Updation for JAIIB & CAIIB Oct 2013

8/13/2019 Updation for JAIIB & CAIIB Oct 2013

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NARANGS LAKSSHYA INSTITUTE FOR BANKERS, GURGAON, MOB 9818546499/9899692772 1

Updates for JAIIB & CAIIB from 1.7.2013 to 31.10.2013

(A) From RBI Circulars

1. Second Quarter Review of Monetary Policy 2013-14 announced on

29.10.2013Following an assessment of the evolving macroeconomic situation, the Reserve Bankhas decided to:

reduce the marginal standing facility (MSF) rate by 25 basis points from 9.0 per centto 8.75 per cent with immediate effect;

increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basispoints from 7.5 per cent to 7.75 per cent with immediate effect

keep cash reserve ratio (CRR) unchanged at 4.0 per cent of net demand and timeliability (NDTL); and

increase the liquidity provided through term repos of 7-day and 14-day tenor from0.25 per cent of NDTL of the banking system to 0.5 per cent with immediate effect.Consequently, the reverse repo rate under the LAF stands adjusted to 6.75 per centand the Bank Rate stands reduced to 8.75 per cent with immediate effect. With these

changes, the MSF rate and the Bank Rate are recalibrated to 100 basis points abovethe repo rate.

2. Section 23 of the Banking Regulation Act, 1949 Relaxations in BranchAuthorisation Policy (19.09.2013)

To enhance the penetration of banking in rural and semi-urban areas, domesticscheduled commercial banks (excluding RRBs) were permitted in December 2009and November 2011 respectively, to open branches in Tier 2 to Tier 6 centres and inthe rural, semi-urban and urban centres in North-Eastern States and Sikkim withouthaving the need to take permission from Reserve Bank of India in each case, subjectto reporting.

With the objective of further liberalising and rationalising the branch authorisationpolicy, the general permission to domestic scheduled commercial banks (other thanRRBs) referred to above is now extended to branches in Tier 1 centres also, subjectto the following:(a) At least 25 percent of the total number of branches opened during the financialyear (excluding entitlement for branches in Tier 1 centres given by way of incentive),must be opened in unbanked rural (Tier 5 and Tier 6) centres, i.e. centres which donot have a brick and mortar structure of any scheduled commercial bank forcustomer based banking transactions.(b) The total number of branches opened in Tier 1 centres during the financial year(excluding entitlement for branches in Tier 1 centres given by way of incentive)cannot exceed the total number of branches opened in Tier 2 to 6 centres and allcentres in the North Eastern States and Sikkim.(c) Banks have to ensure that all branches opened during a financial year are incompliance with the norms as stipulated above. In case a bank is unable to open all

the branches it is eligible for in Tier 1 centres, it may carry-over (open) thesebranches during subsequent two years.(d) Banks, which for some reason are unable to meet their obligations of openingbranches in Tier 2 to 6 centres in aggregate, or in unbanked rural centres (Tiers 5 to6 centres) during the financial year, must necessarily rectify the shortfall in the nextfinancial year.(e) This general permission would be subject to compliance with the parametersstated above as well as regulatory/supervisory comfort in respect of the individualbanks. RBI would have the option to withhold the general permission now being


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granted to banks which fail to meet the above mentioned criteria along with

imposing penal measures on banks which fail to meet the obligations stated above.

3. Export of Goods and Services-Simplification and Revision of Declaration

Form for Exports of Goods/ Softwares (13.09.2013):(i)Under extant regulations, exporter of goods or softwares has to give declaration inone of the forms (GR/PP/SDF/SOFTEX/Bulk SOFTEX) and submit it to the specified

authority for certification. In order to simplify the existing form used for declarationof exports of Goods/Softwares, a common formcalled Export Declaration Form(EDF) has been devised to declare all types of export of goods from Non-EDI portsand a common SOFTEX Form to declare single as well as bulk software exports.

The EDF will replace the existing GR/PP form used for declaration of export of Goods.The procedure relating to the exports of goods through EDI ports will remain thesame and SDF form will be applicable as hitherto.(ii) Under the revised procedure, the exporters will have to declare all the exporttransactions, including those less than US$25000, in the form as applicable.(iii) The above instruction will come into force from October 1, 2013.

4. Clarifications on Basic Savings Bank Deposit Account ( 11.09.2013)(i) In supersession of instructions on No Frill Accounts, RBI has advised banks tooffer a 'Basic Savings Bank Deposit Account' to all their customers which will offerminimum common facilities as stated therein. Banks are required to convert theexisting 'no-frills' accounts into 'Basic Savings Bank Deposit Accounts'.(ii) An individual is eligible to have only one 'Basic Savings Bank Deposit Account' inone bank(iii) Holders of 'Basic Savings Bank Deposit Account' will not be eligible for openingany other savings account in that bank. If a customer has any other existing savingsaccount in that bank, he / she will be required to close it within 30 days from thedate of opening a 'Basic Savings Bank Deposit Account'.(iv) An individual can have Term/Fixed Deposit, Recurring Deposit etc., accounts inthe bank where one holds 'Basic Savings Bank Deposit Account'.(v)Banks are advised not to impose restrictions like age and income criteria of theindividual for opening BSBDA

(vi)The 'Basic Savings Bank Deposit Account' would be subject to provisions of PMLAct and Rules and RBI instructions on Know Your Customer (KYC) / Anti-MoneyLaundering (AML) for opening of bank accounts issued from time to time. BSBDA canalso be opened with simplified KYC norms. However, if BSBDA is opened on the basisof Simplified KYC, the accounts would additionally be treated as BSBDA-Smallaccount and would be subject to the conditions stipulated for such accounts by RBI.

(vii) As notified in terms of Govt. of India notification dated December 16, 2010,BSBDA-Small Accounts would be subject to the following conditions:(a) Total credits in such accounts should not exceed one lakh rupees in a year.(b) Maximum balance in the account should not exceed fifty thousand rupees at anytime(c)The total of debits by way of cash withdrawals and transfers will not exceed tenthousand rupees in a month

(d) Foreign remittances cannot be credited to Small Accounts without completingnormal KYC formalities(e) Small accounts are valid for a period of 12 months initially which may beextended by another 12 months if the person provides proof of having applied for anOfficially Valid Document.(f) Small Accounts can only be opened at CBS linked branches of banks or at suchbranches where it is possible to manually monitor the fulfillments of the conditions.(viii) There is no requirement for any initial deposit for opening a BSBDA


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5. Creation of a Central Repository of Large Common Exposures - Across Banks

(11.09.2013)

Dr. Raghuram Rajan on his taking over the charge as Governor, RBI stated RBIproposes to collect credit data and examine large common exposures across banks.

This will enable the creation of a central repository on large credits, which we willshare with the banks. This will enable banks themselves to be aware of building

leverage and common exposures.Accordingly, it has been decided to use the information supplied by the banksthrough the Return on Large Borrowers (Form A) [Part D of Return on Large Credit inthe revised XBRL based system], which captures system-wide exposure of individualsand entities having exposure (both fund and non-fund based) of more than Rs 10crore, for creation of central repository of large credits across banks. As you areaware, the data under OSMOS system is collected through DSB/Adhoc returns inexercise of powers vested in RBI under Section 27(2) of Banking Regulation Act(hereinafter referred to as the Act) and non-submission of or wrong reporting inthese returns attracts penalties as specified in the Act.Banks are advised to take utmost care about the data accuracy and integrity, whilesubmitting the data on large credit to the Reserve Bank of India, failing which penalaction, as referred to above, would be undertaken

6. Distribution of Banknotes and Coins Alternative Avenues (10.09.2013)In the Monetary Policy Statement 2013-14 n it was stated that With a view toeffectively meeting the growing demand for banknotes and coins in the country,there is a need for identification of alternative avenues for their distribution bybanks. For this purpose, banks may explore the possibility of offering these servicesthrough Business Correspondents (BC) and consider engaging the services of Cash inTransit (CIT) entities for the purpose of distribution of banknotes and coins, therebyaddressing the last mile connectivity issues.RBI has already permitted banks toinclude distribution of banknotes and coins also in the scope of activities which maybe undertaken by Business Correspondents (BCs).Banks are accordingly advised toexplore the possibility of enlisting the services of their BCs for carrying out thevarious currency management functions.

7. Swap Window for Attracting FCNR (B) Dollar Funds (06.09.2013)RBI has introduced a US Dollar-Rupee swap window for fresh FCNR (B) dollar funds,mobilised for a minimum tenor of three years and over.The salient features of the new swap facility are as under:(a) The swap facility will be available to the scheduled commercial banks (excludingRRBs) for fresh FCNR(B) deposits mobilized in any permitted currency for the tenorof minimum three years. However, the swap facility with RBI will be available in USDollars only. The tenor of the swap will be for three years or more in line with thetenor of the underlying FCNR deposits.(b) The swap window will be operated on a daily basis on all working days in Mumbai(except Saturdays and holidays). However, a particular bank can avail of the swapfacility only once in a week. During any particular week, the maximum amount ofdollars that banks would be eligible to swap with RBI would be equal to the fresh

FCNR(B) deposits for minimum tenor of three years mobilized in equivalent US Dollarterms during the preceding week(s).(c) Under the swap arrangement, a bank can sell US Dollars in multiples of USD onemillion to RBI and simultaneously agree to buy the same amount of US Dollars at theend of the swap period. The swap will be undertaken at a fixed rate of 3.5 per centper annum. In the first leg of the transaction, the bank will sell US Dollars to RBI atRBI Reference Rate or any other rate as may be mutually agreed upon. Thesettlement of the first leg of the swap will take place on spot basis from the date of


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transaction. In the reverse leg of the swap transaction, Rupee funds will have to bereturned to RBI along with the swap premium to get the US Dollars back.(d) Banks desirous of availing the swap facility will have to furnish a declaration dulysigned by their authorised signatories that they have mobilised the fresh FCNR(B)deposits for minimum tenor of three years during the preceding week(s).(e) The swap facility will be operationalised by the Financial Markets Department of

RBI at Mumbai. RBI would exercise the right to decide on the day of operation andthe number of banks that can avail of the facility on any particular day keeping inview the market conditions and other relevant factors.(f) The underlying deposits will have a minimum lock-in period of one year. However,premature withdrawal of such deposits would be permitted after one year.Accordingly, swaps undertaken with RBI cannot be cancelled before one year. Incase of premature withdrawal of deposits after one year, the banks may approachRBI for termination of the swap. Banks desirous of terminating a swap will have tofurnish a declaration duly signed by their authorised signatories that they haveallowed premature withdrawal of FCNR (B) deposits. In the event of pre-terminationof a swap, the swap cost would be re-fixed for the completed period of the swap at400 bps above the concessional contracted rate of 3.5 per cent offered to the banksplus the prevailing USD/INR swap rate in the market for the residual tenor of theoriginal swap (towards the replacement cost). RBIs decision regarding the re-pricingof the swap at the time of termination shall be final and no request for anymodification or revision to the same would be entertained.(g) The new swap window comes into effect on September 10, 2013 and will remainopen up to November 30, 2013. RBI will reserve the right to close the scheme earlierwith prior notice.

8. Export and Import of Currency (06.09.2013)Under Regulation (2) of Foreign Exchange Management (Export and Import ofCurrency) (Amendment) Regulations, 2009, any person resident in India may takeoutside India or having gone out of India on a temporary visit, may bring into India(other than to and from Nepal and Bhutan) currency notes of Government of Indiaand Reserve Bank of India notes up to an amount not exceeding Rs.7,500 per

person.As part of providing greater flexibility to the resident individuals travelling abroad,the existing limit, mentioned above, has been enhanced to Rs. 10,000per person.Accordingly, any person resident in India:

(ii) may take outside India (other than to Nepal and Bhutan) currency notesof Government of India and Reserve Bank of India notes up to an amountnot exceeding Rs.10,000 (Rupees ten thousand only) per person; and

(ii) who had gone out of India on a temporary visit, may bring into India at the timeof his return from any place outside India (other than from Nepal and Bhutan),currency notes of Government of India and Reserve Bank of India notes up to anamount not exceeding Rs.10,000 (Rupees ten thousand only) per person.

9. Settlement of Claims of Deceased Depositor Simplification of Procedure Placing of claim forms on banks website (03.09.2013)

In June 2005, RBI had prescribed simplified procedure for settlement of claims ofdeceased depositors. RBI has been receiving feedback from public that banks are notfollowing the simplified procedure as advised in the circular. Banks are therefore,advised once again that they should strictly comply with the instructions containedtherein for hassle-free settlement of claims on the death of a depositor. Further, witha view to facilitate timely settlement of claims on the death of a depositor, banks areadvised to provide claim forms for settlement of claims of the deceased accounts, toany person/s who is/are approaching the bank / branches for forms. Claim forms


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may also be put on the banks website prominently so that claimants of the deceased

depositor can access and download the forms without having to visit the concernedbank/branch for obtaining such forms for filing claim with the bank.

10.Financial Inclusion by Extension of banking Services- Use of Business

Correspondents for distribution of Banknotes and Coins- AlternativeAvenues (02.09.2013)

(a)The scope of activities of Business Correspondents (BCs) may include (i)identification of borrowers; (ii) collection and preliminary processing of loanapplications including verification of primary information/data; (iii) creatingawareness about savings and other products and education and advice on managingmoney and debt counselling; (iv) processing and submission of applications tobanks; (v) promoting, nurturing and monitoring of Self Help Groups/ Joint LiabilityGroups/Credit Groups/others; (vi) post-sanction monitoring; (vii) follow-up forrecovery, (viii) disbursal of small value credit; (ix) recovery of principal/collection ofinterest; (x) collection of small value deposits; (xi) sale of micro insurance/ mutualfund products/ pension products/ other third party products and (xii) receipt anddelivery of small value remittances/ other payment instruments.(b) With a view to effectively meeting the growing demand of banknotes and coins inthe country there is a need for identification of alternative avenues for their

distribution by banks. It has therefore, been decided to allow banks to includedistribution of banknotes and coinsalso in the scope of activities which may beundertaken by BCs.

11.Base Rate Revised Guidelines (02.09.2013)Banks were advised to switch over to the Base Rate system for calculation of theirlending rates with effect from July 1, 2010. In order to give banks some time tostabilize the system of Base Rate calculations, banks were permitted to change thebenchmark and methodology any time during the initial six month period i.e. end-December 2010 which was subsequently extended up to June 30, 2011.In this connection, RBI has been receiving references from certain banks requestingto allow them to change the Base Rate methodology on various grounds. It hasbeen, therefore, decided to allow banks flexibility in computation / revision of Base

Rate methodology in order to enable them to overcome the difficulties faced in thisregard. Accordingly, RBI has advised as under:(i) Banks that have commenced their banking operations in India after the cominginto effect of the Base Rate regime in July 2010 but have not completed one year oftheir banking operations as on the date of this circular, will be allowed to revise theirBase Rate methodology within a year from the date of commencement of theirbusiness operations in India.(ii) Banks that will commence their banking business in India after issue of thiscircular will be allowed to revise their Base Rate methodology within a year from thedate of commencement of their banking business in India.(iii) In case, a bank, including banks listed at (i) and (ii) above, desires to review itsBase Rate methodology after five yearsfrom the date of its finalization, the bankmay approach Reserve Bank for permissionin this regard.

12.Rupee Export Credit - Interest Subvention (26.08.2013)Interest subvention of 2% was extended w.e.f. 01.04.2013 to 31.03.2014 on pre andpost shipment rupee export credit for certain employment oriented export sectors.In this connection, the Government of India has decided to increase the rate ofinterest subvention on the existing sectors from the present 2% to 3% with effectfrom August 1, 2013.Accordingly, banks may reduce the interest rate chargeable to the exporters as perBase Rate system in the existing sectors eligible for export credit subvention by the


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amount of subvention available subject to a floor rate of 7%. Banks may ensure topass on the benefit of 3% interest subvention completely to the eligible exporters.

13.Deregulation of Interest Rates on Non-Resident (External) Rupee (NRE)Deposits (14.08.2013)

In December, 2011 interest rates on NRE and NRO were deregulated with theprovisio that interest rates offered by banks on NRE deposits cannot be higher than

those offered by them on comparable domestic rupee deposits. However, in order topass on the benefit of exemption provided on incremental NRE deposits withmaturity of 3 years and above from CRR/ SLR requirements, it has been decided togive banks the freedom to offer interest rates on such deposits without any ceiling.The extant ceiling on NRO Accounts shall continue. All other instructions in thisregard, as amended from time to time, will remain unchanged. These instructionswill be valid up to November 30, 2013, subject to review.

14.Interest Rates on FCNR(B) Deposits (14.08.2013):

Until further notice and with effect from the close of business in India as on August14, 2013, the interest rate ceiling on FCNR(B) Deposits will be as under:

Maturity Period Existing Revised1 year to less than 3 years LIBOR/Swap plus 200 basis

pointsNo change

3 - 5 years LIBOR/Swap plus 300 basispoints

LIBOR/ SWAP plus 400basis points

On floating rate deposits, interest shall be paid within the ceiling of swap rates forthe respective currency/maturity plus 200 bps/ 400 bps as the case may be. Forfloating rate deposits, the interest reset period shall be six months.These instructions will be valid up to November 30, 2013, subject to review.

15.FCNR(B)/NRE deposits - exemption from maintenance of CRR/SLR and

exclusion from ANBC for Priority Sector Lending (14.08.2013)At present, banks are required to include all Foreign Currency Non-Resident Bank[FCNR (B)] and Non-Resident (External) Rupee (NRE) deposit liabilities forcomputation of Net Demand and Time Liabilities (NDTL) and for maintenance of CRRand SLR.

Banks are advised that with effect from fortnight beginning August 24, 2013,incremental FCNR (B) deposits as also NRE depositswith reference base dateof July 26, 2013, and having maturity of three years and above, mobilised bybanks will be exempt from maintenance of CRR and SLR. To amplify, if a bank had atotal FCNR (B) deposit base of say USD 100 as on the base date, and mobilises anincremental deposit of say USD 20, that portion of USD 20 which has a maturity of 3years and above will not be part of NDTL and will qualify for CRR and SLR exemption.The same principle will apply for calculation of NRE deposits for exemption frommaintenance of CRR/SLR requirements. However, any transfer from Non-Resident(Ordinary) (NRO) accounts to NRE accounts shall not qualify for such exemptions.Further, advances extended in India against the incremental FCNR (B) / NREdeposits qualifying for exemption from CRR/SLR requirements as above, will also beexcluded from Adjusted Net Bank Credit for computation of priority sector lendingtargets.

16.Liberalised Remittance Scheme for Resident Individuals- Reduction of limit

from USD 200,000 to USD 75,000 (14.08.2013)On a review of the scheme, it has now been decided to reduce the existing limit ofUSD 200,000 per financial year to USD 75,000 per financial year (April - March) withimmediate effect. Accordingly, AD Category I banks may now allow remittance upto USD 75,000 per financial year, under the scheme, for any permitted current orcapital account transaction or a combination of both. Further, the following changes /


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clarifications in regard to the remittances under LRS will come into effectimmediately:(i). The scheme should no longer be used for acquisition of immovable property,directly or indirectly, outside India. Therefore, AD Category-I banks may henceforthnot allow any remittances under the LRS Scheme for acquisition of immovableproperty outside India.

(ii). The scheme should not be used for making remittances for any prohibited orillegal activities such as margin trading, lottery etc., as hitherto.(iii). Resident individuals have now been allowed to set up Joint Ventures (JV) /Wholly Owned Subsidiaries (WOS) outside India for bonafide business activitiesoutside India within the limit of USD 75,000 with effect from August 5, 2013.

17.Migration of Post-dated cheques (PDC)/Equated Monthly Instalment (EMI)Cheques to Electronic Clearing Service (Debit) 24.07.2013

All lending banks have been advised by RBI in March, 2013 not to accept any freshPost Dated Cheques (PDC)/Equated Monthly Installment (EMI) cheques in locationswhere the facility of ECS/RECS (Debit) is available and convert existing cheques insuch locations into ECS/RECS (Debit) by obtaining fresh mandates.However, instances of banks obtaining fresh cheques (both CTS-2010 and non CTS-2010 standard) in locations where the facility of ECS/RECS is available have been

brought to our notice, thus necessitating a reiteration of our earlier instructions inthis regard.Accordingly, banks are advised to adhere to the following instructions withimmediate effect:

a. No fresh/additional Post Dated Cheques (PDC)/Equated Monthly Installment (EMI)cheques (either in old format or new CTS-2010 format) shall be accepted in locationswhere the facility of ECS/RECS (Debit) is available. The existing PDCs/EMI chequesin such locations may be converted into ECS/RECS (Debit) by obtaining fresh ECS(Debit) mandates.

b. Section 25 of the Payment and Settlement Systems Act, 2007 accords the samerights and remedies to the payee (beneficiary) against dishonor of electronic fundstransfer instructions under insufficiency of funds as are available under Section 138

of the Negotiable Instruments Act, 1881. Considering the protection available, thereis no need for banks to take additional cheques, if any, from customers in addition toECS (Debit) mandates.

c. Cheques complying with CTS-2010 standard formats shall alone be obtained inlocations, where the facility of ECS/RECS is not available.

18.Change in Daily Minimum Cash Reserve Maintenance Requirement(23.07.2013)

Currently, banks are allowed to maintain a minimum of 70 per cent of the requiredCash Reserve Ratio (CRR) during a fortnight, which is applicable on all days of thereporting fortnight. It has been decided to increase the requirement of minimumdaily CRR balance maintenance to 99 per cent effective from the first day of thefortnight beginning July 27, 2013. (since reduced to 95% from 21.09.2013)

19.Banking Laws (Amendment) Act, 2012 notified in January 2013:

The Act amends the Banking Regulation Act, 1949, the Banking Companies(Acquisition and Transfer of Undertakings) Act, 1970, the Banking Companies(Acquisition and Transfer of Undertakings) Act, 1980 and also makes consequentialamendments to certain other enactments including Indian Stamp Act, 1899 and theIndian Contract Act, 1872. The Amendment Act, 2012 is expected to pave the wayfor issuing new banking licenses by giving the Reserve Bank of India greaterregulatory power over the banking sector beforeit issues new licenses to variousprivate players. Increased competition in the banking will be beneficial to banking


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customers giving them more choice at competitive prices. The amendmentsintroduced by the Act can be categorized under two broad heads namely (a) thoseintended to attract private sector investment and build investor confidence in thebanking sector and (b) those intended to strengthen the RBIs regulatory powers

over banks.(a)Reforms to attract investments

(i)The Act allows banks to issue preference shares as per policy guidelines issued byRBI. Holders of such shares in a banking company will not be entitled to voting rightslike holders of such shares under the Companies Act, 1956 on non-payment ofdividend. Under Basel III norms banks are required to have more capital under Tier Icategory and issuance of preference shares without ceding voting rights will be ashot in the arms of banks.(ii)So far any share-holder of a private bank, regardless of his holding, could exercisenot more than 10% voting rights on a poll. The Amendment Act now gives powers toRBI to increase it to 26% in a phased manner. Likewise, in case of public sectorbanks voting right of just 1% available so far has been increased to 10%. Thischange seeks to bridge the gap between legal and economic ownership of banksthereby allowing investors to have more control over working of banks.(iii)The authorized share capital of public sector banks has been increased from Rs

15 billion to Rs 30 billion. These banks have been allowed to increase or decreasetheir authorized capital with prior approval of RBI and Central Government. Theyhave been permitted to issue rights and bonus shares. These banks earlier could notissue bonus shares despite large reserves. The move is likely to be appreciated byshareholders.(iv)The brokerage, commission or remuneration that a banking company can pay inrespect of any shares issued by it has been increased from 2.5% of paid up value ofshares to 2.5% of the price (including premium, if any) at which the shares areissued.

(b)Reforms to enhance Regulatory Powers of RBI(i)Approval of the RBI is a must for any direct or indirect acquisition or voting rights

in an Indian bank in excess of 5% of paid up capital of the bank. In determining thisthreshold, shares held by relatives or associate enterprises of or persons acting inconcert will be consolidated.(ii)Acquisitions in excess of 25% of shares or voting rights of a bank , if the bank is alisted company, would trigger the Takeover code and the acquirer will then have tomake an open offer.(iii)A significant power conferred on RBI by the Amendment Act is the right to

supersede the Board of Directors of the Banking company, if RB , in consultation withCentral Govt. , is satisfied that it is necessary in the public interest or to prevent theaffairs of the banking company being conducted in a manner detrimental to theinterest of depositors or any banking company or for securing proper managementof any banking company. This power is over and above the power of RBI to removechairman or any director or employee/ officer of a banking company. However,

period of supersession of Board of Directors should not exceed 12 months.

(c)Miscellaneous(i)The Act provides for establishment of Depositor Education and AwarenessFund into which funds lying in accounts which have not been operated for 10 yearsor more will be deposited.(ii)Bank guarantees typically have a clause requiring the beneficiary to prefer a claimwithin a certain period from the date of expiry of bank guarantee. The Indian


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Contract Act, 1872 provides that an agreement that extinguishes the right of a partyis an agreement in restraint of legal proceeding and is void. Through an amendmentto Indian Contract Act, 1872 the Act carves out a specific exemption for such clausesin bank guarantee. This has the effect of holding that such clauses in restraint oflegal proceedings after one year are not void.

20.Guidelines for Licensing of New Banks in the Private Sector

(i) Eligible Promoters: Entities / groups in the private sector, entities in public sector andNon-Banking Financial Companies (NBFCs) shall be eligible to set up a bank through awholly-owned Non-Operative Financial Holding Company (NOFHC).(ii) Fit and Proper criteria: Entities / groups should have a past record of soundcredentials and integrity, be financially sound with a successful track record of 10 years.For this purpose, RBI may seek feedback from other regulators and enforcement andinvestigative agencies.(iii) Corporate structure of the NOFHC: The NOFHC shall be wholly owned by the Promoter /Promoter Group. The NOFHC shall hold the bank as well as all the other financialservices entities of the group.(iv) Minimum voting equity capital requirements for banks and shareholding by NOFHC: Theinitial minimum paid-up voting equity capital for a bank shall be Rs 5 billion. The NOFHCshall initially hold a minimum of 40 per cent of the paid-up voting equity capital of thebank which shall be locked in for a period of five years and which shall be brought downto 15 per cent within 12 years. The bank shall get its shares listed on the stockexchanges within three years of the commencement of business by the bank.(v) Regulatory framework: The bank will be governed by the provisions of the relevantActs, relevant Statutes and the Directives, Prudential regulations and otherGuidelines/Instructions issued by RBI and other regulators. The NOFHC shall beregistered as a non-banking finance company (NBFC) with the RBI and will be governedby a separate set of directions issued by RBI.(vi) Foreign shareholding in the bank: The aggregate non-resident shareholding in the newbank shall not exceed 49% for the first 5 years after which it will be as per the extantpolicy.(vii) Corporate governance of NOFHC: At least 50% of the Directors of the NOFHC should be

independent directors. The corporate structure should not impede effective supervisionof the bank and the NOFHC on a consolidated basis by RBI.(viii) Prudential norms for the NOFHC: The prudential norms will be applied to NOFHC bothon stand-alone as well as on a consolidated basis and the norms would be on similarlines as that of the bank.(ix) Exposure norms: The NOFHC and the bank shall not have any exposure to thePromoter Group. The bank shall not invest in the equity / debt capital instruments of anyfinancial entities held by the NOFHC.(x) Business Plan for the bank: The business plan should be realistic and viable and shouldaddress how the bank proposes to achieve financial inclusion.(xi) Other conditions for the bank: The Board of the bank should have a majority of independent Directors. The bank shall open at least 25 per cent of its branches in unbanked rural centres

(population up to 9,999 as per the latest census) The bank shall comply with the priority sector lending targets and sub-targets as

applicable to the existing domestic banks. Banks promoted by groups having 40 per cent or more assets/income from non-

financial business will require RBIs prior approval for raising paid-up voting equitycapital beyond Rs 10 billion for every block of Rs 5 billion.

Any non-compliance of terms and conditions will attract penal measures includingcancellation of licence of the bank.


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(xii) Additional conditions for NBFCs promoting / converting into a bank : Existing NBFCs, ifconsidered eligible, may be permitted to promote a new bank or convert themselves intobanks

(B) Additional Material for Retail Banking

1. Loans against shares and debentures:

Advances to individuals

Banks may grant advances against the security of shares, debentures or bonds toindividuals subject to the following conditions :(i) Purpose of the Loan: Loan against shares, debentures and bonds may be granted toindividuals to meet contingencies and personal needs or for subscribing to new or rightsissues of shares / debentures / bonds or for purchase in the secondary market, against thesecurity of shares / debentures / bonds held by the individual.

(ii) Amount of advance: Loans against the security of shares, debentures and bonds shouldnot exceed the limit of Rupees ten lakhs per individual if the securities are held in physicalform and Rupees twenty lakhs per individual if the securities are held in dematerialisedform.(iii) Margin: Banks should maintain a minimum margin of 50 percent of the market value ofequity shares / convertible debentures held in physical form. In the case of shares /convertible debentures held in dematerialised form, a minimum margin of 25 percent shouldbe maintained. These are minimum margin stipulations and banks may stipulate highermargins for shares whether held in physical form or dematerialised form. The marginrequirements for advances against preference shares / non-convertible debentures andbonds may be determined by the banks themselves.(iv) Lending policy: Each bank should formulate with the approval of their Board of Directorsa Loan Policy for grant of advances to individuals against shares / debentures / bonds

keeping in view the RBI guidelines. Banks should obtain a declaration from the borrowerindicating the extent of loans availed of by him from other banks as input for creditevaluation. It would also be necessary to ensure that such accommodation from differentbanks is not obtained against shares of a single company or a group of companies. As aprudential measure, each bank may also consider laying down appropriate aggregate sub-limits of such advances.(v)General guidelines applicable to advances against shares / debentures / bonds

(ai Banks should be concerned with what the advances are for, rather than what theadvances are against. While considering grant of advances against shares / debenturesbanks must follow the normal procedures for the sanction, appraisal and post sanctionfollow-up.(b) Advances against the primary security of shares / debentures / bonds should be kept

distinct and separate and not combined with any other advance.(c) Banks should satisfy themselves about the marketability of the shares / debentures andthe net worth and working of the company whose shares / debentures / bonds are offeredas security.(d) Shares / debentures / bonds should be valued at prevailing market prices when they arelodged as security for advances.(e) Banks should exercise particular care when advances are sought against large blocks ofshares by a borrower or a group of borrowers. It should be ensured that advances againstshares are not used to enable the borrower to acquire or retain a controlling interest in the


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company / companies or to facilitate or retain inter-corporate investments.(f) No advance against partly paid shares shall be granted.(gi) No loans to be granted to partnership / proprietorship concerns against the primarysecurity of shares and debentures.(h) Banks operating in India should not be a party to transactions such as making advancesor issuing back-up guarantees favouring other banks for extending credit to clients of Indian

nationality / origin by some of their overseas branches, to enable the borrowers to makeinvestments in shares and debentures / bonds of Indian companies

2. Mobile Banking in India

1. Mobile phones, as a medium for extending banking services, have of-late attained greatersignificance because of their ubiquitous nature. The rapid growth of mobile users in India,through wider coverage of mobile phone networks, have made this medium an importantplatform for extending banking services to every segment of banking clientele in generaland the unbanked segment in particular. In order to ensure a level playing field andconsidering that the technology is relatively new, Reserve Bank brought out a set ofoperating guidelines for adoption by banks. The guidelines, finalised following a wide

consultative process with the stakeholders, were first issued in October 2008 and since thenhave been updated keeping in view the developments taking place. Mobile Bankingtransaction means undertaking banking transactions using mobile phones by bank

customers that involve accessing / credit / debit to their accounts. Banks are permitted tooffer mobile banking services after obtaining necessary permission from the Department ofPayment & Settlement Systems, Reserve Bank of India. Mobile Banking services areavailable to bank customers irrespective of the mobile network. Customers need to firstregister for Mobile Banking with their bankers and download the Mobile Banking applicationon their mobile handsets.2. Banks which are licensed, supervised and having physical presence in India, arepermitted to offer mobile banking services. Only banks who have implemented corebanking solutions are permitted to provide mobile banking services. The services shall berestricted only to customers of banks and/or holders of debit/credit cards issued as per the

extant Reserve Bank of India guidelines. Only Indian Rupee based domestic services shallbe provided. Use of mobile banking services for cross border inward and outward transfersis strictly prohibited. Banks may also use the services of Business Correspondent appointedin compliance with RBI guidelines, for extending this facility to their customers. Theguidelines issued by Reserve Bank on Know Your Customer (KYC), Anti Money

Laundering (AML) and Combating the Financing of Terrorism (CFT) from time to time

would be applicable to mobile based banking services also. Banks shall file SuspiciousTransaction Report (STR) to Financial Intelligence Unit India (FIU-IND) for mobile bankingtransactions as in the case of normal banking transactions.3.Information Security is most critical to the business of mobile banking services and itsunderlying operations. Therefore, technology used for mobile banking must be secure andshould ensure confidentiality, integrity, authenticity and non-repudiability.Transactions upto Rs 5000/- can be facilitated by banks without end-to-end encryption. The risk aspectsinvolved in such transactions may be addressed by the banks through adequate securitymeasures.4. Banks offering mobile banking service must ensure that customers having mobile phonesof any network operator are in a position to avail the service, i.e. should be networkindependent. Restriction, if any, for the customers of particular mobile operator(s) arepermissible only during the initial stages of offering the service, up to a maximum period ofsix months subject to review. The long term goal of mobile banking framework in Indiawould be to enable funds transfer from account in one bank to any other account in the


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same or any other bank on a real time basis irrespective of the mobile network a customerhas subscribed to. This would require interoperability between mobile banking serviceproviders and banks and development of a host of message formats. To ensure inter-operability between banks, and between their mobile banking service providers, banks shalladopt the message formats like ISO 8583, with suitable modification to address specificneeds.

5. Banks are permitted to offer mobile banking facility to their customers without any dailycap for transactions involving purchase of goods/services. However, banks may put in placeper transaction limit depending on the banks own risk perception, with the approval of itsBoard.

3. Floating rate Term Deposits

Floating rate term deposits (FRDs) are a variant of the fixed deposits offered by banks. Theinterest rates on offer are linked to the banks base interest rate. This is a relatively newproduct in the country, with the first one having been launched by State Bank of India inSeptember 2010. As of now, these deposits are only long-term in nature, offered for periodsof 1, 3 and 5 years. One can invest a minimum of Rs 1,000 and multiples thereof, till amaximum of Rs 15 lakh. The interest rate changes each time the base rate does, and can

move up to a maximum of 200 basis points above the fixed term deposit rate.FRDs have their interest rates linked to the banks base rate, which varies with thebenchmark rate revisions. Depending on the deposit tenure, the rate changes to narrow thegap between itself and the prevailing base rate. It is inversely related to the tenure of thedeposit. For instance, while the interest rate offered by a one-year floating deposit is 50basis points lower than the base rate, that of a three-year deposit is 25 basis points lower.The rate for a five-year deposit is at par with the base rate.Keeping your money in FRDs is a good option when the interest rates are expected to rise.Retail investors who have taken loans, use these deposits to hedge their interest rate risk.Earlier, retail investors used to borrow at a floating rate and earn interest on their depositsat a fixed rate. Also, during phases of high inflation, such as now, these deposits are a goodoption, as interest rates are expected to rise.

Falling interest rates are your worst enemy when going for such deposits. One cant reallypredict how low it may go, providing no guaranteed returns. This makes it a risky option forpeople looking at steady earnings. With interest rates changing often, these may not be agreat alternative to fixed term deposits. This is especially true for senior citizens, who relyon a fixed deposits regular income and stability. These products are also consideredcomplicated in nature. So, to make the most of them, the depositor needs to know in whichdirection the interest rates will move, so as to not fall short of the fixed term rates.

(C) Additional Material for Rural Banking

Financial Inclusion:

Poverty and exclusion continue to dominate socio-economic and political discourse in Indiaas they have done over the last six decades in the post-independence period. Povertyreduction has been an important goal of development policy since the inception of planningin India. Various anti-poverty, employment generation and basic services programmes havebeen in operation for decades in India. The ongoing reforms attach great importance toremoval of poverty and to addressing the wide variations across states and the rural-urbandivide. Though the Indian economy recorded impressive growth rates until recently, its


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impact has sadly not fully percolated to the lowest deciles. Despite being one of the tenfastest growing economies of the world, India is still home to one-third of the worlds poor.Further analysis shows that poverty is getting concentrated continuously in the poorerstates.In developing economies like ours, the banks, as mobilisers of savings and allocators ofcredit for production and investment, have a very critical role. As a financial intermediary,

the banks contribute to the economic growth of the country by identifying the entrepreneurswith the best chances of successfully initiating new commercial activities and allocatingcredit to them. At a minimum, all retail commercial banks also provide remittance facilitiesand other payment related products. Thus, inherently, the banking sector possesses atremendous potential to act as an agent of change and ensure redistribution of wealth in thesociety.

However, it is disheartening to note that the number of people with access to the productsand services offered by the banking system continues to be very limited even years afterintroduction of inclusive banking initiatives in the country through measures such as thecooperative movement, nationalization of banks, creation of regional rural banks, etc. AsNobel Laureate Prof. Amartya Sen has also noted, the thrust of developmental policy in

India has undergone a paradigm shift from an exclusive focus on efficiency to one on

equity; from the rate and pattern of growth, and on inequalities, distribution of income andwealth to the extent to which people are deprived of the requirements for leading a fulfillinglife and suffer capability deprivation. Over the past five years, Reserve Bank of India, asalso other policy makers have resolutely pursed the agenda of financial inclusion andachieved discernible progress in improving access to financial services for the masses.However, the progress is far from satisfactory as evidenced by the World Bank FindexSurvey (2012). According to the survey findings, only 35% of Indian adults had access to aformal bank account and 8% borrowed formally in the last 12 months. Only 2% of adultsused an account to receive money from a family member living in another area and 4%used an account to receive payment from the Government. The miniscule numbers suggesta crying need for a further push to the financial inclusion agenda to ensure that the peopleat the bottom of the pyramid join the formal financial system, reap benefits and improve

their financial well-being.The importance of financial inclusion has been emphatically underlined in the wake of thefinancial crisis. As we all know, the crisis has had a significant negative impact on lives ofindividuals globally. Millions of people have lost their livelihoods, their homes and savings.One of the prominent reasons for the crisis was that the financial system was focused onfurthering its own interests and lost its linkage to the real sector and with the society atlarge. The crisis also resulted in a realization that free market forces do not always result ingreater efficiency in the financial system, particularly while protecting the interests of thevulnerable sections of society. This is due to the information asymmetry working againstthese sections, thereby placing them at a severe disadvantage. In wake of the Crisis,therefore, Financial Inclusion has emerged as a policy imperative for inclusive growth inseveral countries across the globe. However, though much lip service has been paid toFinancial Inclusion, the actual progress has remained far from satisfactory. It is regrettable

that the entire debate surrounding financial inclusion has generated significant heat andsound, but little light.Financial Inclusion is defined as the process of ensuring access to appropriatefinancial products and services needed by all sections of the society in general andvulnerable groups such as weaker sections and low income groups in particular, at

an affordable cost in a fair and transparent manner by regulated, mainstream

institutional players. We consider Financial Inclusion and Financial Literacy as twin pillarswhere Financial Inclusion acts on the supply side i.e. for creating access and financial


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literacy acts from the demand side i.e. creating a demand for the financial products andservices. Providing access to basic banking services is the first phase of the financialinclusion process. We are also convinced that only the mainstream, regulated financialplayers are capable of bringing about meaningful financial inclusion as they have the abilityto make the necessary investment in the build-up phase and also cross-subsidize theservices in the initial stages till they become self-sustaining.

RBI's Policy Initiatives to foster Financial Inclusion(a) Reach(i) Branch expansion in rural areasBranch authorisation has been relaxed to the extent that banks do not require priorpermission to open branches in centres with population less than 1 lakh, which is subject toreporting. To further step up the opening of branches in rural areas, banks have beenmandated to open at least 25 per cent of their new branches in unbanked rural centres.In the Annual Policy Statement for 2013-14, banks have been advised to considerfrontloading (prioritizing) the opening of branches in unbanked rural centres over a threeyear cycle co-terminus with their FIPs. This is expected to facilitate the branch expansion inunbanked rural centres.(ii) Agent Banking - Business Correspondent/ Business Facilitator Model

In January 2006, the Reserve Bank permitted banks to utilise the services of intermediaries

in providing banking services through the use of business facilitators and businesscorrespondents. The BC model allows banks to do cash in - cash out transactions at alocation much closer to the rural population, thus addressing the last mile problem.(iii) Combination of Branch and BC Structure to deliver Financial InclusionThe idea is to have a combination of physical branch network and BCs for extendingfinancial inclusion, especially in geographically dispersed areas. To ensure increased bankingpenetration and control over operations of BCs, banks have been advised to establish lowcost branches in the form of intermediate brick and mortar structures in rural centresbetween the present base branch and BC locations, so as to provide support to a cluster ofBCs (about 8-10 BCs) at a reasonable distance of about 3-4 kilometers.(b) AccessRelaxed KYC norms

Know Your Customer (KYC) requirements have been simplified to such an extent thatsmall accounts can be opened with self -certification in the presence of bank officials. RBI has allowed Aadhaar to be used as one of the eligible documents for meeting

the KYC requirement for opening a bank account.Roadmap for Banking Services in unbanked Villages

In the first phase, banks were advised to draw up a roadmap for providing bankingservices in every village having a population of over 2,000 by March 2010. Bankshave successfully met this target and have covered 74398 unbanked villages.

In the second phase, Roadmap has been prepared for covering remaining unbankedvillages i.e. with population less than 2000 in a time bound manner. About 4,90,000unbanked villages with less than 2000 population across the country have beenidentified and allotted to various banks. The idea behind allocating villages to bankswas to ensure availability of at least one banking outlet in each village.

(c) ProductsBouquet of Financial services

In order to ensure that all the financial needs of the customers are met, we have advisedbanks to offer a minimum of four basic products, viz.

A savings cum overdraft account A pure savings account, ideally a recurring or variable recurring deposit A remittance product to facilitate EBT and other remittances, and Entrepreneurial credit products like a General Purpose Credit Card (GCC) or a Kisan


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Credit Card (KCC)(d) Transactions

Direct Benefit TransferThe recent introduction of direct benefit transfer, leveraging the Aadhaar platform, will helpfacilitate delivery of social welfare benefits by direct credit to the bank accounts ofbeneficiaries. The government, in future, has plans to route all social security payments

through the banking network, using the Aadhaar based platform as a unique identifier ofbeneficiaries. In order to ensure smooth roll out of the Governments Direct Benefit Transfer

(DBT) initiative, banks have been advised to: Open accounts of all eligible individuals in camp mode with the support of local

Government authorities. Seed the existing and new accounts with Aadhaar numbers. Put in place an effective mechanism to monitor and review the progress in

implementation of DBT.Financial Inclusion Plan of banks

Financial Inclusion Plan 2010-13

We have encouraged banks to adopt a structured and planned approach to financialinclusion with commitment at the highest levels, through preparation of Board approved

Financial Inclusion Plans (FIPs). The first phase of FIPs was implemented over the period2010-2013. The Reserve Bank has sought to use the FIPs as the basis for FI initiatives atthe bank level. RBI has put in place a structured, comprehensive monitoring mechanism forevaluating banks performance against their FIP plans. Annual review meetings are beingheld with CMDs of banks to ensure top management support and commitment to the FIprocess.

What has been achieved so far?

A snapshot of the progress made by banks under the FIPs (April 10 March 13) for keyparameters, during the three year period is as under:

Nearly 2, 68, 000 banking outlets have been set up in villages as on March 13 asagainst 67,694 banking outlets in villages in March 2010

About 7400 rural branches opened during this period Nearly 109 million Basic Savings Bank Deposit Accounts (BSBDAs) have been added,taking the total no. of BSBDAs to 182 million. Share of ICT based accounts have

increased substantially Percentage of ICT accounts to total BSBDAs has increasedfrom 25% in March 10 to 45% in March 13

With the addition of nearly 9.48 million farm sector householdsduring this period,33.8 million households have been provided with small entrepreneurial credit as atthe end of March 2013

With the addition of nearly 2.25 million non- farm sector householdsduring thisperiod, 3.6 million households have been provided with small entrepreneurial creditas at the end of March 2013.

About 4904 lakh transactions have been carried out in ICT based accounts throughBCs during the three year period

Basic Savings Bank Deposit Account Frequently Asked Questions (FAQs)

1. What is the definition of Basic Savings Bank Deposit Account(BSBDA)?Ans: All the existing No-frills accounts and converted into BSBDA in compliance with theRBI guidelines as well as fresh accounts opened under RBI guidelines for BSBDA should betreated as BSBDA.2. Whether the guidelines issued on no-frills account with 'nil' or very low minimumbalances will continue even after the introduction of Basic Savings Bank Deposit Account?


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Ans:No. Banks have now been advised to offer a 'Basic Savings Bank Deposit Account' toall their customers which will offer minimum common facilities as stated therein. Banks arerequired to convert the existing 'no-frills' accounts into 'Basic Savings Bank DepositAccounts'.3. Can an Individual have any number of 'Basic Savings Bank Deposit Account' in one bank?Response

Ans: No. An individual is eligible to have only one 'Basic Savings Bank Deposit Account' inone bank.4. Whether a 'Basic Savings Bank Deposit Account' holder can have any other savings bankaccount in that bank?Ans:Holders of 'Basic Savings Bank Deposit Account' will not be eligible for opening anyother savings bank account in that bank. If a customer has any other existing savings bankaccount in that bank, he / she will be required to close it within 30 days from the date ofopening a 'Basic Savings Bank Deposit Account'.5 Can an individual have other deposit accounts where one holds 'Basic Savings BankDeposit Account?Ans:Yes. One can have Term/Fixed Deposit, Recurring Deposit etc., accounts in the bankwhere one holds 'Basic Savings Bank Deposit Account'.6. Whether the Basic Savings Bank Deposit Account can be opened by only certain types of

individuals like poor and weaker sections of the population?Ans:No. The 'Basic Savings Bank Deposit Account' should be considered as a normalbanking service available to all customers, through branches.7.Whether there are any restrictions like age, income, amount etc criteria for openingBSBDA by banks for individuals?Ans: No. Banks are advised not to impose restrictions like age and income criteria of theindividual for opening BSBDA.8. Is the 'Basic Savings Bank Deposit Account' a part of furthering the Financial Inclusionobjectives of banks?Ans: The aim of introducing 'Basic Savings Bank Deposit Account' is very much part of theefforts of RBI for furthering Financial Inclusion objectives. All the accounts opened earlier as'no-frills' account should be renamed as BSBDA.

9. What are KYC norms applicable to BSBDA accounts? Are there any relaxations in KYCnorms for BSBDAs?Ans: The 'Basic Savings Bank Deposit Account' would be subject to provisions of PML Actand Rules and RBI instructions on Know Your Customer (KYC) / Anti-Money Laundering(AML) for opening of bank accounts issued from time to time. BSBDA can also be openedwith simplified KYC norms. However, if BSBDA is opened on the basis of Simplified KYC, theaccounts would additionally be treated as BSBDA-Small Account and would be subject tothe conditions stipulated for such accounts10. Can I have a Small Account in ABC Bank as per the Government of India NotificationNo.14/2010/F.No.6/2/2007-E.S. dated December 16, 2010. Can I have additionally a 'BasicSavings Bank Deposit Account?Ans: No, the BSBDA customer cannot have any other savings bank account in the samebank. If 'Basic Savings Bank Deposit Account is opened on the basis of simplified KYC

norms, the account would additionally be treated as a 'Small Account' and would be subjectto conditions stipulated for such accounts11. What are the conditions stipulated for accounts which are additionally to be treated asBSBDA-Small Account?Ans: As notified in Govt of India notification dated December 16, 2010, BSBDA-SmallAccounts would be subject to the following conditions:

i. Total credits in such accounts should not exceed one lakh rupees in a year.ii. Maximum balance in the account should not exceed fifty thousand rupees at any


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timeiii. The total of debits by way of cash withdrawals and transfers will not exceed ten

thousand rupees in a monthiv. Remittances from abroad cannot be credited to Small Accounts without completing

normal KYC formalitiesv. Small accounts are valid for a period of 12 months initially which may be extended

by another 12 months if the person provides proof of having applied for an OfficiallyValid Document.

vi. Small Accounts can only be opened at CBS linked branches of banks or at suchbranches where it is possible to manually monitor the fulfilment of the conditions.

12. What kinds of services are available free in the 'Basic Savings Bank Deposit Account?Ans: The services available free in the 'Basic Savings Bank Deposit Account will includedeposit and withdrawal of cash; receipt / credit of money through electronic paymentchannels or by means of deposit / collection of cheques at bank branches as well as ATMs.13. Is there requirement of any initial minimum deposit while opening a BSBDA as per thecircular dated August 17, 2012?Ans: There is no requirement for any initial deposit for opening a BSBDA.14. Whether banks are free to offer more facilities than those prescribed for Basic SavingsBank Deposit Account?Ans: Yes. However, the decision to allow services beyond the minimum prescribed has beenleft to the discretion of the banks who can either offer additional services free of charge orevolve requirements including pricing structure for additional value-added services on areasonable and transparent basis, to be applied in a non-discriminatory manner with priorintimation to the customers. Banks are required to put in place a reasonable pricingstructure for value added services or prescribe minimum balance requirements which shouldbe displayed prominently and also informed to the customers at the time of accountopening. Offering such additional facilities should be non - discretionary, non-discriminatoryand transparent to all Basic Savings Bank Deposit Account customers. However, such

accounts enjoying additional facilities will not be treated as BSBDAs.15. If BSBDA customers have more than 4 withdrawals and request for cheque book atadditional cost, will it cease to be a BSBDA?

Ans:Yes. Please refer to response to the Query No. 14. However, if the bank does not levyany additional charges and offers more facilities free than those prescribed under BDBDAa/cs without minimum balance then such a/cs can be classified as BSBDA.16. Whether the existing facility available in a normal saving bank account of five freewithdrawals in a month in other banks ATMs as per IBA (DPSS) instructions will hold goodfor BSBDA?Ans: No. In BSBDA, banks are required to provide free of charge minimum fourwithdrawals, through ATMs and other mode including RTGS/NEFT/Clearing/Branch cashwithdrawal/transfer/internet debits/standing instructions/EMI etc It is left to the banks toeither offer free or charge for additional withdrawal/s. However, in case the banks decide tocharge for the additional withdrawal, the pricing structure may be put in place by banks ona reasonable, non-discriminatory and transparent manner.17. Are the banks free to levy Annual ATM Debit Card charges?

Ans: Banks should offer the ATM Debit Cards free of charge and no Annual fee should belevied on such Cards.18. Whether Balance enquiry in ATMs also should be counted within the four withdrawalspermitted under BSBDA?Ans: Balance enquiry through ATMs should not be counted in the four withdrawals allowedfree of charge at ATMs.19. If a customer of BSBDA opts not to have ATM Debit card, should the bank compel thecustomer to accept the ATM debit card ?


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Ans: ATM debit cards may be offered at the time of opening BSBDA and issued if thecustomer requests for the same in writing. Banks need not insist that a customer acceptsATM debit card.20. What about customers who are illiterate or old who may not be in a position to safekeep and use the ATM debit card and PIN associated with it?Ans: Banks while opening the BSBDA should educate such a customers about the ATM Debit

Card, ATM PIN and risk associated with it. However, if a customer chooses not to have anATM Debit Card, banks need not compel such customer to accept ATM Debit Card. If,however, customer opts to have an ATM Debit card, banks should provide the same toBSBDA holders through safe delivery channels by adopting the same procedure which theyhave been adopting for delivery of ATM Debit card and PIN to their other customers.21. Whether Passbooks are also to be offered free to BSBDA holders?Ans: Yes. BSBDA holders should be offered passbook facility free of charge22. If a customer opens a BSBDA but does not close his existing Savings Bank Accountwithin 30 days, are banks then free to close such savings bank accounts?Ans: While opening the BSBDA customers consent in writing be obtained that his existingnon-BSBDA Savings Banks accounts will be closed after 30 days of opening BSBDA andbanks are free to close such accounts after 30 days.23. In certain accounts to which disbursements under MGNREGA are made weekly, the

number of withdrawals may be more than four in a month of five weeks. In such cases, canbanks permit five withdrawals?Ans: In BSBDA, banks are required to provide free of charge minimum four withdrawals,including through ATM and other mode. Beyond four withdrawals, it is left to discretion ofthe banks to either offer free or charge for additional withdrawal/s. However pricingstructure may be put in place by banks on a reasonable, non-discretionary, non-discriminatory and transparent manner.24. What is the prescribed rate of interest payable on balances in such Basic Savings BankDeposit Account?Ans: RBI instructions on Deregulation of Savings Bank Deposit Interest Rate, are applicableto deposits held in Basic Savings Bank Deposit Account.25. In terms of RBI instructions , if payable at par / multi-city cheques are issued to

BSBDA customers based on their request, can banks prescribe minimum balancerequirements?Ans: BSBDA does not envisage cheque book facility in the minimum facilities that should beprovided to BSBDA customers. They are free to extend any additional facility includingcheque book facility free of charge (in which case the account remains BSBDA) or charge forthe additional facilities (in which case the account is not BSBDA).26. What is the time frame available to banks for converting No-Frills Account as BasicSavings Bank Deposit Account? What is the time frame available to banks for issuing ATMCards to all the existing Basic Savings Bank Deposit Account holders?Ans: All the existing No-Frill accounts may be treated as BSBDA accounts from the date ofthe circular i.e., August 17, 2012 and banks may offer the prescribed facilities as per thecircular such as issuing ATM card etc., to the existing No-Frill account holders as and whenthe customer approaches the bank. However, customers opening new accounts after the

issue of our circular should be provided prescribed facilities immediately on opening of theaccount.27. Whether the normal saving bank account can be converted into BSBDA at the request ofcustomer?Ans: Yes. Such customers should give their consent in writing and they should be informedof the features and extent of services available in BSBDAs.


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Major Recommendations of Working Group to Review the Business Correspondent

Model (chairman P. Vijay Bhaskar)- August 2009

Realising the full potential of the BC modelGiven the right impetus, the BC model has the potential to speed up the process of financialinclusion in the country and bring the vast majority of population within the banking fold.

The Group recognises the fact that the process of financial inclusion involves the threecritical aspects of (a) access to banking markets, (b) access to credit markets and (c)financial education. The BC model should, therefore, encompass each of the above threeaspects in order to be able to address the issue of financial inclusion in a holistic manner.The full scope of the model can be realised not just by opening no-frills accounts but by

synthesising the above three aspects as integral components of the model. Towards thisend, there should be proper understanding and appreciation of the BC model by allstakeholders, in particular, by banks. Banks need to appreciate the benefits arising out ofadopting the branchless BC model and implement the same with missionary zeal so as toachieve the ultimate goal of financial inclusion.(Paragraph 3.20)Cash handling

Entities which have cash inflow/outflow as part of their normal activities may be generallyconsidered to take on the role of BCs so that the issues relating to cash handling are

addressed.Banks could think in terms of streamlining cash management by adopting CashRoutes wherever warranted with suitable cash transit insurance to be borne by the banks.Financial Education and Consumer ProtectionBanks need to scale up their efforts substantially towards educating the clientele in theirrespective vernacular languages regarding the benefits of banking habit. For this purpose,extending necessary financial support from the Financial Inclusion Fund administered byNABARD may be considered.Information regarding BCs engaged by banks may be placed on the banks websites. TheAnnual Reports of banks should also include the progress in respect of extending bankingservices through the BC model and the initiatives taken by banks in this regard. Banks mayalso use print and electronic media (including in the vernacular language) to give widepublicity about implementation of BC model by them.

The banks may educate their customers through various means print, electronic, etc. - the role of the BC and their obligation towards the customers, in the vernacular language.The banks need to ensure the preservation and protection of the security and confidentialityof customer information in the custody or possession of the BCs.Banks may put in an appropriate grievance redressal mechanism, which should be widelypublicised and also placed in public domain. The details of the grievance redressal officershould be displayed at the premises of the BC as also at the base branch and madeavailable by the bank/BC at the request of the customerEnsuring viability of BC model

The BC model can succeed only if the banks own up the BCs as their agents. Banks mayneed to have a relook at the compensation structure for BCs.The range of services to be delivered through the BC should be ramped up to include

suitable small savings, micro-credit, micro-insurance, small value remittances etc.Banks may be permitted to collect reasonable service charges from the customer, in atransparent manner, for delivering services through the BC model. Suitable guidelines maybe issued by RBI in this regard, especially keeping in view the profile of customers usingthese services.Banks may bear the initial set up cost of the BCs and extend a handholding support to theBCs, at least during the initial stages. Banks may also need to bear the costs relating totransit insurance of the cash handled by BCs.
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Recommendations of the Committee on Financial Inclusion

The following is the Summary of the recommendations of the Committee on FinancialInclusion headed by Dr. C. Rangarajan,:

Access to finance by the poor and vulnerable groups is a prerequisite for povertyreduction and social cohesion. This has to become an integral part of our efforts topromote inclusive growth. In fact, providing access to finance is a form of empowerment of

the vulnerable groups. Financial inclusion denotes delivery of financial services at anaffordable cost to the vast sections of the disadvantaged and low-income groups. Thevarious financial services include credit, savings, insurance and payments and remittancefacilities. The objective of financial inclusion is to extend the scope of activities of theorganized financial system to include within its ambit people with low incomes. Throughgraduated credit, the attempt must be to lift the poor from one level to another so that theycome out of poverty.Extent of Exclusion

NSSO data reveal that 45.9 million farmer households in the country (51.4%), out ofa total of 89.3 million households do not access credit, either from institutional or non-institutional sources. Further, despite the vast network of bank branches, only 27% of totalfarm households are indebted to formal sources (of which one-third also borrow frominformal sources). Farm households not accessing credit from formal sources as aproportion to total farm households is especially high at 95.91%, 81.26% and 77.59% inthe North Eastern, Eastern and Central Regions respectively. Thus, apart from the fact thatexclusion in general is large, it also varies widely across regions, social groups and assetholdings. The poorer the group, the greater is the exclusion.Demand Side Factors

While financial inclusion can be substantially enhanced by improving the supply sideor the delivery systems, it is also important to note that many regions, segments of thepopulation and sub-sectors of the economy have a limited or weak demand for financialservices. In order to improve their level of inclusion, demand side efforts need to beundertaken including improving human and physical resource endowments, enhancingproductivity, mitigating risk and strengthening market linkages. However, the primary focusof the Committee has been on improving the delivery systems, both conventional and

innovative.National Mission on Financial Inclusion

The Committee feels that the task of financial inclusion must be taken up in amission mode as a financial inclusion plan at the national level. A National Mission onFinancial Inclusion (NaMFI) comprising representatives from all stakeholders may beconstituted to aim at achieving universal financial inclusion within a specific time frame. TheMission should be responsible for suggesting the overall policy changes required forachieving the desired level of financial inclusion, and for supporting a range of stakeholdersin the domain of public, private and NGO sectors - in undertaking promotional initiatives.


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A National Rural Financial Inclusion Plan (NRFIP) may be launched with a clear targetto provide access to comprehensive financial services, including credit, to atleast 50% offinancially excluded households, say 55.77 million by 2012 through rural/semi-urbanbranches of Commercial Banks and Regional Rural Banks. The remaining households, withsuch shifts as may occur in the rural/urban population, have to be covered by 2015. Semi-urban and rural branches of commercial banks and RRBs may set for themselves a

minimum target of covering 250 new cultivator and non-cultivator households per branchper annum, with an emphasis on financing marginal farmers and poor non-cultivatorhouseholds.Development and Technology Funds

There is a cost involved in this massive exercise of extending financial services tohitherto excluded segments of population. Such costs may come down over a period oftime with the resultant business expansion. However, in the initial stages some fundingsupport is required for promotional and developmental initiatives that will lead to bettercredit absorption capacity among the poor and vulnerable sections and for application oftechnology for facilitating the mandated levels of inclusion. The Committee has, therefore,proposed the constitution of two funds with NABARD the Financial Inclusion Promotion &Development Fund and the Financial Inclusion Technology Fund with an initial corpus of Rs.500 crore each to be contributed in equal proportion by GoI / RBI / NABARD. Thisrecommendation has already been accepted by GoI.Business Correspondent Model

Extending outreach on a scale envisaged under NRFIP would be possible only byleveraging technology to open up channels beyond branch network. Adoption ofappropriate technology would enable the branches to go where the customer is presentinstead of the other way round. This, however, is in addition to extending traditional modeof banking by targeted branch expansion in identified districts. The BusinessFacilitator/Business Correspondent (BF/BC) models riding on appropriate technology candeliver this outreach and should form the core of the strategy for extending financialinclusion. The Committee has made some recommendations for relaxation of norms forexpanding the coverage of BF/BC. Ultimately, banks should endeavour to have a BC touchpoint in each of the 6,00,000 villages in the country.

Procedural ChangesProcedural Changes like simplifying mortgage requirements, exemption from Stamp

Duty for loans to small and marginal farmers and providing agricultural / businessdevelopment services in the farm and non-farm sectors respectively, will help in extendingfinancial inclusion.Role of RRBs

RRBs, post-merger, represent a powerful instrument for financial inclusion. Theiroutreach vis--vis other scheduled commercial banks particularly in regions and acrosspopulation groups facing the brunt of financial exclusion is impressive. RRBs account for37% of total rural offices of all scheduled commercial banks and 91% of their workforce isposted in rural and semi-urban areas. They account for 31% of deposit accounts and 37%of loan accounts in rural areas. RRBs have a large presence in regions marked by financial

exclusion of a high order. They account for 34% of all branches in North-Eastern, 30% inEastern and 32% in Central regions. Out of the total 22.38 lakh SHGs credit linked by thebanking industry as on 31stMarch 2006, 33% of the linkages were by RRBs which is quiteimpressive to say the least. Significantly the more backward the region the greater is theshare of RRBs which is amply demonstrated by their 56% share in the North-Eastern, 48%in Central and 40% in Eastern region.

RRBs are, thus, the best suited vehicles to widen and deepen the process of financialinclusion. However, there has to be a firm reinforcement of the rural orientation of these


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institutions with a specific mandate on financial inclusion. With this end in view, theCommittee has recommended that the process of merger of RRBs should not proceedbeyond the level of sponsor bank in each State. The Committee has also recommended therecapitalisation of RRBs with negative Net Worth and widening of their networkto cover allunbanked villages in the districts where they are operating, either by opening a branch orthrough the BF/BC model in a time bound manner. Their area of operation may also be

extended to cover the 87 districts, presently not covered by them.

SHG Bank Linkage Scheme

The SHG - Bank Linkage Programme can be regarded as the most potent initiativesince Independence for delivering financial services to the poor in a sustainable manner.The programme has been growing rapidly and the number of SHGs financed increased to29.25 lakhs on 31 March 2007.

The spread of the SHG - Bank Linkage Programme in different regions has beenuneven with Southern States accounting for the major chunk of credit linkage. Many Stateswith high incidence of poverty have shown poor performance under the programme.NABARD has identified 13 States with large population of the poor, but exhibiting lowperformance in implementation of the programme. The ongoing efforts of NABARD to

upscale the programme in the identified States need to be given a fresh impetus. TheCommittee has recommended that NABARD may open dedicated project offices in these 13States for upscaling the SHG - Bank Linkage Programme. The State Govts. and NABARDmay set aside specific funds out of the budgetary support and the Micro FinanceDevelopment and Equity Fund (MFDEF) respectively for the purpose of promoting SHGs inregions with high levels of exclusion. For the North-Eastern Region, there is a need toevolve SHG models suited to the local context of such areas.

NGOs have played a commendable role in promoting SHGs and linking them withbanks. NGOs, being local initiators with their low resources, are finding it difficult to expandin other areas and regions. There is, therefore, a need to evolve an incentive package whichshould motivate these NGOs to diversify into other backward areas.

The SHG - Bank Linkage Programme is now more than 15 years old. There are alarge number of SHGs in the country which are well established in their savings and creditoperations. The members of such groups want to expand and diversify their activities with aview to attain economies of scale. Many of the groups are organising themselves intofederations and other higher level structures. To achieve this effectively, resource centrescan play a vital role. Federations of SHGs at village and taluk levels have certainadvantages. Federations, if they emerge voluntarily from amongst SHGs, can beencouraged. However, the Committee feels that they cannot be entrusted with the financialintermediation function.

Extending SHG Bank Linkage Scheme to Urban Areas

There are no clear estimates of the number of people in urban areas with no accessto organized financial services. This may be attributed, in part at least, to the migratory

nature of the urban poor, comprising mostly of migrants from the rural areas. Even moneylenders often shy away from lending to urban poor. The Committee has recommendedamendment to NABARD Act to enable it to provide micro finance services to the urban poor.

Joint Liability Groups

SHG-bank linkage has emerged as an effective credit delivery channel to the poorclients. However, there are segments within the poor such as share croppers/orallessees/tenant farmers, whose loan requirements are much larger but who have no


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collaterals to fit into the traditional financing approaches of the banking system. To servicesuch clients, Joint Liability Groups (JLGs), an upgradation of SHG model, could be aneffective way. NABARD had piloted a project for formation and linking of JLGs during 2004-05 in 8 States of the country through 13 RRBs. Based on the encouraging response fromthe project, a scheme for financing JLGs of tenant farmers and oral lessees has also beenevolved. The Committee has recommended that adoption of the JLGs concept could be

another effective method for purveying credit to mid-segment clients such as small farmers,marginal farmers, tenant farmers, etc. and thereby reduce their dependence on informalsources of credit.

Micro Finance Institutions - NBFCs

Micro Finance Institutions (MFIs) could play a significant role in facilitating inclusion,as they are uniquely positioned in reaching out to the rural poor. Many of them operate in alimited geographical area, have a greater understanding of the issues specific to the ruralpoor, enjoy greater acceptability amongst the rural poor and have flexibility in operationsproviding a level of comfort to their clientele. The Committee has, therefore, recommendedthat greater legitimacy, accountability and transparency will not only enable MFIs to sourceadequate debt and equity funds, but also eventually enable them to take and use savings asa low cost source for on-lending.

There is a need to recognize a separate category of Micro finance Non BankingFinance Companies (MFNBFCs), without any relaxation on start-up capital and subject tothe regulatory prescriptions applicable for NBFCs. Such MF-NBFCs could provide thrift,credit, micro-insurance, remittances and other financial services up to a specified amount tothe poor in rural, semi-urban and urban areas. Such MF-NBFCs may also be recognized asBusiness Correspondents of banks for providing only savings and remittance services andalso act as micro insurance agents.

The Micro Financial Sector (Development and Regulation) Bill, 2007 has beenintroduced in Parliament in March 2007. The Committee feels that the Bill, when enacted,would help in promoting orderly growth of microfinance sector in India. The Committee feelsthat MFIs registered under Section 25 of Companies Act, 1956 can be brought under thepurview of this Bill while cooperative societies can be taken out of the purview of the

proposed Bill.Revitalising the Cooperative System

Though the network of commercial banks and RRBs has spread rapidly and they nowhave nearly 50,000 rural/semi-urban branches, their reach in the countryside both in termsof the number of clients and accessibility to the small and marginal farmers and otherpoorer segments is far less than that of cooperatives. In terms of number of agriculturalcredit accounts, the Short Term Cooperative Credit System (STCCS) has 50% moreaccounts than the commercial banks and RRBs put together. On an average, there is onePACS for every 6 villages; these societies have a total membership of more than 120 millionrural people making it one of the largest rural financial systems in the world. However, thehealth of a very large proportion of these rural credit cooperatives has deterioratedsignificantly.

For the revival of the STCCS, the Vaidyanathan Committee Report has suggested an

implementable Action Plan with substantial financial assistance. The implementation of theRevival Package would result in the emergence of strong and robust cooperatives withconducive legal and institutional environment for it to prosper. A financially soundcooperative structure can do wonders for financial inclusion given its extensive outreach.Micro Insurance

Micro-insurance is a key element in the financial services package for people at thebottom of the pyramid. The poor face more risks than the well off. It is becomingincreasingly clear that micro-insurance needs a further push and guidance from the


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Regulator as well as the Government. The Committee concurs with the view that offeringmicro credit without micro-insurance is self-defeating. There is, therefore, a need toemphasise linking of micro credit with micro-insurance.

The country has moved on to a higher growth trajectory. To sustain and acceleratethe growth momentum, we have to ensure increased participation of the economically weaksegments of population in the process of economic growth. Financial inclusion of hitherto

excluded segments of population is a critical part of this process of inclusion. We hope thatthe recommendations made in this Report, if implemented, will acce

Updation for JAIIB & CAIIB Oct 2013

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Transcript of Updation for JAIIB & CAIIB Oct 2013