in the form of common equity at 2.5 per cent of the risk weighted assets