July- Sept 2013

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Dear colleagues,

As you are aware, compliance is all about maintaining Bank’s integrity and reputation and hence it is the responsibility of each and every one of us to ensure that ours is a compliant organisation. Our bank is known for its ethical behaviour in the market and we all should continue to strive to maintain that image. Such effort needs to be doubled up especially in troubled times – which we saw in the last quarter. July – September 2013 has been one of the most volatile periods witnessed by Indian Financial market. Forex volatility, gold controls, interest rate spike, GDP slow down, KYC/AML issues etc., have all made the life of a banker very tough during the period. Only adhering to the basic qualities of “simplicity and prudence” have helped us tide over the period.

It is needless to mention that banking is changing very fast and supervision is becoming more and more intrusive. Anything could lead to non-compliance cost. This is posing multiple challenges to businesses. First and foremost challenge is the customer complaints, which have become the main source of information to the regulator as they reveal the way we function. These also help us in improving ourselves. Supervisor’s objective has shifted from “depositor protection” to “customer protection” and this is very much evident from the way the instructions on zero interest loans, passing on the subvention received from manufacturer, etc., are issued. It is necessary for us, under these circumstances, to minutely examine our processes to check if everything is ok from customer’s point of view.

Another challenge being faced by banks in India today is the maintenance of data and its integrity. Risk Based Supervision is based on three pillars – data, data and data. Data is the source from which the supervisor is going to assign the “inherent risk” rating for the organisation. In the last quarter we were required to provide huge data and it was quite a struggle to gather the data the way it was required. I therefore suggest that each one of us must be careful while entering the data into our systems to ensure that short cuts are not resorted to while collecting and using the data.

The above challenges can be met only if there is a strong compliance culture within the organisation and synergy between the businesses and compliance department. To strengthen these aspects, an interactive programme was organised to understand each other’s expectations and arrive at ways to ensure that all of us are on the same plane, in making our organisation “a compliant one on a real time basis”.

T V Sudhakar Head Compliance

My Musings

Important circulars issued

by RBI

Draft guidelines on Wealth Management

issued by RBI

Industry Updates

Disclaimer

July- Sept 2013

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Important circulars issued by RBI in last quarter:

Retail Liability

Unsolicited Commercial Communications – National Customer Preference Register (NCPR)

RBI has noticed that many banks, financial institutions as also their franchisees are engaging telemarketers who are not registered with TRAI, for marketing their services and these unregistered telemarketers use their normal telephone connections for making commercial calls to customers registered in the National Customer Preference Register. This is resulting in a lot of customer grievance.

Hence, RBI has reiterated that banks should engage only those telemarketers who are registered in terms of the guidelines issued by TRAI, from time to time, for all their promotional/ telemarketing activities. These guidelines should be strictly complied with.

(DBOD.No.FSD.BC.30/24.01.001/2013-14 dated July 15, 2013).

Clean Note Policy

RBI has noticed that at certain branches of banks, the practice of writing/scribbling on the body of the banknotes continues to remain in vogue. Under the present system of mechanized processing of bank notes, inscription or scribbling on any part of the bank note would render it to be classified as unfit for reissue. Accordingly, such bank notes get treated as soiled bank notes and cannot be recirculated.

RBI has also advised all banks to issue suitable instructions to all dealing officers and staff to forthwith stop writing / scribbling of any kind on any part of the bank note to ensure achievement of the objectives of clean note policy.

(DCM (NPD) No. G-11 /09.39.000 /2013-14 dated August 14, 2013)

Settlement of Claims of Deceased Depositor – Simplification of Procedure – Placing of claim forms on bank’s website

RBI has received feedback from public that banks are not following the simplified procedure as advised in the circular regarding Settlement of Claims of Deceased Depositor – Simplification of Procedure. Therefore, RBI has advised all banks once again that they should strictly comply with the instructions contained therein for hassle-free settlement of claims on the death of a depositor.

Further, with a view to facilitate timely settlement of claims on the death of a depositor, RBI has also advised all banks to provide claim forms for settlement of claims of the deceased accounts, to any person/s who is/are approaching the bank / branches for forms. Claim forms may also be put on the bank’s website prominently so that claimants of the deceased

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

(DBOD.No.Leg.BC.48/09.07.005/2013-14 dated September 03, 2013).

Foreign students studying in India – KYC procedure for opening of bank accounts

RBI has laid down the following procedure for opening accounts of foreign students (other than Pakistani nationality) who are not able to provide an immediate address proof for opening bank a/c.

a. Banks may open a Non Resident Ordinary (NRO) bank account of a foreign student on the basis of his/her passport which contains the proof of identity and address in the home country along with a photograph and a letter offering admission from the educational institution.

b. Within a period of 30 days of opening the account, the foreign student should submit to the branch where the account is opened, a valid address proof giving local address.

c. During the 30 days period, the account should be operated with a condition of allowing foreign remittances not exceeding USD 1,000 into the account and a cap of monthly withdrawal to Rs. 50,000/-, pending verification of address.

d. On submission of the proof of current address, the account would be treated as a normal NRO account, and will be operated in terms of instructions contained in RBI Circular on NRO. (DBOD.AML.BC.No.45/14.01.001/2013-14 dated September 02, 2013).

Section 23 of the Banking Regulation Act, 1949 – Relaxations in Branch Authorisation Policy

With the objective of further liberalising and rationalising the branch authorisation policy, the general permission to domestic scheduled commercial banks (other than RRBs) is now extended to branches in Tier 1 centres also, subject to the following:

a) At least 25 percent of the total number of branches opened during the financial year (excluding entitlement for branches in Tier 1 centres given by way of incentive as stated in para 4 below), must be opened in unbanked rural (Tier 5 and Tier 6) centres, i.e. centres which do not have a brick and mortar structure of any scheduled commercial bank for customer 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 as stated in para 4 below) cannot exceed the total number of branches opened in Tier 2 to 6 centres and all centres in the North Eastern States and Sikkim.

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As there is a continuing need for opening more branches in underbanked districts of underbanked States for ensuring more uniform spatial distribution, banks would be provided incentive for opening such branches. Accordingly, banks may open branches in Tier 1 centres, over and above their eligibility as defined at (a) and (b) above, that are equal to the number of branches opened in Tier 2 to Tier 6 centres of underbanked districts of underbanked States, excluding such of the rural branches opened in unbanked rural centres that may be located in the underbanked districts of underbanked States in compliance with the requirement as indicated in (a) above.

Banks have to ensure that all branches opened during a financial year are in compliance 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, as per paras above, it may carry-over (open) these branches during subsequent two years.

Banks, which for some reason are unable to meet their obligations of opening branches in Tier 2 to 6 centres in aggregate, or in unbanked rural centres (Tiers 5 to 6 centres) during the financial year, must necessarily rectify the shortfall in the next financial year.

This general permission would be subject to compliance with the parameters stated in above as well as regulatory/supervisory comfort in respect of the individual banks. RBI would have the option to withhold the general permission now being granted to banks which fail to meet the above mentioned criteria along with imposing penal measures on banks which fail to meet the obligations at mentioned above.

RBI will issue detailed guidelines in this regard including reporting requirements and examples illustrating the above stipulations shortly. All other instructions will remain unchanged.

(DBOD.No.BAPD.BC.54 /22.01.001/2013-14 dated September 19, 2013).

Retail Liability/Retail Assets

Recommendations of Damodaran Committee on Customer Service in Banks- Uniformity in Intersol Charges

In order to ensure that bank customers are treated fairly and reasonably without any discrimination and in a transparent manner at all branches of banks/service delivery locations under CBS environment, RBI advised all banks to follow a uniform, fair and transparent pricing policy and not discriminate between their customers at home branch and non-home branches. Accordingly, if a particular service is provided free at home branch the same should be available free at non home branches also. There should be no discrimination as regards intersol charges between similar transactions done by customers at home branch and those done at non-home branches.

(DBOD. No. Dir. BC.26/13.03.00/2013-14 dated July 01, 2013)

Standardization and Enhancement of Security Features in Cheque Forms/Migrating to CTS 2010 standards

RBI has noticed that while banks have begun to issue fresh cheques in the CTS-2010 format there is still a large volume of non-CTS-2010 format

cheques being presented in image-based clearing. Accordingly, RBI has decided to put in place particular arrangements for clearing of residual non-CTS-2010 standard cheques.

(DPSS.CO.CHD.No./133 /04.07.05 / 2013-14 dated July 16, 2013)

KYC Norms AML Standards/Combating Financing of Terrorism/Obligation of banks under PMLA, 2002 - Simplifying norms for Periodical Updation of KYC

RBI has reviewed the issue in the light of practical difficulties/constraints expressed by bankers/customers in obtaining/submitting fresh KYC documents at frequent intervals as the relative documents submitted earlier specially by low-risk customers have remained unchanged in most of the accounts. Accordingly, RBI has decided to amend the instructions as under:

a) Banks would need to continue to carry out on-going due diligence with respect to the business relationship with every client and closely examine the transactions in order to ensure that they are consistent with their knowledge of the client, his business and risk profile and, wherever necessary, the source of funds.

b) Full KYC exercise will be required to be done at least every 2 years for high risk individuals/entities.

c) Full KYC exercise will be required to be done at least every ten years for low risk and at least every eight years for medium risk individuals and entities.

d) Positive confirmation (obtaining KYC related updates through e-mail/letter / telephonic conversation/forms/interviews/visits, etc.), will be required to be completed at least every two years for medium risk and at least every three years for low risk individuals and entities.

(DBOD.AML.BC. No. 34/14.01.001/2013-14 dated July 23, 2013)

Migration of Post-dated cheques (PDC)/Equated Monthly Installment (EMI) Cheques to Electronic Clearing Service (Debit)

RBI had noticed several instances wherein banks are obtaining fresh cheques (both CTS-2010 and non CTS-2010 standard) in locations where the facility of ECS/RECS is available and hence RBI has reiterated their earlier instructions in this regard. RBI has also advised all banks to adhere to the following instructions with immediate 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 locations where the facility of ECS/RECS (Debit) is available. The existing PDCs/EMI cheques in 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 same rights and remedies to the payee (beneficiary) against dishonor of electronic funds transfer instructions under insufficiency of funds as are available under Section 138 of the Negotiable Instruments Act, 1881. Considering the protection available, there is no need for banks to take additional cheques, if any, from customers in addition to ECS (Debit) mandates.

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

(DBOD.AML.BC. No. 34/14.01.001/2013-14 dated July 24, 2013.)

Overseas forex trading through electronic / internet trading portals

RBI has observed that some banking customers continue to undertake online trading in foreign exchange on portals / websites offering such schemes wherein they initially remit funds from Indian bank accounts using credit cards or other electronic channels to overseas websites / entities and subsequently receive cash refunds from the same overseas entities into their credit card or bank accounts.

With a view to further strengthening the restrictions on such online activities which are in violation of FEMA, 1999, AD Category I banks are hereby directed as follows:

i. All AD Category I banks who offer credit cards or online banking facilities to their customers should advise their customers that any person resident in India collecting and effecting / remitting payments directly /indirectly outside India in any form towards overseas foreign exchange trading through electronic/internet trading portals would make himself/ herself / themselves liable to be proceeded against with for contravention of the Foreign Exchange Management Act (FEMA), 1999 besides being liable for violation of regulations relating to Know Your Customer (KYC) norms / Anti Money Laundering (AML) standards.

ii. As and when any AD category I bank comes across any prohibited transaction undertaken by its credit card or online banking customer the bank will immediately close the card or account of the defaulting customer and report the same to Chief General Manager-in-Charge, Forex Markets Division, Foreign Exchange Department, Reserve Bank of India, Central Office, 5th Floor, Amar Building, P.M. Road, Mumbai – 400001 in the format provided in the Annex to this circular.

If it is observed that the concerned AD category I bank has failed to carry out the measures as outlined above, RBI may proceed against the defaulting bank under section 11(3) of FEMA, 1999 and take any action as may be deemed necessary.

(A.P. (DIR Series) Circular No. 46 dated September 17, 2013)

Know Your Customer (KYC) Norms / Anti-Money Laundering (AML) Standards / Combating of Financing of Terrorism (CFT) / Obligations under Prevention of Money Laundering Act (PMLA), 2002

In recent investigations by the RBI in the light of alleged violation of KYC / AML guidelines by several banks have shown that KYC / AML / CFT guidelines have been violated, particularly in the case of walk-in customers. In this background, RBI has reiterated below certain existing guidelines on KYC / AML / CFT for strict compliance.

a) Banks are required to have in place a KYC policy, which includes, among other things, customer acceptance policy and customer identification procedures. Among other things, quoting of PAN number is mandatory while opening an account or making a time deposit exceeding Rs.50,000 and any person who has not been allotted a PAN shall make a declaration in Form No.60/61.

(b) “A person or entity that maintains an account and / or has a business relationship with the bank” and “any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction”. “In case of transactions carried out by a non-account based customer, that is a walk-in customer, where the amount of transaction is equal to or exceeds rupees fifty thousand, whether conducted as a single transaction or several transactions that appear to be connected, the customer’s identity and address should be verified. However, if a bank has reason to believe that a customer (account based or walk-in) is intentionally structuring a transaction into a series of transactions below the threshold of Rs.50,000/- the bank should verify the identity and address of the customer & also consider filing suspicious transaction report (STR) to FIU-IND”.

Banks and financial institutions are required to verify the identity of the customers for all international money transfer operations.

(c) Banks should ensure that any remittance of funds and issue of travellers’ cheques for value of Rs.50,000/- and above is effected by debit to the customer’s account or against cheques. The applicants (whether customers or not) for the above transactions for amount exceeding Rs.50,000 should affix PAN number on the applications..

(d) Banks are required to file Cash Transaction Reports (CTRs) and Suspicious Transaction Reports (STRs), wherever required (i.e. structuring a transaction into a series of transactions below the threshold limit).

(e) Banks are required to put in place appropriate software to throw alerts when the transactions are inconsistent with risk categorisation and updated profile of customers. Further, it was added that a robust software throwing alerts is essential for effective identification and reporting of suspicious transactions.

(f) Banks should maintain proper record of transactions in compliance with the relative legal requirements.

(g) In addition, in terms of Rule 114B of the Income Tax Rules, every person shall quote his PAN number in all documents pertaining to various transactions listed in the Rules, which includes, at sub-Rule (j), deposit in cash aggregating fifty thousand rupees or more with a bank during any one day.

A number of banks were found to have violated the above instructions. Detailed illustrative instances are provided in circular itself. In this connection, RBI has reiterated that banks should meticulously follow the instructions in letter and spirit and ensure that violations of the above nature do not recur. Such violations would be viewed seriously by the RBI and would involve imposition of penalties.

When banks sell third party products as agents, the responsibility for ensuring compliance with KYC / AML / CFT regulations lies with the third party. However, to mitigate reputational risk to banks and to enable a holistic view of a customer’s transactions, banks are advised to follow the instructions given below :

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(a) Even while selling third party products as agents, banks should verify the identity and address of the walk-in customer.

(b) Banks should also maintain transaction details with regard to sale of third party products and related records for a period and in the manner prescribed in paragraph 2.20 of the Master Circular.

(c) Banks’ AML software should be able to capture, generate and analyse alerts for the purpose of filing CTR / STR in respect of transactions relating to third party products with customers including walk-in customers.

(d) The 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, as detailed in paragraph 2.(c) above, would also be applicable to sale of third party products by banks as agents to customers, including walk-in customers.

The above instructions in respect of third party products would also apply to sale of banks’ own products, payment of dues of credit cards / sale and reloading of prepaid / travel cards and any other product above the threshold of Rs.50,000/-.

Banks should verify the PAN numbers given by the account based as well as walk-in customers in view of the reported findings that dummy / fictitious PAN numbers were quoted for transactions of Rs.50,000 and above. It is reiterated that bank’s internal audit and compliance function should evaluate and ensure adherence to the KYC policies and procedures. Concurrent / Internal auditor should specifically check and verify the application of KYC procedures at the branches and comment on the lapses observed. The compliance in this regard should be put up before the Audit Committee of the Board on quarterly intervals.

RBI has also reiterated that the AML software in use at banks needs to be comprehensive and robust enough to capture all cash and other transactions, including those relating to walk-in customers, sale of gold / silver / platinum, payment of dues of credit cards / reloading of prepaid / travel cards, third party products, and transactions involving internal accounts of the bank. The utility of the CTR / STR alerts for risk categorisation of customers should also be examined.

RBI has advised all banks to ensure that their audit machinery is staffed adequately with individuals who are well-versed in KYC policies and procedures. Banks are expected to ensure that all KYC / AML / CFT related processes, especially scrutiny and analysis of suspicious transaction alerts, are adequately staffed with individuals conversant with KYC/AML/CFT regulation & procedures.

(DBOD.AML. BC.No.29/14.01.001/2013-14 )

Retail Liability/Treasury

Swap Window for Attracting FCNR (B) Dollar Funds

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. Salient features of the new swap facility are detailed in the circular.

(FMD.MOAG. No.84 /01.06.016/2013-14 dated September 06, 2013)

Retail Liability/Trade CPC

Liberalised Remittance Scheme (LRS) for Resident Individuals- Reduction of limit from USD 200,000 to USD 75,000

RBI has reduced the existing limit of USD 200,000 per financial year to USD 75,000 per financial year (April - March) with immediate effect. Accordingly, AD Category – I banks may now allow remittance up to USD 75,000 per financial year, under the scheme, for any permitted current or capital account transaction or a combination of both. Further, the following changes / clarifications in regard to the remittances under LRS will come into effect immediately :

(i) The scheme should no longer be used for acquisition of immovable property, directly or indirectly, outside India. Therefore, AD Category-I banks may henceforth not allow any remittances under the LRS Scheme for acquisition of immovable property outside India.

(ii) The scheme should not be used for making remittances for any prohibited or illegal 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 activities outside India within the limit of USD 75,000 with effect from August 5, 2013 and subject to the terms and conditions stipulated in Notification No.FEMA 263/RB-2013 dated August 5, 2013.

Further, the limit for gift in Rupees by Resident Individuals to NRI close relatives and loans in Rupees by resident individuals to NRI close relatives in terms of A.P. (DIR Series) Circular No.17 and 18 both dated September 16, 2011 shall accordingly stand modified to USD 75,000 per financial year. (A. P. (DIR Series) Circular No.24 dated August 14, 2013 & A.P.

(DIR Series) Circular No.32 dated September 04, 2013).

Investments by Non-resident Indians (NRIs) under Portfolio Investment Scheme (PIS) Liberalisation of Policy

Previously NRIs could invest under PIS on repatriation and/or non-repatriation basis in shares and convertible debentures of listed Indian companies on a recognized stock exchange in India through a registered stock broker. Further, NRIs may purchase/sell shares/convertible debentures under the PIS through a branch designated by an Authorised Dealer for the purpose and duly approved by the RBI.

As a measure of further liberalizations, RBI has decided i) to allot Unique Code number only to Link office of the AD Category - I bank; and ii) to dispense with the allotment of Unique Code number to each branch designated by that AD Category - I bank administering the Scheme. Accordingly, henceforth in accordance with policy approved by the Board, AD Category-I bank shall be free to permit its branches to administer the Portfolio Investment Scheme for NRIs subject to certain conditions. (A. P. (DIR Series) Circular No.29 dated August 20, 2013).

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Retail Assets/Fincon

FCNR(B)/NRE Deposits - Exemption from Maintenance of CRR/SLR and exclusion from ANBC for Priority Sector Lending

RBI has advised all banks that with effect from fortnight beginning August 24, 2013, incremental FCNR (B) deposits as also NRE deposits with reference base date of July 26, 2013, and having maturity of three years and above, mobilised by banks will be exempt from maintenance of CRR and SLR. To amplify, if a bank had a total FCNR (B) deposit base of say USD 100 as on the base date, and mobilises an incremental deposit of say USD 20, that portion of USD 20 which has a maturity of 3 years 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 from maintenance of CRR/SLR requirements. However, any transfer from Non-Resident (Ordinary) (NRO) accounts to NRE accounts shall not qualify for such exemptions.

Further RBI also advised that advances extended in India against the incremental FCNR (B) / NRE deposits qualifying for exemption from CRR/SLR requirements as above, will also be excluded from Adjusted Net Bank Credit for computation of priority sector lending targets.

(DBOD.No.Ret.BC. 36/12.01.001/2013-14 dated August 14, 2013)

DBOD Mail Box Clarification - Setting off FCNR (B)/NRE deposits – CRR/SLR and PSL targets

Query

Whether the exemption given for bank loans extended in India against incremental FCNR(B)/NRE deposits, as advised by RBI circular DBOD.No.Ret.BC.36/12.01.001/2013-14 dated August 14, 2013 is applicable for priority sector targets as on March 31, 2014?

Response

It is clarified that loans extended in India against incremental FCNR(B)/NRE deposits, as stipulated in RBI circular DBOD.No.Ret.BC.36/12.01.001/2013-14 dated August 14, 2013 can be deducted from ANBC as on March 31, 2013 for computation of priority sector targets of March 31, 2014.

(DBOD Mail Box Clarification dated September 25, 2013)

Retail Assets/Wholesale

Rupee Export Credit - Interest Subvention

Government of India has decided to increase the rate of interest subvention on the existing sectors from the present 2% to 3% with effect from August 1, 2013.

Accordingly, banks may reduce the interest rate chargeable to the exporters as per Base Rate system in the existing sectors eligible for export credit subvention by the amount of subvention available subject to a floor rate of 7%. Banks may ensure to pass on the benefit of 3% interest subvention completely to the eligible exporters.

(DBOD.Dir.BC.No.43 /04.02.001/2013-14 dated August 26, 2013)

Treasury

Risk Management and Inter - Bank Dealings - Liberalization of documentation requirements for the resident entities in the Indian Forex Market

RBI has now decided that AD banks, while offering hedging products under the contracted exposure route to their customers may obtain an annual certificate from the statutory auditors to the effect that the contracts outstanding with all AD category I banks at any time during the year did not exceed the value of the underlying exposures at that time. RBI has also reiterated that the AD bank, while entering into any derivative transaction with a client, shall have to obtain an undertaking from the client to the effect that the contracted exposure against which the derivative transaction is being booked has not been used for any derivative transaction with any other AD bank.

(A.P. (DIR Series) Circular No.02 dated July 04, 2013)

Risk Management and Inter Bank Dealings

On a review of the evolving market conditions, RBI has decided that AD Category – I banks should not carry out any proprietary trading in the currency futures / exchange traded currency options markets. In other words, any transaction by the AD Category – I banks in these markets will have to be necessarily on behalf of their clients. These instructions shall come in to effect immediately and shall be in force till further orders.

(A.P. (DIR Series) Circular No. 7 dated July 08, 2013).

Overseas Investments – Shares of SWIFT

Previously the proposal of acquisition of the shares of Society for Worldwide Interbank Financial Telecommunication (SWIFT), Belgium by the resident bank is considered by the Reserve Bank on case to case basis under the approval route.

RBI has granted general permission to a bank in India, being licensed by the Reserve Bank under the provisions of the Banking Regulation Act, 1949, to acquire the shares of SWIFT as per the by-laws of SWIFT, provided the bank has been permitted by the Reserve Bank for admission to the ‘SWIFT User’s Group in India’ as member.

(A.P. (DIR Series) Circular No.8 dated July 11, 2013).

Reporting of OTC transactions in Securitized Debt Instruments

As a measure to develop the securitized debt market and improve transparency, the reporting of Over The Counter (OTC) transactions in Securitized Debt Instruments has been enabled in Fixed Income Money Market and Derivatives Association of India (FIMMDA) reporting platform.

All entities regulated by the Reserve Bank should report their secondary market OTC trades in securitized debt instruments within 15 minutes of the trade on FIMMDA’s reporting platform with effect from September 02, 2013. (IDMD.PCD. 06 /14.03.06/ 2013-14 dated August 26, 2013).

Risk Management and Inter Bank Dealings

Previously the facility of cancellation and rebooking is not permitted for forward contracts, involving Rupee as one of the currencies, booked by

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residents to hedge current and capital account transactions. However, exporters were allowed to cancel and rebook forward contracts to the extent of 25 percent of the contracts booked in a financial year for hedging their contracted export exposures

On a review of the evolving market conditions and with a view to providing operational flexibility to exporters and importers to hedge their foreign exchange risk, RBI has now decided to:

(a) allow exporters to cancel and rebook forward contracts to the extent of 50 percent of the contracts booked in a financial year for hedging their contracted export exposures, and

(b) allow importers to cancel and rebook forward contracts to the extent of 25 percent of the contracts booked in a financial year for hedging their contracted import exposures.

(A.P. (DIR Series) Circular No. 36 dated September 4, 2013.)

Overseas Foreign Currency Borrowings by Authorised Dealer Banks – Enhancement of limit

Previously, AD Category I banks were allowed to borrow beyond 50% of their unimpaired Tier I capital subject, inter alia, to the condition that the borrowing would have a minimum maturity of three years.

On a review, RBI has decided to lower the requirement of minimum maturity from 3 years to 1 year for the aforesaid borrowings made on or before November 30, 2013 for the purpose of availing of the Swap facility from the RBI. After the said date, foreign currency borrowing by AD Category I banks beyond 50% of their Tier I Capital shall have to be of a minimum maturity of 3 years.

(A.P. (DIR Series) Circular No. 54 dated September 25, 2013.)

Investment portfolio of banks – Classification, Valuation and Provisioning

In view of the recent hardening of long term yields has resulted in banks incurring large mark-to-market (MTM) losses in their investment portfolio. Since these MTM losses are partly resulting from abnormal market conditions and could be recouped going forward, RBI has decided to provide the following prudential adjustments for a limited period:

i. In terms of extant instructions, banks are required to bring down their SLR securities in HTM category from 25 % to 23% of their DTL in a progressive manner, the requirement being 24.50% as of end June 2013. It has now been decided to relax this requirement by allowing banks to retain SLR holdings in HTM category at 24.50% of their NDTL. Banks are, therefore, permitted to exceed the limit of 25% of total investments under the HTM category provided the excess comprises only SLR securities and the total SLR securities held in the HTM category is not more than 24.50% of their NDTL as on last Friday of the second preceding fortnight, till further instructions.

ii. As per extant instructions, banks may shift investments to HTM with the approval of the Board of Directors once a year and such shifting will normally be allowed at the beginning of the accounting year. As a one-time measure, it has now been decided to permit banks

to transfer SLR securities from AFS/HFT to HTM category up to the limit of 24.50 per cent of NDTL as prescribed at para 2 (i) above. Such transfer of securities from AFS/HFT category to HTM category should be made at the lower of book value or market value. Banks have the option of valuing these securities for the purpose of such transfer as at the close of business of July 15, 2013 and depreciation, if any, should be provided for in accordance with current regulations. If banks choose to transfer securities as above, the transfers must be done at the earliest but not later than September 30, 2013. This transfer must be out of the outstanding position of AFS/HFT securities as at the close of business of August 23, 2013 up to the limit of 24.50 per cent of NDTL (i.e. NDTL as on July 26, 2013 applicable for maintenance of SLR for August 23, 2013). Such one-time transfer from AFS/HFT would be excluded from 5 per cent cap prescribed for value of sales and transfers of securities to/ from HTM category under the current regulations.

Banks are required to periodically value their AFS and HFT portfolio and provide for net depreciation in accordance with current regulations. Banks will now have the option of distributing the net depreciation on the entire AFS & HFT portfolios on each of the valuation dates in the current financial year in equal installments during the financial year 2013-14.

(DBOD.BP.BC.No. 41/21.04.141/2013-14 dated August 23, 2013).

Treasury/Trade CPC

Import of Gold by Nominated Banks /Agencies/Entities

RBI had imposed certain restrictions on import of various forms of gold by nominated banks/nominated agencies/ premier or star trading houses/SEZ units/EoUs which have been permitted to import gold for use in the domestic sector vide their earlier circular.

RBI has issued following clarifications/modifications in supersession of all the earlier instructions.

a) Import of gold in the form of coins and medallions is now prohibited.

b) All nominated banks / nominated agencies and other entities should ensure that at least one fifth, i.e., 20%, of every lot of import of gold imported to the country is exclusively made available for the purpose of exports and the balance for domestic use. This shall be monitored by customs authorities, and will be implemented port-wise only.

c) Further, nominated banks / nominated agencies and other entities shall make available gold for domestic use only to the entities engaged in jewellery business / bullion dealers and to banks authorised to administer the Gold Deposit Scheme against full upfront payment. Supply of gold in any form to the domestic users other than against full payment upfront shall not be permitted.

d) The nominated banks / agencies / refineries and other entities shall ensure that there is no front loading of imports, particularly in the first and second lots of imports. Such imports shall be linked to normal quantities of gold supplied to the exporters by the nominated banks / agencies and shall not exceed the highest quantity supplied during any one year out of last three years. The quantity thus arrived

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at, however, will not be imported in one or two lots only. As a thumb rule, imports of more than maximum of two months of requirements of the exporters in a lot would be considered unusual. In case of nominated banks not having a previous record of having supplied gold to the exporters they would need to seek prior approval from RBI before placing orders for import of gold for the first lot under the 20/80 scheme.

e) The 20/80 principle would also apply for the henceforth import of gold in any form / purity including gold dore, whereby 20 per cent of the gold imported shall be provided to the exporters. This will be administered and monitored at the refinery level for each consignment at the time of such imports. This will also be monitored by the customs authorities. The refinery shall make available for domestic use only to the entities engaged in jewellery business / bullion dealers and to the banks authorised to administer the Gold Deposit Scheme against full upfront payment and sale of gold against any other form of payment shall not be permitted. Further, the import of gold dore is permitted only against a licence issued by DGFT.

f) Any authorisation such as Advance Authorisation / Duty Free Import Authorization (DFIA) is to be utilised for import of gold meant for export purposes only and no diversion for domestic use shall be permitted.

Entities / units in the SEZ and EoUs, Premier and Star trading houses are permitted to import gold exclusively for the purpose of exports only.

Head Offices of nominated agencies / International Banking Divisions of banks would be responsible for monitoring operations.

(A.P. (DIR Series) Circular No. 25 dated August 14, 2013.)

Trade CPC

External Commercial Borrowings (ECB) Policy-Non-Banking Finance Company –

Asset Finance Companies (NBFC - AFCs)

RBI has decided to allow NBFCs, categorised as Asset Finance Companies (AFCs) by the Reserve Bank and complying with the norms prescribed in the Circular DNBS. PD. CC. No. 5/03.02.089/2006-07 dated December 6, 2006 of the Bank, as amended from time to time, to avail of ECB subject to following conditions:

(i) NBFC-AFCs are allowed to avail of ECB under the automatic route from all recognised lenders as per the extant ECB guidelines with minimum average maturity period of five years in order to finance the import of infrastructure equipment for leasing to infrastructure projects;

(ii) in cases, where the NBFC-AFCs avail of ECB in the form of Foreign Currency Bonds from international capital markets, such ECBs will be permitted to be raised only from those international capital markets that are subject to regulations prescribed by the host country regulator in a Financial Action Task Force (FATF) member country compliant with FATF guidelines.

(iii) such ECBs (including outstanding ECBs) under the automatic route can be availed upto 75% of owned funds of NBFC-AFCs, subject to a maximum of USD 200 million or its equivalent per financial year;

(iv) ECBs by AFCs above 75% of their owned funds will be considered under approval route by RBI

(v) the currency risk of such ECBs is required to be hedged in full. (A.P. (DIR Series) Circular No. 6 dated July 08, 2013).

Export Credit in Foreign Currency

RBI has observed that the export credit limits are calculated in Indian Rupees and the limit is apportioned between Rupee and foreign currency components depending upon the borrowers’ requirement. While the overall export credit limits are fixed in Indian Rupees, the foreign currency component of export credit fluctuates based on the prevailing exchange rates.

RBI has in view of the above examined the issue and advised all banks that they may compute the overall export credit limits of the borrowers on an on-going basis say monthly, based on the prevalent position of current assets, current liabilities and exchange rates and re-allocate limit towards export credit in foreign currency, as per the bank’s own policy. This may result in increasing or decreasing the Indian Rupee equivalent of foreign currency component of export credit.

Alternatively, banks may denominate foreign currency (FC) component of export credit in foreign currency only with a view to ensuring that the exporters are insulated from Rupee fluctuations. The FC component of export credit, sanctioned, disbursed and outstanding will be maintained and monitored in FC. However, for translation of FC assets in the banks’ book, the on-going exchange / FEDAI rates may be used.

(DBOD.Dir.BC.No. 57 /04.02.001/2013-14 dated September 25, 2013.)

Overseas Direct Investments

Previously, the total overseas direct investment (ODI) of an Indian Party in all its Joint Ventures (JVs) and / or Wholly Owned Subsidiaries (WOSs) abroad engaged in any bonafide business activity should not exceed 400 per cent of the net worth of the Indian Party as on the date of the last audited balance sheet under the Automatic Route. RBI has now decided:

a. To reduce the existing limit of 400 per cent of the net worth of the Indian Party to 100 per cent of its net worth under the Automatic Route. Accordingly, AD Category - I banks may allow overseas direct investments under the Automatic Route up to 100 per cent of the net worth of the Indian party, as on the date of the last audited balance sheet;

b. To reduce the existing limit of 400 per cent of the net worth of the Indian company, investing in the overseas unincorporated entities in the energy and natural resources sectors, under the automatic route, to 100 per cent of the net worth of the Indian company investing in the overseas unincorporated entities in the energy and natural resources sectors, as on the date of last audited balance sheet.

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c. Any ODI in excess of 100% of the net worth shall be considered under the Approval Route by the Reserve Bank of India.

In respect of the Navaratna Public Sector Undertakings (PSUs), ONGC Videsh Limited (OVL) and Oil India Ltd (OIL), the extant provision for investing in overseas unincorporated entities and the overseas incorporated entities in the oil sector (i.e., for exploration and drilling for oil and natural gas, etc.), which are duly approved by the Government of India, without any limits under the automatic route, would however continue as hitherto

(A. P. (DIR Series) Circular No.23 dated August 14, 2013.)

Purchase of Shares on the Recognised Stock Exchanges in Accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations

RBI has now reviewed the issue of acquisition of shares under the FDI Scheme by a non-resident on a recognised stock exchange and as a further measure of liberalization, RBI has decided that a nonresident including a Non Resident Indian may acquire shares of a listed Indian company on the stock exchange through a registered broker under FDI scheme. Detailed instructions of the scheme are provided in the circular.

(A.P. (DIR Series) Circular No. 38 dated September 06, 2013).

External Commercial Borrowings (ECB) Policy – Refinancing / Rescheduling of ECB

In terms of the ECB circular (A.P. (DIR Series) Circular No. 112 dated April 20, 2012), the borrowers desirous of refinancing an existing ECB can raise fresh ECB at a higher all-in-cost/reschedule an existing ECB at a higher all-in-cost under the approval route subject to the condition that the enhanced all-in-cost does not exceed the all-in-cost ceiling prescribed as per the extant guidelines. On a review, RBI has decided that the instructions contained in the above mentioned circular will continue to be applicable till September 30, 2013 and is subject to review thereafter.

All other aspects of ECB policy remain unchanged and the contents of this circular may please be brought to the notice of the concerned constituents and customers

External Commercial Borrowings (ECB) Policy Repayment of Rupee loans and/or fresh Rupee capital expenditure – USD 10 billion Scheme

On a review, RBI has decided to extend the benefit of USD 10 billion scheme to Indian companies in the aforesaid sectors which have established Joint Venture (JV) / Wholly Owned Subsidiary (WOS) / have acquired assets overseas in compliance with extant regulations under FEMA, 1999 subject to the conditions as under

(a) ECB can be availed of for repayment of all term loans having average residual maturity of 5 years and above / credit facilities availed of by Indian companies from domestic banks for overseas investment in JV/WOS, in addition to ‘Capital Expenditure’;

(b) ECB can be availed of within the scheme based on the higher of 75 per cent of the average foreign exchange earnings realized during

the past three financial years and / or 75 per cent of the assessment made about the average of foreign exchange earnings potential for the next three financial years of the Indian companies from the JV / WOS / assets abroad as certified by Statutory Auditors / Chartered Accountant / Certified Public Accountant / Category I Merchant Banker registered with SEBI / an Investment Banker outside India registered with the appropriate regulatory authority in the host country;

(c) ECB availed of under the scheme will have to be repaid out of forex earnings from the overseas JV / WOS / assets.

The past earnings in the form of dividend/repatriated profit/ other forex inflows like royalty, technical know-how, fee, etc from overseas JV/WOS/assets will be reckoned as foreign exchange earnings for the purpose of US$ 10 billion scheme. All other aspects of the scheme shall remain unchanged. The amended ECB policy will come into force with immediate effect and is subject to review based on the experience gained in this regard

(A.P. (DIR Series) Circular No.12 dated July 15, 2013).

External Commercial Borrowings (ECB) from the foreign equity holder

RBI has decided to permit eligible borrowers to avail of ECB under the approval route from their foreign equity holder company with minimum average maturity of 7 years for general corporate purposes subject to the following conditions:

i. Minimum paid-up equity of 25 per cent should be held directly by the lender;

ii. Such ECBs would not be used for any purpose not permitted under extant the ECB guidelines (including on-lending to their group companies / step-down subsidiaries in India); and

iii. Repayment of the principal shall commence only after completion of minimum average maturity of 7 years. No prepayment will be allowed before maturity.

The above modifications to the ECB guidelines will come into force with immediate effect. All other aspects of extant ECB guidelines shall remain unchanged

(A.P. (DIR Series) Circular No.31 dated September 04, 2013).

External Commercial Borrowings (ECB) Policy – Liberalisation of definition of Infrastructure Sector

RBI has decided to expand the existing definition for infrastructure sector for the purpose of availing ECB. The expanded infrastructure sector and sub-sectors for the purpose of ECB include:

(a) Energy which will include (i) electricity generation, (ii) electricity transmission, (iii) electricity distribution, (iv) oil pipelines, (v) oil/gas/liquefied natural gas (LNG) storage facility (includes strategic storage of crude oil) and (vi) gas pipelines (includes city gas distribution network);

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(b) Communication which will include (i) mobile telephony services / companies providing cellular services, (ii) fixed network telecommunication (includes optic fibre / cable networks which provide broadband / internet) and (iii) telecommunication towers; (c) Transport which will include (i) railways (railway track, tunnel, viaduct, bridges and includes supporting terminal infrastructure such as loading / unloading terminals, stations and buildings), (ii) roads and bridges, (iii) ports, (iv) inland waterways, (v) airport and (vi) urban public transport (except rolling stock in case of urban road transport);

(d) Water and sanitation which will include (i) water supply pipelines, (ii) solid waste management, (iii) water treatment plants, (iv) sewage projects (sewage collection, treatment and disposal system), (v) irrigation (dams, channels, embankments, etc.) and (vi) storm water drainage system;

(e) (i) mining, (ii) exploration and (iii) refining;

(f) Social and commercial infrastructure which will include (i) hospitals (capital stock and includes medical colleges and para medical training institutes), (ii) Hotel Sector which will include hotels with fixed capital investment of Rs. 200 crore and above, convention centres with fixed capital investment of Rs. 300 crore and above and three star or higher category classified hotels located outside cities with population of more than 1 million (fixed capital investment is excluding of land value), (iii) common infrastructure for industrial parks, SEZs, tourism facilities, (iv) fertilizer (capital investment), (v) post harvest storage infrastructure for agriculture and horticulture produce including cold storage, (vi) soil testing laboratories and (vii) cold chain (includes cold room facility for farm level pre-cooling, for preservation or storage or agriculture and allied produce, marine products and meat.

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What’s in the pipeline

Draft guidelines on Wealth Management issued by RBI:

Recently RBI issued draft guidelines on Wealth Management / Marketing / Distribution services offered by the Bank. The draft guidelines, if accepted in the entirety will have an impact on the way the wealth management business is conducted by some of the banks. RBI has proposed some tough norms and non-adherence to the same will attract serious deterrents against the banks, which could include raising of reserve requirements, withdrawal of facility of refinance from the RBI and denial of access to money markets, apart from prohibition from undertaking referral / investment advisory / PMS activity.

The major concern areas, as per the draft Guidelines, which have necessitated the review, are-

1) Consumer protection issues involving conflicts of interest;

2) Mis-selling;

3) Lack of adequate grievance resolution mechanism;

4) Exposure to operational risk arising from weak internal control mechanisms.

Briefly, following are the salient points of the draft RBI guidelines –

1) Banks to undertake its investment advisory business either from a separate subsidiary or through a Separate Identifiable Department or Division (SIDD).

2) Persons manning the SIDD/subsidiary should have suitable professional qualification for carrying out the role of Investment Advisor /Financial Advisor/Portfolio Manager. A system of continuous development & training of such persons should be put in place.

3) Mechanism to deal with the menace of mis-selling as it is a serious issue as far as consumer protection is concerned, to be put in place.

4) A code of conduct to be put in place for persons engaged in wealth management services.

5) A robust internal grievance redressal machinery to be set up.

6) There should be an arm’s length relationship between the bank and the subsidiary if the wealth management is undertaken through the subsidiary.

7) Banks should put in place sound internal control mechanisms and a system of checks to address risk management.

8) Banks to undertake marketing and distribution of financial products and services only. The third-party product issuer should be a regulated financial entity.

9) Sales process to be transparent with full disclosure to the client as to the details of the product.

10) Clear segregation of functions between marketing and operational staff.

11) Products to be marketed only in branches having specified trained personnel.

12) No incentive (cash or non-cash) linked directly or indirectly to the income received from marketing and distribution function to be paid to the staff engaged in marketing/distribution services of third party products. The staff of the bank is also not permitted to receive any incentive (cash or non-cash) directly from the third party issuer.

13) Transactions above Rs 50000 for these products should only be accepted through debit to customers account with the bank and not in cash/cheque of other banks.

14) Details of all the commissions/other fees (in any form) received, if any, from the third party product provider to be disclosed to the customer.

15) Banks are prohibited from undertaking discretionary portfolio management services. Banks subsidiaries (domestic and overseas)may offer discretionary PMS subject to certain conditions.

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What’s happening around - Industry Updates:

RBI forms panel to boost mobile banking

The Reserve Bank of India (RBI) has formed a technical committee to examine the feasibility of encrypted SMS-based fund transfers. The committee will study challenges faced by banks in mobile banking. The committee will consider the pros and cons of having a single application across all handsets in an SMS-encrypted environment. The committee will also look at any other solution to expand the reach of mobile banking and accordingly, draw a roadmap to implement those solutions. B. Sambamurthy, Director, Institute for Development and Research in Banking Technology, will chair the committee and Vijay Chugh, Chief General Manager at RBI will be the member secretary. The members of the committee will include officials of State Bank of India, ICICI Bank, HDFC Bank, Axis Bank and Vodafone

RBI considering making bank licensing process more frequent

In order to expand the reach of banking, RBI has said it is considering making bank licensing process more frequent and allow free entry of banks as and when necessary. RBI Deputy Governor K C Chakrabarty recently said “With a view to ensuring that the banking system grows in size to meet the needs of a modern economy and improve access of banking services, the RBI is considering giving some additional banking licenses to private sector players subject to their meeting our eligibility criteria… We propose to carry forward these ideas and come up with a detailed road map of a necessary reform and regulations for free entry and making the licensing process more frequent after we get comments from the stakeholders”. He further said the regulator is encouraging foreign banks to adopt the wholly-owned subsidiary model to carry out business in the country.

Reserve Bank of India asks Kerala temple boards about gold stocks

Temple boards in Kerala have received a letter from the Reserve Bank of India (RBI) seeking details of the stock of gold in their possession, a temple board official said on Thursday. A top official of the famous Guruvayoor Devasom Board said a letter has been received from the RBI seeking details of gold stocks it holds. “I have passed on the letter to the managing committee of the temple, as all policy decisions are taken by the committee,” the temple official, asking not to be identified, said. The majority of temples in the state comes under the five different Devasom Boards, of which the Travancore Devasom Board is the biggest, with the famous Sabarimala temple falling within its jurisdiction. Regional Director Salim Gangadharan of the RBI confirmed that a letter has been sent, but clarified: “The RBI has no plans to buy gold, and this exercise is nothing but part of a statistical exercise.” Incidentally, in July 2011 an apex court committee stumbled upon six vaults at the Sree Padmanabhaswamy temple in the heart of the state capital. With only vault B left yet unopened, the treasure found in the five vaults has been estimated at over Rs.1 lakh crore.

(IANS THIRUVANATHAPURAM, SEPTEMBER 5, 2013 | UPDATED 20:19 IST)

Disclaimer:

The material contained in this document aims at providing a summary of various guidelines, notifications, circulars etc. issued by various regulatory authorities from time to time and is for information purposes only. The same should not be construed as an advice on any matter. for complete information on the matter provided therein, readers are advised to refer to the detailed guidelines, notifications, circulars etc available on the websites of the respective regulators or they may consult the respective compliance departments before acting on any matter.