Wednesday, 28 September 2016

Four eyes principles in banking



The four eyes principle is a requirement that two individuals approve some action before it can be taken. The four eyes principle is sometimes called the two-man rule or the two-person rule.

In a business context, the four eyes required for approval are often those of the CEO (Chief Executive Officer) and the CFO (Chief Financial Officer), who must both sign off on any significant business decision. In editing, proofreading and translation, documents typically have a second reader to detect errors and typos that a single pair of eyes might miss. Although neither individual might detect all errors, two readers are likely to miss different things so that, collaboratively, they will catch more mistakes.

Here are a few other examples of the four eyes principle at work:

Many legal and financial documents require the signatures of two individuals.

Banks, casinos and sensitive military areas often include no-lone zones: areas in which two people must be present and within each other's line of vision at all times.

The Emergency War Orders (EWO) safe, which contains missile launch keys and codes, is locked by two padlocks with keys held by different launch officers.

Some data management systems require that important record updates be approved by two separate people before the data is committed.

Although the four eyes principle adds an element of security to any decision-making process, its effectiveness relies upon the ability, integrity and diligence of the individuals involved. In a refinement of the basic principle, a random rotation of authorized individuals serves as the second pair of eyes, so that it cannot be known with any certainty which two individuals will be dealing with a given decision.

Some technological advancement that are gradually making a foray into financial sector:


Some technological advancement that are gradually making a foray into financial sector include big data, artificial intelligence, block chain technology and internet of things. Let me mention a few examples.

1. Banco Santander has expressed its intention to provide secure transactions using voice recognition via its banking app. RBS has trialled “Luvo”, an AI customer service assistance to interact with staff and to potentially serve customers in near future. Japan’s Softbank, in collaboration with Paris-based robotics experts, Aldebaran has developed Pepper, the world’s first humanoid robot. Pepper is already being used in customer services industries as a replacement to an information booth or the welcome desk. Mizuho Financial Group Inc. bank has reportedly introduced Pepper to its flagship branch in Tokyo in 2015 to deal with customer enquiries, while Mitsubishi UFJ Financial Group has tested “Nao”, a humanoid robot to interact with customers. Taking cue from their Japanese counterparts, I understand that HDFC Bank in India is also intending to introduce similar automation via robotics.

2. To buttress the point around increasing reliance on technology in the banking sector in India, following are some statistics. As per the latest RBI Annual Report, the share of electronic transactions in total transactions in volume terms has moved up to 84.4 per cent from 74.6 per cent in the previous year. Likewise in value terms, their share has also inched up to 95.2 per cent from 94.6 per cent. At end-March 2016, the national electronic funds transfer (NEFT) facility was available through 130,013 branches of 172 banks, in addition to business correspondent (BC) outlets. NEFT handled 1.2 billion transactions valued at around Rs.83 trillion (approximately $ 1.3 tn) up from 928 million transactions for Rs.60 trillion (approximately $ 0.9 tn) in the previous year. In March 2016, NEFT processed the highest ever monthly volume of 129 million transactions. Similarly, the internet banking and mobile banking based payments are increasing at a rapid pace.

Udyami Mitra portal

Udyami Mitra portal set up by SIDBI leverages IT architecture of Stand-Up Mitra portal and aims at instilling ease of access to MSMEs’ financial and non-financial service needs. The Portal, as a virtual market place endeavours to provide 'End to End' solutions not only for credit delivery but also for the host of credit-plus services by way of hand holding support, application tracking, multiple interface with stakeholders (i.e. banks, service providers, applicants).RBI wants to  see development of more such technological interfaces in the coming days making it easier for MSME entrepreneurs to borrow from the banking system. RBI is committed to support such initiatives with appropriate safeguards and consumer protection measures.

TReDS--Trade Receivables Discounting System

TReDS: In order to solve the problem of delayed payment to MSMEs, RBI has licensed three entities for operating the Trade Receivables Discounting System (TReDS). The system would facilitate the financing of trade receivables of MSME enterprises from corporate and other buyers, including government departments and public sector undertakings (PSUs) through multiple financiers. The objective is to create Electronic Bill Factoring Exchanges which could electronically accept and settle bills so that MSMEs could encash their receivables without delay. It is expected that the TReDS will commence operations within this current fiscal. It would be important that the use of TReDS is made mandatory for, to begin with corporate and PSUs and later for the Government departments. RBI would urge the Chambers and the MSME Ministry to proactively examine this aspect as success of TReDS initiative can be a game changer for the MSME sector.

Saturday, 3 September 2016

Know Your Customer Guidelines

(This is a summarised and simplified version of the Reserve Bank of India’s Know Your Customer guidelines.)
Q1. What is KYC? Why is it required?
Response: KYC means “Know Your Customer”. It is a process by which banks obtain information about the identity and address of the customers. This process helps to ensure that banks’ services are not misused. The KYC procedure is to be completed by the banks while opening accounts. Banks are also required to periodically update their customers’ KYC details.

Q2. What are the KYC requirements for opening a bank account?
Response: To open a bank account, one needs to submit a ‘proof of identity and proof of address’ together with a recent photograph.

Q3. What are the documents to be given as ‘proof of identity’ and ‘proof of address’?
Response: The Government of India has notified six documents as ‘Officially Valid Documents’ (OVDs) for the purpose of producing proof of identity. These six documents are Passport, Driving Licence, Voters’ Identity Card, PAN Card, Aadhaar Card issued by UIDAI and NREGA Job Card. You need to submit any one of these documents as proof of identity. If these documents also contain your address details, then it would also be accepted as ‘proof of address’. If the document submitted by you for proof of identity does not contain address details, then you will have to submit another officially valid document which contains address details.

Q4. If I do not have any of the documents listed above to show my ‘proof of identity’, can I still open a bank account?
Response: Yes. You can still open a bank account known as ‘Small Account’ by submitting your recent photograph and putting your signature or thumb impression in the presence of the bank official.

Q5. Is there any difference between such ‘small accounts’ and other accounts
Response: Yes. The ‘Small Accounts’ have certain limitations such as:
  • balance in such accounts at any point of time should not exceed Rs.50,000
  • total credits in one year should not exceed Rs.1,00,000
  • total withdrawal and transfers in a month should not exceed Rs.10,000
  • Foreign remittances cannot be credited to such accounts.
Such accounts remain operational initially for a period of twelve months and thereafter, for a further period of twelve months if the holder of such an account provides evidence to the bank of having applied for any of the officially valid documents within twelve months of the opening of such account.

Q6. Would it be possible, if I do not have any of the officially valid documents, to have a bank account, which is not subjected to any limitations as in the case of ‘small accounts’?

Response: A normal account can be opened by submitting a copy of any one of the following documents as Proof of Identity (PoI):
(i) Identity card with person’s photograph issued by Central/State Government Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, and Public Financial Institutions;
or
(ii) letter issued by a gazetted officer, with a duly attested photograph of the person.
For Proof of Address (PoA), you may submit the following documents:
  1. Utility bill, which is not more than two months old, of any service provider (electricity, telephone, post-paid mobile phone, piped gas, water bill);
  2. Property or Municipal Tax receipt;
  3. Bank account or Post Office savings bank account statement;
  4. Pension or family Pension Payment Orders (PPOs) issued to retired employees by Government Departments or Public Sector Undertakings, if they contain the address;
  5. Letter of allotment of accommodation from employer issued by State or Central Government departments, statutory or regulatory bodies, public sector undertakings, scheduled commercial banks, financial institutions and listed companies. Similarly, leave and license agreements with such employers allotting official accommodation; and
  6. Documents issued by Government departments of foreign jurisdictions or letter issued by Foreign Embassy or Mission in India.
This, however, is not a general rule and it is left to the judgement of the banks to decide whether this simplified procedure can be adopted in respect of any customer.

Q7. If my name has been changed and I do not have any OVD in the new name, how can I open an account?
Response: A copy of the marriage certificate issued by the State Government or Gazette notification indicating change in name together with a certified copy of the ‘Officially Valid Documents’ in the prior name of the person is to be furnished for opening of account in cases of persons who change their names on account of marriage or otherwise.

Q8. Are banks required to categorise their customers based on risk assessment?
Response: Yes, banks are required to classify their customers into ‘low’, ‘medium’ and ‘high’ risk categories depending on their AML risk assessment.

Q9. Do banks inform customers about this risk categorisation?
Response: No

Q10. If I refuse to provide requested documents for KYC to my bank for opening an account, what may be the result?
Response: If you do not provide the required documents for KYC, the bank will not be able to open your account.

Q11. Can I open a bank account with only an Aadhaar card?
Response: Yes, Aadhaar card is accepted as a proof of both identity and address.

Q12. Is it compulsory to furnish Aadhaar Card for opening an account?
Response: No. you may furnish Aadhaar card or any of the other five OVDs for opening an account.

Q13. What is e-KYC? How does e-KYC work?
Response: e-KYC refers to electronic KYC.
e-KYC is possible only for those who have Aadhaar numbers. While using e-KYC service, you have to authorise the Unique Identification Authority of India (UIDAI), by explicit consent, to release your identity/address through biometric authentication to the bank branches/business correspondent (BC). The UIDAI then transfers your data comprising your name, age, gender, and photograph electronically to the bank. Information thus provided through e-KYC process is permitted to be treated as an ‘Officially Valid Document’ under PML Rules and is a valid process for KYC verification.

Q14. Is introduction necessary while opening a bank account?
Response: No, introduction is not required.

Q15. If I am staying in Chennai but if my proof of address shows my address of New Delhi, can I still open an account in Chennai?
Response: Yes. You can open a bank account in Chennai even if the address in the “Officially Valid Document” is that of New Delhi and you do not have a proof of address for your Chennai address. In such case, you can submit the officially valid document having your New Delhi address, together with a declaration about your Chennai address for communication purposes.

Q16. Can I transfer my existing bank account from one place to another? Do I need to undergo full KYC again?
Response: It is possible to transfer an account from one branch to another branch of the same bank. There is no need to undergo KYC exercise again for such transfer. However, if there is a change of address, then you will have to submit a declaration about the current address. If the address appearing in the ‘Officially Valid Documents’ (OVDs) submitted for proof of address is no longer your valid address (i.e. neither your permanent address nor your current address), you need to get an Officially Valid Document for Proof of Address containing the current or the permanent address and furnish the same within six months. In case of opening an account in another bank, however, you will have to undergo KYC exercise afresh.

Q17. Do I have to furnish KYC documents for each account I open in a bank even though I have furnished the documents of proof of identity and address?
Response: No, if you have opened a KYC compliant account with a bank, other than a ‘small account’, then for opening another account with the same bank, furnishing of documents is not necessary.

Q18. For which banking transactions do I need to quote my PAN number?
Response: PAN number needs to be quoted for transactions such as account opening, transactions above Rs.50,000 (whether in cash or non-cash), etc. A full list of transactions where PAN number needs to be quoted can be accessed from website of Income Tax Department at the following URL:
Q19. Whether KYC is applicable for Credit/Debit cards?
Response: Yes. KYC exercise is necessary for Credit/ Smart Cards and also in respect of add-on/ supplementary cards. Since debit cards are issued only to account holders and accounts are opened only after the KYC procedure is completed, there is no need for separate KYC for issuing debit card.

Q20. I do not have a bank account. But I need to make a remittance. Is KYC applicable to me?
Response: Yes. KYC exercise needs to be done for all those who want to make domestic remittances of Rs. 50,000 and above and all foreign remittances.

Q21. Can I purchase a Demand Draft/Payment Order/Travellers Cheque against cash?
Response: Yes, Demand Draft/Payment Order/Travellers Cheques for below Rs.50,000/- can be purchased against cash and such instruments for Rs. 50000/- and above can be issued only by way of debiting the customer's account or against cheques.

Q22. Do I need to submit KYC documents to the bank while purchasing third party products (like insurance or mutual fund products) from banks?
Response: Yes, all customers who do not have accounts with the bank (known as walk-in customers) have to produce proof of identity and address while purchasing third party products from banks if the transaction is for Rs.50,000 and above. KYC exercise will not be necessary for bank’s own customers for purchasing third party products. However, instructions to make payment by debit to customers’ accounts or against cheques for remittance of funds/issue of travellers’ cheques, sale of gold/silver/platinum and the requirement of quoting PAN number for transactions of Rs.50,000 and above will be applicable to purchase of third party products from bank by its customers as also to walk-in customers.

Q23. My KYC was completed when I opened the account. Why does my bank insist on doing KYC again?
Response: Banks are required to periodically update KYC records. This is a part of their ongoing due diligence on bank accounts. The periodicity of such updation varies from account to account depending on its risk categorisation by the bank. Periodic updation of records also helps prevent frauds in customer accounts.

Q24. What are the rules regarding periodic updation of KYC?
Response: Different periodicities have been prescribed for updation of KYC records depending on the risk perception of the bank. KYC is required to be done at least once in two years for high risk customers, once in eight years for medium risk customers and once in ten years for low risk customers. This exercise would involve all formalities for KYC normally taken at the time of opening the account.
While periodic updation of KYC has to be carried out in respect of customer categorised as ‘low risk’ also, if there is no change in status with respect to the identity (change in name, etc.) and/or address of such customers the banks may ask such customers to submit only a self-certification about ‘no-change in status’ at the time of periodic updation. Banks may not ask such customers to submit copies of ‘Officially Valid Documents’ for periodic updation.
In case of change of address of such ‘low risk’ customers, they could merely forward a certified copy of the document (proof of address) by mail/post, etc. Physical presence of such low risk customer is not required at the time of periodic updation.
Customers who are minors have to submit fresh photograph on becoming major.

Q25. What if I do not provide the KYC documents at the time of periodic updation?
Response: If you do not provide your KYC documents at the time of periodic updation, bank has the option to close your account. Before closing the account, the bank may, however, impose ‘partial freezing’ (i.e. initially allowing all credits and disallowing all debits while giving an option to you to close the account and take your money back). Later, even credits also would not be allowed. The ‘partial freezing’ however, would be exercised by the bank after giving you due notice.

Q26. How is partial freezing imposed?
Response: Partial freezing is imposed in the following ways:
  • Banks have to give due notice of three months initially to the customers before exercising the option of ‘partial freezing’.
  • After that a reminder for further period of three months will be issued.
  • Thereafter, banks shall impose ‘partial freezing’ by allowing all credits and disallowing all debits with the freedom to close the accounts.
  • If the accounts are still KYC non-compliant after six months of imposing initial ‘partial freezing’ banks shall disallow all debits and credits from/to the accounts, classifying them inoperative.
Meanwhile, the account holders can revive accounts by submitting the KYC documents.

Free Annual Credit Report to Individuals



Free Annual Credit Report to Individuals

In exercise of the powers conferred by subsection (1) of Section 11 of Credit Information Companies (Regulation) Act, 2005, Reserve Bank of India, being satisfied that it is necessary and expedient in the public interest, hereby directs that effective January 1, 2017, all Credit Information Companies (CICs) shall provide access, upon request and after due authentication of the requester, to a free full credit report (FFCR) once in a calendar year to individuals whose credit history is available with the CIC. This report shall show the latest position of the credit institutions’ exposure to the individual as per records available with the CIC.

The FFCR shall be in electronic format, and the procedure for accessing the FFCR shall be displayed on the CIC’s website. The contents of the FFCR shall be the same as appearing in the most detailed version of the reports on the individual provided to credit institutions, including the credit score.

The CIC shall have a Board approved policy on making available the FFCR.

Friday, 19 August 2016

Green growth


Green growth means achieving economic growth while reducing pollution and greenhouse gas emissions, minimising waste and improving efficiency in the use of natural resources. This requires long-term investment and sustained financing.

Wednesday, 17 August 2016

A daunting New Vocabulary :



FOLLOWING ARE SOME LATEST VOCABULARY USED IN FINANCIAL MARKET:


SFB: Small Finance Banks,

PB: Payment Banks,

P2P: Peer to Peer,

PPI: Prepaid Payment Instruments,

TReDS: Trade Receivables Discounting System,

UPI: Unified Payments Interface



TLAC: Total Loss Absorbency Capacity,

CCB: Capital Conservation Buffer,

LCR: Liquidity Coverage Ratio,

NSFR: Net Stable Funding Ratio,

SIFIs: Systemically Important Financial Intermediaries,

IFRS: International Financial Reporting Standards



LIVING WILL: A living will, also called a directive to physicians or advance directive, is a document that lets people state their wishes for end-of-life medical care, in case they become unable to communicate their decisions. It has no power after death.



The Volcker Rule: refers to Section 619(12 U.S.C. Section 1851) of the Dodd–Frank Wall Street Reform and Consumer Protection Act, originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers.Volcker argued that such speculative activity played a key role in the financial crisis of 2007–2010. The rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank's own accounts, although a number of exceptions to this ban were included in the Dodd-Frank law.

Friday, 5 August 2016

Dishonour of cheques – Modification in procedure



1. Banks were advised to introduce a condition for operation of accounts with cheque facility that in the event of dishonour of a cheque valuing rupees one crore and above drawn on a particular account of the drawer on four occasions during the financial year for want of sufficient funds in the account, no fresh cheque book would be issued. Also, the bank may consider closing current account at its discretion.

2. The above instructions have been reviewed and it has been decided to leave it to the discretion of the banks to determine their response to dishonour of cheques of the account holders. Banks should put in place an appropriate policy approved by the Board or its Committee taking into consideration the need to prevent misuse of the cheque drawing facility and avoid penalising customers for unintended dishonour of cheques.

3. This policy should be transparent, made known to every customer upfront and implemented fairly.

Tuesday, 26 July 2016

Masala bonds


Masala bonds



A number of Indian firms are gearing up to raise funds from issuing what are known as ‘masala bonds.’ Coinciding with Prime Minister Narendra Modi’s recent visit to the UK, organisations such as Housing Development Finance Corp., Yes Bank, and the Railways had announced they were going to raise funds through this route from the London market. Ratings agency S&P expects the issuance of masala bonds to touch $5 billion annually over the next two to three years. Here is an explainer on what masala bonds are all about:

What are masala bonds?

Bonds are instruments of debt - typically used by corporates to raise money from investors. Masala bonds have to be explained in the context of Indian corporates raising money from overseas investors. Before masala bonds, corporates have had to rely on avenues such as external commercial borrowings or ECBs. The challenge with the likes of ECBs is the entity raising money is faced with a currency risk - they have to be raised and repaid in dollar terms. A year is a long time in forex markets - currencies fluctuate sharply. So, imagine the risk a bond issuing entity, especially one with largely rupee earnings, if issue and repayment are years apart.

Enter masala bonds! They are rupee-denominated bonds issued to overseas buyers. This is how it is different from other instruments. With a masala bond, a corporate could issue Rs. 10 billion worth of bonds with the promise of paying back Rs. 11 billion in one year. But as the Indian rupee has limited convertibility, the investors will lend the dollar equivalent of the Rs. 10 billion. After one year, the Indian corporate needs to pay back the dollar equivalent of Rs. 11 billion. The currency risk is with the investor.

How did the tag masala come about?

The International Finance Corporation (IFC), the investment arm of the World Bank, issued a Rs. 1,000 crore bond in November last year. The purpose of the issue was to fund infrastructure projects in India. IFC named them ‘masala’ bonds to reflect the Indian angle to it. This kind of naming has been done before. This is, in fact, much like IFC's Chinese yuan-denominated Dim sum bonds. It isn't unusual in the foreign bonds market to encounter names such as Yankee and Bulldog. By the way, Japanese yen-denominated bonds are called Samurai. There was even much speculation about what the rupee-denominated bonds would be called before 'masala' was confirmed. Samosa, Ganga, and Peacock were apparently some of the names doing the rounds.

What has been the regulator's stance on this?

The Reserve Bank of India has issued guidelines allowing Indian companies, non-banking finance companies (HDFC, India Bulls Housing Finance are examples of such companies) and infrastructure investment trusts and real investment trusts (investment vehicles that pool money from various investors and invest in infrastructure and real estate sectors) to issue rupee-denominated bond overseas.

The rules put the issue limit to $750 million and also has a pricing cap for various tenures of issue. Experts say the move to permit masala bonds is an attempt to increase the international status of rupee and is also a step toward full currency convertibility (the freedom to convert Indian currency into other internationally accepted currency without any restrictions).

Why should investors look at masala bonds?

The Finance Ministry has cut the withholding tax (a tax deducted at source on residents outside the country) on interest income of such bonds to 5 per cent from 20 per cent, making it attractive for investors. Also, capital gains from rupee appreciation are exempted from tax.

Globally, there is ample liquidity thanks to lower interest rates in developed markets, but there are very few investment options due to weak economic conditions globally. India is that rare fast-growing large economy, and masala bonds is one way for investors to take advantage of this.

By the way, these bonds are bought by retail investors as well as big institutions overseas.

What do masala bonds mean to the issuer?

An important consideration for issuers is the access to cheaper funding than what's available in the domestic markets, according to ratings firm S&P. For corporates, who would be the main issuers, masala bonds will be one other key source of funding apart from banks and local debt markets. Another ratings firm India Ratings and Research says such bonds would lower the cost of capital over a period of time - the cost remains one of the highest in Asia. This also makes sense given that Indian banks are reluctant to lend to sectors facing weak demand and heavy debt.

Is there anything investors need to worry about?

Investors would need to keenly watch the credibility of the issuer. For example, it would easy for an HDFC or NTPC to easy to raise the bond when compared to a smaller firm. Higher the credit rating of a firm, the better would be the appetite for their issues. Since the currency risk is on the investors, they will like the rupee to be stable. S&P says the initial excitement over masala bonds will give way to the ultimate realisation that because currency and economic growth are external factors, investors will subject issuers to a lot more scrutiny.

To make masala bonds more attractive, the Reserve Bank of India (RBI) has reduced the minimum tenure of such bonds that an Indian company can issue offshore to three years from the previously stated five years.

“It has been decided to reduce the minimum maturity period for the rupee-denominated bonds issued overseas to three years in order to align with the maturity prescription regarding foreign investment in corporate bonds through the foreign portfolio investment (FPI) route,” the central bank said in a circular on Wednesday.

Money raised through masala bonds overseas will be counted in the overall investment limit for FPIs in corporate bonds, which now stands at Rs.2.44 trillion. FPI investment limit in corporate bonds will be expressed in rupees instead of dollars, bringing it on a par with limits in government bonds. The maximum amount a single issuer can raise through masala bonds is Rs.5,000 crore, RBI said.

According to bankers, the reduction in maturity of the bond may not make a big difference in terms of attracting investors.

“This was one of the demands but until the withholding tax and allowing domestic banks to invest is addressed, there is unlikely to be a significant improvement in demand for such bonds,” said a banker on condition of anonymity.

Masala bonds are issued in rupees but can be settled in US dollars and thus besides the credit risk of the issuer, risk of the exchange rate also falls on the investor. In addition, the investor also has to pay 5% withholding tax.

In the pursuit of adequate compensation for credit and exchange rate risk, and the cost of withholding tax, foreign investors have sought higher yield from companies that marketed masala bonds over the last five months.

But to match the yield demanded by investors, companies will have to forego their advantage of borrowing cheap from the offshore market compared with local rates.

Further, Indian banks can only act as arrangers or underwriters of such bonds and cannot invest in them. If an Indian bank does underwrite a masala bond issue, it will have to offload the investment in six months.

Indian companies were allowed to issue rupee-denominated bonds in the offshore market in September last year but so far no company has been able to raise funds through this route.

The idea of masala bonds was first floated by RBI in April 2015 following which the central bank issued guidelines for the same in September. Over the last four months, Indian Railway Finance Corp. (IRFC), Housing Development and Finance Corp., NTPC Ltd, Shriram Transport Finance and Dewan Housing Finance Ltd have all hawked masala bonds without success. Adani Transmission Ltd was the latest to market masala bonds overseas last month.

The guidelines allow multilateral agencies such as the World Bank to also borrow through masala bonds and invest the proceeds in the Indian infrastructure sector.





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Friday, 15 July 2016

WHAT IS COUNTER TRADE IN FOREX



Counter trade is an arrangement involving adjustment of  value of goods imported into India against value of goods  exported from India in terms of the Reserve Bank guidelines.

Tuesday, 12 July 2016

Computation of Adjusted Net Bank Credit (ANBC)

Computation of Adjusted Net Bank Credit (ANBC)
Bank Credit in India [As prescribed in item No.VI of Form ‘A’ under Section 42 (2) of the RBI Act, 1934].
I
Bills Rediscounted with RBI and other approved Financial Institutions.
II
Net Bank Credit (NBC)*
III (I-II)
Bonds/debentures in Non-SLR categories under HTM category+ other investments eligible to be treated as priority sector +Outstanding Deposits under RIDF and other eligible funds with NABARD, NHB, SIDBI and MUDRA Ltd. on account of priority sector shortfall + outstanding PSLCs

IV
Eligible amount for exemptions on issuance of long-term bonds for infrastructure and affordable housing as per 

V
Eligible advances extended in India against the incremental FCNR (B)/NRE deposits, qualifying for exemption from CRR/SLR requirements.
VI
ANBC
III+IV-V-VI
* For the purpose of priority sector computation only. Banks should not deduct / net any amount like provisions, accrued interest, etc. from NBC.


It has been observed that some banks are subtracting prudential write off at Corporate/Head Office level while reporting Bank Credit as above. In such cases it must be ensured that bank credit to priority sector and all other sub-sectors so written off should also be subtracted category wise from priority sector and sub-target achievement.

All types of loans, investments or any other items which are treated as eligible for classification under priority sector target/sub-target achievement should also form part of Adjusted Net Bank Credit.

Saturday, 25 June 2016

Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2015



1.   Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2015

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

3.   In addition, payments received in foreign exchange by an Indian startup arising out of sales/ export made by the startup or its overseas subsidiaries will be a permissible credit to the Exchange Earners Foreign Currency (EEFC) account maintained in India by the startup.

4.  A startup will mean an entity which complies with the conditions laid down in Notification No. GSR 180(E) dated February 17, 2016 issued by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India.

5.   Further, the existing facility of opening foreign currency account outside India, available to the Life Insurance Corporation of India or the General Insurance Corporation of India and their subsidiaries for the purpose of meeting the expenditure incidental to the insurance business carried on by them has now been liberalised. Accordingly, any insurance/ reinsurance company registered with the Insurance Regulatory and Development Authority of India (IRDA) may open a foreign currency account with a bank outside India to carry out insurance/ reinsurance business.


Friday, 17 June 2016

National Rural Livelihood Mission

National Rural Livelihood Mission (NRLM) :

is a poverty alleviation project implemented by Ministry of Rural Development, Government of India. 
This scheme is focused on promoting self-employment and organization of rural poor. 
The basic idea behind this programme is to organize the poor into SHG (Self Help Groups) groups and make them capable for self-employment. In 1999 after restructuring Integrated Rural Development Programme(IRDP), Ministry of Rural Development (MoRD) launched Swarnajayanti Grameen Swarojgar Yojana (SGSY) to focus on promoting self-employment among rural poor. SGSY is now remodeled to form NRLM thereby plugging the shortfalls of SGSY programme.
This scheme was launched in 2011 with a budget of $5.1 billion and is one of the flagship programmes of Ministry of Rural Development. This is one of the world's largest initiatives to improve the livelihood of poor. This programme is supported by World Bank with a credit of $1 Billion.

Wednesday, 15 June 2016

Foreign currency accounts by a person resident in India- part-III

Continued.....................



(E) Diamond Dollar Accounts (DDAs)

An Authorized Dealer Category-I bank in India may allow firms and companies who comply with the eligibility criteria stipulated in the Foreign Trade Policy of Government of India, in force from time to time and the directions as may be issued by Reserve Bank of India, from time to time, to open, hold and maintain Diamond Dollar Accounts (DDAs) in India subject to the terms and conditions of the DDA Scheme specified in Schedule II.

(F) Exporters

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

What is 'Brexit'




Brexit is an abbreviation of "British exit" that mirrors the term Grexit. It refers to the possibility that Britain will withdraw from the European Union. The country will hold an in-out referendum on its EU membership on June 23.

Supporters of Brexit base their opinion on a variety of factors from the global competitiveness of British businesses to concerns about immigration. Britain has already opted out of the EU's monetary union (meaning that it uses the pound instead of the euro) and the Schengen Area (meaning that it does not share open borders with a number of other European states). "Out" campaigners argue that Brussels' bureaucracy is a drag on the British economy and that EU laws and regulations are a threat to British sovereignty.

Foreign currency accounts by a person resident in India

Continued.....................

(D) A Unit in a Special Economic Zone (SEZ) 

A unit located in a Special Economic Zone may open hold and maintain a Foreign Currency Account with an authorized dealer in India provided that, 

(a) all foreign exchange funds received by the unit in the Special Economic Zone (SEZ) are credited to such account, 

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

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

(d) the balances in the accounts shall be exempt from the restrictions imposed under Rule 5, except item 1(ii) of the Schedule III, of the Government of India Notification No.GSR.381(E) dated May 3, 2000, as amended from time to time. 

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

To be Continued........

Opening, holding and maintaining Foreign Currency Accounts in India


Opening, holding and maintaining Foreign Currency Accounts in India

(A) Exchange Earners’ Foreign Currency Account:- A person resident in India may open, hold and maintain with an authorised dealer in India, a Foreign Currency Account to be known as Exchange Earners’ Foreign Currency (EEFC) Account, subject to the terms and conditions of the Exchange Earners' Foreign Currency Account Scheme specified in the Schedule I. 

(B) Resident Foreign Currency Account:-
(1) A person resident in India may open, hold and maintain with an authorised dealer in India a Foreign Currency Account, to be known as a Resident Foreign Currency (RFC) Account, out of foreign exchange – 
(a) received as pension or any other superannuation or other monetary benefits from his employer outside India; or 

(b) realised on conversion of the assets referred to in sub-section (4) of section 6 of the Act, and repatriated to India; or 

(c) received or acquired as gift or inheritance from a person referred to in sub-section (4) of section 6 of the Act; or

(d) referred to in clause (c) of section 9 of the Act, or acquired as gift or inheritance there from; or 

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

(2) The funds in a Resident Foreign Currency Account opened or held or maintained in terms of sub-regulation 

(1) shall be free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form, by whatever name called, outside India. 

(2) Resident individuals are permitted to include resident relative(s) as joint holder(s) in their Resident Foreign Currency account on ‘former or survivor’ basis. 
However, such resident Indian relative joint account holder shall not be eligible to operate the account during the life time of the resident account holder. 

Explanation – For the purpose of this sub-regulation, the expression ‘relative’ shall have the same meaning as assigned to it under section 2(77) of the Companies Act, 2013.

 (C) Resident Foreign Currency (Domestic) Account 
(1) A resident Individual may open, hold and maintain with an Authorised Dealer in India a foreign currency account, to be known as Resident Foreign Currency (Domestic) Account, out of foreign exchange acquired in the form of currency notes, bank notes and travellers’ cheques as under: 
(a) by way of payment for services not arising from any business in or anything done in India while on a visit to any place outside India; or 
(b) from any person not resident in India and who is on a visit to India, as honorarium or gift or for services rendered or in settlement of any lawful obligation; or
(c) by way of honorarium or gift while on a visit to any place outside India; or 
(d) in the form of unspent amount of foreign exchange acquired by him from an authorised person for travel abroad; or 
(e) as gift from a relative; Explanation - For the purpose of this sub-regulation, the expression ‘relative’ shall have the same meaning as assigned to it under section 2(77) of the Companies Act, 2013. 
(f) by way of earning through export of goods/ services, or as royalty, honorarium or by any other lawful means; 
(g) representing the disinvestment proceeds received by the resident account holder on conversion of shares held by him to ADRs/ GDRs under the DR Scheme, 2014 approved by the Government of India. 
(h) by way of earnings received as the proceeds of life insurance policy claims/ maturity/ surrender values settled in foreign currency from an insurance company in India permitted to undertake life insurance business by the Insurance Regulatory and Development Authority

(2) Debits to the account shall be for payments towards a current account transaction in accordance with the provisions of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 and towards a capital account transaction permissible under the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000. 

(3) The account shall be maintained in the form of Current Account and shall not bear any interest. 

(4) There shall be no ceiling on the balances in the account

to be continued..................

Monday, 13 June 2016

Scheme for Sustainable Structuring of Stressed Assets

Scheme for Sustainable Structuring of Stressed Assets

June 13, 2016

Scheme for Sustainable Structuring of Stressed Assets
In order to strengthen the lenders’ ability to deal with stressed assets, Reserve Bank of India has been issuing, from time to time, guidelines and prudential norms on stressed assets resolution by regulated lenders.
2. Resolution of large borrowal accounts which are facing severe financial difficulties may, inter-alia, require co-ordinated deep financial restructuring which often involves a substantial write-down of debt and/or making large provisions. Citing the case of the Strategic Debt Restructuring (SDR) mechanism which provides 18 months for banks to make prescribed provisions for the residual debt and mark-to-market (MTM) provisions on their equity holding arising from conversion of debt, banks have represented for allowing more time to write down the debt and make the required provisions in cases of resolution of large accounts.
3. In order to ensure that adequate deep financial restructuring is done to give projects a chance of sustained revival, the Reserve Bank, after due consultation with banks, has decided to facilitate the resolution of large accounts, which satisfy the conditions set out in the following paragraphs.
4. Eligible Accounts
For being eligible under the scheme, the account1 should meet all the following conditions:
(i) The project has commenced commercial operations;
(ii) The aggregate exposure (including accrued interest) of all institutional lenders in the account is more than Rs.500 crore (including Rupee loans, Foreign Currency loans/External Commercial Borrowings,);
(iii) The debt meets the test of sustainability as outlined in para 5 below.
5. Debt Sustainability
A debt level will be deemed sustainable if the Joint Lenders Forum (JLF)/Consortium of lenders/bank conclude through independent techno-economic viability (TEV) that debt of that principal value amongst the current funded/non-funded liabilities owed to institutional lenders can be serviced over the same tenor as that of the existing facilities even if the future cash flows remain at their current level. For this scheme to apply, sustainable debt should not be less than 50 percent of current funded liabilities. This is referred to as Part A in paragraph 6.2 below.
6. Sustainable Debt
6.1 The resolution plan may involve one of the following options with regard to the post-resolution ownership of the borrowing entity:
(a) The current promoter continues to hold majority of the shares or shares required to have control;
(b) The current promoter has been replaced with a new promoter, in one of the following ways:
  1. Through conversion of a part of the debt into equity under SDR mechanism which is thereafter sold to a new promoter;
  2. In the manner contemplated as per Prudential Norms on Change in Ownership of Borrowing Entities (Outside SDR Scheme);
(c) The lenders have acquired majority shareholding in the entity through conversion of debt into equity either under SDR or otherwise and
  1. allow the current management to continue or
  2. hand over management to another agency/professionals under an operate and manage contract.
Note: Where malfeasance on the part of the promoter has been established, through a forensic audit or otherwise, this scheme shall not be applicable if there is no change in promoter or the management is vested in the delinquent promoter.
6.2 In any of the circumstances mentioned above, the JLF/consortium/bank shall, after an independent TEV, bifurcate the current dues of the borrower into Part A and Part B as described below;
(a) Determine the level of debt (including new funding required to be sanctioned within next six months and non-funded credit facilities crystallising within next 6 months) that can be serviced (both interest and principal) within the respective residual maturities of existing debt, from all sources, based on the cash flows available from the current as well as immediately prospective (not more than six months) level of operations. For this purpose, free cash flows (i.e., cash flow from operations minus committed capital expenditure) available for servicing debt as per latest audited/reviewed financial statement will be considered. Where there is more than one debt facility, the maturity profile of each facility shall be that which exists on the date of finalising this resolution plan. For the purpose of determining the level of debt that can be serviced, the assessed free cash flow shall be allocated to servicing each existing debt facility in the order in which its servicing falls due. The level of debt so determined will be referred to as Part A in these guidelines.
(b) The difference between the aggregate current outstanding debt, from all sources, and Part A will be referred to as Part B in these guidelines.
(c) The security position of lenders will, however, not be diluted and Part A portion of loan will continue to have at least the same amount of security cover as was available prior to this resolution.
7. The Resolution Plan
7.1 The Resolution Plan shall have the following features:
  1. There shall be no fresh moratorium granted on interest or principal repayment for servicing of Part A.
  2. There shall not be any extension of the repayment schedule or reduction in the interest rate for servicing of Part A, as compared to repayment schedule and interest rate prior to this resolution.
  3. Part B shall be converted into equity/redeemable cumulative optionally convertible preference shares. However, in cases where the resolution plan does not involve change in promoter, banks may, at their discretion, also convert a portion of Part B into optionally convertible debentures. All such instruments will continue to be referred to as Part B instruments in this circular for ease of reference.
7.2 Valuation and marking to market
For the purpose of this scheme, the fair value for Part B instruments will be arrived at as per the following methodologies:
• Equity - The equity shares in the bank's portfolio should be marked to market preferably on a daily basis, but at least on a weekly basis. Equity shares for which current quotations are not available or where the shares are not listed on the stock exchanges, should be valued at the lowest value arrived using the following valuation methodologies:
  • Break-up value (without considering 'revaluation reserves', if any) which is to be ascertained from the company's latest audited balance sheet (which should not be more than one year prior to the date of valuation). In case the latest audited balance sheet is not available the shares are to be valued at Re.1 per company. The independent TEV will assist in ascertaining the break-up value.
  • Discounted cash flow method where the discount factor is the actual interest rate charged to the borrower plus 3 per cent, subject to floor of 14 per cent. Further, cash flows ( cash flow available from the current as well as immediately prospective (not more than six months) level of operations) occurring within 85 per cent of the useful economic life of the project only shall be reckoned.
• Redeemable cumulative optionally convertible preference shares/optionally convertible debentures - The valuation should be on discounted cash flow (DCF) basis. These will be valued with a discount rate of a minimum mark up of 1.5 per cent over the weighted average actual interest rate charged to the borrower for the various facilities. Where preference dividends are in arrears, no credit should be taken for accrued dividends and the value determined as above on DCF basis should be discounted further by at least 15 per cent if arrears are for one year, 25 per cent if arrears are for two years, so on and so forth (i.e., with 10 percent increments).
7.3 Where the resolution plan does not involve a change in promoter or where existing promoter is allowed to operate and manage the company as minority owner by lenders, the principle of proportionate loss sharing by the promoters should be met. In such cases, lenders shall, therefore, require the existing promoters to dilute their shareholdings, by way of conversion of debt into equity /sale of some portion of promoter’s equity to lenders, at least in the same proportion as that of part B to total dues to lenders. JLF/Consortium/bank should also obtain promoters’ personal guarantee in all such cases, for at least the amount of Part A.
7.4 The upside for the lenders will be primarily through equity/quasi equity, if the borrowing entity turns around. The terms for exercise of option for the conversion of preference shares/debentures to equity shall be clearly spelt out. The existing promoter or the new promoter, as the case may be, may have the right of first refusal in case the lenders decide to sell the share, at a price beyond some predetermined price. The lenders may also include appropriate covenants to cover the use of cash flows arising beyond the projected levels having regard to quasi-equity instruments held in Part B
7.5 Other important principles for this scheme are the following:
  1. The JLF/Consortium/bank shall engage the services of credible professional agencies to conduct the TEV and prepare the resolution plan. While engaging professional agencies, the JLF/Consortium/bank shall ensure that the agency is reputed, truly independent/free from any conflict of interest, has proven expertise and will be in a position to safeguard the interest of lenders while preserving the economic value of the assets. Further, from a risk management perspective, lenders should avoid concentration of such assignments in any one particular professional agency.
  2. The resolution plan shall be agreed upon by a minimum of 75 percent of lenders by value and 50 percent of lenders by number in the JLF/consortium/bank.
  3. At individual bank level, the bifurcation into Part A and part B shall be in the proportion of Part A to Part B at the aggregate level.
8. Overseeing Committee
  1. An Overseeing Committee (OC), comprising of eminent persons, will be constituted by IBA in consultation with RBI. The members of OC cannot be changed without the prior approval of RBI.
  2. The resolution plan shall be submitted by the JLF/consortium/bank to the OC.
  3. The OC will review the processes involved in preparation of resolution plan, etc. for reasonableness and adherence to the provisions of these guidelines, and opine on it.
  4. The OC will be an advisory body.
9. Asset Classification and Provisioning
(A) Where there is a change of promoter–
In case a change of promoter takes place, i.e. a new promoter comes in, the asset classification and provisioning requirement will be as per the ‘SDR’ scheme or ‘outside SDR’ scheme as applicable.
(B) Where there is no change of promoters –
  1. Asset classification as on the date of lenders’ decision to resolve the account under these guidelines (reference date) will continue for a period of 90 days from this date. This standstill clause is permitted to enable JLF/consortium/bank to formulate the resolution plan and implement the same within the said 90 day period. If the resolution is not implemented within this period, the asset classification will be as per the extant asset classification norms, assuming there was no such ‘stand-still’
  2. In respect of an account that is ‘Standard’ as on the reference date, the entire outstanding (both Part A and part B) will remain Standard subject to provisions made upfront by the lenders being at least the higher of 40 percent of the amount held in part B or 20 percent of the aggregate outstanding (sum of Part A and part B). For this purpose, the provisions already held in the account can be reckoned.
  3. In respect of an account that is classified as non-performing asset on the date of this resolution, the entire outstanding (both Part A and part B) shall continue to be classified and provided for as a non-performing asset as per extant IRAC norms.
  4. Lenders may upgrade Part A and Part B to standard category after one year of satisfactory performance of Part A loans. In case of any pre-existing moratorium in the account, the upgrade will be permitted one year after completion of the longest moratorium, subject to satisfactory performance of Part A debt during this period. However, lenders will continue to mark to market Part B instruments as per the norms stated herein.
  5. Any provisioning requirement on account of difference between the book value of Part B instruments and their fair value as indicated in para 7.2 ibid, in excess of the minimum requirements prescribed as per the above para (ii) and (iii), shall be made within four quarters commencing with the quarter in which the resolution plan is actually implemented in the lender’s books, such that the MTM provision held is not less than 25 percent of the required provision in the first quarter, not less than 50 percent in the second quarter and so on. For this purpose, the provision already held in the account can be reckoned.
  6. If the provisions held by the bank in respect of an account prior to this resolution are more than the cumulative provisioning requirement prescribed in the applicable sub-paragraphs above, the excess can be reversed only after one year from the date of implementation of resolution plan (i.e. when it is reflected in the books of the lender, hereinafter referred to as ‘date of restructuring’), subject to satisfactory performance during this period.
  7. The resolution plan and control rights should be structured in such a way so that the promoters are not in a position to sell the company/firm without the prior approval of lenders and without sharing the upside, if any, with the lenders towards loss in Part B.
  8. If Part A subsequently slips into NPA category, the account will be classified with slippage in category with reference to the classification obtaining on the reference date and necessary provisions should be made immediately.
  9. Where a bank/NBFC/AIFI chooses to make the prescribed provisions/write downs over more than one quarter and this results in the full provisioning/write down remaining to be made as on the close of a financial year, banks/NBFCs/AIFIs should debit 'other reserves' [i.e., reserves other than the one created in terms of Section 17(2) of the Banking Regulation Act 1949] by the amount remaining un-provided/not written down at the end of the financial year, by credit to specific provisions. However, bank/NBFC/AIFI should proportionately reverse the debits to ‘other reserves’ and complete the provisioning/write down by debiting profit and loss account, in the subsequent quarters of the next financial year. Banks shall make suitable disclosures in Notes to Accounts with regard to the quantum of provision made during the year under this scheme and the quantum of unamortised provisions debited to ‘other reserves’ as at the end of the year.
10. Fees and Charges
The IBA will collect a fee from the lenders as a prescribed percentage of the outstanding debt of the borrowal entity to the consortium/JLF/consortium/bank and create a corpus fund. This fund will be used to meet the expenses of the OC.
11. Mandatory Implementation
Once the resolution plan prepared/presented by the lenders is ratified by the OC, it will be binding on all lenders. They will, however, have the option to exit as per the extant guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP).
Yours faithfully,
(Sudarshan Sen)
Principal Chief General Manager
Related pressrelease
Jun 13, 2016RBI introduces a ‘Scheme for Sustainable Structuring of Stressed Assets’

1 In respect of Securitisation Companies/ Reconstruction Companies (SCs/RCs), only those accounts are eligible which, in addition to meeting the listed criteria, have been acquired against consideration in cash only, i.e. not by issuing any Security Receipts.