Drishti Book 2020 PDF

BANKING IS EASY
DRISHTI
Insight into Current Banking Scenario
Version 6.0 : March 2020
(A Very useful book on Current Topics of Day to Day Banking and all Knowledge
Based exams related to Banking Promotion test, Group Discussion & Interview)
Compiled by
Sanjay Kumar Trivedy
Chief Manager, Canara Bank, Gandhinagar, Nagpur (Maharashtra)
Preface
Dear Friends,
Interview/GD is an opportunity for you to present your personality consisting of your attitude, views,
awareness level before the interview board, so that the “potential in you” is appropriately judged by the
members on the interview board, who are learned people in their own field of specialization. The interview
board, in order to judge your Potential evaluates your performance in the recent past, operating style, team
building capabilities, effectiveness, neutral judgement level,transparency in dealings, initiatives, attitude and
leadership qualities.
An official working in the Banking sector has to keep pace with Updated knowledge, skills & attitude, as the
same is required everywhere. Employees play vital role in Banking/service organizations and they need to be
transformed into Knowledge Assets to remain competitive in the dynamic environment and it is more so with
Banks as they are very service sensitive. Thus it is imperative for the bank staff to serve the clientele with
updated information of bank's products & services to accomplish corporate objectives.
Indian Banking is in its most exciting phases. The impact of liberalization has been wide spread and has
thrown up both challenges and opportunities for bankers. Ever increasing competition is a part of
professional life and the banker who is ahead of his peers in terms of knowledge skill, technology and quick
response will be the winner.The Technology has also played role in this development. The transfer of amount
is now happening through RTGS, NEFT, Net & Moblie Banking. Almost all Banks have App for Mobile banking
using GPRS or NUUP or USSD depending upon their arrangement/software used by them. The amount
transferred through digital mode has increased many folds during last four to five months.
During the course in the Banking Career, the Performing bankers have to face interviews occasionally. The
interaction during such interviews, mainly focus on, from Job knowledge to attitudinal aspects, from
potential to perform to perforformance and from banking history to emerging banking scenario. Due to their
pre-occupation with their functional routine, the bankers rarely find enough time to go through economic
papers, financial news/magazines and such study materials. But, they are expected to be conversant with all
changes taking place in the financial services Sector, which has witnessed notable transformation over last
five decades.
It is with a sense of great delight that I am presenting this book “DRISHTI-2020”- A book on Current
Banking Topics (2019-20)-Version 6.0, a very useful book, latest updated has many unique features to its
credit & consists of all topics required for Interview with clear concept & simple language. Although there is
no fixed syllabus for Interview but mostly questions were asked from your area of operations where you are
working besides some general and latest topics related with Banking & finance, so command over your area
of work where you are working in your branch/ Section/deptt. The whole book is divided into various
chapters- topic/subject-wise to ake it more meaningful. Besides this book, you are requested to go through
my previous version as many articles appear in DRISHTI-2019 are still very important toady.
All possible care is taken to provide error free information, however, readers may note that the information
given herein is merely for guidance/reference and they need to refer the relevant circulars & Manuals for full
details.
I express my sincere thanks to friends/colleagues for their support in encouraging the idea and contributing
the required resources for release of this book. I solicit your views on the content and quality of the topics
for further improvement.
I wish you all the Success and hope the study material will help in achieving the goal.
Arise, Awake and stop not till the goal is reached"... Sw ami Vivekananda
Date: 18.03.2020 Sanjay Kumar Trivedy
Compiled by Sanjay Kumar Trivedy, Chief Manager, Canara Bank, Gandhinagar, Nagpur, Maharashtra 1|Page
About the Author
Mr. Sanjay Kumar Trivedy (Native: Motihari, Bihar), Presently working as Chief Manager( Scale-
IV) in Canara Bank, Gandhinagar branch, Nagpur,Maharashtra state. He Joined Canara Bank as
DRO/PO (AEO) on 10.03.1997 and and worked in various places, starting from Maujgarh branch (1997-
2000), Near Abohar(Punjab), Sirsa Main- Haryana (2000-2004), BMC, Jalandhar (2004-2006)
Toiladungari, Sakchi, Jamshedpur(2006-2009), Jhalak near Chaibasa (2009-2011), J B Nagar, Andheri
East , Mumbai ( 2011-2013) and then Faculty as well as College in charge ( Principal ) in Regional Staff
Training College, Mumbai (2013-2016), Govt.Link Cell, Nagpur (01.05.2016 to 15.07.2017), Itwari
Branch, Nagpur ( 17.07.2017 to 15.09.2017 ), Shrigonda Branch (16.09.2017 to 07.07.2018), Chatigali,
Solapur ( 08.07.2018 to 27.05.2019) and then Gandhinagar,Nagpur (Since 28.05.2019 to …). He won
more than 232 awards in various fields of Banking by his Bank – Canara Bank, which includes twice
gold coin for CASA mobilization. His best achievement was as an officer/AEO, he converted his Section:
Agril Finance into Hi-tech Agril. Branch at BMC, Jalandhar and while working in Jhalak branch near
Chaibasa (Jharkhand), won twice best Rural banker award from NABARD during 2009-10 &2010-11 in
SHG credit linkage & Farmers Club Formation. During this journey started from 1997 to till date he
worked in almost all area of Banking.
Mr. Sanjay Kumar Trivedy is M.Sc. (Agril), CAIIB, PGDCA, MBA, MBA (Finance),Diploma (IIBF) in Rural
Banking, Treasury, Investment and Risk Management, Commodity Derivatives for Bankers, Advanced
Wealth Management, Certificate (IIBF) in Trade Finance, Certificate in Anti-Money Laundering / Know
Your Customer, Certificate Examination in SME Finance for Bankers, Certificate Examination in
Customer Service & Banking Codes and Standards, Certificate Examination in CAIIB - Elective Subjects
( Retail Banking & Human Resource Management) & Certificate Examination in Microfinance
Mr. Sanjay Kumar Trivedy has teaching experience of more than 16 years, from Sirsa Main Branch
(2000-2004) , he started teaching to his colleagues/staff and in this long journey he has given good
results both in Promotion test as well as JAIIB /CAIIB examination. He has taken IIBF-JAIIB & CAIIB
classes at Mumbai. He has compiled/authored more than 20 books in last three years related banking -
JAIIB, CAIIB, Book on Promotion Test ( all cadres), Interview , Drishti (Current Banking Topics –
Interview book for Scale iv & above), Group Discussion, Certificate course on Customer Service &
BCSBI, AML& KYC, MSME Finance for Bankers, Book on Abroad Posting, Confirmation Test for PO,
Banking & Technology and many more books on day today banking and many more in the offing.
Mr. Sanjay Kumar Trivedy is working in a mission mode to reduce knowledge gap among bankers with
objective to provide educational support free of cost to all in general and bankers in particular with
objective to empower Banker colleagues specially young banker who join the bank in last more than
one decade for their better productivity, Sense of satisfaction, Customer delight with ultimate increase
of quality banking business for their organisations.
He can be contacted only through whatsapp no. : 9987519725
Infuse your life with action. Don't wait for it to happen. Make it happen. Make your own future. Make your
own hope. Make your own love. And whatever your beliefs, honor your creator, not by passively waiting for
grace to come down from upon high, but by doing what you can to make grace happen... yourself, right now,
right down here on Earth – Bradley Whiteford
The best way to find yourself is to lose yourself in the service of others - Mahatma Gandhi
INDEX
SI. CONTENTS Page No.
No
A INDIAN ECONOMY 5-28
5
Economic Survey 2019-20
1
8
Union Budget : 2020-21
2
12
Sixth Bi-Monthly Monetary Policy (06.02.20202)
3
15
Seven ages of India’s Monetary Policy
4
20
$ 5 trillion Economy
5
25
Evolving Economy
6
B INDIAN BANKING 29-55

1 The PMC Bank Crisis 29
2 RBI Recent Repo Cuts and their Transmission 33
3 Golden Jubilee of Bank’s Nationalisation 36
4 Banking Landscape in the 21st Century 41
5 Indian Banking at Cross Roads 45
6 Indian Banking Sector : Current Status 49
7 Amalgamation of PSBs : Task Ahead 53
C LATEST RBI GUIDELINES (2019-2020) 56-90
D LOANS & ADVANCES 91-110

1 MSMEs in India : Opportunities, Issues & Challenges 91
2. Strengthening MSMES : Policy Innovations 95
3 Rural & Agriculture Finance for Inclusive & Sustainable Development 99
4 Micro Finance as the Next wave of Financial Inclusion 102
5 Partial Guarantee Schemes for NBFCs 105
6 Co-orgination of Loans 107
7 Peer to Peer Lending 108
E DIGITAL BANKING 111-124

1 Opportunities & Challenges of Fintech 111
2 Digital Banking 113
3 Artificial Intelligence 114
4 Block Chain technology & Banking 115
5 Role of Technology in Banking in Next Decade 117
6 Banking : Re-invention 121
F NPA & RECOVERY MANAGEMENT 125-143
1 Resolution of Stressed Assets – Prudential Framework 125

2 Insolvency & Bankruptcy Code : A Big Game Changer 130
3 The Need for Innovations in NPA Recovery 135
4 Prompt Corrective action & MOU 142
G BASEL & RISK MANAGEMENT 144-151

1 Risk Capital of Public Sector Banks 144
2 Risk Management in Banking in the Next Decade 148
H FOREX & TREASURY 152-158

1. Dimension of India’s External Sector Resilience 152
2. FEDAI Rules : 2019 155
3. New ECB Framework 156
4. Special Non- resident rupee Account ( SNRR) 156
5. Foreign Exchange Risk management 157
I GENERAL BANKING 159-175

1 Emerging Challenges in Financial Stability 159
2 Concurrent Audit System Revised RBI Directions 163
3 Financial Stability Report : Dec 2019 163
4 RBI Vision : 2022 ( Utkarsh) 167
5 Banking : Stepping into the next decade –Professionalism holds the key 168
6 Customer Service in Banks : For Sustainable Business Growth 171
7 Financial Bench Mark Administrators : RBI Directions 2019 174
Disclaimer
While every effort has been made by me to avoid errors or omissions in this publication, any error or discrepancy
noted may be brought to my notice through whatsapp no. 9987519725 or e-mail to [email protected] which
shall be taken care of in the subsequent editions. It is also suggested that to clarify any doubt colleagues should
cross-check the facts, laws and contents of this publication with original Govt. / RBI /
Manuals/Circulars/Notifications/Memo/Spl Comm. of our bank.
A. INDIAN ECONOMY
1. ECONOMIC SURVEY -2020
The Chief Economic Advisor (CEA) Krishnamurthy V Subramanian tabled the Economic Survey 2019-20 in the
Parliament on January 31, 2019, and gave a review of the developments in the economy over the previous 12
months and also an outlook for the next financial year.  The Economic Survey brings out the economic trends
in the country and facilitates a better appreciation of the mobilisation of resources and their allocation in the
Union Budget. The Survey analyses the sectoral trends and other relevant economic factors that have a bearing
on the Budget. It is presented in Parliament ahead of the Budget for the ensuing year.  The Theme of
Economic Survey 2020 is ‘Enable Markets’, Promote 'Pro-Business' Policy & Strengthen 'Trust' in Economy.  The
Survey 2020 throws light on new ideas to boost growth and accelerate wealth creation. These are –
Thalinomics, Adoption of China model, Trust and others.
INDIA’S ECONOMIC PERFORMANCE IN 2019-20
 GDP GROWTH: Amidst a weak environment for global manufacturing, trade and demand, the Indian economy
slowed down with GDP growth moderating to 4.8 per cent in H1 of 201920, lower than 6.2 per cent in H2 of
2018-19. GDP growth pegged at 6-6.5% in fiscal year starting April 1, up from 5% in current fiscal.  FISCAL
DEFICIT: Fiscal deficit target for current fiscal may need to be relaxed to revive growth. In 2019-20, Centre‟s
fiscal deficit was budgeted at Rs. 7.04 lakh crore (3.3 per cent of GDP), as compared to Rs. 6.49 lakh crore (3.4
per cent of GDP) in 2018-19 PA. In the first eight months of 2019-20, fiscal deficit stood at 114.8 per cent of
the budgeted level.
 PRICES AND INFLATION:  CPI inflation increased to 4.1% in 2019-20 from 3.7% in 2018-19.  WPI inflation
declined to 1.5% in 2019-20 from 4.7% in 201819. The major drivers of CPI inflation in 2019-20 were food and
beverages, particularly vegetables and pulses.
SIZE OF THE ECONOMY
 The World Economic Outlook (WEO) Update of January 2020 published by IMF has estimated the global output
to grow at 2.9 per cent in 2019, declining from 3.6 per cent in 2018 and 3.8 per cent in 2017.  The WEO of
October 2019 has estimated India‟s economy to become the fifth largest in the world, as measured using GDP
at current US$ prices, moving past United Kingdom and France. The size of the economy is estimated at US$
2.9 trillion in 2019.  The WEO Update of January 2020 has projected the growth of Indian economy to increase
to 5.8 per cent in 2020 expecting India to contribute significantly to an eventual pickup in the growth of world
output. India's GDP in nominal prices was Rs.190.1 lakh crore (US$ 2.7 trillion) in 2018-19.
 FISCAL DEVELOPMENTS:
 Revenue Receipts registered a higher growth during the first eight months of 2019-20, compared to the same
period last year, led by considerable growth in Non-Tax revenue.  Gross GST monthly collections have crossed
the mark of Rs. 1 lakh crore for a total of five times during 2019-20 (up to December 2019).  Structural
reforms undertaken in taxation during the current financial year included change in corporate tax rate. 
Survey notes that the General Government (Centre plus States) has been on the path of fiscal consolidation
 EXTERNAL SECTOR:  India‟s BoP position improved from US$ 412.9 bn of forex reserves in end March, 2019
to US$ 433.7 bn in end Sept. 2019.  India‟s merchandise trade balance improved from 2009-14 to 2014-19,
although most of the improvement in the latter period was due to more than 50% decline in crude prices in
2016-17.  Current account deficit (CAD) narrowed from 2.1% in 2018-19 to 1.5% of GDP in H1 of 2019-20. 
Foreign reserves stood at US$ 461.2 bn as on 10th Jan., 2020.  India‟s top five trading partners continue to be
USA, China, UAE, Saudi Arabia and Hong Kong.  Top export items: Petroleum products, precious stones, drug
formulations & biologicals, gold and other precious metals.  Largest export destinations in 2019-20 (April-
Nov.): United States of America (USA), followed by United Arab Emirates (UAE), China and Hong Kong.  The
merchandise exports to GDP ratio declined, entailing a negative impact on BoP position.  India improved its
ranking from 143 in 2016 to 68 in 2019 under the indicator, „Trading across Borders‟, monitored by World Bank
in its Ease of Doing Business Report.  According to World Bank's Logistics Performance Index, India ranks 44th
in 2018 globally, up from 54th rank in 2014.  Net FDI inflows continued to be buoyant in 2019-20 attracting
US$ 24.4 bn in the first eight months, higher than the corresponding period of 2018-19. Net FPI in the first
eight months of 2019-20 stood at US$ 12.6 bn.
 INDUSTRY AND INFRASTRUCTURE:
 The industrial sector has registered a 0.6% growth in 2019-20 and 5% in 2018-19.  Fertilizer sector
showcased a growth of 4% in 2019-20.  Steel sector registered a growth of 5.2% in 2019-20.  Over 119 crore
telephone connections were provided until September 2019.  Report on National Infrastructure Pipeline
projects total investment of Rs. 102 lakh crore on infrastructure from 2020 to 2025 in India.  Industrial growth
is estimated at 2.5% of fiscal 2019-20.
EMPLOYMENT, SOCIAL INFRASTRUCTURE AND HUMAN DEVELOPMENT:
 The Govt‟s expenditure on social services such as health & education as a proportion of GDP increased to
7.7% in 2019-20.  India improved its position in the Human Development Index by fetching 129th rank in 2018
from 130th in 2017.  Share of formal employment increased from 17.9% in 2011 12 to 22.8% in 2017-18
reflecting formalisation in the economy.  Citizens‟ access to health services improved through Ayushman
Bharat and Mission Indradhanush.  In terms of houses, over 76% of households in rural and 96% in urban areas
had pucca houses.
AGRICULTURE AND FOOD MANAGEMENT:
 The Economic Survey states that the largest proportion of the Indian population depends on agriculture for
job opportunities. However, the share of agriculture and allied sectors in Gross Value Added (GVA) of India is
continuously declining due to higher growth of non-agricultural sectors.  The GVA at Basic Prices of
„Agriculture, Forestry and Fishing‟ sector expected to grow by 2.8% for 2019-20.
 SERVICES SECTOR:
The Survey highlights the increasing significance of services sector in the Indian economy. Gross Value Added
growth of the services sector moderated in 2019-20 as suggested by various high-frequency indicators and
sectoral data such as air passenger traffic, port and shipping freight traffic, bank credit etc. The Services
sector contributes:  About 55% of the total size of the economy and GVA growth.  Two-thirds of total FDI
inflows into India.  About 38 per cent of total exports.  More than 50 % of GVA in 15 out of the 33 states and
UTs.  FDI into services sector has witnessed a recovery in early 2019-20.
 PRIVATISATION AND WEALTH CREATION:  The Economic Survey 2020 calls for privatization to boost job and
wealth creation. It examines the before and after the performance of over 10 CPSEs that underwent strategic
disinvestment. The Strategic disinvestment in BPCL has led to an increase of over Rs. 30,000 crore wealth in
India. Collectively, the net profit, net worth, return on assets (ROA) & equity (ROE) have improved notably.
The more aggressive disinvestment is suggested for higher profitability.
 THALINOMICS - ECONOMICS OF PLATE OF FOOD: The Economic Survey attempts to quantify what a common
person pays for a Thali across India. The prices of a vegetarian Thali have declined sharply since 2015-16;
however, this price increased in 2019-20. During 2006 - 2020, the affordability of Indian vegetarian Thalis
improved by 29% and affordability of non-vegetarian Indian Thali improved by 18%.
MONETARY POLICY & FINANCIAL INTERMEDIATION:  RBI‟s Monetary policy stance remained
“accommodative” in 2019-20. The Repo rate was cut by 110 basis points in 2019-20 due to slower growth &
lower inflation.  Non Performing Advances (NPA) ratio remained unchanged for Commercial banks at 9.3%
during March-September 2019  Bank Credit growth (YoY) moderated from 12.9% in April 2019 to 7.1% as on
December 20, 2019.  Capital to Risk-weighted Asset Ratio of SCBs increased from 14.3% to 15.1% between
March 2019 and September 2019.
SUSTAINABLE DEVELOPMENT & CLIMATE CHANGE:  The Survey acknowledges that India is rightly moving
forward on the path of Sustainable Development Goals (SDG) implementation. The states like H.P.,
Chandigarh, Kerala, and Tamil Nadu came out as front runners in SDG India Index 2019.  Apart from this, India
hosted COP-14 of UNCCD which resulted in the adoption of „Delhi Declaration‟.  India strongly committed
itself to implement the Paris Agreement at COP-25 of UNFCCC at Madrid, Spain.  Indian Forest and tree cover
increased to 80.73 million hectare  One of the major concerns is burning of agricultural residues that lead to
high pollution levels and deteriorates air quality.
UNDERMINING MARKETS: IS GOVT. INTERVENTION REQUIRED?  The Survey suggests restricted government
intervention in the markets. It lists out several instances where the intervention of Government has adversely
affected the market such as imposing stock limits under Essential Commodities Act (ECA), 1955 that led to
increase in onion prices in 2019; regulation of drug prices under ECA; intervention in the food grain market and
so on. Eliminating such instances will enable competitive markets spurring investments and economic growth. 
Frequent and unpredictable imposition of blanket stock limits on commodities under ECA distorts the
incentives for the creation of storage infrastructure by the private sector; movement up the agricultural value
chain; development of national market for agricultural commodities.  The survey does the analysis of debt
waivers given by States/Centre. Full waiver beneficiaries consume less, save less, invest less and are less
productive after the waiver, compared to the partial beneficiaries. Further, Debt waivers disrupt the credit
culture. They reduce formal credit flow to the very same farmers, thereby defeating the purpose.
 The Survey suggests that the government must analyse and then decide whether its intervention is even
required in a particular market. This will directly benefit by encouraging investments and economic growth.
CREATION OF JOBS AND GROWTH:  The Economic Survey calls for the integration of „Assemble in India‟ with
„Make in India‟ to create more jobs and accelerate growth. The survey seeks to Increase export market share
to 3.5% by 2025 and 6% by 2030. Further, creation of over 4 crore rewarding jobs by 2025 and over 8 crore jobs
by 2030.  This can be achieved by adopting China-like policies such as export of goods majorly to rich
markets.
 WEALTH CREATION: The Economic Survey talks about the need to bring openness in the market for the
creation of wealth through increased investment. In light of this, the survey points towards an Invisible Hand
that is supported by the Hand of Trust. It presents an amalgamation of old and new; old in terms of ancient
Indian tradition and new suggests the use of FinTech in Indian Public Sector Banks. It calls for strengthening
this invisible hand through Equal opportunities for new entrants; Fair competition & ease doing business; Trade
for job creation; Scaling up of the banking sector and Introduction of the idea of trust as a public good.
ENTREPRENEURSHIP AND WEALTH CREATION AT THE GRASSROOTS:  The Survey highlights entrepreneurship
as a strategy to fuel productivity, growth and wealth creation. India ranks third in number of new firms
created, as per the World Bank.  New firm creation in India increased dramatically since 2014. There has been
12.2% cumulative annual growth rate of new firms in the formal sector during 2014-18.  About 1.24 lakh new
firms created in 2018, an increase of about 80% from about 70,000 in 2014.  The Survey examines the content
and drivers of entrepreneurial activity at the bottom of the administrative pyramid and highlights that new
firm creation in services is significantly higher than that in manufacturing, infrastructure or agriculture. The
Survey notes that grassroots entrepreneurship is not just driven by necessity.  A 10 percent increase in
registration of new firms in a district yields a 1.8% increase in Gross Domestic District Product.  Ease of Doing
Business and flexible labour regulation. Survey suggests enhancing ease of doing business and implementing
flexible labour laws can create maximum jobs in districts and thereby in the states.  The Survey calls for the
creation of wealth through:  Entrepreneurship of the working class.  Pro-business policies to test the power
of competitive markets.  Elimination of policies that weaken the markets.  Integration of Assemble in India
into Make in India.  Scaling up of the banking sector.  Privatization to foster efficiency
PRO-BUSINESS VERSUS PRO-MARKETS: The Economic Survey states that India needs more of probusiness
policies and break away from pro-crony policies to become a USD 5 trillion economy. The Survey states that till
2011, several Pro-Crony policies were followed such as preferential allocation of natural resources. These pro-
crony policies majorly led to willful defaults which drained off the banks.
TARGETING EASE OF DOING BUSINESS:  India was ranked at 63rd position in World Bank‟s Doing Business 2019
rankings. However, the economy is still trailing in several parameters such as Ease of Starting Business, Paying
Taxes, Registering Property and Enforcing Contracts.  The Economic Survey calls for close coordination
between the Logistics Divisions of Union Ministry of Commerce and Industry, Union Ministry of Shipping, Central
Board of Indirect Taxes and Customs and the port authorities.
GOLDEN JUBILEE OF BANK NATIONALISATION:  The year 2019 marked the golden jubilee year of Bank
Nationalisation. The Survey points out that the growth of Indian Banking Sector has not been proportionate
with the overall growth of the economy.  India has only one bank in the global top 100 – same as countries
that are a fraction of its size: Finland (about 1/11th), Denmark (1/8th), etc.  The onus of supporting the
economy falls on the PSBs accounting for 70 % of the market share in Indian banking.  PSBs are inefficient
compared to their peer groups on every performance parameter. In 2019, investment for every rupee in PSBs,
on average, led to the loss of 23 paise, while in NPBs it led to the gain of 9.6 paise.  The Survey calls for
making PSBs more efficient through:  ESOP for employees of banks.  Creation of an entity similar to that of
GSTN to aggregate data from all PSBs and ensure better monitoring of borrowers through artificial intelligence
and machine learning.  Representation on boards proportionate to the blocks held by employees to incentivize
employees and align their interests with that of all shareholders of banks.
FINANCIAL FRAGILITY IN THE NBFC SECTOR:  The Survey investigates the key drivers of Rollover Risk of the
shadow banking system in India in light of the current liquidity crunch in the sector.  The Key drivers of
Rollover Risk identified are:  Asset Liability Management (ALM) Risk.  Interconnectedness Risk.  Financial
and Operating Resilience of an NBFC.  Over-dependence on short-term wholesale funding.  The Survey
computes a diagnostic (Health Score) by quantifying the Rollover risk for a sample of HFCs and RetailNBFCs
(which are representative of their respective sectors).  The analysis of the Health Score has the following
findings:  The HFC sector exhibited a declining trend post 2014 and overall health of the sector worsened
considerably by the end of FY2019.  The Score of the Retail-NBFC sector was consistently below par for the
period 2014 -19.  Larger Retail-NBFCs had higher Health Scores but among medium and small Retail- NBFCs,
the medium size ones had a lower score for the entire period of 2014-19.  The Survey suggests that the Health
Score provides an early warning signal of impending liquidity problems.  The Survey prescribes this analysis to
efficiently allocate liquidity enhancements across firms (with different Health Scores) in the NBFC sector,
thereby arresting financial fragility in a capital-efficient manner.
CONCLUSION: In an attempt to boost demand, 2019-20 has witnessed significant easing of monetary policy.
Having duly recognized the financial stresses built up in the economy, the government has taken significant
steps towards speeding up the insolvency resolution process under Insolvency and Bankruptcy Code (IBC) and
easing of credit, particularly for the stressed real estate and Non-Banking Financial Companies (NBFCs) sectors.
At the same time, impact of critical measures taken to boost investment, particularly under the National
Infrastructure Pipeline, present green shoots for growth in H2 of 2019-20 and 2020-21.
2. UNION BUDGET: 2020-21

The Finance Minister Nirmala Sitaraman presented the Union Budget 202021. This is the second budget after
NDA returned to power for a second term. This year's Union Budget centres around three ideas - Aspirational
India, Economic Development, A Caring Society.  The Budget highlights that the Indian economy has moved
on from a growth rate of just over 4% in 1950s to 6% in 1980s and1990s. However, during 201419 the economy
clocked growth of 7.4% on average with inflation, averaging around 4.5%.
MILESTONES & ACHIEVEMENTS OF INDIAN ECONOMY:  India is now the fifth largest economy of the world. 
An average growth of 7.4% clocked during 2014-19 with inflation averaging around 4.5%.  Between 2006-16,
India was able to raise 271 million people out of poverty.  India’s Foreign Direct Investment elevated to US$
284 billion during 2014-19 from US$ 190 billion during 2009-14.  Central Government debt reduced to 48.7% of
GDP (March 2019) from 52.2% (March 2014).  Two cross-cutting developments:  Proliferation of technologies
(Analytics, Machine Learning, robotics, Bioinformatics and Artificial Intelligence).  Highest ever number of
people in the productive age group (15-65 years) in India.
MACRO-ECONOMIC FRAMEWORK STATEMENT 2020-21:
GDP GROWTH: As per the first advance estimates of annual national income, the real GDP growth is estimated
at 5 percent in 2019-20, as compared to the provisional estimates of 6.8 percent in 2018-19. Correspondingly,
the real growth of gross value added (GVA) is estimated at 4.9 percent in 2019-20 as compared to 6.6 percent
in 2018-19.
FISCAL DEFICIT AND REVENUE DEFICIT:  The fiscal deficit and revenue deficit for 2019-20 were budgeted at
3.3 percent of GDP and 2.3 percent of GDP respectively. The BE 2019-20 envisaged a tax to GDP ratio of 11.7
percent and total expenditure to GDP ratio of 13.2 percent.  Fiscal deficit of 3.8% estimated in RE 2019-20
and 3.5% for BE 2020-21. It comprises two ingredients;  3.3% for year 2019-20 and 3% for the 2020-21 budget
estimate.  Deviation of 0.5%, consistent with Section 4(3) of FRBM Act, both for RE 2019-20 and BE 2020-21.
CONSUMER PRICE INDEX (COMBINED) (CPI-C): CPI-C inflation for 2018-19 declined to 3.4%. It averaged 4.1% in
2019-20 (April to Dec.) and stood at 7.3% in Dec., 2019.
WHOLESALE PRICE INDEX (WPI): WPI of stood at 4.3% in 2018-19. It averaged 1.5% in 2019-20 (April to Dec.)
and stood at 2.6% in Dec. 2019.
INDEX OF INDUSTRIAL PRODUCTION (IIP): The Index of Industrial Production (IIP) grew at 0.6% during April-
Nov. 2019 as compared to 3.8% in 2018-19. The eight core infrastructure supportive industries, viz. coal, crude
oil, natural gas, refinery products, fertilizers, steel, cement and electricity that have a total weight of nearly
40 percent in the Index of Industrial Production (IIP) remained stagnant during April-Nov. 2019 as compared to
a growth of 4.4 percent in 2018-19.
AGRICULTURE:  In 2018-19, as per fourth advance estimates, food grain production in the country was
estimated at 285 million tonnes, the same as in 2017-18. However, food grain production was 19.2 million
tonnes higher than the average production of previous five years.  Govt. has increased Minimum Support
Prices (MSP) for all mandated kharif, rabi and other commercial crops. The enhanced MSP ensures a return of
1.5 times over all India weighted average cost of production for the season 2019-20.  India continues to be the
largest producer of milk in the world. The milk production in the country was 187.7 million tonnes in 2018-19
growing 6.5 per cent over the previous year.
EXTERNAL SECTOR:  Merchandise exports (customs basis) during 2019- 20 (April-Dec.), were US$ 239.3
billion, which declined by 2% over the level of US$ 244.1 billion in the corresponding period of the previous
year. During 2019-20 (April-Dec.), merchandise imports were US$ 357.4 bn, registering a decline of 8.9% over
the level of US$ 392.3 bn in corresponding period of the previous year.  Merchandise trade deficit improved
from US$ 148.2 billion in 2018-19 (AprilDec.) to US$ 118.1 billion in 2019-20 (April-Dec.).  India's external
sector has regained some stability in the first half of 2019-20, with improvement in Balance of Payments
position anchored in narrowing of current account deficit from 2.1 in 2018-19 to 1.5 in H1 of 2019-20, growing
inflows of foreign direct investment (FDI), rebounding of portfolio flows from net outflow to net inflow and
receipt of robust remittances, all showing up in higher accretion of foreign exchange reserves, which as on end
December, 2019 stood at US$ 457.5 billion.  Net FDI inflows have continued to be buoyant in 2019- 20 (April-
Nov.) attracting US$ 24.4 billion as against US$ 21.2 billion.
HIGHLIGHTS OF BUDGET 2020

Sixteen Action Points for Agriculture, Irrigation and Rural Development:  Rs. 2.83 lakh crore to be
allocated for the following 16 Action Points:  Rs. 1.60 lakh crore for Agriculture, Irrigation & allied activities.
 Rs. 1.23 lakh crore for Rural development & Panchayati Raj.
Agriculture Credit: Rs. 15 lakh crore target set for the year 2020-21.  PM-KISAN beneficiaries to be covered
under the KCC scheme.  NABARD Re-finance Scheme to be further expanded.
 Measures for Water-stressed Districts: Comprehensive measures for 100 water-stressed districts proposed. 
Blue Economy:  Rs. 1 lakh crore fisheries’ exports to be achieved by 2024-25.  200 lakh tonnes fish
production targeted by 2022-23.  3477 Sagar Mitras and 500 Fish Farmer Producer Organisations to involve
youth in fisheries extension.
Kisan Rail: To be setup by Indian Railways through PPP:  To build a seamless national cold supply chain for
perishables (milk, meat, fish, etc).  Express and Freight trains to have refrigerated coaches.  Krishi Udaan:
To be launched by the Ministry of Civil Aviation - both international & national routes to be covered.  One-
Product One-District: For better marketing and export in the Horticulture sector.  Use of Fertilisers: Balanced
use of all kinds of fertilizers - traditional organic and innovative fertilizers.  Farming: Measures for organic,
natural, & integrated farming:  Jaivik Kheti Portal – online national organic products market to be
strengthened.Zero-Budget Natural Farming.  PM-KUSUM: 20 lakh farmers to be provided for setting up stand-
alone solar pumps and another 15 lakh farmers to be helped to solarise their grid-connected pump sets. 
Village Storage Scheme: To be run by the SHGs to provide farmers a good holding capacity and reduce their
logistics cost.  Women, SHGs to regain their position as Dhaanya Lakshmi.
GEO-TAG: NABARD to map and geo-tag agri-warehouses, cold storages, reefer van facilities, etc.  e-NWR:
Financing on Negotiable Warehousing Receipts (eNWR) to be integrated with e-NAM.  Livestock:  Doubling of
milk processing capacity to 108 million MT from 53.5 million MT by 2025. Further, artificial insemination to be
increased to 70% from the present 30%.  Foot and Mouth Disease, Brucellosis in cattle and Peste Des Petits
ruminants in sheep and goat to be eliminated by 2025.  Deen Dayal Antyodaya Yojana: 0.5 crore households
mobilized with 58 lakh SHGs for poverty alleviation.
WELLNESS, WATER AND SANITATION:  Rs. 69,000 crore allocated for overall Healthcare sector.  Rs. 6,400
crore (out of Rs. 69,000 crore) for PM Jan Arogya Yojana (PMJAY):  Jan Aushadhi Kendra Scheme to offer 2000
medicines and 300 surgicals in all districts by 2024.  TB Harega Desh Jeetega campaign launched -
commitment to end Tuberculosis by 2025.  Rs. 3.60 lakh crore approved for Jal Jeevan Mission.  Rs.12,300 cr
allocation for Swachh Bharat Mission.  EDUCATION AND SKILLS:  Rs. 99,300 crore for education sector and Rs.
3,000 crore for skill development in 2020-21.  National Police University and National Forensic Science
University proposed for policing science, forensic science, and cyber-forensics.  Degree level full-fledged
online education program by Top100 institutions in the National Institutional Ranking Framework.
ECONOMIC DEVELOPMENT:
 INDUSTRY, COMMERCE AND INVESTMENT:  Rs. 27,300 crore allocated for 2020-21 for development and
promotion of Industry and Commerce. Investment Clearance Cell proposed to provide ‘end to end’ facilitation
and support.  Five new smart cities proposed to be developed.  National Technical Textiles Mission to be set
up with fouryear implementation period from 2020-21 to 2023-24.  New scheme NIRVIK to be launched to
achieve higher export credit disbursement.  Turnover of Government e-Marketplace (GeM) proposed to be
taken to Rs 3 lakh crore.  All Ministries to issue quality standard orders as per PM’s vision of ‘Zero Defect-Zero
Effect’ manufacturing.
INFRASTRUCTURE:  Rs.100 lakh crore to be invested on infrastructure over the next 5 years.  National
Infrastructure Pipeline: Rs. 103 lakh cr worth projects; launched on 31st Dec. 2019.  A National Logistics
Policy to be released soon to clarify roles of the Union Govt., State Govt. and key regulators. A single window
e-logistics market to be created  Infrastructure agencies of the government to involve youthpower in start-
ups.
HIGHWAYS:  Accelerated development of highways to be undertaken, including 2,500 Km access control
highways and 9,000 Km of economic corridors.  Delhi-Mumbai Expressway and two other packages to be
completed by 2023.  Chennai-Bengaluru Expressway to be started.  Proposed to monetize at least 12 lots of
highway bundles of over 6,000 Km before 2024.
INDIAN RAILWAYS:  Large solar power capacity to be set up alongside rail tracks, on land owned by railways.
 Four station re-development projects and operation of 150 passenger trains through PPP.  More Tejas type
trains to connect iconic tourist destinations.  148 km long Bengaluru Suburban transport project at a cost of
Rs. 18,600 crore, to have fares on metro model.
PORTS & WATER-WAYS:  Corporatizing at least one major port and its listing on stock exchanges to be
considered.  Economic activity along river banks to be energised as per Prime Minister’s Arth Ganga concept.
 AIRPORTS:  100 more airports to be developed by 2024 to support Udaan scheme. Further, Air fleet number
expected to go up from present 600 to 1200 during this time.
NEW ECONOMY:  Policy to enable private sector to build Data Centre parks.  Fibre to the Home (FTTH)
connections through Bharatnet to link 100,000 gram panchayats this year. Rs.6,000 cr proposed for Bharatnet
programme in 2020-21.  Measures proposed to benefit Start-ups:  A digital platform to be promoted to
facilitate seamless application and capture of IPRs.  Knowledge Translation Clusters to be set up across
different technology sectors including new and emerging areas.  Mapping of India’s genetic landscape - Two
new national level Science Schemes to be initiated.  Rs.8,000 crore proposed over five years for National
Mission on Quantum Technologies and Applications.
CARING SOCIETY:  Rs.28,600 crore proposed for women specific programs.  Enhanced allocation of Rs. 9,500
crore provided for 2020-21 for senior citizens and Divyang.
CULTURE & TOURISM:  An Indian Institute of Heritage and Conservation to be set up.  5 archaeological sites
to be developed as iconic sites with onsite Museums - Rakhigarhi (Haryana); Hastinapur (Uttar Pradesh);
Shivsagar (Assam); Dholavira (Gujarat); Adichanallur (Tamil Nadu).  Re-curation of the Indian Museum in
Kolkata.  Museum on Numismatics & Trade to be located in the historic Old Mint building in Kolkata. 
Support for setting up of a Tribal Museum in Ranchi.  Maritime museum to be set up at Lothal- the Harrapan
age maritime site near Ahmedabad.
GOVERNANCE: Clean, corruption-free, policy driven, good in intent and most importantly trusting in faith. 
Taxpayer Charter to be enshrined in the Statute will bring fairness and efficiency in tax administration.  New
National Policy on Official Statistics to promote use of latest technologies including AI.  An independent,
professional and specialist National Recruitment Agency (NRA) for conducting a computerbased online Common
Eligibility Test for recruitment.  A sum of Rs. 100 crore allocated to begin the preparations for G20 presidency
to be hosted in India in the year 2022.
FINANCIAL SECTOR:  Deposit Insurance and Credit Guarantee Corporation (DICGC) permitted to increase
Compiled by Sanjay Kumar Trivedy, Chief Manager, Canara Bank, Gandhinagar, Nagpur, Maharashtra 10 | P a g e
Deposit Insurance Coverage to Rs. 5 lakh from Rs.1 lakh per depositor.  Rs. 3,50,000 crore capital infused in
the banks.  Cooperative Banks to be strengthen by amending Banking Regulation Act for increasing
professionalism; enabling access to capital and improving governance and oversight for sound banking through
the RBI.  NBFCs eligibility limit for debt recovery reduced from Rs. 500 cr to Rs 100 cr in asset size and from
Rs 1 cr to Rs 50 lakh in loan size.  Private capital in Banking system: Government to sell its balance holding in
IDBI Bank to private, retail and institutional investors through the stock exchange.  Auto-enrolment in
Universal Pension coverage.  Factor Regulation Act 2011 to be amended to enable NBFCs to extend invoice
financing to the MSMEs through TReDS  New scheme to provide subordinate debt for entrepreneurs of MSMEs
by the banks. This would be counted as quasi-equity.  Window for MSME’s debt restructuring by RBI to be
extended by one year till March 31, 2021.  An Rs 1,000 crore scheme anchored by EXIM Bank together with
SIDBI.
FINANCIAL MARKET:  The Budget proposes deepening Bond Market.  Certain specified categories of
Government securities to be opened fully for non-resident investors also.  FPI limit in corporate bonds
increased to 15% from 9% of its outstanding stock.  Debt Based Exchange Traded Fund expanded by a new
Debt-ETF consisting primarily of Government Securities.  A Partial Credit Guarantee scheme for the NBFCs
formulated post the Union budget 2019-20.
INFRASTRUCTURE FINANCING:  Rs 22,000 crore to cater to the equity support to Infrastructure Finance
Companies such as IIFCL and a subsidiary of NIIF.  IFSC, GIFT city - to become a centre of international
finance as well as a centre for high end data processing:  An International Bullion exchange(s) to be set up as
an additional option for trade by global market participants.
DISINVESTMENT:  Government to sell a part of its holding in LIC by way of IPO.
FISCAL MANAGEMENT:
DIRECT TAX: To stimulate growth, simplify tax structure, bring ease of compliance, and reduce litigations. 
Personal Income Tax: New and simplified personal income tax regime proposed: Taxable Income Slab (Rs.)
Existing tax rates New tax rates 0-2.5 Lakh Exempt Exempt 2.5-5 Lakh 5% 5% 5-7.5 Lakh 20% 10% 7.5-10 Lakh
20% 15% 10-12.5 Lakh 30% 20% 12.5-15 Lakh 30% 25% Above 15 Lakh 30% 30%.  Around 70 of the existing
exemptions and deductions (more than 100) to be removed in the new simplified regime. New tax regime to be
optional - an individual may continue to pay tax as per the old regime and avail deductions and exemptions.
New regime to entail estimated revenue forgone of Rs. 40,000 crore per year.  Corporate Tax: Tax rate of 15%
extended to new electricity generation companies.
Dividend Distribution Tax (DDT): DDT removed making India a more attractive investment destination.
Deduction to be allowed for dividend received by holding company from its subsidiary. Rs. 25,000 cr estimated
annual revenue forgone.  Start-ups: Start-ups with turnover up to Rs. 100 cr to enjoy 100% deduction for 3
consecutive assessment years out of 10 years.
MSMEs to boost less-cash economy: Turnover threshold for audit increased to Rs. 5 cr from Rs. 1 cr for
businesses carrying out less than 5% business transactions in cash.  Cooperatives: Parity brought between
cooperatives and corporate sector. Option to cooperative societies to be taxed at 22% + 10% surcharge and 4%
cess with no exemption / deductions.  Tax concession for Foreign Investments: 100% tax exemption to the
interest, dividend and capital gains income on investment made in infrastructure and priority sectors before
31st March, 2024 with a minimum lock-in period of 3 years by the Sovereign Wealth Fund of foreign
governments.
Affordable Housing: Additional deduction up to Rs. 1.5 lakhs for interest paid on loans taken for an affordable
house extended till 31st March, 2021. Further, date of approval of affordable housing projects for availing tax
holiday on profits earned by developers extended till 31st March, 2021. Tax Facilitation Measures:  Instant
PAN to be allotted online through Aadhaar.  ‘Vivad Se Vishwas’ scheme, with a deadline of 30th June, 2020,
to reduce litigations in direct taxes:  Waiver of interest and penalty - only disputed taxes to be paid for
payments till 31st March, 2020.  Faceless appeals to be enabled by amending the Income Tax Act.  Losses of
merged banks: Amendments proposed to the Income-tax Act to ensure that entities benefit from unabsorbed
losses and depreciation of the amalgamating entities.
Indirect Tax:  GST: Cash reward system envisaged to incentivise customers to seek invoice. Further,
simplified return with features like SMS based filing for nil return and improved input tax credit flow to be
implemented as a pilot run.  Dynamic QR-code capturing GST parameters proposed for consumer invoices.
CONCLUSION: As per the Budget, the growth of the economy appears to have bottomed out and is expected
to pick up in 2020-21. Major challenges for the economy arising from the external front are geo-political
tensions in Middle East and rising crude oil prices due to supply disruption which may decelerate growth and
increase inflation. Challenges in the domestic front are revival of investments and savings. The positive
prospects for the economy are continuation of structural reforms that will revive growth and expected
normalization of credit flow as investment picks up induced by a cut in the corporate tax rate and anticipated
transmission of repo rate cuts earlier implemented by the Monetary Policy Committee.
3. SIXTH BI-MONTHLY MONETARY POLICY (06.02.2020)

 The RBI announced its sixth Bi-Monthly Monetary Policy on Feb. 6, 2020 and maintained the status quo on
the key policy Repo rate. The MPC observes that the economy continues to be weak and the output gap
remains negative.  The MPC recognises that there is monetary policy space for future action. However, given
the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture.
Accordingly, the MPC has decided to keep the policy repo rate unchanged.  The MPC also decided to continue
with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains
within the target.  The decisions are in consonance with the objective of achieving the medium-term target
for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
TARGETS:  GDP OUTLOOK: GDP growth for 2020-21 is projected at 6.0%, in the range of 5.5-6.0 per cent in
H1 and 6.2 per cent in Q3.  INFLATION: The CPI inflation projection is revised upwards to 6.5 per cent for
Q4:2019-20; 5.4-5.0 per cent for H1:2020-21; and 3.2 per cent for Q3:2020-21, with risks broadly balanced. 
FISCAL DEFICIT: The fiscal deficit of the Central Government for 2019-20 is placed at 3.8% of GDP in the
revised estimates as against 3.3% of GDP in the budget estimates. The fiscal deficit is budgeted to decline to
3.5% of GDP for 2020-21. Fresh gross market borrowings are budgeted to increase by Rs. 70,000 crore to Rs. 7.8
lakh crore in 2020-21 from Rs. 7.1 lakh cr in 2019-20.
MONETARY AND LIQUIDITY MEASURES: On the basis of an assessment of the current and evolving
macroeconomic situation, the key rates are:
 REPO RATE: The policy Repo rate under the Liquidity Adjustment Facility (LAF) kept unchanged at 5.15 per
cent. The policy rate corridor remains unchanged at +/- 25 bps.
 REVERSE REPO RATE: The Reverse repo rate under the LAF determined with a spread of 25 bps below the
repo rate remains unchanged at 4.90 per cent.
MARGINAL STANDING FACILITY: The MSF rate (an emergency funding window) with a spread of 25 bps above
remains unchanged at 5.40%.
 BANK RATE: The MSF rate and the Bank Rate are calibrated to 25 basis above the repo rate. The Bank Rate
thus remains unchanged at 5.40 per cent.
CASH RESERVE RATIO (CRR): CRR of scheduled banks unchanged at 4% of their NDTL. The minimum daily
maintenance of the CRR of 90% remains unchanged.
 STATUTORY LIQUIDITY RATIO: In order to align the SLR with the Liquidity Coverage Ratio requirement, RBI
decided to reduce the SLR by 25 bps every calendar quarter until the SLR reaches 18% of NDTL. The first
reduction of 25 bps took effect in the quarter commencing 5th Jan, 2019. The SLR of scheduled commercial
banks reduced to 18.25% w.e.f 4th Jan.2020 and finally to 18% w.e.f. 11th April, 2020.
ASSESSMENT
GLOBAL ECONOMY:  The global economic activity has remained slow-paced, but is getting differentiated
across geographies. Among the key advanced economies, the US economy grew by 2.1 per cent in Q4:2019, the
same pace as in Q3.  In the euro area, economic activity slowed down. Growth momentum in the UK appears
to have weakened.  Among emerging market economies (EMEs), the Chinese economy slowed down to a 29-
year low of 6.1 per cent in 2019, caused by sluggish domestic demand and prolonged trade tensions.  Crude
oil and gold prices shot up in early January sparked by the US-Iran confrontation, but both softened from mid-
January as geo-political tensions eased. By end-January, crude oil prices dipped sharply due to sell-offs
triggered by the outbreak of the coronavirus.  Global financial markets remained resilient in December 2019
and for the most part of January 2020 as thawing US-China trade relations and improved prospects of an
orderly Brexit buoyed investors’ sentiment.
DOMESTIC ECONOMY:  The first advance estimates released by the National Statistical Office (NSO) on
January 7, 2020 placed India’s real gross domestic product (GDP) growth for 2019-20 at 5.0 per cent. In its
January 31 release, the NSO revised real GDP growth for 2018-19 to 6.1 per cent from 6.8 per cent given in the
provisional estimates of May 2019. On the supply side, growth of real gross value added (GVA) is estimated at
4.9 per cent in 2019-20 as compared with 6.0 per cent in 2018-19.  Production and imports of capital goods –
two key pointers of investment activity continued to contract in November / December, though at a moderate
pace compared with the previous month.  Industrial activity, measured by the index of industrial production
(IIP), improved in November after contracting in the previous three months. The output of core industries
returned to positive territory in December after four months of contraction.  Several high frequency
indicators of services have turned upwards in the recent period, pointing to a modest revival in momentum,
although the outlook is still muted.  Retail inflation, measured by year-on-year changes in the CPI, surged to
7.4 per cent in December 2019, the highest reading since July 2014. While food group inflation rose to double
digits, the fuel group moved out of deflation.  CPI food inflation increased from 6.9 per cent in October to
12.2 per cent in December, primarily caused by a spike in onion prices due to unseasonal rains in October-
November. Excluding onions, food inflation would have been lower by 4.7 percentage points and headline
inflation by 2.1 percentage points.  Overall liquidity in the system remained in surplus in December 2019 and
January 2020. Average daily net absorption under the liquidity adjustment facility (LAF) amounted to Rs. 2.61
lakh crore in December 2019. In January 2020, the average daily net absorption of surplus liquidity soared to
Rs. 3.18 lakh crore. The Reserve Bank conducted four auctions involving the simultaneous purchase of long-
term and sale of short-term government securities under open market operations (OMOs) for a notified amount
of Rs. 10,000 crore each during December 2019, and Jan. 2020. The weighted average call rate (WACR) traded
below the policy repo rate (on an average) by 10 bps in December and by 19 bps in January on easy liquidity
conditions.  After the introduction of the external benchmark system, most banks have linked their lending
rates for housing, personal and micro and small enterprises (MSEs) to the policy repo rate of the Reserve Bank
of India.  During October-December 2019, the WALRs of domestic (public and private sector) banks on fresh
rupee loans declined by 18 bps for housing loans, 87 bps for vehicle loans and 23 bps for loans to micro, small
and medium enterprises.  Export growth continued to contract in November-December 2019, reflecting the
slowdown in global trade. Import growth slumped in November-December 2019, with contraction in both oil
and non-oil non-gold imports.  On the financing side, net foreign direct investment rose to US$ 24.4 billion in
April-Nov. 2019 from US$ 21.2 billion a year ago. Net foreign portfolio investment was of the order of US$ 8.6
billion in 2019-20 (up to February 4) as against net outflows of US$ 14.2 billion in the same period last year. In
addition, net investments by FPIs under the voluntary retention route have aggregated US$ 7.8 billion since
March 11, 2019.  External commercial borrowings were higher at US$ 13.4 billion during April-December 2019
as compared with US$ 2.5 billion during the same period a year ago.  India’s foreign exchange reserves were
at US$ 471.4 billion on February 4, 2020, an increase of US$ 58.5 billion over endMarch 2019.
STATEMENT ON DEVELOPMENTAL AND REGULATORY POLICIES -This Statement sets out various
developmental and regulatory policy measures for strengthening regulation and supervision; broadening and
deepening financial markets; and improving the payment and settlement systems.
1) Revised Liquidity Management Framework:
 An Internal Working Group was set up to review the current liquidity management framework with a view to
simplifying it and suggest measures to clearly communicate the objectives and the toolkit for liquidity
management.  The Group has articulated guiding principles for an effective liquidity management
framework. Some of the major guiding principles are: a) The liquidity framework should be guided by the
objective of maintaining the call money rate close to the policy rate; b) It should be consistent with the policy
rate; and c) It should not undermine the price discovery in the inter-bank money market.
Based on the feedback received, RBI has decided to finetune the existing liquidity management
framework. Key elements of the Revised Framework are:  Liquidity management is the operating procedure
of monetary policy; the weighted average call rate (WACR) will continue to be its operating target.  The
liquidity management corridor is retained, with the marginal standing facility (MSF) rate as its upper bound
(ceiling) and the fixed rate reverse repo rate as the lower bound (floor), with the repo rate in the middle of
the corridor.  The width of the corridor remains unchanged at 50 basis points (bps) – the reverse repo rate
being 25 bps below the repo rate and the MSF rate 25 bps above the repo rate.  With the WACR being the
single operating target, the need for specifying a one-sided target for liquidity provision of one percent of net
demand and time liabilities (NDTL) does not arise. Accordingly, the daily fixed rate repo and four 14-day term
repos every fortnight being conducted, at present, are being withdrawn.  The Reserve Bank will ensure
adequate provision / absorption of liquidity as warranted by underlying and evolving market conditions -
unrestricted by quantitative ceilings at or around the policy rate.  Instruments of liquidity management will
include fixed and variable rate repo / reverse repo auctions, outright open market operations (OMOs), forex
swaps and other instruments as may be deployed from time to time to ensure that the system has adequate
liquidity at all times.
 A 14-day term repo / reverse repo operation at a variable rate and conducted to coincide with the cash
reserve ratio (CRR) maintenance cycle would be the main liquidity management tool for managing frictional
liquidity requirements.  The main liquidity operation would be supported by fine-tuning operations, overnight
and / or longer, to tide over any unanticipated liquidity changes during the reserve maintenance period.  In
addition, the RBI will conduct, if needed, longer-term variable rate repo / reverse repo operations of more
than 14 days.  The current requirement of maintaining a minimum of 90 per cent of the prescribed CRR on a
daily basis will continue.  Standalone Primary Dealers (SPDs) would be allowed to participate directly in all
overnight liquidity management operations.  The margin requirements under the Liquidity Adjustment Facility
(LAF) would be reviewed on a periodic basis; the margin requirement for reverse repo transactions, however,
would continue to be ‘Nil’.
2) Long Term Repo Operations (LTROs) for Improving Monetary Transmission:  Since June 2019, the
Reserve Bank has ensured that comfortable liquidity is available in the system in order to facilitate the
transmission of monetary policy actions and flow of credit to the economy. These efforts are being carried
forward with a view to assuring banks about the availability of durable liquidity at reasonable cost relative to
prevailing market conditions. This should encourage banks to undertake maturity transformation smoothly and
seamlessly so as to augment credit flows to productive sectors.  Accordingly, RBI has decided that from the
fortnight beginning on Feb.15, 2020, it shall conduct term repos of one-year and three-year tenors of
appropriate sizes for up to a total amount of Rs. 1,00,000 cr at the policy repo rate.
3) Incentivising Bank Credit to Specific Sectors:  Alongside sustained efforts to improve monetary
transmission, the Reserve Bank is actively engaged in revitalizing the flow of bank credit to productive sectors
having multiplier effects to support impulses of growth.  As a part of this, RBI has now decided that
scheduled commercial banks will be allowed to deduct the equivalent of incremental credit disbursed by them
as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs),
over and above the outstanding level of credit to these segments as at the end of the fortnight ended January
31, 2020 from their net demand and time liabilities (NDTL) for maintenance of cash reserve ratio (CRR).  This
exemption will be available for incremental credit extended up to the fortnight ending July 31, 2020.
4) External Benchmarking of New Floating Rate Loans by Banks to Medium Enterprises:  In pursuance of
the recommendations of an Internal Study Group headed by Dr. Janak Raj, all new floating rate personal or
retail loans and floating rate loans to micro and small enterprises (MSEs) extended by banks were linked to
external benchmarks, viz., (i) the policy repo rate; or (ii) any benchmark market interest rate produced by the
Financial Benchmarks India Private Ltd. (FBIL), including Treasury bill rates effective October 1, 2019. 
Subsequent to the introduction of an external benchmark system, the monetary transmission has improved to
the sectors where new floating rate loans have been linked to the external benchmark.  With a view to
further strengthening monetary transmission, RBI has decided to link pricing of loans by scheduled commercial
banks for the medium enterprises also to an external benchmark effective April 1, 2020.
5) Extension of One-time Restructuring Scheme for MSME:  The Micro, Small and Medium Enterprises
(MSMEs) sector plays an important role in the growth of the Indian economy, contributing over 28% of the GDP,
more than 40% of exports, while creating employment for about 11 crore people.  Considering the
importance of MSMEs in the Indian economy and for creating an enabling environment for the sector in its
efforts towards formalisation, a one-time restructuring of loans to MSMEs that were in default but ‘standard’ as
on January 1, 2019, was permitted without an asset classification downgrade. The restructuring of the
borrower account was to be implemented by March 31, 2020. The scheme has provided relief to a large number
of MSMEs.  As the process of formalisation of the MSME sector has a positive impact on financial stability and
this process is still underway, RBI has decided to extend the benefit of one-time restructuring without an asset
classification downgrade to standard accounts of GST registered MSMEs that were in default as on January 1,
2020. The restructuring under the scheme has to be implemented latest by December 31, 2020.  This will
benefit the eligible MSME entities which could not be restructured under the provisions of the extant guidelines
as also the MSME entities which have become stressed thereafter.
6) Guidelines on Projects under Implementation in Commercial Real Estate sector:  RBI has decided to
permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial
real estate, delayed for reasons beyond the control of promoters, by another one year without downgrading
the asset classification, in line with treatment accorded to other project loans for non-infrastructure sector.
This would complement the initiatives taken by the Government of India in the real estate sector.
7) Regional Rural Banks - Permission for Merchant Acquiring Business: To give a fillip to digital banking and
enabling regional rural banks to provide cost effective and user-friendly solutions to their customers, RBU has
decided to allow RRBs, like other commercial banks, to act as merchant acquiring banks, using Aadhaar Pay –
BHIM app and POS terminals.
8) Proposed Changes in Regulations Applicable to HFCs for Public Comments: Post transfer of regulation of
HFCs from National Housing Bank (NHB) to Reserve Bank with effect from August 09, 2019, RBI has proposed to
place the draft revised regulations on the Bank’s website by the end of Jan. 2020, for public comments.
9) Deepening of Rupee Interest Rate Derivative Market:  Currently, market makers undertaking rupee
interest rate derivative (IRD) transactions with non-residents by way of ‘backto-back’ arrangements are
required to recognise all rupee IRD transactions undertaken by their related entities globally, in their books in
India. This arrangement is proposed to be extended to cover all market makers, whether or not they undertake
back-toback transactions.  RBI has accordingly proposed that all rupee IRD transactions of market makers and
their related entities globally, shall be accounted for in India. This measure would encourage higher non-
resident participation, enhance the role of domestic market makers in the offshore market, improve
transparency, and achieve better regulatory oversight. The revised draft directions shall be issued by end-
March 2020.
10) Margin Requirements for Non-Centrally Cleared Derivatives:  Well-established margining arrangements
for financial contracts contribute to financial stability by enhancing credibility of the market mechanism and
discouraging excessive risktaking.  To improve safety of settlement of over-the-counter (OTC) derivatives
that are not centrally cleared, following the G-20 recommendations, the RBI had issued a discussion paper to
implement global practices related to margin requirements for such derivatives.  The introduction of
legislation for netting of financial transactions proposed in the Union Budget 2020-21 would be a significant
enabler for efficient margining. It has, therefore, been decided by RBI to issue the directions regarding
exchange of variation margin (VM) for non-centrally cleared derivatives (NCCDs) by end-March 2020.
11) Inter-operability of Depositories:  In continuation of efforts to facilitate interoperability of Government
securities depositories, as announced in the Union Budget 2019-20, the RBI will modify its Government
securities registry (the PDO-NDS system) to include constituent details in the Constituent Subsidiary General
Ledger (CSGL) accounts.  This is expected to fuel interest of retail investors to invest in Government
securities. The upgrade is expected to be made operational by end of July 2020.
12) Digital Payments Index:  Digital payments in India have been growing rapidly. The Reserve Bank shall
construct and periodically publish a composite ‘Digital Payments Index’ (DPI) to capture the extent of
digitisation of payments effectively. The DPI would be based on multiple parameters and shall reflect
accurately the penetration and deepening of various digital payment modes.  The DPI will be made available
from July 2020 onwards.
13) Framework to Establish Self-Regulatory Organisation (SRO) for Digital Payment System:  With
substantial growth in digital payments and maturity gained by entities in the payment ecosystem, it is
desirable to have a Self-Regulatory Organisation (SRO) for orderly operations of the entities in the payment
system.  The RBI will put in place a framework for establishing an SRO for the digital payment system by April
2020 with a view to fostering best practices on security, customer protection and pricing, among others. The
SRO will serve as a two-way communication channel between the players and the regulator.
14) Pan India Cheque Truncation System (CTS): The Cheque Truncation System (CTS), which is currently
operational at the major clearing houses of the country, has stabilised well and it has made large efficiency
gains. In view of this, a pan India CTS will be made operational by Sept. 2020.
4. Seven Ages of India’s Monetary Policy

(Address by Shri Shaktikanta Das, Governor, Reserve Bank of India at the St. Stephen's College, University of
Delhi on January 24, 2020)
I am delighted to be back in my alma mater. Being here, brings back a surge of memories. Today, I wish to
dwell upon a few aspects of central banking in the Indian context and RBI’s role in the current situation. I shall
specifically focus on the evolution of monetary policy regimes in India and if I am to use the poetic license of
Shakespeare, may I call it the seven ages of India’s monetary policy?
2. The history of central banking goes back to the seventeenth century when the first institution, ‘the
Riksbank’, recognised as a central bank was set up in Sweden in 1668. Set up as a joint stock bank, it was
chartered to lend funds to the government and to act as a clearing house for commerce. Later on, the Riksbank
abandoned commercial lending and was granted a monopoly for issuing banknotes in 1897. Subsequently,
several countries set up institutions that functioned as central banks. These early central banks like the Bank
of England and Banque de France, though set up with private capital, helped sovereigns finance their debt and
were engaged in banking activities. Since then, the role of central banks across countries has constantly
evolved in line with the changing needs of their economies and evolving financial structure. Today, the
functions of modern central banks are vastly different from what was expected from their early counterparts.
3. Let me briefly outline how the profile of the Reserve Bank has been intrinsically interwoven with the
economic and financial developments in our country since independence.
4. The Reserve Bank was set up under the Reserve Bank of India Act 1934 with the original Preamble that
describes the broad mandate of the Reserve Bank as follows: “it is expedient to constitute a Reserve Bank for
India to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in
India and generally, to operate the currency and credit system of the country to its advantage”. 5. Later, the
Reserve Bank of India was nationalised in 1949. While the Reserve Bank continues to perform its traditional
functions such as currency management, bankers’ bank and banker to the Government, its function of
conducting monetary policy has undergone a sea change in various respects from time to time.
6. As we know, policy change is generally guided by two major forces: first, the objectives that may seem
appropriate earlier may lose relevance with changing behavioural relationships over time. For instance, when
we found that the relationship of money with nominal income was not very predictable as in the past, we
adopted multiple indicators approach in 1998. Second, the state of knowledge, updated with new theories and
evidences, requires to be applied in pursuit of better policy outcomes. This is precisely what shaped the
conduct of monetary policy in India over time.
Evolution of monetary policy in line with the changing character of the economy
1935 to 1949: Initial Phase
7. It is interesting to note that the Reserve Bank came into being in the backdrop of the great depression
facing the world economy. Given the unsettled international monetary systems, the Preamble to the RBI Act,
1934 provided the edifice for the evolution of monetary policy framework. Until independence, the focus was
on maintaining the sterling parity by regulating liquidity through open market operations (OMOs), with
additional monetary tools of bank rate and cash reserve ratio (CRR). In other words, exchange rate was the
nominal anchor for monetary policy. In view of the agrarian nature of the economy, inflation often emerged as
a concern due to frequent supply side shocks. While the price control measures and rationing of essential
commodities was undertaken by the Government, the Reserve Bank also used selective credit control and
moral suasion to restrain banks from extending credit for speculative purposes.
1949 to 1969: Monetary Policy in sync with the Five-Year Plans
8. India’s independence in 1947 was a turning point in the economic history of the country. What followed was
a policy of planned economic development. These two decades were characterised not only by a predominant
role of the state but also by a marked shift in the conduct of monetary policy. The broad objective was to
ensure a socialistic pattern of society through economic growth with a focus on self-reliance. This was
intended to be achieved by building up of indigenous capacity, encouraging small as well as large-scale
industries, reducing income inequalities, ensuring balanced regional development, and preventing
concentration of economic power. Accordingly, the government also assumed entrepreneurial role to develop
the industrial sector by establishing public sector undertakings.
9. As planned expenditure was accorded pivotal role in the process of development, there was emphasis on
credit allocation to productive sectors. The role of monetary policy, therefore, during this phase of planned
economic development revolved around the requirements of five-year plans. Even if there was no formal
framework, monetary policy was relied upon for administering the supply of and demand for credit in the
economy. The policy instruments used in regulating the credit availability were bank rate, reserve
requirements and open market operations (OMOs). With the enactment of the Banking Regulation Act in 1949,
statutory liquidity ratio (SLR) requirement prescribed for banks emerged as a secured source for government
borrowings and also served as an additional instrument of monetary and liquidity management. Inflation
remained moderate in the post-independence period but emerged as a concern during 1964-68.
1969 to 1985: Credit Planning
10. Nationalisation of major banks in 1969 marked another phase in the evolution of monetary policy. The main
objective of nationalisation of banks was to ensure credit availability to a wider range of people and activities.
As banks got power to expand credit, the Reserve Bank faced the challenge of maintaining a balance between
financing economic growth and ensuring price stability in the wake of the sharp rise in money supply
emanating from credit expansion. Besides, Indo-Pak war in 1971, drought in 1973, global oil price shocks in
1973 and 1979, and collapse of the Bretton-woods system in 1973 also had inflationary consequences.
Therefore, concerns of high inflation caused by deficit financing during 1960s gathered momentum during the
1970s. Incidentally, the high inflation in the domestic economy coincided with stagflation – high inflation and
slow growth – in advanced economies. In such a milieu, traditional monetary policy instruments, viz., the Bank
Rate and OMOs were found inadequate to address the implications of money supply for price stability. As banks
were flushed with deposits under the impact of deficit financing, they did not need to approach RBI for funds.
This undermined the efficacy of Bank Rate as a monetary policy instrument. Similarly, due to underdeveloped
government securities market, OMOs had limited scope to be used as monetary policy instrument. During this
phase, the average growth rate hovered around 4.0 per cent, while wholesale price index (WPI) based inflation
was around 8.8 per cent.
1985 to 1998: Monetary Targeting
11. In the 1980s, fiscal dominance accentuated as reflected in automatic monetisation of budget deficit
through ad hoc treasury bills and progressive increase in SLR by 1985. Concomitantly, inflationary impact of
deficit financing warranted tightening of monetary policy – both the CRR and Bank Rate were raised
significantly. The experience of monetary policy in dealing with the objectives of containing inflation and
promoting growth eventually led to adoption of monetary targeting as a formal monetary policy framework in
1985 on the recommendations of the Chakravarty Committee. In this framework, with the objective of
controlling inflation through limiting monetary expansion, reserve money was used as operating target and
broad money as intermediate target. The targeted growth in money supply was based on expected real GDP
growth and a tolerable level of inflation. This approach was flexible as it allowed for feedback effects. CRR
was used as the primary instrument for monetary control. Nonetheless, due to continued fiscal dominance,
both SLR and CRR reached their peak levels by 1990.
12. The worsening of fiscal situation in late 1980s was manifested in deterioration of external balance position
and collapse in domestic growth in 1991-92, in the backdrop of adverse global shocks – the gulf war and
disintegration of the Soviet Union. The resultant balance of payments crisis triggered large scale structural
reforms, financial sector liberalization and opening up of the economy to achieve sustainable growth with price
stability. Concurrently, there was a shift from fixed exchange rate regime to a market determined exchange
rate system in 1993. In the wake of trade and financial sector reforms and the consequent rise in foreign
capital flows and financial innovations, the assumption of stability in money demand function as well as
efficacy of broad money as intermediate target came under question. At the same time, there was a notable
shift towards market-based financing for both the government and the private sector. In fact, automatic
monetisation through ad hoc treasury bills was abolished in 1997 and replaced with a system of ways and
means advances (WMAs). During this period, average domestic growth rate was 5.6 per cent and average WPI-
based inflation was 8.1 per cent.
1998 to 2015: Multiple Indicators Approach
13. As liberalisation of the economy since the early 1990s and financial innovations began to undermine the
efficacy of the prevalent monetary targeting framework, a need was felt to review the monetary policy
framework and recast its operating procedures. As a result, the Reserve Bank of India adopted multiple
indicators approach in April 1998. Under this approach, besides monetary aggregates, a host of forward looking
indicators such as credit, output, inflation, trade, capital flows, exchange rate, returns in different markets
and fiscal performance constituted the basis of information set used for monetary policy formulation. The
enactment of the Fiscal Responsibility and Budget Management (FRBM) Act in 2003, by introducing fiscal
discipline, provided flexibility to monetary policy. Increased market orientation of the domestic economy and
deregulation of interest rates introduced since the early 1990s also enabled a shift from direct to indirect
instruments of monetary policy. There was, therefore, greater emphasis on rate channels relative to quantity
instruments for monetary policy formulation. Accordingly, shortterm interest rates became instruments to
signal monetary policy stance of RBI.
14. In order to stabilise short-term interest rates, the Reserve Bank placed greater emphasis on the integration
of money market with other market segments. It modulated market liquidity to steer monetary conditions to
the desired trajectory by using a mix of policy instruments. Some of these instruments including changes in
reserve requirements, standing facilities and OMOs were meant to affect the quantum of marginal liquidity,
while changes in policy rates, such as the Bank Rate and reverse repo/repo rates were the instruments for
changing the price of liquidity.
15. An assessment of macroeconomic outcomes suggests that the multiple indicator approach served fairly well
from 1998-99 to 2008-09. During this period, average domestic growth rate improved to 6.4 per cent and WPI
based inflation moderated to 5.4 per cent.
2013-2016: Preconditions Set for Inflation Targeting
16. In the post-global financial crisis period (i.e., post-2008), however, the credibility of this framework came
into question as persistently high inflation and weakening growth began to co-exist. In the face of doubledigit
inflation of 2012-13, the US Fed’s taper talk in May/June 2013 posed significant challenges to domestic
monetary policy for maintaining the delicate balance between sustaining growth, containing inflation and
securing financial stability. The extant multiple indicators approach was criticised on the ground that a large
set of indicators do not provide a clearly defined nominal anchor for monetary policy. An Expert Committee
was set up by RBI to revise and strengthen the monetary policy framework and suggest ways to make it more
transparent and predictable. In its Report of 2014, the Committee reviewed the multiple indicators approach
and recommended that inflation should be the nominal anchor for the monetary policy framework in India.
Against this backdrop, the Reserve Bank imposed on itself a glide path for bringing down inflation in a
sequential manner – from its peak of 11.5 per cent in November 2013 to 8 per cent by January 2015; 6 per cent
by January 2016 and 5 per cent by Q4 of 2016-17.
2016 onwards: Flexible Inflation Targeting
17. Amid this, a Monetary Policy Framework Agreement (MPFA) was signed between the Government of India
and the Reserve Bank on February 20, 2015. Subsequently, flexible inflation targeting (FIT) was formally
adopted with the amendment of the RBI Act in May 2016. The role of the Reserve Bank in the area of monetary
policy has been restated in the amended Act as follows:
“the primary objective of monetary policy is to maintain price stability while keeping in mind the objective of
growth”.
18. Empowered by this mandate, the RBI adopted a flexible inflation targeting (FIT) framework under which
primacy is accorded to the objective of price stability, defined numerically by a target of 4 per cent for
consumer price headline inflation with a tolerance band of +/- 2 per cent around it, while simultaneously
focusing on growth when inflation is under control. The relative emphasis on inflation and growth depends on
the macroeconomic scenario, inflation and growth outlook, and signals emerging from incoming data. Since
then RBI has been conducting monetary policy in a forward-looking manner and effectively communicating its
decisions to maintain inflation around its target and thereby to support growth. At the same time, RBI is also
fine-tuning its operating procedures of monetary policy for effective policy transmission across the financial
markets and thereby onto the real economy. As an outcome, inflation has fallen successively and has averaged
below 4 per cent since 2017-18, notwithstanding recent up-tick in inflation driven by food prices, especially
the sharp increase in vegetable prices reflecting the adverse impact of unseasonal rains and cyclone.
Evolution of monetary policy in line with the changing Theoretical Developments and International Best
Practices
19. The monetary policy framework in India has also been guided by developments in theory and international
best practices. For instance, the collapse of the Bretton-Woods system of fixed exchange rates and high
inflation in many advanced economies during the 1970s provided the necessary background to the choice of
money supply as a nominal anchor. Since the late 1980s, however, experience of many advanced countries with
monetary targeting framework was not satisfactory inter alia due to growing disconnect between monetary
aggregates and goal variables such as inflation. A similar instability in money demand function was also
evidenced in the Indian context in the 1990s which led to a shift from monetary targeting to multiple
indicators approach in 1998.
20. Since early 1990s, beginning with New Zealand in 1990, many advanced and emerging market economies
(EMEs) have switched to inflation targeting as the preferred policy framework. India, however, formally
adopted the framework in 2016 which has helped us in terms of learning from the experiences of a diverse set
of countries over a long period of time. In fact, the post-global financial crisis experience questioned the
relevance of narrow focus on price stability as the sole objective of monetary policy, which called for adoption
of a flexible approach to inflation targeting to achieve macro-financial stability. In this milieu, financial
stability has emerged as another key consideration for monetary policy, though jury is still out as to whether it
should be added as an explicit objective. It is interesting to note that the central banking function as the
lender of last resort (LOLR) has remained intact, notwithstanding the developments and refinements in the
policy frameworks across countries, including India.
Evolution of monetary policy in line with the financial market developments
21. Financial markets play a critical role in effective transmission of monetary policy impulses to the rest of
the economy. Monetary policy transmission involves two stages. In the first stage, monetary policy changes are
transmitted through the money market to other markets, i.e., the bond market and the bank loan market. The
second stage involves the propagation of monetary policy impulses from the financial market to the real
economy - by influencing spending decisions of individuals and firms. Within the financial system, money
market is central to monetary operations conducted by the central bank.
22. In the case of India, money market prior to the 1980s was characterised by paucity of instruments and lack
of depth. Owing to limited participation, money market liquidity was highly skewed, characterised by a few
dominant lenders and a large number of chronic borrowers. In the presence of ad hoc Treasury Bills with fixed
interest rate under the system of automatic monetisation, Treasury Bills could not emerge as a short-term
money market instrument. Administered interest rates and captive investor base in government securities
market further impeded open market operations as an effective instrument of monetary control. The
prevalence of interest rate regulations along with restrictions on participation prohibited the integration of
different market segments which is a prerequisite for effective monetary policy transmission. In this
environment, monetary policy initially relied mainly on credit planning and selective credit controls and
eventually on monetary targeting through quantitative instruments.
23. Financial markets reforms since the early 1990s, therefore, focused on dismantling various price and non-
price controls in the financial system to facilitate integration of financial markets. Reform measures
encompassed removing structural bottlenecks, introducing new players/instruments, ensuring free pricing of
financial assets, relaxing quantitative restrictions, strengthening institutions, improving trading, clearing and
settlement practices, encouraging good market practices and promoting greater transparency. These reforms
gradually facilitated the price discovery in financial markets and interest rate emerged as a signaling
mechanism. This paved way for introduction of the Liquidity Adjustment Facility (LAF) in 2000-01 as a tool for
both liquidity management and also a signalling device for interest rates in the overnight money market. Amid
greater integration of domestic financial markets with global markets, subsequently, the RBI also began to
recognise the impact of global developments on domestic monetary policy. The developments in financial
markets enabled the Reserve Bank to use market-based instruments of monetary policy and utilise the forward-
looking information provided by financial markets in the conduct of monetary policy under the multiple
indicators approach.
24. Although various segments of financial markets had acquired depth and maturity over time, a key challenge
has been on fuller and faster transmission of policy rate changes not only to money market segments but also
to the broader credit markets. In order to address these challenges, the Reserve Bank has been trying different
models. At the same time, the liquidity management framework was also fine-tuned since April 2016 with the
objective of maintaining the operating target close to the policy rate. Under this framework, the Reserve Bank
assured the market to meet its durable liquidity requirements while fine-tuning its operations to make short-
term liquidity conditions consistent with the stated policy stance. This was achieved through a variety of
instruments including fixed and variable rate repo/reverse repo of various maturities, the marginal standing
facility (MSF) and outright open market operations – complemented at times by the cash management bills and
foreign exchange swaps.
Challenges in the Current Context
25. One of the major challenges for central banks is the assessment of the current economic situation. As we
all know, the precise estimation of key parameters such as potential output and output gaps on a real time
basis is a challenging task, although they are crucial for the conduct of monetary policy. In recent times,
shifting trend growth in several economies, global spillover effects and disconnect between the financial cycles
and business cycles in the face of supply shocks broadly explain why monetary policy around the world is in a
state of flux. Nonetheless, a view has to be taken on the true nature of the slack in demand and supply-side
shocks to inflation for timely use of counter cyclical policies.
26. We, in the Reserve Bank, therefore, constantly update our assessment of the economy based on incoming
data and survey based forward looking information juxtaposed with model-based estimates for policy
formulation. This approach helped the Reserve Bank to use the policy space opened up by the expected
moderation in inflation and act early, recognizing the imminent slowdown before it was confirmed by data
subsequently. Monetary policy, however, has its own limits. Structural reforms and fiscal measures may have
to be continued and further activated to provide a durable push to demand and boost growth. In my previous
talks elsewhere, I have highlighted certain potential growth drivers which, through backward and forward
linkages, could give significant push to growth. Some of these areas include prioritising food processing
industries, tourism, e-commerce, start-ups and efforts to become a part of the global value chain. The
Government is also focusing on infrastructure spending which will augment growth potential of the economy.
States should also play an important role by enhancing capital expenditure which has high multiplier effect.
Concluding Remarks
27. Monetary policy frameworks in India has thus evolved in line with the developments in theory and country
practices, the changing nature of the economy and developments in financial markets. Within the broad
objectives, however, the relative emphasis on inflation, growth and financial stability has varied across
monetary policy regimes. Although global experience with financial stability as an added policy objective is
still unsettled, the Reserve Bank has always been giving due importance to financial stability since the
enactment of the Preamble to the RBI Act. The regulation and supervision of banks and non-bank financial
intermediaries has rested with the Reserve Bank and has kept pace with the prescribed global norms over time.
More recently, the focus of financial stability has not only confined to regulation and supervision but also
extending the reach of formal financial system to the unbanked and unserved population.
28. Apart from financial inclusion, there is also a focus on promoting secured, seamless and real-time
payments and settlements. This renewed focus on financial inclusion and secured payments and settlements
are not only aimed at promoting the confidence of general public in the domestic financial system but also
improving the credibility of monetary policy for price stability, inclusive growth and financial stability.
5. $ 5 Trillion Economy: Aspiration to Action

( Keynote Address by Shri Shaktikanta Das, Governor, Reserve Bank of India Delivered at the India Economic
Conclave held in Mumbai on December 16, 20191 )
It is a privilege to be here this morning at the very prestigious India Economic Conclave organised by The
Times Network. I assumed charge of the Reserve Bank last year on December 12, and this event was held
around that time. Having witnessed many of the proceedings of the event last year on television, I looked
forward to participating in this year’s conclave. I must also compliment Shri Anand of Times Network and Shri
Vaidyanathan of IDFC First Bank for introducing the subject and the theme of the event succinctly.
2. Today, as we sit down and talk here or elsewhere, almost every discussion converges on the state of the
Indian economy. Multiple views are expressed, multiple analyses are done, and multiple suggestions are made.
The whole country’s interest in the economy is a very good sign. There is indeed a need for very informed and
objective conversation on the state of the Indian economy, and more importantly, about our future course of
action.
3. In this context, I propose to talk about the important role of the Reserve Bank of India in creating a financial
system for the 21st century, with a focus on the growth aspect. Financial stability, which is essential for
growth and economic development, will also be touched upon by me.
Role of the Reserve Bank of India
4. As a national institution, the Reserve Bank predates the independence of India. The preamble of the RBI
Act, 1934, states the RBI’s role as:
“…to regulate the issue of banknotes and the keeping of reserves with a view to securing monetary stability in
India and generally to operate the currency and credit system of the country to its advantage…”
5. This mandate has been interpreted over time as to maintain price stability, financial stability and economic
growth with the relative emphasis between these objectives governed by the prevailing macroeconomic
conditions. In May 2016, the RBI Act was amended, and the role of the Reserve Bank in the area of monetary
policy has been restated as follows:
“the primary objective of monetary policy is to maintain price stability while keeping in mind the objective of
growth”.
6. Empowered by this mandate, the RBI adopted a flexible inflation targeting (FIT) framework under which
primacy is accorded to the objective of price stability, defined numerically by a target of 4 per cent for
consumer price headline inflation with a tolerance band of +/- 2 per cent around it, while simultaneously
focusing on growth when inflation is under control. The relative emphasis on inflation and growth depends on
the macroeconomic scenario, inflation and growth outlook, and signals emerging from incoming data.
7. Post Global Financial Crisis (GFC), financial stability has emerged as a key priority for central banks around
the world. Though the jury is still out as to whether it should be added as an explicit objective of monetary
policy, the fact remains that it has always been an underlying theme within this mandate. In fact, drawing
upon this mandate, the Reserve Bank of India has taken several policy actions in recent months encompassing
monetary and liquidity measures as well as macro-prudential measures to reinvigorate domestic demand and
accelerate the pace of economic growth. Simultaneously, we have been taking steps to strengthen the banking
and the non-banking financial companies (NBFC) sector. The Reserve Bank of India will continue to do
whatever is necessary to deal with the multiple challenges of growth slowdown, spikes of inflationary pressures
and health of the domestic banking sector and NBFCs.
8. Having briefly touched upon the role of the Reserve Bank, let me now turn to growth and then to financial
stability.
Global Growth
9. In the recent couple of years, we have seen that global growth has slowed down because of trade tensions,
protectionist tendencies, lingering uncertainty over Brexit, among others. What is critical is that the outlook
on all these is ever-changing.
10. Talking about the ongoing trade tensions, one often hears of statements about trade wars between the
two leading nations coming to an end one day, followed by contrary news the next day. This fluctuation has
been happening over a period, especially in the last few months. Yesterday's announcement of the United
States of America (USA) and China coming to some understanding, hopefully, will be sustainable and will not
get reversed in the coming weeks or months. Media reports of China increasing its agricultural imports from the
USA and the USA going slow on its proposal to levy new tariffs on Chinese imports, I hope, will bring in a lot of
certainty in the global trade and growth spheres.
11. Similarly, in the case of Brexit, there has been a positive development in the sense that there is a stable
government which is committed to Brexit. Earlier, the debate in the public space in the United Kingdom (UK)
was oscillating between Brexit and no Brexit. Fortunately, as it would appear, there is some element of
certainty coming in there.
12. To highlight the kind of uncertain times that we are living in, I would like to mention one more
development. When the Saudi oil drone strikes happened about a few months ago, the oil markets went into
great suspense immediately. In an interview within two/three days of the drone strikes, I was asked a question
by your channel, ET Now, and I had said that I will wait for at least two weeks to see Saudi Arabia’s revival
plan. But fortunately, within no time, the Saudi authorities were able to put together a revival plan and the
shock was rendered temporary. While the times are uncertain, it is good that efforts are being put in to reduce
the element of uncertainty.
13. Against this backdrop, I had observed in my intervention at the Introductory Session of the IMF’s
International Monetary and Financial Committee (IMFC) meeting in October 2019 that we (all member
countries) need to act now and together to prevent the slowdown from becoming entrenched.
14. Global growth is widely talked about in India because it influences domestic growth as well. I do not
intend to imply that the slowdown that we are experiencing in the country is entirely due to global factors, but
they do have an impact. For emerging market economies such as India, quick revival of growth is very
important - considering their contribution to global growth - and there is, therefore, a need for coordinated
and timely action by all countries. This is a point which needs to be driven home very strongly.
15. In 2008, when the global financial crisis (GFC) happened, multilateralism was at the forefront of global
discourse. Ten years later, today, when there is a global slowdown, it is no more the dominant theme –
bilateralism has overtaken the multilateral sentiment. All the G-20 countries, led by the USA, had come
together post GFC and worked out a global plan of action to revive growth. We do not see that kind of global
action in the current scenario. I only hope that global growth does not suffer from hysteresis. That is, delayed
action by countries should not overtake or should not stifle the recovery process. For example, even though
quarterly growth (annualised) in the Euro area (EA) has been stable in the last two quarters - it was 0.8 per
cent in Q2 and Q3 of this year – it is not what the EA would like to have. We find that there is space for fiscal
policy action in many of the larger European economies, but we are yet to see any traction on that front.
These countries may have their own reasons for holding back fiscal action, but as an outsider and after my
interaction with central bank governors of other major economies, it is felt that fiscal action in Europe is
somewhat delayed and we are yet to see the kind of fiscal action that we saw in 2008. In fact, it is noteworthy
that the new chief of European Central Bank, Ms. Christine Lagarde, has stressed the need for some amount of
fiscal expansion by countries in the EA which can afford to do so.
16. Talking about the world growth scenario, we find that there are some marginal signs of pickup in the US
economy, with growth in Q3 being 2.1 per cent in comparison to 2.0 per cent in Q2 of 2019. The UK, which
recorded a surprising growth of -0.8 per cent in Q2, has reported a 1.2 per cent annualised growth in Q3.
Growth in China has decelerated. South Africa has witnessed a decline in growth from 3.2 per cent in Q2 to -
0.6 per cent in Q3. Brazil has shown some marginal improvement. The overall picture, however, remains
unclear.
17. Fortunately, for India, both Government and the Reserve Bank have acted in time. With regard to the RBI, I
can say that the markets were somewhat surprised by RBI’s action a little ahead of time, in terms of reduction
in policy rate as early as in February 2019, when we anticipated that a momentum for a slowdown is building
up. The Government, on its part, has also announced several policy measures in the last five to six months.
18. I would like to conclude this part of my intervention by saying that a synchronised slowdown across
countries necessitates coordinated policy action by major economies.
Domestic Economic Growth
19. Coming to domestic economy, it is imperative that we recognise and highlight the growth drivers of the
past and the present. What led the Indian growth story in the last two to three decades? Which sectors could
play that role today?
Growth Drivers of the Past
20. In the late 1990s and the first decade of the 21st century, it was essentially the information technology
(IT) sector which led the growth. India was able to capitalise on the IT boom; in fact, India's software exports
went up by 13 times from about US$ 6.3 billion in 2000-2001 to US$ 83.5 billion in 2018-19. The telecom
revolution also happened during the same period and created a lot of new jobs and also added to the gross
domestic product (GDP). The infrastructure sector, especially the construction of highways, also expanded with
the Golden Quadrilateral and the other initiatives that followed. Riding on the global growth, manufacturing
activity was mainly driven by new automobile companies which made entry into India such as Ford, Hyundai,
Toyota, Renault and Nissan, among others. Maruti and Ashok Leyland went for expansion and new
manufacturing facilities came up. Simultaneously, big global electronic hardware and manufacturing
companies started setting up their base in India. Furthermore, the Incredible India campaign was initiated and
large number of foreign tourists started taking interest in India. In fact, receipts from the tourism sector grew
by almost eight times from US$ 3.5 billion in 2000-01 to US$ 28.4 billion in 2018-19. Growth in the late 1990s
and in the early years of this century was, thus, primarily driven by IT, telecom, manufacturing, especially in
automobiles, electronics and tourism. Related segments within the service sector also experienced
concomitant expansion.
What can be the growth drivers of today?
21. Going forward, India should strive and become a part of the global manufacturing value chain. We have
been fairly insulated from the global value chain. Therefore, when major manufacturing economies
experienced slowdown in the past, India was not significantly impacted. It cannot be a justification for
remaining permanently away from it for far too long. For a major economy such as ours, which is increasingly
making its global presence felt, it is necessary to play a significant part of the global value chain. I am sure
that the policy makers in the Government will give due attention to this aspect. There are of course a number
of steps which have been taken in this direction in the recent months and years; however, more steps are
necessary.
22. Food processing could be another area. We also need to regain our pre-eminence in textiles. Opportunities
in the manufacturing and tourism sectors need to be explored further. Spending on infrastructure by the
Central and State Governments is another important area. Capital expenditure of states has remained stagnant
around 2.6-2.7 per cent of their gross domestic product (GDP) over the last few years. This needs to be
stepped up. E-commerce and start-ups offer new opportunities and several steps have been taken to create an
enabling ecosystem in these areas.
23. The RBI’s role in the context of revival of growth has been multipronged. As I mentioned earlier, we have
pre-emptively reduced the policy rate by 135 basis points between February 2019 and now to reinvigorate
demand. In keeping with the accommodative stance, the Reserve Bank has injected a sizable amount of
liquidity into the system which was in deficit for a very long time. Currently, the system is in daily surplus by
about ₹2.5-3.0 lakh crore – that is the quantum of money we are absorbing through reverse repo operations
every day.
24. To ensure better and higher credit flow, we have taken several measures. To touch upon a few, we have
increased the single exposure limit for banks to NBFCs; allowed commercial bank lending to NBFCs for on-
lending to certain sectors of the priority sector; and reduced the risk weights for banks in certain category of
loans to individuals without compromising on any of the macro-prudential principles which is prescribed under
the Basel norms.
Role of RBI in maintaining Financial Stability
25. This brings me to the role that RBI plays in maintaining financial stability. In this regard, I would like to
share certain interesting facts. I touched upon it briefly in the press conference post monetary policy, but I
would like to highlight a few points again. We did a survey of 1539 listed manufacturing companies and an
analysis was done based on their H1:2019-20 unaudited half yearly statements which indicate the following:
i) These manufacturing companies have increased their investment in fixed assets, including capital work-in-
progress, during the first half of 2019-20. ii) 45.6 per cent of the funds available with these companies were
deployed in fixed assets as compared to 18.9 per cent in the first six months of last year, which means that
there was a certain quantum of funds available with the manufacturing companies which was put into fixed
assets. This probably means that some signs of revival are beginning to show in the investment cycle. I must
qualify by saying that it is too early to rush into any conclusion. Nonetheless, this is an interesting fact which
deserves attention. iii) Our analysis also showed that there is evidence of some amount of deleveraging (i.e.,
reduction in borrowing) during the first half of this financial year. The proportion of available funds that was
used to reduce the long-term and short-term borrowing during the first half of 2019-20 was 11 per cent and 4.2
per cent, respectively. iv) Many companies are not availing their working capital limits to the full, which may
not be a very good sign. It points to some slowdown in the economic activity. On the other hand, it could also
imply that they have adequate surplus with them which is being used to meet their working capital
requirements. As time progresses, one would expect them to utilise more of these funds in investments. In
other words, there is a certain amount of capital available in the system which needs to feed into the
investment cycle.
26. What explains this phenomenon? My sense is that there is a process of cleaning up of balance sheets going
on in the corporates. So, as far as these corporates are concerned, new investments are being carefully
thought through. They have certain amount of funds available, certain amount of investable resources at their
disposal, but they are in the process of deleveraging and cleaning up of their own balance sheets before they
can restart their investment plans.
27. Banks and NBFCs are cleaning up their balance sheets as well. These are positive signs which are creating a
base for future growth. In the case of Scheduled Commercial Banks (SCBs), we find that the system-wide
capital to risk-weighted assets ratio (CRAR) is about 14.3 per cent at the end of March 2019. Comparable
numbers for other countries, like China and the US, are 14.1 per cent and 14.9 per cent, respectively. One of
course must mention that in the advanced European countries like France and Germany, it is a little higher at
about 18-19 per cent. But our 14.3 per cent is well above the regulatory requirement2.
28. The problem of stressed assets is also being addressed and the resolution of non-performing assets (NPAs)
has gathered momentum. The Supreme Court's judgment in the case of Essar Steel has really unclogged a
major resolution issue which had been pending for quite some time. There has been improvement in the gross
NPA figures. After a long time, scheduled commercial banks, especially the public sector banks, have had
perceptible improvement in profitability.
29. In this context, the role of the Reserve Bank has been to focus on strengthening regulation and supervision
to create or to facilitate a robust framework of financial stability where the banks and the NBFCs will be able
to fulfil the expectations of the society. We have carried out a review of regulations of banks and NBFCs in the
recent months and have brought about several improvements regarding their supervision. We have created
separate Departments of Supervision and Regulation; there is a College of Supervisors which is being set up to
improve the supervisory skills of our personnel; and an internal research and analysis wing is being set up
within the regulation and supervision departments to support them with analytical and research inputs.
Because of the interconnectedness of our financial system, this research and analysis wing will be able to see
things together; correlate them and look at issues holistically; and identify the possible vulnerable areas and
the possible weak or fragile spots, if any, that are showing signs of coming up.
30. We also need to focus on 21st century banking in which a lot of activity is currently taking place in digital
banking. We have put in place a ‘regulatory sandbox’ for FinTech. In the digital payments space, the Reserve
Bank has played an important role in creating a kind of a model (Unified Payments Interface (UPI)) that is being
watched internationally. The Bank of International Settlements (BIS), in a very recently published paper, has
said that the UPI framework of India can become an international model to facilitate quick and seamless
payments not only within countries but across countries. The National Payments Corporation of India (NPCI) has
decided to set up a subsidiary to focus on taking the UPI model to other countries as a business proposition.
Role of Communication
31. While doing all these, an important area which is not often discussed about, but which I would like to
specifically mention is communication. While there have been divergent opinions about central bank
communication, there is no denying the fact that it plays a very important role in the functioning of a central
bank. Some central bankers in the past have believed that central bank communication should be delightfully
vague. That is, at the end of a Governor’s talk, when one tries to understand what he said, one realises that he
has said nothing or nothing new. The counter view is that central bank communication should give clarity,
should bring about transparency in its policymaking and should also give some forward guidance.
32. It is for you to assess how we have fared in this aspect, but we have tried to strengthen our communication
in the recent months. I would not say that it is for the first time – as it has happened earlier too – but that, by
and large, the focus of RBI’s communication has been to give greater clarity to what goes behind decisions and
be as transparent as possible. In fact, I can share that in the last few months, whenever we have taken any
major policy decision, we have had detailed and long meetings with analysts, researchers and media
personnel. We have also had discussions with academic bodies and research institutions and these are held
closed-door so that a free and frank discussion can flow, and we can try to explain what has gone into the
decision-making process. For the first time, we have also started giving forward guidance about our major
policy decisions, especially with regard to monetary policy. Let me give some examples: i) About six months
ago, in one of the monetary policy committee (MPC) resolutions, we had said that growth is a matter of highest
priority as long as inflation is under control. We gave a very clear message that so far as the Reserve Bank is
concerned, so far as the monetary policy is concerned, and so far as the MPC is concerned, growth is a matter
of highest priority. ii) To give some amount of forward guidance to the market and the analysts, after we had
changed our stance to accommodative a few months ago, we had said in the MPC resolution that the Reserve
Bank will continue the accommodative stance as long as necessary to revive growth while keeping in mind the
inflation target. iii) When we took a pause in the last MPC meeting, I do not know why the markets said that
they were surprised. I was told that the market was surprised by our policy decision in February, but
subsequently I am happy and want to thank all of you for accepting that it was the right call to take. This time
around too, with the pause that we have taken, I do hope that the events will unfold in a manner which will
prove that the MPC’s decision was right. But that is not the point I am trying to make and only time will tell
how the situation evolves. When we took the pause, the MPC very clearly recognised that monetary space is
available, and it will use this space as per requirement, keeping in mind the incoming data regarding inflation
and growth. This can be construed as an example of forward guidance wherein the reasons for the pause have
been very elaborately explained in the MPC resolution and in the statement which I made during the press
conference. It is available on the RBI website. In our decision to take a pause, while we have said that there is
space for further monetary policy action, we have very carefully and very definitively also said that the timing
will have to be decided in a manner that its impact is optimum and maximised.
33. We have, in fact, in other policy measures also, tried to bring about a lot of transparency, showing our
focus on communication. To explain the power of communication, let me mention the 2008 Global Financial
Crisis and the expansionary policy that the US Fed adopted at that time. The communication at that time was
very powerful; therefore, it was accepted by the international markets and the analysts. Everybody understood
exactly what the Fed was going to do. In 2013, during the socalled taper tantrum, the US Fed’s communication
was not as powerful - a mere mention that they are perhaps going to roll back or unwind the expansionary
policy - created a huge havoc and volatility in the international financial markets. Communication, therefore,
is a powerful tool. Any decision that is taken by the central bank has to be backed by communication. Of
course, communication should be backed by action and it should never be empty words.
Conclusion
34. Let me conclude by saying that in a complex and interconnected economy such as India, challenges
emanate from the spheres of monetary policy, regulation and supervision of financial markets as well as
detection of frauds, risk management functions and internal control systems of banks and non-banks, amongst
others.
35. Consequently, there is never a dull moment in the central bank. It is always full of challenges; what is
important is that we should respond to these in time. Recently, an old timer in Mumbai told me that you have
winds blowing from two different directions in the top floors of the Reserve Bank. I thought he was talking
about the role of the Reserve Bank and how complex it is until I realised that he meant that the wind actually
blows in from two different directions. My reply to him was:
“Well, that would demonstrate how complex and challenging is the role of Reserve Bank in a complex economy
like India!”
6. Evolving Economy
Multiple Opportunities for Banks to Grow Despite the backdrop of articulation of a clear vision to
increase the size of the economy to US $ 3 trillion by 2020, US $ 5 trillion by 2025 on its way to reach US $ 10
trillion by 2030 as envisaged in the interim budget, union budget and followed by reinforcing policies, there is
a marked slowdown of GDP to 5 percent in Q1 of the current fiscal obfuscating such aspirations.
Notwithstanding such near term disruptions, the potential spurt in the size of the economy would open up
multiple opportunities to different sectors, more importantly, to banks that are meant to undertake speedy
and efficient financial intermediation.
Banks can take a cue from the most important intentions, and aspirations were set out beginning with the
economic survey, union budget, series of stimulus packages and more significant is the proposed mergers
among the Public Sector Banking space. These could pose both challenges and opportunities to the banks to
move to a higher growth trajectory.
But the realisation of growth objectives will be contingent upon coordinating synergy of a large number of
players that have an umbilical connect with banks such as nonbanks,fintech companies and peer-to-peer
lenders and so on. Going by the same logic, deposits of the banking system now at INR 127 trillion and bank
credit at INR 97 trillion (September 13, 2019) should be close to double its size by 2025. The stronger and
fewer Public Sector Banks (PSBs) in new dispensation can look forward to handling business size far higher than
they handle today. The capacity needs to be increased with improved human resource productivity and synergy
of technology.
With consolidation and big banks in the fray, better economies of scale can be attained. The 27 PSBs at one
point of time now turning into 12 should be able to make them more capable of handling a larger chunk of
business.
But to tap such newer opportunities, organisational preparedness requires a granular analysis of impending
scope to work out growth strategies for different lines of business.
1. Opportunities for banks
To start the journey of the uphill trek to reach the GDP target of US $ 5 trillion, the road map and resource
algorithm in union budget and stimulus packages (UB&Sps) are well-calibrated with continued thrust on fiscal
prudence with an avowed objective to peg fiscal deficit at 3.3 percent of the GDP. It is the right opportunity
for banks, more importantly, the stronger and bigger PSBs whose market share has been declining after the
asset quality review (AQR) of the Reserve Bank of India (RBI) and its aftermath. PSBs need to reinstate their
strategic role in supporting the economic growth and help attain the sustainable development goals set out by
Niti Ayog.
Overcoming the near term disruptions, achieving a sustained real GDP growth of 8 percent per annum will be
necessary to inch up close to the long term growth objectives. It may look to be a tough challenge to realise
the broad vision of growth, but banks can sense huge opportunities in the new measures of relief. In a bank-led
economy, the efficiency of the financial sector will be critical for ensuring seamless monetary transmission and
flow of credit. Many thoughtful measures built in the set of UB&Sps for strengthening the banking sector and
rescuing Non-Bank Finance Companies (NBFCs) can lead to the development of a robust financial sector
ecosystem.
The upfront infusion of INR 70000 crores of capital into selected PSBs can shore up capital adequacy and create
more lending space. The impact of these relief measures on how the financial sector groaning under the weight
of ailing NBFCs and continued asset quality woes will be able to work will depend on the strategies designed
andimplemented with full vigour.
To unleash such opportunities, banks will have to work out strategies to overcome the series of shocks and
collateral damage caused to the financial sector. It began with Infrastructure Leasing and Financial Services
(IL&FS) fiasco in September 2018 with its ramifications on Dewan Housing Finance Limited (DHFL) and other
interconnected NBFCs. It exacerbated with the fallout of fraud in Punjab and Maharashtra Cooperative Bank
(PMCB) perpetrated in connivance with Housing Development Infrastructure Limited (HDIL). These adverse
developments weakened the sentiments in financial intermediation impeding the growth.
2. Consolidation of PSBs
When 18 PSBs eventually converge into 12 large and more capable PSBs, they can compete with large private
peers and pose a challenge to other financial intermediaries. In the process, the customers can look forward to
improved quality of customer service with fine-tuned risk-based pricing policies. Realising the need for a strong
capital base to comply with Basel – III standards by March 2020, the government has infused capital in many
targeted PSBs assessing the needs. It is in addition to INR 2.5 trillion already provided to PSBs in the last five
years. The enhanced capital allocation can restore lending appetite.
The slowdown in credit growth in the last three years due to large-scale bad loans is also being tackled by
amending several clauses of Insolvency and Bankruptcy Code -2016 (IBC) to make it strong and pragmatic.
Near term disruption in the working of 10 PSBs to be formed into four large banks cannot be ruled out, but it
needs to be minimised with a suitable plan of action. But more important is to derive the synergy of
amalgamation in the long term. With boards of PNB, Union Bank, Canara Bank and Indian bank approving the
amalgamation plan, the process has moved to the next stage to obtain formal approval of the government. Out
of the newly carved outset of PSBs, six of them will be bigger in size and reach, and their role will be
significant to decide the future course of financial intermediation.
The 10 PSBs under merger plans have a total business share of INR 55.56 trillion with a branch network of
37663. They together wield significant clout on the banking system. It will be challenging for them to minimise
the disruption in the working. The process of amalgamation should not be allowed to mar the prospects of
their growth in the intervening period. Formation of separate teams for rolling out amalgamation plans and
hiving off lines of responsibilities will be essential. Cordoning the disruption from stretching to operations need
to be pursued by enhancing the levels of follow up and monitoring of regular performance.
3. Policy impact on banks
Policies are getting aligned to work out the methods to prevent other people (other than account holder) from
depositing money into a bank account. This has become necessary after the large-scale deposit of funds by the
third party into the account belonging to someone else during demonetisation that impacted the efficacy of
the process. It will help banks check the menace of money laundering. It will further scale down cash
transactions. As part of the ease of living for customers, PSBs are expected to harness technology and increase
the offer of personal loans online and can roll out doorstep banking. Senior citizens and people needing special
assistance and differently-abled would get preferred attention of banks as a part of the transformation.
Liquidity relief is provided to the NBFCs that have caused huge collateral damage to the financial system after
IL&FS collapse and its aftermath. The lingering liquidity shortfall continues causing successive default in
honouring their financial commitments. Under the new arrangement, the government will now encourage PSBs
to buy highrated pooled assets of the sound NBFCs up to INR 1 trillion for which the government will provide a
one-time six-month partial credit guarantee for the first loss of up to 10 percent.
Banks are also incentivised to support the NBFCs by using one percent of their Net demand and time liabilities
(NDTL) to be treated as high-quality liquid assets for computing their liquidity coverage ratio (LCR). This extra
liquidity can be used to extend fresh funding to NBFCs and Housing Finance Companies (HFCs) effective July 5,
2019. NBFCs will also be treated at par with banks in respect of tax breaks on interest received. They will now
be able to handle taxes on losses arising out of Non- Performing Assets (NPAs).
Government has proposed an amendment to Section 45-IA of the RBI Act 1934 to empower the central bank to
supersede the board of NBFCs and enable resolution of financially troubled NBFCs through merger,
restructuring or splitting them into viable and non-viable units known as bridge institutions. RBI can now
remove auditors, call for audit of any group company of an NBFC and can even decide upon the compensation
of senior management.
Such comprehensive empowerment can improve public confidence in the NBFC sector. RBI will now regulate
HFCs, a power so far vested with National Housing Bank (NHB). Out of the 82 HFCs, top five HFCs have a
marketshare of over 90 percent that is more important to be brought under robust regulations.
4. Scope for increased flow of credit
Despite hefty repo rate cuts by the RBI in the current rate cycle beginning February 2019, the role of banks in
transmitting policy rates has remained subdued. The weighted average lending rates (WALR) on fresh rupee
loans hardly decreased by 29 basis points (bps) and the WALR on outstanding loans increased by seven bps.
Further drilling down the WALR trends will indicate that foreign banks, private banks and PSBs have brought
them down by 66, 48 and 25 bps respectively. Similarly, the market share of fresh rupee loans of private banks
has gone up to 49.3 percent as against 39.8 percent of PSBs during the fiscal up to August 2019.
Such trend reflects a more aggressive role of private banks compared to PSBs that are struggling with the high
volume of toxic assets. The rest of the market share of 10.9 percent of fresh rupee loans goes to other sectors
of banks. Since the bulk of the beneficiaries at the bottom of the pyramid are with PSBs, the flow of credit
may not have reached the wider section of the society limiting the revival process. However, with an
increasing market share of private banks and enhanced lending activism, the benefit is beginning to impact the
larger segment of borrowers even at the lower rung of the society.
Even an overall trend of credit growth of banks does not augur well to push growth prospects. The year-on-year
(y-o-y) bank credit growth has been tepid at 10.3 percent as on September 13, 2019 as against 13.5 percent
recorded during the corresponding period of the previous year that reflects marked slowdown in credit off-take
during current fiscal 2020.
Banks can work on new opportunities to increase credit flow based on the recent additional tax concessions
extended up to INR 1,50,000 on interest on affordable housing loans. The increased allocation under Pradhan
Mantri Awas Yojana (PMAY) will open up more scope for the retail lending sector. Similarly, the tax concession
on home loans now at INR 2 lacs will go up to INR 3.5 lacs.
The added tax concession will be available only to fresh loans to be granted during the financial year 2020. It
will increase the sudden demand for home loans. With the Real Estate Regulatory Authority (RERA)
institutionalised in many states, the construction / housing sector will be better regulated, protecting the
rights of buyers.
With a target of 1.95 crore housing units to be constructed in a record time of next two-three years to move
towards the objective to provide housing for all by 2022, the sector will get a boost, and banks can tap this
source which has a high cross-selling opportunity.
Similarly, the income tax concession on interest on loans taken to buy electric vehicles can create additional
demand for car loans. Eventually, even the auto industry may gradually shift towards manufacturing electric
vehicles to fall in-line with green initiatives. With hardly one percent of the people opting for electric vehicles
as of now, there will be a spurt in buyers in higher tax bracket who can save more. Increase in retail loan
portfolio could be possible with the new dispensation.
The infrastructure sector will be under focus with an expenditure outlay of INR 1 trillion to be spent in the
next five years. Allocation of INR 80250 crores for phase-III of Pradhan Mantri Gram Sadak Yojana (PMGSY) for
the upgradationof 1.25 lac kilometres of road in the hinterland will activate many interdependent businesses
to boost rural infrastructure. Similarly, under ‘National Rural Drinking Water Mission’, all rural households are
to be provided piped water supply by 2024. Presently, 18 – 20 percent of the households have such facility.
This will also bring up many rural activities right from laying pipelines, construction of overhead tanks, civil
works, job works, and sale of hardware accessories along with the job creation.
Every such activity brings increased bank collaboration.
Proposals to increasingly use the Public-Private Partnership (PPP) model by railways and privatisation of some
of its activities when seen together with increased capital expenditure (capex) spent by the government will
benefit many sectors. The proposal to raise foreign currency resources from overseas will open up new
opportunities for many sectors of the economy.
5. Increased thrust on MSME
Since MSME and ‘Startups’ are known to be critical employment-intensive sectors, measures are proposed to
increase the flow of credit to unleash its potentiality. The angel tax has been addressed, and a two percent
interest subvention is allowed on fresh loans to be granted to Goods, and Service Tax (GST) registered MSMEs
for which an allocation of INR 350 crores is made in Union Budget 2019-20.
Rationalisation of labour laws can help them accelerate the formalisation of the economy. The corporate tax
rate is brought down to 25 percent for the firms having a turnover of up to INR 400 crores, raised from INR 250
crores which will provide relief to 99.3 percent of the 1.5 lac companies incorporated so far according to the
data of Ministry of Corporate Affairs (MCA).
To reinforce ‘Make in India’ campaign to pump prime manufacturing activity, the import tariffs are calibrated
to boost local manufacturing. Increase in customs duty of certain automobile components and electronic
devices will increase local manufacturing activities and more so when loans are made available with interest
subvention. MSME units will be encouraged to increase production by taking benefit of concessions using digital
mode.
When these budgetary sops are seen together with the key recommendations of the recent report of the
‘Expert Committee on MSME (Chairman: U K Sinha)’, it will provide further insight on the emerging potentiality
of the sector. Among many far reaching recommendations, the game changing proposals relate to
(I) formation of Stressed Asset Fund of INR 5000 crores for the units impacted by change in external
environment beyond the control of the entrepreneur;
(ii) setting up an apex National / State level council for MSMEs;
(iii) doubling of limits of collateral free loans under Pradhan Mantri MUDRA Yojana and Startup India to increase
flow of funds;
(iv) expansion of scope of Small Industries Development Bank of India (SIDBI) to be the fulcrum to steer the
sector to the next level of growth;
(v) creation of incentives and disincentives to the lenders by introducing Rural Infrastructure Development
Fund (RIDF) scheme requiring the banks to deposit shortfall in achieving MSME targets;
(vi) making it mandatory to source 25 percent of Public Sector Undertakings (PSU) needs from MSME units
through Government e-Marketplace (GeM) portal;
(vii) expansion of number of MSE Facilitation Council (MSEFC) to help address the delayed payment
conundrum of the sector along with strengthening Trade Receivables electronic Discount System (TreDS)
platform.
At the same time, the government has also directed PSBs to assign credit availability aspects of MSME sector to
GM level executive for accelerating the flow of credit. It also suggested a well-calibrated monitoring
mechanism to institutionalise weekly feedback in a bid to improve accountability for performance. Despite
several expert committees providing guidance and policy interventions from time to time, the plight of MSME
continues to be weak. To energise the sector, the government had earlier rolled out 12-point MSME outreach
initiatives in November 2018. One of the most important initiatives was the introduction of ‘in-principle’
sanction of loans to MSME units up to INR 1 crore in just 59 minutes. The intending borrower should log into a
dedicated website – ‘psbloansin59minutes’ which will collect borrower’s details online from various digitally
connected sources such as income tax department, GST and other sources to provide an in-principle sanction
with which the potential borrower can approach any PSB to get the loan.
These are some early efforts to speed up credit delivery, if implemented well may facilitate the borrowers.
The demand for external credit of MSME sector is estimated to be in the range of INR 37 trillion in 2018 as
against formal credit flow of INR 14.5 trillion that hardly meets half its needs. Bank credit to MSME sector was
INR 11.7 trillion in March 2015 that could reach INR 15.77 trillion by March 2019 working out an annualised
growth of 6.9 percent far below the banking industry credit growth.
Because of these developments, banks can work towards increasing exposure to the MSME sector in a big way
and pursue inclusive development.
B. INDIAN BANKING
1.The PMC Bank Crisis -Where Do We Go From Here?

Introduction
Of late, banks in India have been in the news for all the wrong reasons – the mounting level of NPAs, the huge
frauds committed by Vijay Mallya, Nirav Modi, Mehul Choksi, the continued deterioration in asset quality,
grossly inadequate capital levels necessitating capital infusion, poor profitability, etc. The issue of a shadow
banking system in emerging markets, particularly in India, has also evoked considerable debate and discussion
across the development spectrum (Acharya et al, 2013). In this disconcerting macroeconomic and banking
landscape, the collapse of the PMC Bank like a pack of cards shook players across the development spectrum,
viz, 16 lac depositors, bankers, regulators, planners and policymakers and shocked the collective conscience of
the nation. Position of PMC Bank While the PMC Bank (PMCB) is small compared to the size, muscle and reach
of the most commercial banks in India, this Bank spread over seven states with 51,000 members was the 5th
largest among cooperative banks. With 137 branches, deposits of INR 11, 617 crore, advances of INR 8,383
crore, NPAs of 4 percent, capital adequacy of 12.6 percent as at end-March 2019 (well above RBI’s 9 percent
regulatory prescription) and a net profit of INR 99.69 crore compared to INR 100.90 crore a year ago, the
PMCB was seen as a relatively well-run Bank. Authoritative data sources, such as RBI reports, notifications and
statistical returns and PMCB's annual reports did not reveal any real concern till March 2018 or despite some
slackness in the basic banking data even in March 2019.
But as the data and analysis in the public domain now increasingly reveal the cookie crumbled because of
major financial irregularities, failures of internal control and systems, and wrong / under-reporting of
exposure. Primafacie evidence strongly suggests a nexus between unscrupulous property developers,
complicit top bank management, and politicians Among the 54 urban Cooperative Banks (UCBs), three had a
negative capital to risk-weighted assets ratio (CRAR). Among the rest, except for one bank, the others had a
CRAR above the mandated limit. The benchmark of return on assets (RoA) of >=1 percent is widely accepted
in the literature on banking development as a leading indicator of sound and sustainable banking. Viewed
against this benchmark, PMCB had an RoA of 0.89 percent as at end-March 2018. Six of the 54 UCBs had a
negative RoA while 33 of them had RoA between 0 and 1 percent. In these difficult times of mounting NPAs
and the squeeze on profits and profitability, the PMCB’s RoA falling to 0.75 percent in FY 2019 did not
conceivably raise any red flags and given the macro-economic and banking setting, was even considered
reasonably good. The RBI’s rating system including, CRAR; net NPAs to total advances; RoAs; liquid-assets to
total-assets; and cost to income rates, the proportion of UCBs under A / B / C / D ratings placed about one-
fifth of UCBs (including PMCB) under A rating in 2018. Despite the ballooning of the Gross Non-Performing
Assets (GNPA) on PMCB balance-sheet to 3.79 percent on March 31, 2019, it was still justifiably considered to
be well within manageable proportions. More than 40 percent of PMCB's loans went to priority sectors such as
agriculture, micro, small and medium enterprises (MSME), education and housing till 2015. But this proportion
fell to just over 15 percent in 2019, revealing completely skewed incremental sanction and disbursement of
loans during 2015-2019 with disastrous consequences. Unfolding sordid corporate saga The whistleblower’s
September 17, 2019 letter was quickly followed by the Managing Director (MD) and Chief Executive Officer
(CEO) Joy Thomas’s five-page detailed confession letter to the RBI on September 21. The whistleblower gave
detailed information about financial irregularities and the real estate company’s loans not being classified as
non-performing, despite defaults on repayments.
The MD’s letter makes deeply disturbing and completely unnerving reading: ‘…We should have declared the
non-payment immediately, but we feared for the reputation of the bank, and so we lied.
We lied about it. We said there was nothing wrong when there was a lot that was suspect about this whole
charade. We lied to the shareholders, the board, the RBI and pretty much everyone else except the select few
people that were perpetrating this fraud. The auditors could have called this out. But you know how auditors
work? So much pressure, so little time. And they only checked new loans. Everything else that came before it
simply went under the radar. Then the RBI came checking. Initially, they only concentrated on large loans,
but when they started pressing for details, we created thousands of dummy accounts…’ In view thereof, the
RBI responded ‘swiftly Figure 2 Figure 3 the music because this is one issue in which there has to be zero
tolerance in the banking sector. The inspection team must also invariably have one IT expert to examine all
core banking solution (CBS)-related issues, IS audit, cybersecurity, etc. RBI’s action In terms of the RBI’s
sweeping restrictions triggered by this highly non-linear event, curbs were placed on fresh lending, accepting
fresh deposits and investments. Customers withdrawal was initially capped at INR 1,000 (later raised first to
INR 10,000, then to INR 25,000 and finally to INR 40,000), irrespective of the type, total balance or the
number of accounts. The customers could offset their loan with their deposits only if both accounts were held
with PMCB and can renew existing term deposits on maturity in the same name and same capacity. In
emergencies like hospitalisation, etc, the RBI may grant a case-by-case exception, though it is not certain to
come through. Modus operandi Things come to such a sorry pass with PMCB creating 21,049 dummy accounts
(mostly belonging to dead account holders, while some belonged to people who had closed their bank accounts
and inoperative accounts), creative banking and ostensibly advancing a large number of project loans and
deliberately delaying computerisation. A complex maze of firms linked to HDIL and their promoters Rakesh
Wadhawan and Sarang Wadhawan, with little or no revenue, borrowed money from PMCB and, in turn,
invested in each other and related companies. An oil and gas firm promoted by Rakesh Wadhawan and Sarang
Wadhawan invested INR 174 crore in two Mauritius firms that had not ‘conducted any business operations’
since their inception in June 2010. How long can we continue to have more of the same and cooperative banks
fail over and over again? This question is not rhetorical but is fundamental to the narrative of development. No
wonder, then, that Standard and Poor’s (S&P) stressed that the PMC imbroglio brought out a governance deficit
in India's financial sector. The S&P’s contention ‘India's financial sector needs to raise its governance standards
and restore trust’ would enjoy a fair measure of consensus across the development spectrum. The Mumbai
Police filed a case against the ousted management of PMC Bank and the promoters of HDIL. The Economic
Offences Wing (EOW) has also formed a Special Investigation Team (SIT). The FIR was filed under ssections 409
(criminal breach of trust by a public servant or banker), 420 (cheating), and 465, 466 and 471 (related to
forgery) of the Indian Penal Code along with 120 (b) (criminal conspiracy). The FIR analyses the modus
operandi, whereby HDIL promoters allegedly colluded with the bank management in massive misreporting.
‘Despite nonpayment, the bank officials did not classify the loans as nonperforming advances and intentionally
hid the information about the same from RBI,’ the FIR said. It remains to be seen whether this is a case of
siphoning off the funds and their misuse, a clear diversion of funds or even the larger issue of moneylaundering
is also involved in these murky transactions. Cooperatives down through the ages The genesis of cooperatives
can be traced to the formation of the Fenwick Society on March 14, 1761 in Scotland. Cooperative Banks have a
history of over 110 years in India. While generic issues of governance and transparency affect public sector
banks (PSBs), private banks, and nonbanking financial companies (NBFCs), such issues have a particularly
debilitating impact on the cooperative banking system in India. Hence, cooperative banks in India seem to be
failing in India with unfailing regularity. The Ahmedabad’s Madhavpura Mercantile Cooperative Bank failure of
2001 because of Ketan Parikh (an uncanny similarity to the HDIL in the PMC Bank) on top of the Madhavpura
Cooperative Bank scam in 2001-02 is a case in point. It has long been loftily maintained that cooperatives have
failed in India (notwithstanding stray examples like Amul, Indian Farmers Fertilizer Cooperatives-IFFCO) but
cooperatives must succeed, particularly because cooperative institutions continue to account for about 8
percent of deposits and 9 percent of loans and advances loans in India as at end-March 2018. Hence, despite
their relative decline, they continue to be an essential element of the overarching banking ecosystem in India
in several ways, particularly at the bottom of the income pyramid. Let us do some number crunching: 46 UCBs
had negative net worth as at end-March 2019 and 26 were under the
directions of the RBI; about 40 percent of Primary Agricultural Credit Society (PACS) are loss-making; almost 24
percent of State Co-operative Agriculture and Rural Development Banks’ (SCARDBs’) loans and almost 33
percent of Primary Cooperative Agriculture and Rural Development Banks’ (PCARDBs’) loans were NPAs. No
wonder, then, t hat in conformity with the suggested roadmap, the number of cooperative banks in India
steadily declined from 1926 in 2004 to 1551 in 2018. Committees on reforming cooperative banks There have
been several committees, which have attempted to streamline the functions and working of cooperative banks
in India, eg, Satish Marathe Committee (1991), Madhav Rao Committee (1999), N H Vishwanathan Working
Group on augmenting capital of UCBs (2005), R Gandhi Working Group on information technology systems in
UCBs (2007-08), VS Das Group on an umbrella organisation for the urban cooperative banking sector (2009), YH
Malegam Committee on licensing of new UCBs (2011), R Gandhi Committee (2015). The R Gandhi Committee
recommended, inter-alia, creation of an umbrella organisation for cooperative banks and instituting a board of
management, accelerated winding up / merger process without involving other regulators under the
cooperative societies’ laws, effective regulation of such banks and allowing conversion of UCBs into small
finance banks subject to their fulfilling RBI norms. Supervisory and regulatory issues There were issues of
ineffective off-site surveillance and oversight and gaps in audit and inspection conducted under Section 35 of
the Banking Regulation Act, 1949 (BR Act). In flagrant violation of all canons of banking and the time tested
principles of prudent risk management, 73 percent of the total loans went to HDIL. Further, PMC Bank had also
reportedly granted a personal loan of INR 96.5 crore to HDIL’s promoter Sarang Wadhawan. These debilitating
factors forced the Bank to go down under. The rural credit system is characterised by somnolence (Sharma,
2001) and fragmentation. Stark fragmentation is reflected in 1,551 UCBs and around 96,600 rural co-operative
banks- PACS and large size Adivasi multi-purpose societies (LAMPS). Historically, the dual control of the State
government (what has sometimes been called ‘back-seat driving’) and the RBI has often been identified as an
important reason for the What is particularly galling is that this implosion is not a one-off case but is
symptomatic of a deeper malaise that is structural and deeply entrenched. Generally, commercial and
cooperative banks are seen to be similarly placed, but there are several important differences between them.
Considered in a proper historical and comparative perspective, commercial banks vis-à-vis cooperative banks
have a much higher capital base (capital base of INR 25 lac for UCBs, INR 100 crore for small finance banks and
INR 200 crore for a new commercial bank, to be raised to INR 300 crore within three years of commencement
of business); they are subject to greater regulatory rigours of the RBI; and unlike commercial banks which are
structured as joint-stock companies, UCBs are structured as co-operatives, with their members carrying
unlimited liability. Further, whereas a clear distinction exists between a commercial bank’s shareholders and
its borrowers, UCB borrowers are shareholders; generally, manpower and operational efficiency levels are
discernibly higher in commercial banks and commercial banks are also listed on the Stock Exchanges, thereby
subjecting them to market discipline.
Frauds in Indian banking While fraud is as commonplace as falsehood and as versatile as human ingenuity, the
RBI’s definition of fraud in the Report of RBI Working Group on Information Security, Electronic Banking,
Technology Risk Management and Cyber Frauds maintains: ‘A deliberate act of omission or commission by any
person, carried out in the course of a banking transaction or the books of accounts maintained manually or
under computer system in banks, resulting into wrongful gain to any person for a temporary period or
otherwise, with or without any monetary loss to the bank’.
Frauds classified by the RBI include misappropriation and criminal breach of trust; fraudulent encashment
through forged instruments, manipulation of books of account or through fictitious accounts and conversion of
property; unauthorised credit facilities extended for reward or for illegal gratification; cash shortages;
cheating and forgery; fraudulent transactions involving foreign exchange; any other type of fraud not coming
under the specific heads as above. The Legal Dictionary defines misappropriation as ‘the intentional, illegal
use of the property or funds of another person for one's own use or other unauthorised purpose, particularly by
a public official, a trustee of a trust, an executor or administrator of a dead person's estate, or by any person
with a responsibility to care for and protect another's assets (a fiduciary duty). It is a felony (a crime
punishable by a prison sentence).’ Thus, misappropriation is a type of fraud, wherein people who are
entrusted to manage the assets of an organisation, steal from it or misuse the asset for personal use. Asset
misappropriation and criminal breach of trust involve third parties or employees in an organisation who abuse
their position to steal from it through fraudulent activity. Historically, some basic characteristics of frauds in
Indian banking relate to the fact that the advances portfolio accounts for the largest share of the total amount
involved in frauds and considerable delay in declaration of frauds by various banks in cases of consortium /
multiple financing. Most credit-related frauds occur because of deficient appraisal system, poor post
disbursement supervision and inadequate follow up (Chakrabarty 2013). But with
collusion and worse at the highest banking echelons, this is what makes the PMCB case different and something
of an outlier. All banks have a policy and operating framework in place for detection, reporting and monitoring
of frauds as also the surveillance / oversight process in operation to prevent
the perpetration of frauds. The RBI, vide its Circular No. DBS. CO.FrMC.BC.No.10/23.04.001/2010-11 dated 31st
May, 2011 had identified certain areas, wherein frauds had shown occurrence or increasing trend in banks.
There are important aspects, such as detection and reporting of frauds; corrective action; preventive and
punitive action; and provisioning for frauds. Banks need to furnish Fraud Monitoring Return (FMR) in individual
fraud cases, irrespective of the amount involved to the RBI electronically using FMR Application in XRL System
supplied to them within three weeks from the date of detection. Interest of the depositors In the rapidly
evolving banking scenario, the interest of the depositors has to be paramount. In terms of Section 5(b) of the
BR Act, 1949, ‘banking’ means the accepting, for the purpose of lending or investment, of deposits of money
from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.
Hence, bankers are trustees of public money and the deposits are kept with them in a fiduciary capacity. But
with deposit insurance limited to INR 1 lac per bank account (static at INR 1 lac for over 25 years now), India
is among the countries with the lowest protection to depositors in case of bank failure, while India’s Deposit
Insurance and Credit Guarantee Corporation (DICGC) scheme covers 70 percent of bank depositors. But
accounts with less than INR 1 lac together make up only about 8 percent of total bank accounts. Roadmap
ahead There is a manifest need to go beyond a silo approach and examine multi-layered issues in a
comprehensive framework for proper assessment and suitable policy prescriptive implications. The issue of
curbing frauds, misappropriations and malfeasance all along the line necessitates synchronised measures. Some
such measures to reduce fraud risk and boost performance include a sharper focus on the issues of adequate
supervision of top management; rotation of staff in line with the recommendations of the Ghosh Committee;
streamlined incentive mechanism for employees; collusion between the staff, corporate borrowers and third-
party agencies; staff accountability; employee code of conduct and risk-based internal audit. Fraud control
strategies and policies, which are aimed at providing improved accountability and transparency, require
customer screening against negative list; strengthened regulatory system; effective use of appropriate tools
and technologies to discourage and identify fraud and detect early warning signals; awareness of bank
employees and customers; clear understanding and communication between departments and coordination
among different agencies, viz, the Central Board of Direct Taxes (CBDT), the Central Vigilance Commission
(CVC) and the RBI. An attempt should be made to identify vulnerabilities in the Bank’s procedures, operations,
monitoring and control to mitigate the risks of fraud, dissect the causes of major fraud and misappropriation
cases and disseminate real-life fraud investigations case histories and modus operandi to prevent recurrence of
such cases. Drawing insights from the past experiences would lead to greater sensitisation on these issues
thereby strengthening an anti-fraud culture, including the promotion of ethical conduct and greater domain
knowledge. Non-adherence to systems and procedures and any spike in business, contrary to the growth
trend, observed elsewhere in the area and other similarly placed branches, needs to be looked at closely.
Effective results require proactive efforts to prevent, detect and mitigate frauds, robust strategies of internal
control and risk management, invariably checking the mandatory reports and maintaining the secrecy of
password, and an accent on the ‘Whistleblower Policy’. Some of the critical success factors relate to an early
conviction of individuals responsible for financial crimes and deterrent punishment, development of specialised
financial sleuths with knowledge of nuances of forensic accounting and a sound legal understanding of frauds.
Implementation of effective fraud detection, mitigation and investigation to minimise frauds require the use of
the best available IT systems and data analytics to combat computer frauds, bribery and corruption and
cybercrimes. In the light of fast-paced developments post-PMCB crisis, issues of the contagion effect, short-
termism as against sustained growth, corporate governance, conflict of interest and systemic risk also need to
be carefully considered for a comprehensive assessment and perspective. Monitoring of outlier movement at
the regional level would also be helpful. The measures initiated by the RBI, viz, revamping its regulatory and
supervisory structure by creating a specialised cadre of supervisory officers, strengthening its analytical
vertical and enhancing onsite supervision, market intelligence and statutory auditor roles for supervision and
creating an institutional mechanism for sharing of fraud-related information among UCBs like Credit Fraud
Registry (CFR) for commercial banks are contextually significant. There has also to be a thorough overhaul of
the system, the regulatory landscape changed, close supervision and monitoring all along the line with a clear
sense of accountability and implementation of the red-flagged account (RFA) and early warning signals (EWS)
framework, streamlined mechanisms for fraud prevention and control and enhanced financial literacy to tackle
the menace of frauds and misappropriations. Financial services need to approach intrinsic fraud management
by concerted measures strategically, eg, transparency across levels in organisations, a holistic perspective
with a clear understanding of the current financial sector scenario, regulatory viewpoints, anti-fraud
resources, tools, knowledge and best practices to identify signals, understand drivers of change, anticipate
disruptive trends and initiate broad-spectrum measures accordingly. These are not merely obscure metrics but
are well-defined standards to be closely and mandatorily followed so that things do not again come to such a
pass. There is also a compelling need to examine the ‘fit and proper’ character of the directors on the board of
cooperative banks in the light of their infirm financial position and frail corporate governance. For, such cases
have placed the credibility of third parties such as auditing firms and credit rating agencies under the scanner
and the issues of oversight by banks and inadequate diligence have been brought to the fore by institutions
across the development spectrum-banks themselves in their post-facto analyses, the regulator and the
investigative agencies, such as, the CBI and the ED (Gandhi, 2014).
How come HDIL, which had an overwhelming share of the loan book, was represented in the management?
Trust and faith are certainly important in banking and financial institutions. But the scrupulous
implementation of the verification mechanism is a pre-requisite to sound and the sustainable banking system in
India, as indeed elsewhere. The issue of extricating the banking system from this morass is at once both
difficult and necessary. Towards this end, a renewed thrust on the pursuit of the three KY Principles, ie, Know
Your Customer, Know Your helpful (Gandhi, 2015).
Given the gravity and enormity of the issue, leveraging information and communication technology (Sharma,
2010), communication and accessibility of data to implement a system-wide fraud mitigation mission and
streamlined fraud detection, mitigation and control mechanism is necessary. A system-wide and holistic
approach is a tall order and necessitates prompt identification, investigation and exchange of information.
Such issues are unquestionably important not only for the safety of banks but also for the larger issue of
systemic and resilient macro-economic and financial stability because of interdependencies and interlinkages
within and across the financial sector. In the ultimate analysis, however, given the interplay between
cooperative banks and the sociopolitical system, such ominous events (eg, PMCB, Madhavpura) raise long-
standing questions about stronger political will. Stronger political will is necessary to address the deep and
worrisome fault-lines in a coordinated and concerted manner with a sense of urgency.
2. RBI’s Recent Repo Rate Cuts And Their Transmission by Banks

The Reserve Bank of India (RBI) on October 4, 2019, reduced the benchmark repo rate for the fifth time in a
row, the highest ever number of rate cuts in a row by the Monetary Policy Committee (MPC). The RBI reduced
rates by 25 basis points (bps) each in February, April, June and October and by 35 bps in August this year,
bringing the current repo rate to 5.15 percent. Including the latest rate cut, the total cut in repo rate in 2019
is 135 bps. The last time the repo rate was this low was in January 2009, when
it stood at 5.50 percent. In fact, over the last two decades, RBI’s repo rate has dipped meaningfully below 6
percent only twice; this is happening now due to the current inflation-growth combination.
The MPC of India is responsible for fixing the benchmark interest rate in India. The Committee was created in
2016 to bring transparency and accountability in fixing India's Monetary Policy. The meetings of the Committee
are held six times a year, February, April, June, August, October and December. The MPC comprises six
members – three officials of the RBI and three external members nominated by the Government of India (GoI).
The Governor of RBI is the ex-officio chairperson of the Committee. Decisions by the Committee are taken by a
majority with the Governor having the casting vote in case of a tie. The Committee members need to observe a
‘silent period’ of seven days before and after the rate decision for ‘utmost confidentiality’. The monetary
policy is published after every meeting, with each member explaining his opinions.
The current mandate of the Committee is to maintain 4 percent annual inflation until March 31, 2021 with an
upper tolerance of 6 percent and a lower tolerance of 2 percent.
The Committee is answerable to the GoI if the inflation exceeds the range prescribed for three consecutive
months. The recent rate cut in October, by 25 bps was widely expected. RBI has maintained its accommodative
stance this time once again, giving an impression that the repo rate
may further go down in the near future. The unusual 35 bps cut in August 2019 On August 7, the MPC surprised
financial markets byand tested pattern, it gave financial markets visibility about near term moves by the
Central Bank. After taking three baby steps since February 2019, when the recent rate-cutting cycle started,
MPC changed track this time; neither a baby step (25 bps cut) nor a giant step (50 bps). A 35 bps rate cut looks
unusual at first, but internationally such practices are not uncommon. Typically, the European Central Bank
(ECB) moves rates by 10 bps; Chinese Central bank in multiples of 9 bps; and the central bank of Taiwan, by
12.5 bps. Going by the current trend, we can expect next rate cut by the RBI to be 15 bps or even 40 bps,
depending on economic conditio ns. In future, the
MPC can probably tread on a further finer path of multiples of 5 bps. The proximate reason for the steep cuts
is the downward revision of gross domestic product (GDP) growth of FY20. In its latest revision of GDP
estimates for 2019-20, RBI has brought growth rate down to 6.1 percent from 6.9
percent earlier, with downside risks. At the same time inflation projections for FY20 were largely unchanged.
Cutting the repo rate by 35 bps, bringing in the policy rate to 5.4 percent. The decision was not unanimous as
four members voted for 35 bps cut, while two members preferred to keep the reduction to 25 bps. The policy
stance was maintained as accommodative. The surprise was both in terms of the quantum as well as the
decision to move away from multiples of 25 bps for rate changes. Although there is nothing sacrosanct about a
25 or 50 bps move, in the conventional policy design in India so far, the multiples of 25 bps were being used.
This being a tried Moreover, the MPC expects inflation to remain below 4 percent into Q1FY21 also. Benign
inflation seems to be the bedrock on which MPC’s accommodative stance and rate cuts are based. With the
comfort that inflation is running
below target, the MPC has chosen to address growth concerns. Thus, the projection of near term inflation
assumes importance. While MPC’s inflation estimate seems a bit aggressive, it gives reason to expect further
policy accommodation and upward surprises. The terminal repo rate expectations are currently in 4.5 – 5.00
percent range with a high possibility of it touching 4.5 percent. The repo rate is the starting point of the
needle of interest rates in the economy. When the RBI wants interest rates to come down, MPC reduces the
repo rate. When money is available at relatively cheaper rates, there is all the more reason for entrepreneurs
to avail of loans and build capacities. It also makes it easier for individuals to avail of housing, personal or
other loans, as EMIs are lower, which incentivises consumption. This, in turn, propels production of those goods
and services and, hence, the economy. The transmission mechanism of monetary policy of the European
Central Bank is detailed in Exhibit I at the end of this article to illustrate this process of transmission.
Transmission of repo rate to lending rates by banks Transmission of monetary policy, or the lack of it, has
lately been called into question by the policymakers, the central banks and economists. The effectiveness of
the repo rate as a monetary policy tool depends on how quickly the policy rate results in changes in lending
rates by the banks. In India, the transmission has remained partial and with a lag. The RBI and the government
have started showing their impatience with this phenomenon of late and partial transmission.
Recent experience in transmission of repo rates A cumulative rate reduction of 75 bps between February – June
2019 along with a change in the policy stance has led to 102 bps drop in the 10-year government bond yield but
a feeble 29 bps cut in the bank loan rates. The government thus is the biggest beneficiary of the rate-cutting
cycle as its borrowing cost has gone down substantially, but the banking system has cold-shouldered corporate
India and retail borrowers. Again, between January 2015 and October 2016 (before demonetisation), while the
RBI cut repo rate by 175 bps, lending rates on fresh loans came down by about one percentage point.
Demonetisation, which led to flush deposits and a sharp cut in deposit rates, had led to sharper lending rates
in the months to follow. In August 2019, within hours of the rate cut announcement, State Bank of India,
nation’s largest lender, rushed to cut its MCLR or the marginal cost of fund-based lending rate, by 15 bps,
roughly passing on 40 percent of the benefit to its borrowers. Some other public sector banks (PSBs) have
followed SBI, cutting their rates by 10- 20 bps.
Tamal Bandyopadhyay, consulting editor on banking matters wrote so aptly in Business Standard after the
recent repo cut ‘You can lead a horse to water, but you can't make it drink.’ It is really important to
understand why the banks are so reluctant to pass on the benefit of low interest rates to the borrowers? The
public in general, based on pronouncements from policymakers and reports from media feel that the bankers
are lazy and greedy and are insensitive towards the needs of the economy in general and consumers and
business in particular. While they cut down the rates on deposits fast, they are slow in paring the loan rates.
Also, the benefit of lower loan rates is often given to the new borrowers while the old borrowers continue to
pay high rates, especially in the retail loan segment.
This, however, is an oversimplification of the ground realities. The incremental build-up in banks’ deposits
continues to lag credit growth. Also, the lending rate cuts should follow softer deposit rates. However, this
happens, only after a lag of not less than six months. Even when the banks cut their deposit rates, the new
rates are applicable only to incremental deposits, while the major part the loan portfolio book gets re-priced
almost immediately, following a loan rate cut. Also, the rate cut typically does not impact the banks’ CASA
Deposits (Current and Savings Bank) accounts. Most large banks have been paying 3.5 – 4
percent interest on such accounts. The share of CASA deposits to total deposits is 41.3 percent, as per
Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks (SCBs), December 2018. Thus, the
lowering of rate does not impact the cost of the entire deposit portfolio of the banks. Further, interest rates
on small savings under the government’s various schemes remained at much higher levels compared to that of
banks, making it virtually impossible for banks to lower the deposit rates. Another very important contributing
factor in pricing the lending rate is the piling up of bad assets. Banks do not earn any interest on bad loans
and, on top of that, need to provide for them. In the process, the good borrowers end up subsidising the bad
borrowers.
Ideally, when the RBI cuts repo rates, banks should reduce their MCLR leading to a reduction in interest rates
on loans to customers. MCLR is the minimum interest rate, below which a bank is not permitted to lend. Key to
understanding this issue is the way the MCLR is calculated.
Banks calculate the MCLR based on a formula that includes ‘the cost of deposits (which depends on deposit
rates), provisions for non-performing assets, returns on capital, as well as their operating costs etc.’ The cost
of raising new funds also includes the cost of maintaining the mandatory cash reserve ratio (CRR) and statutory
liquidity ratio (SLR).
The problem with the MCLR is that it is driven by a formula. Banks have claimed that their cost of funds has
remained high due to high deposit rates. Thus, if the deposit rate does not change significantly, a bank's
lending rate may also not change much. Another factor is that deposits have fixed rates until maturity.
Therefore, even if deposit rates are lowered, the cost-benefit to a bank would come with a lag. However,
lending rates are flexible – if a bank changes its rates today, all loans will have to be priced at the new rates,
benefiting customers but not the bank.
Since banks source only a minuscule portion of their funds (1 percent) from the repo window and rely
significantly on longer-term deposits; only about 50-60 percent of banks’ funding gets re-priced. Hence, a cut
in repo rate does not immediately reduce their costs; impeding lending rate cuts.
This structural issue is likely to persist, and linking the lending rate to repo rate in all cases may not be easy to
achieve by banks.
How does one ensure monetary policy transmission?
The transmission of the policy rates needs to be looked into for both loans as well as deposits – and not for
loans alone. Currently, we talk mostly of paring the lending rates.
But, realistically, one needs to take care of the transmission of the policy rate to deposit rates as well. Then
only it would be possible to ensure the transmission in lending rates quickly. The only way to pare the deposit
cost instantly is to have a substantial floating deposit base.
Either the banks need to make the floating rate deposits attractive to entice savers or the regulator can
consider making the deposits above a certain amount (say above INR 1 crore) linked to floating rates
mandatory.
The Indian banking system's search for an ideal benchmark for loan rates has been on for 25 years. First, there
was the prime lending rate (PLR), which was introduced in October 1994. It was the rate at which banks used
to lend to their top-rated clients, but it had no relation to their cost of funds. The PLR was replaced by BPLR
or benchmark PLR, which was supposed to factor in the actual cost of funds, operating expenses and regulatory
requirements, provision for bad loans as well as profit margin. Then came the base rate, in July 2010, that was
supposedly more transparent and fair to small and medium enterprises that had for so long been subsidising
top-rated corporate borrowers. But somehow it did not happen and was replaced by the current benchmark
MCLR. But again, it didn’t meet the desired objective. As per the reports, RBI is planning to introduce a new
benchmark soon.
Unlike in the developed countries, where banks raise money from the market to lend, in India, deposits and
capital are the primary sources of lending. So, the key to bringing down loan rates is the cost of deposits. We
need to look for two benchmarks – one for loans and another for deposits. In isolation, a benchmark for loan
alone will never work. If we remain obsessed with monetary
transmission for loans alone, banks may end up robbing Peter to pay Paul.
Repo Linked Lending rate (RLLR)
As the name suggests, RLLR is the lending rate which is linked to the RBI’s repo rate. As per a recent RBI
directive, from October 1, 2019, all new floating rates personal or retail loans such as the car or home loans
sanctioned by banks will have to be linked to external benchmarks, and the central bank’s repo rate is one of
them. Every bank will have its RLLR, which will keep varying each time the RBI revises the repo rate. Effective
RLLR will depend on multiple factors. For example, the RLLR-linked home loan interest rate will depend on
factors such as the loan amount, the loan-to-value of the loan and the risk profile of the borrower, amongst
other things. There will be a spread or margin charged by the bank. Thus, a bank may have an RLLR of 6.5
percent, but the actual home loan interest could be 7.5 percent, assuming a 1 percent spread charged by the
bank. Banks are free to fix a reasonable margin while lending to the borrowers.
Why is RLLR replacing MCLR?
Whenever the RBI revises the repo rate, the MCLR of banks gets impacted. Any cut in the repo rate means that
the banks can lower the MCLR and vice versa. However, it has been observed that there is a time lag in passing
the repo rate cuts from banks to the borrowers. In the case of MCLR linked interest rate, the entire repo rate
cut benefit is not passed on. In RLLR loans, the transmission is
quicker as compared to MCLR loans. Typically, in the case of MCLR-based loans, the reset period can be 6-12
months. When the interest rate is on a downward trend, the RLLR home loans will suit borrowers. Conversely,
they may hurt borrowers in the rising interest rate scenario.
Explicit linkage to an external benchmark is likely to improve the transmission of the current and future rate
cuts because, after the announcement, banks won’t be able to hike the spread in response to cuts in the
benchmark rate. As per RBI’s statement on the subject ‘The spread over the benchmark rate — to be decided
wholly at banks discretion at the inception of the loan—should remain unchanged through the life of the loan,
unless the
borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract.’
However, there are a few caveats to the application of RLLR. First, the new benchmark applies to new loans
only, and loans of existing borrowers will continue as earlier.
They can consider transferring their MCLR-linked loans to a repo-linked loan. Secondly, loans taken from NBFCs
and housing finance companies will see no change as these will not be linked to an external benchmark.
Further, the benefit of repo rate linkage depends on future rate cuts, and here the experts sound a caution.
Most experts are of the view that we are not far from the bottom of the rate cycle. The market expectation
for the terminal repo rate in the current phase is in 4.5 – 5.00 percent range. Once the interest rate cycle
reverses, the loan rates under RLLR will also start going up.
3. Golden Jubilee of Banks’ Nationalisation- A Walk Through

In mid-July 2019, the banking sector, the Public SectorBanks (PSBs) celebrated the Golden Jubilee period
ofbanks’ Nationalisation as 14 banks were first nationalisedon 19th July 1969, followed it with another tranche
of sixbanks on 14th April 1980. It was the right thing to do then,50 years ago. With capital in the hands of few,
largeindustry, trade and business were shining, but the
agricultural sector, as well as small scale industries, werestruggling for a formal financing arrangement. This
led to the feeling that large industries and business houses werecornering deposits from the public but
deploying in theselected few areas, to the exclusion of agricultural andsmall industries. It was felt that the
only way to revive thethen unbalanced economic growth was to nationalisebanks, the economic Nerve Centre,
to enlarge their
presence through an inclusive approach.
As far as nationalisation of commercial banks is concerned,the ‘Baby Step’ was taken based on the
recommendationsof the Committee of Direction of All India Rural CreditSurvey (1951), under the aegis of
Reserve Bank of India(RBI) as it advocated ‘one strong integrated state partneredcommercial institution’ to
stimulate banking developmentin general and rural credit in particular. Accordingly,Imperial Bank of India
Limited was taken over by the government and renamed the same into State Bank ofIndia (SBI) in 1955.
Further, a number of erstwhile eightprincely states’ owned banks were made its subsidiaries in1959. It is a
different story that in March 2017, all thesesubsidiaries and associates of SBI were merged with SBI,to enable it
to compete globally.
Thus, the intended objective of nationalisation was to makethese banks serve better towards the development
ofIndian economy in tune with the dynamic priorities of thenation, as a whole. Announcing the bank
nationalisation on19th July 1969, then PM late Indira Gandhi had stated:‘An institution such as the banking
system, which touches and shouldtouch the lives of millions has necessarily to be inspired by a largersocial
purpose and has to sub-serve national priorities and objectives.
That is why there has been a widespread demand that major banksshould be not only socially controlled but
also, publicly owned. Thisstep, now taken, is a continuation of the process which has beenunderway. It is my
earnest hope that it will mark a new and morevigorous phase in the implementation of avowed plans and
policies.’As 50 years is a too long period to be covered elaborately,the growth and development witnessed in
banking industrybetween 1969 and 2019, is captured in a nutshell in aDecade-Wise Capsule Form, to grasp the
overall picture.
First decade (1969 – 1978)
The government and the regulator (RBI) set up many StudyGroups / Working Committees in the areas of the
generalfunctioning of banks, priority sector concept, agriculturaland allied activities, industry and trade as
well. A focusedinstitution of National Agricultural Board and Rural
Development (NABARD) encompassing Integrated RuralDevelopment Programme (IRDP), Differential Rate
ofInterest (DRI), Lead Bank Scheme, Regional Rural Bank(RRB), Service Area Approach, Village Adoption, etc,
toaddress the rural and agricultural requirements.
Through the recommendations of Tandon and Chore Committee, scientific Lending Norms were introduced
toenable the banks to assess credit requirement of thepotential borrowers and utilise scarce resources of
moneywhen credit squeeze was prevailing, and only genuinerequirements were met. This method holds good
forensuring that the borrower brings in some portion ofsurplus long term funds as their stake in the
WorkingCapital requirements and balance to be supported by banks,in either First or Second or Third method
of Lending, with the stake of the borrower increasing gradually. Ideally, when the borrower builds up his stake
sufficiently enough,then the bank can slowly withdraw their stake. But thisnever was put into practice as
either the borrower’s growthdemanded higher bank loan or the borrower’s long termsurplus funds were
diverted for other activities, and theshort term Working Capital funds remain forever withinthe relationship
between the bank and the borrower, tofund. Slowly and steadily, the concept of Net WorkingCapital, which is
the Long Term Funds as reduced by anyLong Term uses of funds, went for a toss.
Deposit Insurance and Credit Guarantee Corporation wasestablished to take care of small depositors’ interest
in theevent of banks getting into liquidation mode. The premiumwas borne by the banks themselves. Present
coverage isINR 1 lac, which is under active consideration for revision.
Second decade (1979 – 1988)
Six more banks were nationalised, thereby strengtheninggovernment hold in the banking sector. Famous
Twentypoint programme was introduced to ensure efficientproduction and distribution of essential goods and
alsoservices to the populace, besides to raise income andstandard of living for the weaker section.
Governmentsponsoredmany schemes to cater to the requirements of
small and medium farmers, project finance for agriculturalactivities (that was ignored, perhaps at the cost of
lendingto corporates and big business houses), small scale
industries, etc. However, over a period of time and on areview at the highest level, it was revealed that only
16percent of every rupee lent was going to the benefit oftargeted beneficiaries of the identified schemes.
Scheme forSelf Employment for Educated Unemployed Youth wasintroduced. Besides, for the first time,
international normsfor regulating banks in the risk management area – vizCapital Adequacy Ratio (CAR), with
focus on credit riskalone, was brought in, which unfolded many norms
enlarging the scope for regulation, as the Basel norms, in the years to come by.
Third decade (1989 – 1998)
With the advent of Liberalisation, Privatisation and Globalisation (LPG), followed by economic and
financialsectors reforms, banking sector underwent drastic changes in its accounting methods and perception
ofRisk Management associated with the banking activities.
The infamous securities scam for the linkage of bankswith capital market in an undesirable manner
surfacedand shocked both the capital market and also the
banking sector. Setting up of Private Banks was encouraged to bring in competitive spirit and entrepreneurship
among bankers. While discarding the accrued income concept, Income Recognition and Asset Classification,
popularly known as IRAC norms, were broughtin and everything was looked into through the mirror of ‘Risk’.
Hence, slowly steadily profitability was given its dueimportance. Viability of establishment of banks was
studied upon from the angle of money generation withservice as well as the development of rural areas taking
aback seat. Narasimham Committee’s first report for
financial sector reform was set in motion, paving the wayfor allowing space for private sector entry to banks,
whichgave birth to two large banks viz, ICICI Bank Limited andHDFC Bank Limited, with the former taking over
thebusiness of a Development Financial Institution (DFI)established in the year 1955. With the introduction of
theIRAC Norms, banks started showing huge losses on
account of the classification of loans into PerformingAssets and NPAs – Standard in the former category
andSubstandard, Doubtful and Loss Assets in the later one.
Government phased out certain directed lending, deregulated interest rate to a certain extent.
With a view to focus on regulation, a separate Board forFinancial Supervision was set up, besides the setting
ofOff-Site Monitoring and Online Supervision (OSMOS)
mechanism. Credit Monitoring Arrangement (CMA) wasput in place by the RBI to bring in some close and
periodical monitoring of large borrowers, with exposuresof INR one crore and above. While the new
generationprivate banks were making in-roads, old private banks werecoming out of their home dominant
approach to explorethe available business opportunities existing elsewhere bothin India and abroad. This paved
the way for exponentialgrowth in Retail Banking, Housing Finance, MerchantBanking, Project Financing, etc.
Slowly and steadily, the specialised DFIs were unnecessarily closeddown paving for the banking sector,
normally handling with therecycling of money, making their biggest and irretrievable mistakeof picking up Long
Term Project / Infrastructure Loans, that werenot their forte. If at all, there was a single and vital reason for
theever-growing NPAs / stressed assets in the banking industry; it wasthis move.
Fourth decade (1999 – 2008)
Pioneered by Bank of Baroda, as advocated in the secondreport of Narasimham Committee, many banks went
fortapping the capital market to raise funds for growth in thebanking business. As a part of Risk Management,
besidesCredit Risk, Market Risk Management was inducted, thusrecognising first, the Asset Liability
Management (ALM) tostart with. While technology was growing at an exponential scale toaccommodate
aspirations of customers, human intervention andhuman intelligence were given a go by, and speed of lending
based on a certain pre-designed template for lending, either individually or
through consortium / collective banks assumed importance. This is the period in which the misuse and
diversion of funds borrowed andsome economic slowdown combined to produce increasing NPAs.
Money was sourced at a high cost and lent in an indiscriminatemanner and at times, at lower than the cost of
funds, to boostbusiness volume. Quality was compromised as the focus was onquantity only.
Concept of Know Your Customer (KYC) was introducedto strengthen the checking mechanism for money
laundering. To facilitate banks to recover the money lent,without going through the labyrinth of the legal
process,Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest (SARFAESI)
Act waspassed, duly followed by the setting up of Asset
Reconstruction Company of India Limited (ARCIL).
Deposit interest rates of 7 days and above were deregulatedto be decided by the banks sourcing funds,
according totheir requirements. Basel II norms were strengthened toencompass all the risks under the overall
name of creditrisk, market risk, liquidity risk and also the operational riskfor the due capital charge.
Towards the end of this period though world over thefinancial sector was under deep trouble. India
withstoodthe onslaught and proved its resilience, thanks to the firmsteps taken by the regulator over the
functions of banks.
Fifth decade (2009 – 2018)
For rationalisation of Capital Market operations and also toensure that investors of public issue of shares do
notsuffer in the chance participation of public issue of shares,Application Supported Blocked Accounts (ASBA)
was introduced. This move minimised blockage of funds of thesmall investor when the refunds of money to
unsuccessfulapplicants are to be made quickly. On the one hand bankswere taking steps to the concept of
‘Customer Delight’through technological advancement to close the time gap inmeeting the customer
requirements for their normalbanking activities, the mistakes in the past lending activitiesstarted looking up
menacingly putting the viability andsurvival of certain banks at risk, as the NPAs grew in anunwieldy manner.
Various factors including but not limitedto poor governance mechanism both in private banks andPSBs and
inadequate surveillance mechanism led to theNPAs mounting to beyond the manageable level and alsobreached
earlier set norms on certain key financial
performance parameters of Capital Adequacy, Profitability,Delinquency, etc.
A few differentiated banks, such as Payment Banks, SmallFinance Banks, etc were encouraged. At the same
time private sector bank Kotak Mahendra Bank Ltd, made a
strategic move to take over ING Vysya Bank Ltd, with aview to growing inorganically and in hindsight, one can
sayit paved the way for its growth, both functionally and alsoin the Capital Market, as it paced its growth to
competewith banks like IndusInd Bank Ltd, Yes Bank Ltd, HDFCBank Ltd, etc. The recent development is the
probablemerger of Lakshmi Vilas Bank Ltd, with Indiabulls
Housing Finance Ltd, which is under active consideration.
Further, the formation of MUDRA Bank Ltd – Micro Units Development Refinance Authority Bank – ensuredthat
requirements of micro-units are taken care of.
While SBI took the initiative of consolidating its associatebanks into itself, to lead domestically and compete
globallyby entering into the Top 50 Banks in the world, the
government went ahead with its plan of licensing to formdifferentiated banks, to take care of the specific
needs andrequirements of a certain section of core functions. This isfollowed by the merger of weak Dena Bank
and wellfunctioning Vijaya Bank, with Bank of Baroda, wef 1stApril, 2019.
After making a number of attempts to recover from andreduce NPAs were in vain, and industry witnessing
gradualand steady as well as non-stop increase in Bad Loans, theRBI swung into action of listing out the banks
for closesurveillance and monitoring mechanism under the umbrellaof ‘Prompt Corrective Action’, popularly
known as PCAframework. Almost a dozen banks, constituting more than50 percent PSBs were placed under PCA
framework andslowly, one after the other gets pulled out.
The way forward
With the advent of technology, since the economic reformsin the early nineties, the volume of business of
banking has been growing quite significantly besides the number ofbranches and related outlets to cater to the
needs ofgrowing populace India. The present generation of bankemployees are neither aware of the sea change
the bankingsector had gone through during the half a century in theIndependent India, nor could take a proper
perception ofhow the banking would be in its next quarter or half acentury, as they are more driven by
computer systems thanthe banking knowledge, as their mind is already taken awayfrom the basics of banking
and the evolution that has happened, particularly they have just been witnessingtechnological advancement.
As future of banking holds immense potential fueled bygrowth in trade and services after due stabilisation
ofGoods and Services Tax (GST) framework, one can drawup a brief list of the way forward for the banking
industry,as follows: Banks should focus their attention only for bankingrelatedcore activities, and other
administrative
transactions and activities should not be thrust on thebanks by the government / RBI.
• Aspects such as Corporate Governance, IndependentDirectors, ensuring collective wisdom as against oneman
show, reasonable time of 5 years or so for the
Chief Executive Officer (CEO), etc, need to be giventheir due importance. The post of CEO should not bekept
vacant for an unduly long time, except say for amaximum of one week or so and that of any Directorfor a
maximum of one month.
• Top Management personnel – say Scale VI and VII (Deputy General Manager and General Manager) should be
subject to rotation among various banks, withformer within the geographical zone and latter acrossthe country
so that no Top Management personnel gainundue roots and advantages, besides giving them a chance for
enhancing their exposure and qualitativeaptitude and approach.
• Banks should keep a safe distance from taking exposureon infrastructure, long term project loan, etc, for
whicha separate entity, like the erstwhile DFI, should be
established, as the resources mix of banks dealing withshort term and recycle oriented cash flow could be
optimally utilised.
• Independent qualitative credit appraisal coupled withclose monitoring / surveillance mechanism, would go
along way in strengthening Credit Portfolio of the
institution. All and Sundry branches of banks need notand should not take exposures on the borrowers,
beyond a cut off amount.
• Access to data through technology cannot be taken asthe substitute to the knowledge of employees, who
should be exposed to a few more operations beyondthe core competency to equip themselves to take
higherresponsibilities.
• Differentiated banks concept is likely to take precedence over the universal banking concept.
• Recruitment standards need to be unbiased and impartial, taking the background, future potential
andforesight of requirement. Periodical skill up-gradation,training, etc, should be given due importance.
• Banks raise capital first, then mobilise deposits andbuild up Credit Portfolio. This being the case CAR is
amisnomer. With a view on adequate risk management inmind, the matter should be looked into from other
perspectives. Instead of stipulating CAR, better todemand Asset Creation Multiple (ACM). To explain,
instead of stipulating minimum CAR of say 8 percent,stipulate maximum ACM of 12.5 percent. While CAR isa
business enabling ratio, as for a given advance one istrying to increase the capital, whereas ACM stipulates,how
much an asset can grow for a given capital. This isan ideal tool for managing risk. Stipulating CAR, insteadof
ACM, is like cutting the Foot (Capital) according to the Shoe (Risk Weighted Assets).
The above is not an exhaustive list, but only an inclusiveone. Bank branches have grown from around 8,200 in
1969to nearly 1.45 lacs; deposits grew from INR 4,800 crores toINR 115 lacs crores while advances leapfrogged
to 87 lacscrores. This is a glorious growth from any point of view.
As of now only three banks in India have been identifiedas Too Big To Fail (TBTF), one in public sector and two
in the private domain and they are SBI, ICICI Bank and
HDFC Bank. These banks function under the implicitcover and assurance of getting rescued by the
government,should the situation turn to be adverse.
After a decade of banks’ Nationalisation, in order to handlelarge scale branch network, it was thought fit to
have aseparate recruitment process for selection of candidatesthrough Common Entrance Test across four
regions in the country so that availability of local candidates could be
ensured and thus the Formation of Banking Service Recruitment Boards (BSRB) effective from the
eightiesassisted banks to have qualitative candidates as employees.
These candidates are due to retire shortly, but the bankingscenarios have changed and owing to large scale
computerisation, Internet Banking, Mobile Banking, etc,human resources have been considerably reduced, and
the new set of banking personnel are required to be moretechnology-oriented. The transition is likely to
changedrastically the way banking business would be carried out in the years to come. The banking sector is
the nerve centre and engine ofeconomic growth. Whenever the engine encounters afault, the train is bound to
move on the slow track andthen come to a halt if the fault is not attended and rectified completely.
4. Banking Landscape in the 21st Century

(Address by Shri Shaktikanta Das, Governor, Reserve Bank of India at the Mint’s Annual Banking Conclave, 2020
on February 24, 2020)
It is indeed a matter of great pleasure for me to be here today in the Annual Banking Conclave of the Mint. I
am told that this is the 13th edition of Conclave in what has become a prestigious annual event attracting the
best and brightest minds of the finance and banking industry. This Conclave provides an important platform to
all stakeholders in India’s financial and banking sector for assessing where we stand today and preparing
ourselves for where we want to reach tomorrow.
2. Several issues facing the Indian banking sector have occupied the attention of policy makers in the last few
years. Being a regulator and supervisor of banks, the Reserve Bank stands committed to ensuring a sound and
robust banking system in the country. Emergence of new business models and new technology and its
application in banking and finance have thrown up new opportunities. With the aim of taking a deeper look at
India’s banking sector in the context of these new developments, the topic that I have chosen for my talk
today is “Banking Landscape in the 21st Century”.
3. Finance and banking have emerged as engines of global economic growth. It is argued, and in my opinion
rightly so, that technology has played a pivotal role in the proliferation of financial services1. Cheques, wire
transfers, ATMs and credit cards were important innovations of such nature. Fast forward to more recent
times, it seems that we are already witnessing yet another paradigm shift in banking on the back of a
technological revolution that promises better customer experience, risk management and returns to
shareholders2. Given this environment, it becomes extremely important to understand what it entails for the
banking sector and how we can prepare ourselves for the times ahead. Against this background, let me now
begin with discussing trends in global banking and then I shall dwell on some recent trends in Indian banking,
new dimensions of banking and way forward.
I. Global Banking: Emerging Regulatory Trends
4. The global financial crisis represents a watershed for the banking sector. It exposed the inherent
vulnerabilities of an otherwise formidable international financial system. The crisis paved the way for an
overhaul of the regulatory framework, long lasting changes to the economic and financial environment, and
shifts in the competitive landscape of financial services industry.
5. International standard setting bodies like the Basel Committee on Banking Supervision (BCBS) and the
Financial Stability Board (FSB) were prompt in addressing the shortcomings of the pre-crisis regulatory
framework. Consequently, many regulatory norms including leverage, liquidity and capital adequacy were
reviewed as part of the Basel-III reforms aimed at making the global financial system more resilient. To address
liquidity risk, new instruments such as the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio
(NSFR) were introduced, supplemented by large exposures framework capping large and risky exposures. Aimed
at addressing the “Too Big to Fail (TBTF)” problem, the FSB phased in the Total Loss Absorbing Capacity (TLAC)
for the Global Systemically Important Banks (G-SIBs) to rebuild their capital buffers. Various jurisdictions also
adopted other key reforms initiated by the FSB, such as sound resolution regimes for financial institutions and
effective supervision of compensation practices. Regarding non-bank financial intermediation (NBFI), the FSB
has been conducting annual monitoring exercises since 2011. Broadly, it has been observed that, several
aspects of non-bank financial intermediation which contributed to the financial crisis have considerably
declined.
6. Given the initiatives taken by the international bodies, policy makers across jurisdictions have been
fortifying their regulatory frameworks. These policies are expected to pay back in the medium to long run by
enhancing the soundness and resilience of the global banking system. More recently, with the global growth
slowdown that began in 2018, credit growth, being procyclical, has decelerated across major economies. This,
in turn, has adversely affected bank profitability. Despite distinct improvement in asset quality, structural
weaknesses like continued overreliance on investment in government securities in the Euro area and wholesale
funding in many advanced economies remain. Nevertheless, capital position of banks has improved consistently
in major advanced and emerging market economies on the back of various regulatory reforms introduced after
the global financial crisis.
II. Indian Scenario
7. At the Reserve Bank of India, we have largely complied with Basel standards in terms of countercyclical
capital buffer (CCCB); capital requirements for central counter-parties (CCPs); leverage ratio framework;
Liquidity Coverage Ratio(LCR); Net Stable Funding Ratio (NSFR); Domestic-Systemically Important Banks (D-
SIBs) requirements; and a Supervisory framework for measuring and controlling large exposures. On the
resolution front, some progress has been made in terms of the notification issued by the Central Government
under section 227 of the IBC. We may, however, expect to have an integrated framework for resolution of
financial firms operating in India in the near future. The implementation of this reform is of particular
importance for having a resilient financial system in India.
8. In terms of recent progress, the Indian banking sector is slowly turning around on the back of improvements
in asset quality with enhanced resolutions through the Insolvency and Bankruptcy Code (IBC). Despite the
recent decline in impaired assets and a significant improvement in provisioning, profitability of the banking
sector remains fragile. Capital position of banks has, however, improved on account of recapitalisation of
public sector banks by the Government and capital raising efforts by private sector banks. Nevertheless, the
sector continues to encounter challenges from events like those around the telecom sector.
9. Consequently, the overhang of non-performing assets (NPAs) remains relatively high which is weighing on
credit growth. Also, in view of subdued profitability and deleveraging by certain corporates, risk-averse banks
have shifted their focus away from large infrastructure and industrial loans towards retail loans. This
diversification strategy, while helpful as a risk mitigation tool, has its own limitations. Further, sector specific
pockets of stress need policy attention. At the same time, proper due diligence and risk pricing in lending is of
prime importance so that the health of the banking sector is not compromised while ensuring adequate flow of
credit to productive sectors of the economy.
10. The banking stability indicator, as reported in RBI’s Financial Stability Report of December 20193, shows an
improvement. Timely mitigation measures like faster resolution, better recovery, etc., need to be continued
to bring down the gross non-performing assets (GNPA) ratios of all scheduled commercial banks (SCBs). While
lower rate of credit growth limits the size of the denominator for measuring GNPA, risks arising out of global
and domestic economic conditions and geo-political developments persist.
III. New Dimensions of Banking : Emerging Structure of Banking
11. While global banking system is still in the process of addressing the gaps exposed by global financial crisis,
new issues have surfaced and challenged the very core of the traditional banking business. Globally, banks are
facing increasing competition from non-traditional players, which are taking advantage of digital innovation.
Banking structures across the globe are adapting to these new impulses.
12. Numerous FinTech startups have formed, spanning the banking and financial services industry. They have
entered the payments and remittance space in the sphere of peer-to-peer lending, crowd-funding, trade
finance, insurance, account aggregation and wealth management. Through collaboration with FinTech players,
several banks are applying a hybrid model where mobile services interact with banking services.
13. Banks are not only facing competition from Fintech companies but also from large technology companies
(BigTechs) which are entering into financial services industry in a big way. Building on the advantages of the
reinforcing nature of their data-network activities, some BigTechs are venturing into payments, money
management, insurance and lending activities. At present, financial services are only a small part of their
business globally. But given their size and reach, their entry into financial services has the potential to bring
about rapid transformation of the financial sector landscape. It may, of course, bring many potential benefits.
Using big data, BigTechs can assess the riskiness of borrowers, reducing the need for collateral4. Hence, their
low-cost structure business can easily be scaled up to provide basic financial services to the unbanked
population.
14. These developments pose a challenge to banks as well as banking regulators. Banks have to imbibe these
new technology and business practices to remain competitive. Banking regulators, on the other hand, have to
focus on achieving a balance between promoting innovation and applying a measured/proportional supervisory
and regulatory framework. All these mean that the future of banking will not be a continuation of the past. We
would see a very different banking sector, in terms of structure and business model, in the coming years.
15. So, what would be a possible scenario in India? Distinct segments of banking institutions may emerge in the
coming years. The first segment may consist of large Indian banks with domestic and international presence.
This process will be augmented by the merger of Public Sector Banks (PSBs). The second segment is likely to
comprise several midsized banking institutions including niche banks with economy-wide presence. The third
segment may encompass smaller private sector banks, small finance banks, regional rural banks and co-
operative banks, which may specifically cater to the credit requirements of small borrowers in the unorganised
sector in rural/local areas. The fourth segment may consist of digital players who may act as service providers
directly to customers or through banks by acting as their agents or associates. The reoriented banking system
will of course be characterised by a continuum of banks. The banking space would also include both traditional
players with strong customer base and new technology led players.
16. In the context of the emerging scenario, a properly worked out consolidation of public sector banks can
generate synergies in allocation of workforce and branches as well as streamlining of operations to meet the
future challenges. The focus has to be on ushering in significant improvements in efficiency and rationalisation
of scarce capital to meet the capital adequacy requirements. Investments in technology and skill building has
to be stepped up. Bigger and agile banks may be able to reposition themselves with better branding exercises,
backed by improved technology, skills and business models.
17. Ultimately, the strength of a banking system depends on the strength of its corporate governance that
fosters a robust and ethicsdriven compliance culture. In this context, the Reserve Bank has been issuing
instructions on corporate governance. For example, the compensation guidelines for whole time directors,
CEOs and material risk takers of banks have also been substantially modified. Large-scale divergences and
frauds observed across banks raises questions on the role and effective utilisation of internal control systems
within banks to identify areas of emerging risks. The RBI has issued the revised guidelines on the concurrent
audit system in banks, drawing from the recommendations of the Expert Committee under Shri Y.H. Malegam.
The guidelines are aimed at strengthening the internal control functions enjoining greater responsibility on the
audit committees of the Boards while providing them greater leeway. Besides, RBI would also issue draft
guidelines on corporate governance in banks, as indicated in our annual report and reiterated in the report on
trends and progress of banking in India 2018-19 published in August 2019 and December 2019 respectively.
Digital Disruptions
18. Besides structural changes, digital disruptions will continue to transform the banking sector. Initiatives
undertaken by the Government, the Reserve Bank and the industry have led to a radical shift towards
ubiquitous digitization, which has provided an impetus to adoption of technology. There is a unique confluence
of several positives like demographic dividend, JAM trinity, etc., that would further support rapid digitisation
of financial services in India.
19. With inroads into their traditional businesses, banks are expanding into newer areas such as insurance,
asset management, brokerage and other services. It is heartening to note that the mindset of banks is changing
and they no longer view FinTech firms as disruptive. This change in approach has provided the financial
services sector a sense of security. There is evidence that Fintech companies are acting as enablers in the
banking ecosystem. Banks are relying on a number of strategies to embrace technological innovation; ranging
from investing in FinTech companies and founding their own FinTech subsidiaries, to collaborating with Fintech
companies. Banks and non-banks are partnering to offer the combination of trust and innovation to the Indian
consumer. This “best of both worlds” approach has resulted in tremendous growth in the number of digital
payments, which is expected to continue. These strategies can effectively ensure that banks retain market
share, as customers increasingly value more efficient and cost-effective services.
20. In the light of these developments, conventional banking is making way for next-generation banking with a
focus on digitisation and modernisation. The need for brick and mortar branches is being reviewed continuously
as digitisation has literally brought banking to one’s fingertips, obviating the need to physically visit a bank
branch for most of the banking services.
21. The movement towards digital payments has also been facilitated by introduction of fast payment systems,
such as Immediate Payment Service (IMPS) and Unified Payment Interface (UPI), which provide immediate
credit to beneficiaries and are available round the clock. The extent of digital penetration can be gauged from
the fact that, each day on an average, the payment systems in India process more than 10 crore transactions of
nearly INR 6 lakh crore. Today, digital payments account for around 97 per cent of daily payment system
transactions in terms of volume. This has been made possible with an accelerated growth of over 50 per cent in
the volume of digital payment transactions in the last five years.
22. The Reserve Bank has recently started operating its retail payment system, viz., National Electronic Funds
Transfer (NEFT) on a 24x7 basis. This is a game changer and places India among very few countries which
provide this facility. The Bank for International Settlements (BIS), in a recently published paper, has indicated
that the UPI framework of India can become an international model to facilitate quick and seamless payments
not only within countries but even across countries. There is considerable interest at International fora to
understand and learn from our experience in furthering digital payments and we are very glad to share and
collaborate. The National Payments Corporation of India (NPCI) has also decided to set up a subsidiary to focus
on taking the UPI model to other countries which will help enhance global outreach of India’s payment
systems. With a view to encourage competition and further innovation in the retail payments space, we have
also placed on our website a draft framework of a pan-India New Umbrella Entity (NUE) for retail payment
systems for public comments.
Strengthening Regulation and Supervision
23. In the context of ever expanding dimensions of the banking sector in the 21st century, we need to be
aware of the extensive regulatory and supervisory reforms essential for ensuring stability and inclusiveness of
the banking sector. It has been RBI’s endeavor to constantly improve the efficacy of its supervisory and
regulatory functions, so that the resilience of the regulated financial entities can be enhanced. A number of
steps have been taken in the recent past in this regard. In particular, we have reorganised the supervisory and
the regulatory departments of the Reserve Bank with the aim to improve coordination and allocate resources
more optimally. From a supervisory perspective, this will augment the identification of systemic and
idiosyncratic risks which will help us build synergy between off-site and on-site supervision teams.
24. We are also following a calibrated supervisory approach to bring in required modularity and scalability, to
better focus on risky practices and institutions and to deploy an appropriate range of tools and technology to
achieve our supervisory objectives. We are focusing on a sharper and more forward-looking off-site surveillance
framework as an aid to our onsite supervision. A Sup-tech initiative is being implemented as a part of the
integrated compliance management and tracking system. This will facilitate transparent and efficient
monitoring of all pending compliances of supervised entities through a web-based interface, automate the
inspection planning process and cyber incident reporting, and ensure seamless collection of data. Thematic
studies will be undertaken across banks and other financial sector entities. New elements of supervision will
also be introduced from time to time. The proposed Research and Policy Division and Risk Specialists Division
will assist in this process.
25. Appropriately recognising the systemic importance of non-banking financial companies (NBFCs) and their
inter-linkages with the financial system, the Reserve Bank has taken necessary steps to ameliorate the
concerns relating to their asset quality and liquidity. The amendment to the Reserve Bank of India Act 1934,
effective August 1, 2019, has further empowered the Reserve Bank to constructively intervene in the
operations of NBFCs. The asset-liability management (ALM) position and other relevant aspects of top 50 NBFCs
are being closely monitored, which covers all NBFCs with asset size above ₹5000 crores. The ALM of top 51-100
NBFCs is also being examined by the respective regional offices of the Reserve Bank.
26. In addition to the four pillars of supervision viz. on-site inspection, off-site surveillance, market
intelligence and reports of Statutory Auditors (SAs), a fifth pillar of supervision in the form of periodic
interaction with all the stakeholders – including statutory auditors, credit rating agencies, credit information
companies, mutual funds and banks having large exposures to NBFCs – has been instituted to have a clearer
understanding of the emerging risks and developments in the sector so that critical information is available,
whenever required.
27. As regards the co-operative banking segment, we have developed a robust stress-testing framework for
urban cooperative banks (UCBs). It also acts as an early warning system for co-operative banks with the
purpose of timely identification of weak banks for appropriate action. This is a shift from reactive to pro-active
supervisory approach, intended to ensure surveillance of vulnerabilities in UCBs on an ongoing basis. Moreover,
as on December 31, 2019, more than 90 per cent of these banks are now on Core Banking Solution (CBS),
although efforts are still required to standardize the solutions and have robust set of internal controls
implemented in the CBS for improved outcomes. The CAMELS (Capital, Asset Quality, Management, Earnings,
Liquidity and Systems and Control) supervisory rating methodology for UCBs has also been comprehensively
revised. We have also taken steps to bring UCBs under the CRILC reporting framework and issued draft
guidelines on exposure norms to mitigate credit concentration risk and enhancement in Priority Sector lending
targets to further financial inclusion. To improve governance, we have issued guidelines on constitution of
Board of Management (BOM) for UCBs with deposit size of Rs. 100 crores and above while making it voluntary
for adoption by other smaller UCBs. Further, in order to have appropriate regulatory powers for RBI in respect
of co-operative banks, almost on par with those over banking companies, certain amendments in the Banking
Regulation Act, 1949 have been proposed.
IV. Way Forward
28. The changing landscape of the banking industry will unfold in the backdrop of a strong regulatory and
supervisory regime with increased intensity and tech-enabled supervision of banks. The challenge before banks
is to make the best use of technology and innovation to bring down intermediation costs while protecting their
bottom lines. Further, Artificial Intelligence (AI), Machine Learning (ML) and Big Data are becoming central to
financial services innovation. They can also help in fraud detection and in identifying better ways of monitoring
use of funds by borrowers, track suspicious transactions, etc. by processing large datasets.
29. One of the challenges for policy makers, especially in countries like India, is to ensure that new innovations
in banking sector serve the customer by reducing the cost of financial services and enhancing the range and
access to products in a manner that is safe. Advanced analytics and real-time monitoring of emerging
cybersecurity risks will be critical in detecting potential threats and enabling pre-emptive action.
30. As the Indian banking sector is propelled forward to a higher orbit, banks would have to strive hard to
remain relevant in the changed economic environment by reworking their business strategies, designing
products with the customer in mind and focusing on improving the efficiency of their services. The possibilities
are enormous. We should be seized of the issues and act in time.
5. Indian Banking at Crossroads: Some Reflections

(Inaugural Address by Shri Shaktikanta Das, Governor, Reserve Bank of India on November 16, 2019)
I am very happy to be amongst you today to address the first Annual Economics Conference being organised by
the Amrut Mody School of Management, Ahmedabad University. The theme of the conference – “50 years of
Bank Nationalisation: Indian Banking at Crossroads” - provides the perfect backdrop for a discussion on the
evolution of Public Sector Banks(PSBs), their journey over the last 50 years and a vision for their future. The
banking system has played a critical role in the upliftment of our country, especially in the recent decades
which saw unprecedented economic growth. However, the banking system, especially the public sector banks,
has experienced a large churn after the Global Financial Crisis(GFC) as it tries to grapple with multiple
challenges, including high non-performing loans (NPLs), global and domestic economic downturns, adaptation
of technology and competition from new age fintech companies. In my address today, I shall attempt to discuss
the challenges that lay ahead for the broader banking sector and what we expect of them going forward. I shall
also briefly touch upon our approach to tackling the issues in the non-banking finance companies and urban co-
operative banks, which are important segments of the financial sector.
2. Many a time, to see through to the future, looking back at the past provides insights that are of much help.
With that limited objective, I shall wade back a little to the past for the sake of contextualising our
discussion. In 1967, credit to agriculture constituted only 2.2 per cent of the total advances of the Scheduled
Commercial Banks in sharp contrast to industry which constituted 64.3 per cent. Five cities in the country,
viz., Ahmedabad, Mumbai, Delhi, Kolkata and Chennai accounted for around 44 per cent of the bank deposits
and 60 per cent of the outstanding bank credit in1969. This led to the widespread political perception that,
left to themselves, the private sector banks were not sufficiently aware of their larger responsibilities towards
society. The solutions that the policy makers thought of at that time included exerting various degrees of
control over the banking system, which ultimately culminated in the decision to nationalise 14 private sector
banks in 1969, followed by the nationalisation of six more private sector banks in 1980. The impact of the
decision to nationalise banks has been succinctly summarised in the History of RBI, Volume III: “….at the time
of nationalisation as many as 617 towns out of 2,700 in the country were not covered by commercial banks.
And, even worse, out of about 600,000 villages, hardly 5,000 had banks. The spread, too, was uneven…...”
Current Challenges and the Role of Exogenous Factors
3. Against this historical detour, let me come to the challenges faced by the banks today, many of which are a
result of how various exogenous factors have played out over the years. Everyone concerned should realise that
banks are in the business of taking bonafide risks. This means that out of a host of exposures which a bank
chooses to take, a few may go bad. The PSBs, which have been used as vehicles to further the development
agenda of the Government, had to achieve and maximise multiple objectives. The high growth phase prior to
the GFC (2008) was aided by bank credit to a large extent, mostly by PSBs, leading to risk build ups in the
balance sheet of the lenders. In particular, bank credit to infrastructure sector increased at an unprecedented
rate. This exposed the PSBs to the travails of the infrastructure sector, which materialised significantly in the
post-crisis years.
4. Further, the tail end of the above high growth period in advances to infrastructure coincided with a period
of slowdown in economic growth and tightening of environmental clearances. Also, the transformation of major
term lending institutions into universal banks/NBFCs led to commercial banks becoming the primary source of
long-term debt financing to projects in infrastructure and core industries. An immediate consequence of these
circumstances was that it led to a spurt in the level of ‘restructured standard assets’, i.e., assets which were
restructured without being downgraded as non-performing assets (NPAs). Eventually, most of the restructured
assets which were allowed to be classified as ‘standard’ became NPAs as the restructuring packages proved to
be unviable. Inadequate credit assessment by banks and governance issues also played their due part in the
risk build-up.
5. As documented, the increase in NPAs was significantly higher in PSBs as compared to their private and
foreign counterparts. PSBs, probably to fulfil the additional social objective of their mandate, had taken
higher exposure in some of the critical sectors of the economy such as mining, iron and steel, and
infrastructure. NPA levels in these sectors shot up as all these sectors suffered external shocks leading to the
respective stress – mining and energy was hit by the cancellation of allocation of coal blocks; iron and steel
sector faced cost pressures due to dumping of cheaper steel from China; telecommunications sector underwent
a disruption in the form of cancellation of 2G spectrum allotment; an construction sector was marred by delays
in obtaining necessary government approvals, in particular environmental clearances.
6. To add to these issues, shocks in the form of debt waivers/moratoriums and payment issues of DISCOMs also
meant significant costs to the fisc and also affected the health of the banking sector as well as the credit
culture. Interestingly, data put together by the Indian Banks Association shows that of the 10 states that
announced debt waiver schemes since 2017, only three states have reimbursed almost completely as promised.
Thus, it is imperative that write-off amounts are reimbursed to the banks and DISCOM payments are made in a
time bound manner, so as to improve the health of banks and their capacity to lend in subsequent years.
Corporate Governance – The Elephant in the Room
7. This brings me to some of the internal challenges faced by the PSBs, and their governance could easily be
identified as a central concern. In fact, many of the problems that currently seem to affect the PSBs such as
the elevated levels of NPA, capital shortfalls, frauds and inadequate risk management can mostly be attributed
to the manifestation of underlying corporate governance issues. The role of independent Boards in fostering a
compliance culture by establishing the proper systems of control, audit and distinct reporting of business and
risk management has been found wanting in some PSBs leading to build-up of NPAs. Also, the understanding of
risks from a business perspective by the Boards in some banks has been inadequate due to skill gap and,
competency issues. The fact remains that a strong corporate governance culture, with a focus on transparency
and accountability, has to percolate from a strong Board which sets the example by leading.
8. Let me also touch upon governance issues in private sector banks (PVBs) which originate from altogether
different set of concerns. The issues here mainly relate to incentive structure of their managements, quality of
audits and compliance and also functioning of Audit and Risk Management Committees. The Reserve Bank has
recently issued guidelines for compensation in private sector banks which include specification of minimum
variable pay component and clawback arrangements, among others.
Resolution of Stressed Assets
9. Apart from governance, one of the biggest challenges faced by the PSBs, and the banking system in general,
is the resolution of stressed assets. For a long time, India did not have a bankruptcy law in place, and hence
the Reserve Bank introduced various restructuring frameworks which were designed to emulate the desirable
attributes of a bankruptcy law. The enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) has been a
game changer in this regard. Despite the impression that IBC has been marred with numerous litigations
leading to delays in resolution, I am optimistic that these are teething problems in a new law. Majority of the
companies that went through insolvency proceedings under IBC and ended in liquidation so far were already
stressed entities for a long time whose value had been eroded significantly and were pending before the Board
for Industrial and Financial Reconstruction (BIFR). The real impact of the IBC is to be seen in the fresh cases
where I expect the law to provide an efficient avenue to effect a resolution.
10. To complement these efforts, the Reserve Bank has put in place a framework for resolution of stressed
assets through a circular dated June 7, 2019 which envisages a time bound implementation of a resolution
plan, failing which disincentives in the form of additional provisions will kick in.
11. While these provisions are available for real sector firms, the situation is entirely different when it comes
to resolution of financial firms. In this regard, the Government, on November 15, 2019 has notified the rules
containing a framework for resolution of financial services providers (FSPs) under the IBC. The applicability of
these rules would be limited to certain financial services providers to be separately notified by the
Government in consultation with regulators.
12. Our resolute efforts towards recognition, repair and resolution have resulted in non-performing assets
(NPAs) of the banking system declining for the first time in March 2019 after a gap of 7 years. Fresh slippages
declined and the system-level provision coverage ratio jumped to 60.5 per cent from 48.3 per cent a year ago.
The capital adequacy ratio of the banking system has increased to 14.3 per cent, much higher than the Basel
norms. This has benefited from the recapitalisation of PSBs in the order of ₹ 2.9 lakh crore by the Government
in the recent period.
Mergers of Public Sector Banks
13. The government, with an objective to create strong and competitive banks, has announced an
amalgamation of PSBs in order to create stronger banks with global presence. This consolidation is in the
direction of the recommendations of the first report of the Narasimham Committee in 1991, where the
requirement for fewer but stronger banks for India economy had been highlighted. The idea was to enable such
banks to compete at the national and international level. A well-executed merger generates synergies of
workforce and capital, helps in streamlining of operations and leads to significant improvements in efficiency.
It can also entail diffusion of best practices across the board between banks. The bigger and agile banks, in
principle, could reposition themselves with better branding exercises. I must, however, hasten to add that the
merger process has to be executed without creating any disruption in the normal functioning of these banks.
Non-Bank Financial Companies (NBFC) Sector
14. It is well recognised that NBFCs play a prominent role in the Indian financial system by catering to financial
needs of a wide variety of customers and niche sectors, providing complementarity and competition to banks.
The NBFC sector largely depends on market and bank borrowings, thereby creating a web of inter-linkages with
banks and financial markets. As Housing Finance Companies (HFCs) now fall under the regulatory purview of
the Reserve Bank, we are undertaking a review of extant regulations and are in the process of harmonising
these regulations for HFCs with applicable regulations for NBFCs.
15. In the aftermath of the IL&FS crisis and subsequent defaults by a few companies, asset quality concerns
have emerged, which imposes liquidity constraints on NBFCs. The Reserve Bank has been proactive in taking
several measures to address these concerns and strengthen the regulatory and supervisory architecture of the
NBFC sector, thereby ensuring that the sector remains stable and robust. We have attached considerable
importance to make them resilient through harmonization of regulations and a robust liquidity framework. RBI
on November 4, 2019 has come out with guidelines on liquidity risk management framework for NBFCs. Our
objective is to ensure proper governance and risk management structures in NBFCs.
Urban Co-operative Banks
16. Let me now turn to co-operative banks. They contribute significantly in credit delivery and in bringing
other financial services to the people. The performance of some of these institutions, however, has been
hampered due to operational and governance issues. The recent unearthing of fraud in one of the urban co-
operative banks (UCBs) has brought up issues relating to their governance, prudent internal control
mechanisms, and adequacy of checks and balances to the forefront.
17. Turning back to history, the Urban Co-operative Banks were brought under the ambit of the Banking
Regulation (BR) Act, 1949 with effect from March 1, 1966. Certain provisions of the BR Act, however, were not
made applicable to them, limiting the scope of regulation and supervision over them1. Broadly speaking,
banking-related functions of cooperative banks are regulated by the Reserve Bank and management-related
functions are controlled by the concerned State / Central Government. The Reserve Bank’s regulatory control
over UCBs is affected due to this duality of control. RBI has made concerted efforts in the past to mitigate the
adverse impact of dual regulation in the form of MoUs with State/ Central Governments and setting up of a
State-level Task Force for Co-operative Urban Banks (TAFCUB). However, challenges still persist. At present,
the Reserve Bank is working with the Government to amend the Act governing co-operative banks. We have
suggested several legislative changes to the Central Government for better regulation and supervision of UCBs.
On our part, we are reviewing the existing architecture of regulation and supervision of UCBs and shall carry
out necessary changes in sync with the evolving requirements.
18. Going forward, UCBs are likely to increasingly face competition from players such as Small Finance banks
(SFBs), Payments Banks, NBFCs and Micro-Finance Institutions (MFIs). It is, therefore, necessary for them to
adopt robust technology to enable them to provide banking services at lower costs and with adequate
safeguards. The Reserve Bank has been taking proactive steps to assist these institutions to adopt a robust IT
infrastructure. The proposed national level Umbrella Organisation (UO) is expected to provide liquidity and
capital support to member co-operative banks, and will therefore contribute to the strength and vibrancy of
the sector.
New Frontiers of Banking
19. The emergence of new banking models, in the form of Payments Banks and Small Finance Banks, have
widened the horizons of banking in India. The Government and the Reserve Bank have taken several initiatives
to encourage greater use of electronic payments2 to achieve a ‘less cash’ society. These measures have led to
digital payments3 to GDP ratio rising to 8.6 per cent at end-March 2019 from 6.7 per cent at endMarch 2016.
During the same period, the number of per capita digital transactions rose from 4.6 to 17.6. Similarly, Fin-Tech
is offering alternative models of lending and capital raising. In this regard, crowdfunding, peer-to-peer lending,
invoice financing (Trade Receivables Discounting System (TReDs)) and digital lending have made their presence
felt. They have helped in improving the efficiency of intermediation by bringing down the costs, sachetisation
of products and services and in expanding the reach of financial services to a greater number of people.
20. More recently, Artificial Intelligence (AI), Machine Learning (ML) and Big Data are becoming central to
financial services innovation. Analysis of vast amount of data, both structured and unstructured, has been
made possible using these techniques. Increasing levels of expectations of compliance to regulations and a
greater focus on data and reporting has brought RegTech and SupTech into limelight. They are being applied in
areas such as risk management, regulatory reporting, data management, compliance, e-KYC / anti-money
laundering (AML)/ Combating the Financing of Terrorism (CFT), and fraud prevention.
21. In light of these developments, conventional banking is making way for next-generation banking with focus
on digitisation and modernisation. The need for brick and mortar branches is being reviewed continuously as
digitisation has brought banking to the fingertips of the people, obviating the need to physically visit a bank
branch. The transformation of the financial services landscape caused by technological innovations can blur
the difference between a bank and a technology company, as technological giants are making rapid strides
into areas such as payments, traditionally the domain of banks. This will present testing grounds for the
regulators to delicately balance promotion of innovation and applying uniform supervisory and regulatory
framework.
Concluding Observations
22. Let me conclude by saying that banks have a critical role in the economy. The privilege of raising
unsecured liabilities from the society and generating revenue by deploying them in various avenues and
ventures necessitates prudent risk assessment of such deployment. In this process, the banks do have a
responsibility to shoulder when it comes to contributing to the growth of productive sectors of the economy
including infrastructure.
23. As we move forward, we at the RBI are focusing on governance, risk management, internal audit and
compliance functions in banks more closely. In a bid to strengthen oversight of commercial banks, co-operative
banks and NBFCs, we have created a unified department of supervision (DoS) and a unified department of
regulation (DoR) with effect from November 1, 2019. This move will enhance the efficacy of supervision and
regulation as these entities operate in an increasingly integrated environment with overlapping business
domains. It is our endeavour to update the knowledge and skill levels of supervisors on a continuous basis. We
are adopting a multi-pronged approach in this aspect. We are in the process of setting up a College of
Supervisors to augment and reinforce supervisory skills among regulatory and supervisory staff. In addition, an
internal supervisory research and analysis wing is being created to supplement and support regulatory and
supervisory activities. As indicated earlier, technology would continue to play a vital role in enhancing the
efficacy of regulation and supervision in a continual manner.
24. We are also addressing some of the long persisting issues in our regulatory and supervisory framework in a
systematic and time bound manner towards building a more efficient and robust financial system.
6. Indian Banking Sector: Current Status and the Way Forward

(Address by Shri Shaktikanta Das, Governor, Reserve Bank of India Delivered at the National Institute of Bank
Management,Pune at the 15th Annual Convocation of Post Graduate Diploma in Management on, June 8,2019)
I am happy to be participating in the Fifteenth Annual Convocation ceremony of Post-Graduate Diploma in
Management (Banking and Financial Services) for the Batch of 2017-19. I thank Dr. K.L. Dhingra, Director,
National Institute of Bank Management (NIBM) and members of faculty for inviting me to join the young minds
at their convocation ceremony. This is indeed a moment of pride for students as it marks the fruition of years
of dedication, perseverance and hard work. To the students, I would like to convey my best wishes as they
embark on a new phase in their lives. I am certain that it will be a life full of opportunities and challenges, and
I hope you adopt a path of integrity and ethics to be able to make tough decisions as you move forward. As the
father of the nation, Mahatma Gandhi, had said, “Always choose the right path and speak truth”. Your self-
faith and determination will provide you with the strength to march ahead. My congratulations are also for the
parents and guardians who are present here.
2. Let me now turn to the topic which I am going to address today. I propose to cover the current status of the
banking sector and would highlight some issues as a way forward.
Banking Sector
3. The last few years have been testing times for Indian banks as they grappled with deteriorating asset quality
leading to higher provisioning requirements, falling profitability and weak capital position. However, the
banking system is on the cusp of a transformation, aided by recent policy measures to reduce vulnerabilities
and improve its financial health. Several initiatives have been undertaken and are also underway to strengthen
the regulatory and supervisory frameworks aimed at increasing the resilience of the banking system.
Banking Regulation
4. As of March 2019, the capital to risk weighted assets ratio (CRAR) of scheduled commercial banks (SCBs) at
14.2 per cent remains well above the regulatory requirement of 9.0 per cent. However, if we take into account
the capital conservation buffer (CCB), some banks, especially PublicSector Banks (PSBs), are falling short of the
required 10.875 per cent. Overall, the Government’s efforts to infuse capital into PSBs has significantly helped
them achieve these targets.
5. We have also put in place frameworks on countercyclical capital buffer (CCCB), leverage ratio, Liquidity
Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)1. For better management of concentration risks
and in order to align Indian banks with the international norms, the Reserve Bank proposed guidelines on large
exposures which became effective from April 1, 2019. The latest round of reforms published by the Basel
committee on Banking Supervision (BCBS) in December 2017 have implementation timelines stretching up to
2022. The Reserve Bank is expected to come up with the draft guidelines by 2020 for consultations.
Non-Performing Assets
6. The deterioration in asset quality of Indian banks, especially that of Public Sector Banks (PSBs), can be
traced to the credit boom of 20062011 when bank lending grew at an average rate of over 20 per cent. Other
factors that contributed to the deterioration in asset quality were adverse macro-financial environment; lax
credit appraisal and post-sanction monitoring standards; project delays and cost overruns; and the absence of
a strong bankruptcy regime until May 2016. The Reserve Bank set up a Central Repository of Information on
Large Credits (CRILC) in 2014 which was followed by an Asset Quality Review (AQR) in 2015. As a result of these
initiatives, the recognition of non-performing assets improved, leading to a sharp rise in the gross NPA ratio
from 4.3 per cent at endMarch 2015 to 7.5 per cent at end-March 2016. It further reached the peak of 11.5 per
cent in March 2018. Recent supervisory data suggests that various efforts made by the Reserve Bank in
strengthening its regulatory and supervisory framework and the resolution mechanism instituted through
Insolvency and Bankruptcy Code (IBC) are bearing fruit. This is reflected in significant improvement in asset
quality of scheduled commercial banks (SCBs) during 2018-19 as gross NPA ratio declined to 9.3 per cent as on
March 2019.
7. At the same time, there has been an improvement in provision coverage ratio (PCR) of SCBs to 60.9 per cent
at end-March 2019 from 48.3 per cent at end-March 2018 and 44.0 per cent at end-March 2015. Due to weak
capital position of banks and risk aversion on their part, credit growth remained subdued in recent years.
However, with incipient sign of improvement in the health of banks, credit growth is picking up.
Resolution of Stressed Assets
8. It is now well recognised that an efficient bankruptcy regime is essential for timely resolution and
liquidation of stressed companies. The Insolvency and Bankruptcy Code, 2016, (IBC) has significantly altered
the financial landscape as it provides a market mechanism for time-bound insolvency resolution enabling
maximisation of value. The new regime is a paradigm shift in which creditors take control of the assets in
contrast to the earlier systems in which debtors remained in possession of the assets till its resolution or
liquidation, leading to an improvement in the credit culture of the country.
9. In the wake of the Supreme Court’s order nullifying the Reserve Bank’s circular of February 12, 2018 for
resolution of stressed assets, we have issued fresh guidelines yesterday (June 7, 2019). The new guidelines
provide a system of strong disincentives in the form of additional provisioning for delay in initiation of
resolution or insolvency proceedings. The new framework makes inter-creditor agreements mandatory and
provides for a majority decision to prevail. Further, wherever necessary, the Reserve Bank will issue directions
to banks for initiation of insolvency proceedings against borrowers for specific defaults so that the momentum
towards effective resolution remains uncompromised. It is expected that the revised prudential framework for
resolution of stressed assets will sustain the improvements in credit culture that have been ushered in by the
efforts of the Government and the Reserve Bank so far, and that, it will go a long way in promoting a strong
and resilient financial system in India.
Non-Banking Financial Companies (NBFCs)
10. Let me now turn to Non-Banking Financial Companies (NBFCs). They play an important role in the Indian
financial system given their unique position in providing complementarity as well as competition to banks.
They cater to diverse financial needs of a wide variety of customers, both in urban and rural areas. This sector,
with a size of around 16 per cent of the combined balance sheet of SCBs, has been growing at a faster pace in
recent years. As at end-March 2019, the aggregate CRAR of NBFC sector was 19.3 per cent, while the gross NPA
ratio was 6.6 per cent. The credit growth of NBFCs, which was over 20 per cent earlier, slowed down in the
third quarter of 2018-19 after the debt default by a systemically important NBFC. However, market
confidence somewhat resurfaced in the last quarter of 2018-19 as the major sources of funding registered a
recovery.
11. The debt default by a large NBFC in mid-2018 highlighted the vulnerability and need for strengthening
regulatory vigil on the sector in general and on the asset liability management (ALM) framework in particular.
The Reserve Bank has recently come out with draft guidelines for a robust liquidity framework for the NBFCs.
12. Further, the Reserve Bank has relaxed the norms for NBFCs to securitise their loan books. In addition,
banks have been allowed to provide partial credit enhancement (PCE) to bonds issued by the systemically
important non-deposit taking NBFCs and Housing Finance Companies.
13. With a view to eschewing the regulatory arbitrage between banks and non-banks, the Reserve Bank has
been aligning the regulatory and supervisory frameworks for NBFCs with that of SCBs. A comprehensive
Information Technology (IT) framework for strengthening off-site surveillance of NBFCs is being put in place.
Further, multiple categories of NBFCs are being rationalised into fewer categories in order to provide them
greater operational flexibility.
14. The Reserve Bank has also taken steps to enhance the supervision over NBFCs. These efforts are primarily
focused on improving the four supervisory pillars – on-site examination, off-site surveillance, market
intelligence and annual reports of statutory auditors. A fifth pillar of supervision in the form of an
institutionalised arrangement for periodic interaction with all the stakeholders including statutory auditors,
credit rating agencies and banks having large exposures to NBFCs is being put in place.
Way Forward
15. I have already highlighted certain critical issues in the area of regulation and supervision of banks and non-
banks. As a way forward, I would like to highlight some important issues which need to be addressed in the
coming months. The first and foremost is governance reforms in banks and non-banks. These would include the
following:
(i) In order to improve the functioning of the PSB boards and to foster corporate governance, it is important to
enhance their quality and stability through further streamlining appointment process, succession planning and
compensation. These aspects could be evaluated by bank boards and reviewed by the Banks Board Bureau. We
also need to create a pool of independent directors across various areas of expertise.
(ii) The performance of MDs/CEOs of both public and private sector banks should be closely monitored by the
Board of Directors either through a sub-committee or through an external peer group review.
(iii) An effective performance evaluation system should also be put in place for banks to improve their
financial and operating parameters. The Government, the Bank Board Bureau and the Reserve Bank are
engaged in developing an objective framework for performance evaluation of PSBs. This should redefine the
contours of corporate governance in PSBs with a focus on transparency, accountability and efficiency.
(iv) Governance issues in private sector banks (PVBs) originate from altogether different set of concerns. The
issues here mainly relate to incentive structure of their managements, quality of audits and compliance and
also efficient functioning of Audit and Risk Management Committees. The Reserve Bank has issued a discussion
paper on proposed guidelines for compensation in private sector banks which includes specification of
minimum variable pay component and clawback arrangements, among others. The Reserve Bank will continue
to play a positive and constructive role to ensure private sector banks flourish in their operations.
16. Second, to create potent risk management systems in banks, the Chief Risk Officers (CROs) have to play an
effective role and should be directly accountable to Managing Directors (MDs), Chief Executive Officers (CEOs)
and Risk Management Committee of the Board.
17. Third, along with risk management, compliance function in banks is one of the key elements in their
corporate governance structure. These have to be adequately strengthened and made sufficiently
independent. For the compliance function to be effective, it must be supported by a healthy compliance
culture within the organisation. Banks should review their compliance function comprehensively to ensure
compliance to all statutory and regulatory prescriptions in addition to their own internal guidelines, directions
of the Board and their Committees and audit assessments. It is important that the Board of Directors are
always sensitised of any compliance failures. A group-wide compliance programme would help managements
and Boards in understanding the legal and reputational risks in the organisation, especially their concentration
in certain areas.
18. Fourth, it has been observed that most bank frauds can be traced to absence of effective controls. An
essential element of an effective system of internal control is a strong control mechanism. It is the
responsibility of the Board of Directors and senior management to emphasise the importance of internal
control through their actions and words. Banks should regularly reorient and train their personnel so that they
fully understand the importance of internal controls in their respective stations. The boards of banks should
specifically pay attention to creating and sustaining a culture of effective control in the banks.
19. Fifth, even though the Government’s capital infusion has helped public sector banks (PSBs) to improve
their balance sheets, I would like to stress that PSBs should not become too dependent on this source.
Depending upon individual situations, PSBs should access the capital market for mobilisation of capital.
20. Sixth, I have referred to the importance of the IBC and the new bankruptcy regime earlier. There are,
however, delays in the resolution of cases, as a significant number of them have extended beyond 180 or 270
days. The government has already announced two new National Company Law Tribunal (NCLT) benches at
Indore and Amravati. Nevertheless, more number of benches as well as members are required. On our part, we
are opening a new RBI Professorial Chair at the Indian Institute of Corporate Affairs (IICA), Manesar, Haryana
which is starting a two year Graduate Insolvency Programme to increase the pool of trained insolvency
professionals.
21. Seventh, in the light of various developments in the financial sector such as the use of complex financial
products and rapid technological innovations which give rise to interconnectedness and spill over effects within
and between entities, there has been a move globally towards building specialised teams of bank supervisors.
Even in the Indian context, some incidents in the financial sector have underscored the need for specialisation
in supervision and regulation. The build-up of risks among regulated entities due to exposure concentrations,
non-transparent market practices and the associated contagion effects in the banking sector have significant
implications for financial stability. Considering these issues, the Reserve Bank has now decided to build a
specialised regulatory and supervisory cadre for regulation and supervision of banks, non-banks and co-
operatives. This specialised cadre in the Reserve Bank will play a pivotal role so that sound banking and non-
banking sectors efficiently intermediate the financing requirements of the entire economy.
22. Eighth, the Reserve Bank has been at the forefront of creating an enabling environment for growth of
digital technology for new financial products and services. We are strengthening the surveillance framework
and have issued draft guidelines on Framework for Regulatory Sandbox. A committee on deepening of digital
payments under the chairmanship of Shri Nandan Nilekani was formed which has submitted its report.
Recently, the Reserve Bank came up with a Payment System Vision 2021 to ensure uninterrupted availability of
safe, secure, accessible and affordable payment systems. The Reserve Bank will examine the recommendations
of the report of Nilekani Committee and dovetail the action points, wherever necessary, with Vision 2021, for
implementation.
23. Ninth, we also need to address the existing inadequacies in customer service and benchmark it against
international standards. Efforts in developing robust customer grievance redressal mechanisms to increase
customers’ trust and confidence in payment systems will be continued. Given the rising popularity of digital
payments, data protection and cyber security norms need to be continuously strengthened. With the emerging
threat landscape, where organised cyber-crime and cyber warfare are gaining prominence, working towards
ensuring continuous protection against the changing contours of cyber security threat becomes imperative. As
banks’ engagement with technology is increasing at a rapid pace, the challenge for the regulator would be to
balance efficiency with prudential measures to mitigate risks to be able to harness the opportunities offered
by Fintech.
24. Let me now turn to NBFCs. The conventional approach to their regulation and supervision has been light-
touch, so that they could complement banks with their diverse financial products for niche areas and reach a
large cross-section of population through innovative service delivery mechanisms. However, with a view to
strengthen the sector, maintain stability and avoid regulatory arbitrage, the Reserve Bank has been proactively
taking necessary regulatory and supervisory steps, keeping in mind the requirements of the time. In the light of
recent developments, there is a case for having a fresh look at their regulation and supervision. It is our
endeavour to have an optimal level of regulation and supervision so that the NBFC sector is financially resilient
and robust. At the same time, NBFCs should be enabled to operate as well-functioning entities with necessary
capacity to reach wider sections of population. The Reserve Bank will continue to monitor the activity and
performance of this sector with a focus on major entities and their inter-linkages with other sectors. We will
not hesitate to take any required steps to maintain financial stability in the short, medium and long-term.
25. As you are aware, fine tuning and improving supervision and regulation are continuous exercises. Towards
this direction, we have reduced the periodicity of the NBFC supervision to 12 months from 18 months earlier.
We expect the Board of Directors of companies themselves to act diligently and take necessary action based on
Reserve Bank’s supervision reports.
26. Further, our objective is to harmonise the liquidity norms between banks and NBFCs, taking into account
the unique business model of the NBFCs vis-à-vis banks. In this context, the final guidelines on the liquidity risk
management framework which we have proposed recently will be issued shortly.
27. Let me also make a reference to Urban Co-operative Banks (UCBs). Our experience suggests that the Board
of Directors of UCBs require greater expertise and skill to conduct banking business professionally. The Reserve
Bank is in the process of issuing guidelines on this issue. A need is also felt for establishment of an Umbrella
Organisation for UCBs which may extend loans and refinance facilities, setup IT infrastructure and provide
support for capital and liquidity. The structure, functions and the regulatory guidelines of this organisation are
being examined by the Reserve Bank. Mergers and consolidation in the sector will also help in reducing
operating costs, encouraging greater risk diversification and economising capital. We propose to put in place a
mechanism for encouraging voluntary mergers in the sector through appropriate incentives. We also propose to
create a Centralised Fraud Registry for UCBs.
28. I have highlighted several issues in the banking and non-banking sectors. A sound and resilient financial
system is a prerequisite for a modern economy that involves all sections of its society in sharing equitably the
benefits of economic and social progress. As you would know, reforms are an ongoing process. The Reserve
Bank will endeavour to be proactive in its approach. In the fast-changing financial landscape, we will continue
to be watchful to the emerging challenges and respond to them appropriately to ensure a resilient and robust
financial system.
7. Amalgamation of PSBs : Tasks Ahead

In the proposed amalgamation of Vijaya Bank (VB) and Dena Bank (DB) with Bank of Baroda (BOB) mooted by
the government, the first phase is completed. Individual boards of the three banks have approved. Internal
committees have been formed to prepare the blueprint for operationalising the process. It will be a historic
initiative to revamp Public Sector Banks (PSBs), pending since the banking sector reforms were initiated in
1991.
This strategic move should be the beginning of the transformation of PSBs into smart and agile entities to
compete with private peers. Understandably, the consolidation is not confined to resolve lingering bad loan
crisis alone. It has a bigger purpose to make the banking sector more robust and capable to increase lending
appetite, conserve capital, improve risk management capabilities, and attain economies of scale in augmenting
business growth.
Such stronger and bigger PSBs like SBI can support the growing economy.
Amalgamation in the offing is contentious and debatable policy inflicting intense short-term pains with
prospects of long-term gains provided the amalgamation process is seamlessly executed with firm but the fine
balancing of stakeholder interests. The interest of bank employees’ unions of various affiliations is to be
protected, and their competencies have to be brought together to co-exist for the growth of the new entity.
The common mindset is never to disturb the apple cart even if synergy in consolidation is clearly visible.
Procrastination in taking such strategic actions by successive leadership led to a prolonged delay in consolidation
despite the wide consensus of experts on the idea. In the midst of deteriorating asset quality, many of the weak
PSBs are gasping for breath. At this critical juncture, strategic solutions like consolidation in PSB space cannot be
further postponed. It is time for leadership to initiate such tectonic shift in policies despite diverse public opinions
and widespread resentment, in the long-term interest.
Reasons for amalgamation
PSBs have been operating in buyer’s market in the post-reform era in the last over two and half decades in
intense completion. The entry of new generation private banks, differentiated banks and increased
collaboration with fintech companies, non-banks and insurance companies has led to massive diversification
with inherent risks.
The technological innovations and greater connect with non-bank financial services has brought new challenges
which need stronger risk appetite and larger asset size. Compared to international banks, the asset size of Indian
banks is low. Even after the merger, SBI should now be ranking among top 50 global banks, somewhere around
45.
Moreover, the changed operating environment demands new strategies to cope with the challenges of
maintaining quality and ease to tackle capital adequacy issues, and more importantly, to improve operational
efficiency to compete with new peers. Perhaps, the right time has arrived to think differently. Doing new age
banking with archaic mindset may not be viable in the long run. When PSBs are at such crossroads, there is an
urgency to think beyond socio-political implications of consolidation in the larger interest of strengthening
banks.
The idea of consolidation of PSBs originates from some of the unimplemented recommendations of the First
Narasimham Committee on the Financial System (CFS 1991). It was also reiterated in its second committee on
Banking Sector Reforms (BSR 1998). The committee proposed a substantial reduction in the number of PSBs.
The redefined structure should have 3-4 large banks with international reach. 8-10 national banks followed by
a set of local banks and rural banks. The merger of PSBs was also recommended in the report of the working
group on restructuring of weak banks led by M S Verma, former Chairman SBI (1999).
With SBI standing tall as a behemoth with total assets of INR 34.55 trillion (in March 2018) at a premier position
in the industry followed by HDFC bank at a far distance with asset size of INR 10.64 crores. Now the new
amalgamated entity (NAE) in PSB space will be the third in terms of asset size with INR 10.19 trillion. These
mega banks can be followed by a couple of more PSBs coming together with impressive size and wider
geographical reach to connect with not only domestic but with the global banking system. In view of expert
opinions and proven benefits of consolidation stemming from SBI group consolidation, identification of the three
PSBs for amalgamation is taken. This can perhaps be in the first leg as a conscious strategy to test success.
Strength of NAE
The NAE formed with the assets of three PSBs (BOB, VB and DB) will be stronger and resilient to expand the
business. The NAE will have better business muscle with deposits and advances at INR 14.82 trillion. The
combined network of 9489 branches can provide wider representation with better customer connect as a
strong synergy. Net Non-Performing Assets (NPAs) will be down to 5.7 percent much better than aggregate net
NPAs of PSB sector struggling with high levels at 12.13 percent. Provision coverage ratio (PCR) will improve to
67.5 percent much better than 63.7 percent of PSB sector average. The total number of employees will be
85675, a strong force capable of offering, may be improved services, way forward to satisfy the expanded
customer base. However, managing their consternation will be critical to optimise synergy of the three PSBs.
Well articulated and transparent human resource policy without any bias will be able to infuse confidence in the
NAE.
Other strengths will relate to the consolidation of capital base. The total Tier – I combined capital shall be 9.3
percent inching up its capital adequacy ratio (CAR) to 12.26 percent. Effectively some of the accumulated high
net NPAs of DB at 11.04 percent can be absorbed due to comparatively low net NPAs in other two banks pegged
at VB (4.1 percent) and BOB (5.4 percent).
The transition could be seamless as the technology platform is uniform – Finacle of Infosys. The weakest link in
the value chain is DB working under restricted conditions of prompt corrective action (PCA) of RBI. However,
the other two are capable to handhold it to form a strong NAE.
Human resource challenge
In any strategic shift of such magnitude, the challenges are daunting. The biggest challenge in implementing the
proposed amalgamation will be to reorient human resources of the three banks to integrate them into a cohesive
team to take the NAE forward overcoming emotional impact of losing its parental corporate brand image with
which the employees have been associated and recognised in the society for decades. People with diverse age
profile and independent mindsets used to follow different risk appetite in parent banks. They have to collaborate
to deliver better value in the NAE creating innovative opportunities to meet their career aspirations.
Cultural integration and bringing together coherence among key policies, technology alignment, trimming down
organisational structure, redefining lines of business, workflows, systems and processes and reorganising systemic
controls will have to be planned meticulously. The human resources at all levels will have to be geared up to
execute the amalgamation process with alacrity and professional stance. An acceptable brand image is to be
developed for the NAE. In order to ensure the execution of the amalgamation process, a lot of combined team
efforts will be needed. How the leadership is able to accomplish, will decide the future shape of NAE.
An acceptable identity to NAE
More critical aspect than managing human resources will be to provide an impressive identity to NAE. Quite
often the terms ‘merger’ and ‘amalgamation’ are used interchangeably. But in the current context
‘amalgamation’ is proposed and not ‘merger’. Experts point out that merger refers to a corporate restructuring
activity of two or more companies into a single company whereby the identities of some of the companies get
dissolved.
But amalgamation is a wider concept. Under Accounting Standards, in case of amalgamation, there is not only
pooling of assets and liabilities but also involves swapping of shares based on market valuation. PSBs are
governed
under ‘Banking Companies (acquisition and transfer of undertakings) Act 1970’.
Therefore, the rollout of the amalgamation process required the approval of amalgamation by Board of
Directors of the three banks separately which is now done. Based on their resolutions, it has to move to cabinet
ministers and both houses of parliament. Only when the amalgamation scheme receives approvals from all
concerned, it will be ready for execution. In the meantime, the banks can collaborate to shape up
operationalisation of NAE.
In the whole rigour of such approvals, the moot point of keen interest to all will be about the brand identity
(name) of NAE. It will be an emotional and sensitive issue. Every PSB in the fray is unique with its reputation
and brand image built over a century. But it will be desirable to use the brand image of at least one of the
banks to maintain continuity. Destruction of the brand value of all the three mighty PSBs will tantamount to
raging them to ground. It will take another hundred years to build it.
Therefore, serious introspection and consensus are needed to go with one of them. It is not possible to jumble up
the names just to maintain identity but getting a new name could be easy but then reinventing brand name will
be difficult. It requires much investment in publicity and image makeover globally. In the given circumstances,
even if debated independently without any bias on the track record, a continuation of NAE with the brand
identity of ‘Bank of Baroda’ emerges as a consensus and logical name in the larger interest. The reach and
depth of the image of BOB built in the past brought about a wide international reputation, which should not be
withered away. Further, based on the experience of 22 bank mergers witnessed since 1990 (post-reform era),
the name of the combined entity was never changed for popularity and assuaging the emotional feelings of
stakeholders.
If brand name of ‘Bank of Baroda’ the premier bank is not retained as the name of NAE, the whole purpose of
transforming it into robust large size PSB will turn out to be nobody’s business. Like SBI, Bank of Baroda should
be allowed to take care of the two other PSBs so that the bigger PSB owns the responsibility to take
amalgamation process to its logical end.
A different name to the NAE just to temporarily appease a section of people will have neither recognition nor
ownership from any of the three PSBs except a psychological feeling of winning a war, which is already lost. The
thrust of new identity just to satisfy PSBs involved in amalgamation, as top-down command will tantamount to
accepting defeat before the war begins. In order to have a stiff accountability for execution on the larger PSB,
it will be necessary and non-negotiable imperative to retain the identity of the premier bank. If required, a
well-calibrated voluntary retirement scheme can also be mooted to reduce the staff strength. It can weed out
unsatisfied manpower and eventually reduce intermediation cost.
Operationalisation of amalgamation
As the plan announced by the government, once amalgamation is approved, the NAE can be formed and made
functional from April 1, 2019 in terms of predetermined timelines led by the teamwork of the three banks.
Background work would call for the redrafting of many of the policies, drawing up standard operating
procedures and deciding stages of workflows to integrate back-office operations for more efficient customer
service. It will call for mapping skill sets and talent of every class of employees of all the three banks to enable
better deployment of manpower and assigning responsibilities to lead profit centers of NAE. Managing human
aspects of amalgamation will be very critical to improve the outcome. Closing down operational units must be
decided purely on business considerations and mutual reciprocation. Setting up different management teams
to work on diverse integration projects will have to be backed with a faster decision support system.
The NAE can have better risk appetite that serves the very purpose for which amalgamation is initiated. The
end state of amalgamation is to ensure that better profitability numbers in future should be able to erase past
accumulated losses. It will need a well-calibrated identity neutral approach to trim down redundant flab.
Way forward
If the real benefit of amalgamation in PSB space is to be derived, certain much-awaited reinforcing bank reforms
will have to be quickly implemented, rather simultaneously. It has to begin with adding rigour in regulating the
top echelons of the bank’s leadership akin to private peers. Strengthening the board governance by introducing
new
criteria for selection, training and rigorous performance review of independent directors (IDs) which is
glaringly missing. Empowering the RBI to approve or change the board members including full-time directors
depending upon the supervisory outcome. Developing sensitivity towards long-term quality consciousness and
improved compliance standards can be enforced only if the regulators are fully empowered to do so even with
the PSBs. That precisely is the reason that RBI is seeking powers to oversee the board structure of the PSBs
which is currently not in its purview. This limits its ability to oversee compliance in totality.
Induction of quality IDs with domain expertise can well be assigned to Banks Board Bureau (BBB) set up for the
purpose. It will also be necessary to consider removing dual regulation of PSBs by hastening setting up of Bank
Investment Company (BIC) in line with the recommendations of Dr P J Nayak Committee meant to review the
governance of boards of banks in India. The process of phasing out government ownership from 51 percent to
33 percent can also be thought through. Hence, the success of amalgamation in PSB space will depend much on
the ability to manage aftermath with supporting changes. Using amalgamation as a standalone initiative
without enough reinforcements will weaken the purpose of amalgamation return inefficiency. The synergy of
the bold bank reforms will have to be fully derived to infuse renewed optimism among PSBs. It will need
inclusive ownership of all stakeholders in pursuing amalgamation so that such large and strong PSBs can be
strategic players in global banking space.
C. RBI POLICY GUIDELINES (2019-20)
SIXTH BI-MONTHLY MONETARY POLICY (06.02.2020)

 The RBI announced its sixth Bi-Monthly Monetary Policy on Feb. 6, 2020 and maintained the status quo on
the key policy Repo rate. The MPC observes that the economy continues to be weak and the output gap
remains negative.  The MPC recognises that there is monetary policy space for future action. However, given
the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture.
Accordingly, the MPC has decided to keep the policy repo rate unchanged.  The MPC also decided to continue
with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains
within the target.  The decisions are in consonance with the objective of achieving the medium-term target
for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
TARGETS:  GDP OUTLOOK: GDP growth for 2020-21 is projected at 6.0%, in the range of 5.5-6.0 per cent in
H1 and 6.2 per cent in Q3.  INFLATION: The CPI inflation projection is revised upwards to 6.5 per cent for
Q4:2019-20; 5.4-5.0 per cent for H1:2020-21; and 3.2 per cent for Q3:2020-21, with risks broadly balanced. 
FISCAL DEFICIT: The fiscal deficit of the Central Government for 2019-20 is placed at 3.8% of GDP in the
revised estimates as against 3.3% of GDP in the budget estimates. The fiscal deficit is budgeted to decline to
3.5% of GDP for 2020-21. Fresh gross market borrowings are budgeted to increase by Rs. 70,000 crore to Rs. 7.8
lakh crore in 2020-21 from Rs. 7.1 lakh cr in 2019-20.
MONETARY AND LIQUIDITY MEASURES: On the basis of an assessment of the current and evolving
macroeconomic situation, the key rates are:
 REPO RATE: The policy Repo rate under the Liquidity Adjustment Facility (LAF) kept unchanged at 5.15 per
cent. The policy rate corridor remains unchanged at +/- 25 bps.
 REVERSE REPO RATE: The Reverse repo rate under the LAF determined with a spread of 25 bps below the
repo rate remains unchanged at 4.90 per cent.
MARGINAL STANDING FACILITY: The MSF rate (an emergency funding window) with a spread of 25 bps above
remains unchanged at 5.40%.
 BANK RATE: The MSF rate and the Bank Rate are calibrated to 25 basis above the repo rate. The Bank Rate
thus remains unchanged at 5.40 per cent.
CASH RESERVE RATIO (CRR): CRR of scheduled banks unchanged at 4% of their NDTL. The minimum daily
maintenance of the CRR of 90% remains unchanged.
 STATUTORY LIQUIDITY RATIO: In order to align the SLR with the Liquidity Coverage Ratio requirement, RBI
decided to reduce the SLR by 25 bps every calendar quarter until the SLR reaches 18% of NDTL. The first
reduction of 25 bps took effect in the quarter commencing 5th Jan, 2019. The SLR of scheduled commercial
banks reduced to 18.25% w.e.f 4th Jan.2020 and finally to 18% w.e.f. 11th April, 2020.
PROVISION OF ADDITIONAL FIXED-RATE REVERSE REPO AND MSF WINDOW-The Reserve Bank has decided to
make National Electronic Funds Transfer (NEFT) System available on 24x7 basis from December 16, 2019. To
give eligible market participants more flexibility and to facilitate their liquidity management, as an interim
measure, the Reserve Bank has now decided to provide an additional fixed-rate Reverse Repo and Marginal
Standing Facility (MSF) window on all days as under:
TYPE OF OPERATION WINDOW TIMINGS
Fixed-rate Reverse Repo 23:00 hrs to 23:59 hrs
MSF 23:00 hrs to 23:59 hrs
The reversal of these operations will take place along with other LAF operations as is currently being done. The
results of these operations will be published in the Money Market Operation (MMO) press release. The existing
fixed-rate Reverse Repo and MSF windows, available between 17:30 hrs and 19:30 hrs on RTGS working days,
will continue, as hitherto. These changes will come into effect from December 16, 2019 (Monday).
RBI reduces repo rate by 25 basis points in 4th Bimonthly Monetary Policy and no changes in 5th Bimonthly
MPC on 05.12.19 : In its 4th Bi-monthly Monetary Policy Committee meeting, the Reserve Bank of India has
reduced the policy repo rate by 25 basis points (bps). The MPC has also decided to maintain the
accommodative stance of monetary policy. The main decisions taken in the 4th Bi-monthly Monetary Policy
Committee meeting are: The repo rate under the liquidity adjustment facility (LAF) was reduced from 5.40%
to 5.15%. The reverse repo rate under the LAF stands revised to 4.90%. Hence, total The repo rate cut during
2019 is 1.35%. The marginal standing facility (MSF) rate and the Bank Rate is revised to 5.40%. RBI has also
reduced the real GDP growth for 201920 from 6.9% to 6.1%.RBI to transfer Rs 1.76 lakh crore to government
POLICY RATES Wef 05.12.2019 Wef 06.02.2020
CRR 4.00% (15.02.2013) 4.00% (15.02.2013)
SLR 18.25% (12.10.2019) 18.25% (04.01.2020)
Overnight LAF (of NDTL) 0.25% 0.25%
14-days term Repo(of NDTL) 0.75% 0.75%
LAF/REPO RATE 5.15% 5.15%
Reverse REPO 4.90% 4.90%
MSF/Bank Rate 5.40% 5.40%
Maintenance of SLR
As annonced by RBI on 05.12.18, RBI decided to reduce the SLR requirement of banks by 25 basis points every
calendar quarter from 19.50 per cent of of their Net Demand and Time Liabilities (NDTL) to: (i) 19.25 per cent
from January 5, 2019 (ii) 19.00 per cent from April 13, 2019 (iii) 18.75 per cent from July 6, 2019 (iv) 18.50 per
cent from October 12, 2019 (v) 18.25 per cent from January 4, 2020 (vi) 18.00 per cent from April 11, 2020.
The Reserve Bank of India has given its approval to transfer a sum of Rs 1,76,051 crore to the Government of
India, comprising of Rs 1,23,414 crore of surplus for the year 2018-19 and Rs 52,637 crore of excess provisions
identified as per the revised Economic Capital Framework. The panel was led by former RBI Governor Bimala
Jalan.
RBI RATE OF INTEREST ON FLOATING RATE BONDS The rate of interest on the Floating Rate Bonds, 2020
(FRB 2020) applicable for the half year December 21, 2019 to June 20, 2020 shall be 5.15% per annum. It may
be recalled that the rate of interest on FRB, 2020 is set at the average (rounded off to two decimal places) of
implicit yields at the cut-off prices, of the last three auctions of GoI182 day Treasury Bills, held up to period
preceding the coupon reset date, which is December 21, 2019. The implicit yields will be computed by
reckoning 365 days in a year. The coupon rate has been fixed accordingly.
FINANCIAL BENCHMARK ADMINISTRATORS RBI has notified benchmarks administered by Financial Benchmarks
India Pvt. Ltd. (FBIL) as a ‘significant benchmark’ as under: Overnight Mumbai Interbank Outright Rate
(MIBOR) Mumbai Interbank Forward Outright Rate (MIFOR) USD/INR Reference Rate Treasury Bill Rates
Valuation of Government Securities Valuation of State Development Loans (SDL) Further, in terms of
paragraph 3(ii) of the above directions, the person administering the ‘significant benchmark’, shall make an
application to the Reserve Bank within a period of three months from the date of this notification for
authorization to continue administering these benchmarks.
CREDIT GUARANTEE SCHEME FOR PSUs: Union Cabinet has approved a partial credit guarantee scheme for
public sector banks to purchase high rated pooled assets from financially sound NBFCs. PSBs can purchase high
rated pooled assets from financially sound NBFCs/Housing Finance Companies. a) The amount of overall
guarantee will be limited to first loss of up to 10 per cent of fair value of assets being purchased by the banks
under the Scheme, or Rs. 10,000 crore, whichever is lower. b) The scheme would cover NBFCs / HFCs that may
have slipped into SMA-0 category during the one year period prior to 1.8.2018. c) The minimum rating of the
underlying asset pool being purchased by PSBs has been revised from the existing "AA" to "BBB+" The
government expects that the move help address NBFCs/HFCs resolve their temporary liquidity or cash flow
mismatch issues.
RBI STARTS ‘ON TAP’ LICENSING FOR SFBs: The RBI has released guidelines for ‘on tap’ licensing of Small
Finance Banks in the private sector. Existing payments banks (PBs), which have completed five years of
operations, are eligible for conversion into small finance banks. The preference will also be given to those
applicants who plan to set up the bank in under-banked states/districts, such as in the North-East, East and
Central regions of the country. The minimum capital for setting up an SFB has been mandated at Rs.200 crores.
However, the primary (urban) co-operative banks (UCBs), which wish to become SFBs, the initial requirement
of net worth will be Rs.100 crores, which will have to be increased to Rs.200 crores within five years from the
date of commencement of business. With this ‘on tap’ facility, the RBI will now accept applications and grant
licenses for SFBs throughout the year, in contrast to the erstwhile guidelines where the application window
was open until 16 January 2015.
LONGER TERM VARIABLE RATE REVERSE REPO AUCTIONS IN NOVEMBER 2019 The RBI monitors the system
liquidity on an ongoing basis and conducts liquidity management operations based on an assessment of the
evolving liquidity conditions and the requirements of the system. It has been noticed by RBI, since the surplus
liquidity conditions are expected to continue for some time, it would be necessary to absorb part of the surplus
liquidity for a slightly longer duration, while continuing to meet the durable liquidity requirements for the FY
2019-20 on a consistent basis. The internal working group of RBI mandated to review the current liquidity
management framework had recommended longer term repo operations at market related rates to augment
the toolkit for liquidity management operations.
REGULATORY AND SUPERVISORY FRAMEWORK FOR CORE INVESTMENT COMPANIES (CIC) RBI constituted a
Working Group (WG) has submitted its report to the Governor. The key recommendations of the WG headed by
Sh. Tapan Ray are as under: a) Capital contribution by a CIC in a step-down CIC, over and above 10% of its
owned funds, should be deducted from its Adjusted Networth, as applicable to other NBFCs. Further, step-
down CICs may not be permitted to invest in any other CIC, while allowing them to invest freely in other group
companies; b) The number of layers of CICs in a group should be restricted to two. As such, any CIC within a
group shall not make investment through more than a total of two layers of CICs, including itself; c) Every
Group having a CIC should have a Group Risk Management Committee (GRMC); d) Constitution of the Board
level committees viz., Audit Committee and Nomination and Remuneration Committee should be mandated ;
e) Offsite returns may be designed by the Reserve Bank and may be prescribed for the CICs on the lines of
other NBFCs. Annual submission of Statutory Auditors Certificates may also be mandated; and Onsite inspection
of CICs may be conducted periodically. Definition of CIC: A Core Investment Company (CIC) is a Non-Banking
Financial Company (NBFC) which carries on the business of acquisition of shares and securities and holds not
less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds,
debentures, debt or loans in group companies.
Lending by banks to InvITs As per RBI circular dated 18.04.17, banks can BANKING POLICY invest in units of
InvITs subject to the specified conditions. Banks and other stakeholders have been seeking clarity on provision
of credit facilities to InvITs. RBI examined and decided (14.10.19) that banks can lend to InvITs subject to the
following conditions: i) Banks shall put in place a Board approved policy on exposures to InvITs which shall inter
alia cover the appraisal mechanism, sanctioning conditions, internal limits, monitoring mechanism, etc. ii)
Without prejudice to generality, banks shall undertake assessment of all critical parameters including
sufficiency of cash flows at InvIT level to ensure timely debt servicing. The overall leverage of the InvITs and
the underlying SPVs put together shall be within the permissible leverage as per the Board approved policy of
the banks. Banks shall also monitor performance of the underlying SPVs on an ongoing basis as ability of the
InvITs to meet their debt obligation will largely depend on the performance of these SPVs. As InvITs are trusts,
banks should keep in mind the legal provisions in respect of these entities especially those regarding
enforcement of security. iii) Banks shall lend to only those InvITs where none of the underlying SPVs, which
have existing bank loans, is facing ‘financial difficulty’. iv) Bank finance to InvITs for acquiring equity of other
entities shall be subject to the conditions. v) The Audit Committee of the Board of banks shall review the
compliance to the above conditions on a half yearly basis.
Large Exposures Framework As per RBI circular dated 03.06.19, on “Large Exposures Framework (LEF)”,
banks’ exposures to a single NBFC is restricted to 15 percent of their available eligible capital base, while
general single counterparty exposure limit is 20 percent, which can be extended to 25 percent by banks’
Boards under exceptional circumstances. RBI decided (12.09.19) that a bank’s exposure to a single NBFC
(excluding gold loan companies) will be restricted to 20 percent of that bank’s eligible capital base.
AMENDMENT TO KYC – AADHAR -Government. of India, on Feb 13, 2019 had notified amendments to the
Prevention of Money-laundering (Maintenance of Records) Rules, 2005. Further, an Ordinance, “Aadhaar and
other Laws (amendment) Ordinance, 2019”, was notified by the Government amending, inter alia, the
Prevention of Money Laundering Act, 2002. Accordingly, following amendments have been made in KYC
Directions by RBI, on 29.05.19: a) Banks can carry out Aadhaar authentication/ offline-verification of an
individual who voluntarily uses his Aadhaar number for identification purpose. (Section 16 of the amended MD
on KYC) b) ‘Proof of possession of Aadhaar number’ has been added to the list of Officially Valid Documents
(OVD) with a proviso that where the customer submits ‘Proof of possession of Aadhaar number’ as OVD, he may
submit it in such form as are issued by the Unique Identification Authority of India (UIDAI). (Section 3 of the
amended MD) c) For customer identification of “individuals”:
i. For individual desirous of receiving any benefit or subsidy under any scheme notified under section 7 of the
Aadhaar (Targeted Delivery of Financial and Other subsidies, Benefits and Services) Act, 2016, the bank shall
obtain the customers Aadhaar and may carry out its e-KYC authentication based on his declaration that he is
desirous of receiving benefit/subsidy under the Aadhaar Act, 2016. (Section 16 of the amended MD)
ii. For non-DBT beneficiary customers, the Regulated Entities (REs) shall obtain a certified copy of any OVD
containing details of his identity and address along with one recent photograph. (Section 16 of the amended
MD) d) REs shall ensure that the customers (non-DBT beneficiaries) while submitting Aadhaar for Customer Due
Diligence, redact or blackout their Aadhaar number in terms of sub-rule 16 of Rule 9 of the amended PML
Rules.(Section 16 of the amended MD) e) REs other than banks may identify a customer through offline
verification under the Aadhaar Act with his/her consent. (Section 16 of the amended MD) f) In case OVD
furnished by the client does not contain updated address, certain deemed OVDs for the limited purpose of
proof of address can be submitted provided that the OVD updated with current address is submitted within 3
months. (Section 3(a) ix of the amended MD) g) For non-individual customers, PAN/Form No. 60 of the entity
(for companies and Partnership firms – only PAN) shall be obtained apart from other entity related documents.
The PAN/Form No. 60 of the authorised signatories shall also be obtained.(Section 30-33) h) For existing bank
account holders, PAN or Form No. 60 is to be submitted within such timelines as may be notified by the
Government, failing which account shall be subject to temporary ceasing till PAN or Form No. 60 is submitted.
However, before temporarily ceasing operations for an account RE shall give the customer an accessible notice
and a reasonable opportunity to be heard.(Section 39 of the amended MD).
SAFE CUSTODY OF RBI’s GOLD RESERVES  Certain sections of the print and social media had reported about
RBI shifting abroad a part of its gold holding in 2014.  The Reserve Bank has clarified that the gold reserves
being maintained by it are in safe custody and no gold was shifted by the RBI from India to other countries in
2014 or thereafter.  The media reports are factually incorrect. It is a normal practice for Central Banks world
over, to keep their gold reserves overseas with Central Banks of other countries like Bank of England for safe
custody.
RBI KEHTA HAI As part of its latest awareness initiative, RBI has come out with a series of awareness messages
thru ‘RBI Kehta Hai’. The latest is on the theme of Banking Ombudsman to make people aware of the various
grievance redressal mechanisms available to them as Bank Customers
Legal Entity Identifier Code for participation in non-derivative markets The Legal Entity Identifier (LEI) code
has been conceived of, as a key measure to improve the quality and accuracy of financial data systems for
better risk management, post the Global Financial Crisis. The LEI is a 20-character unique identity code
assigned to entities who are parties to a financial transaction. Globally, use of LEI has expanded beyond
derivative reporting and it is being used in areas relating to banking, securities market, credit rating, market
supervision. In India, the LEI system has been implemented in a phased manner for participants (other than
individuals) in the over-the-counter markets for rupee interest rate derivatives, foreign currency derivatives
and credit derivatives in India and for large corporate borrowers of banks. On 29.11.18, RBI proposed to
implement the LEI mechanism for all financial market transactions undertaken by non-individuals in interest
rate, currency or credit markets regulated.All participants, other than individuals, undertaking transactions in the
markets regulated by RBI viz., Government securities markets, money markets (markets for any instrument with a
maturity of one year or less) and non-derivative forex markets (transactions that settle on or before the spot date) shall
obtain Legal Entity Identifier (LEI) codes by the due date indicated in the schedule. Only those entities that obtain an LEI
code on or before the due dates applicable to them shall be able to undertake transactions in these financial markets
after the due date, either as an issuer or as an investor or as a seller / buyer. Transactions undertaken on recognized
stock exchanges are outside the purview of the LEI requirement. Entities responsible for executing transactions,
reporting or for depository functions in these markets, shall capture the LEI code of the transacting participants in their
systems. Entities can obtain LEI from any of the Local Operating Units (LOUs) accredited by the Global Legal Entity
Identifier Foundation (GLEIF). In India LEI code may be obtained from Legal Entity Identifier India Ltd. (LEIL).
Entities undertaking financial transactions shall ensure that their LEI code is considered current under the rules of
the Global LEI System. Lapsed LEI codes shall be deemed invalid for transactions in markets regulated by RBI.
The previous implementation time deadline has been extended on 27.04.19 RBI as under:
Phase-1 : Entities with net worth of above Rs.10000 million by 31.12.2019
Phase-2 : Entities between Rs.2000 million and Rs.10000 million by 31.12.19
Phase-3: Entities with net worth up to Rs.2000 Millions by 31.03.20.
Ombudsman Scheme for Non-Banking Financial Companies, 2018
On 23.02.2018, RBI had implemented the Ombudsman Scheme for Non-Banking Financial Companies (NBFCs) as
defined in Section 45-I(f) of the Reserve Bank of India Act, 1934 and registered with the RBI under Section 45-IA of
the Reserve Bank of India Act, 1934 which are authorised to accept deposits. The Scheme was to be extended to
remaining identified categories of NBFCs based on experience gained. In partial modification of the Notification, RBI
directed that the Non-banking Financial Companies, as defined in Section 45-I(f) of the Reserve Bank of India Act, 1934
and registered with the RBI under Section 45-IA of the Reserve Bank of India Act, 1934 which (a) are authorised to accept
deposits; (b) are Non-Deposit Taking Non-Banking Financial Companies having customer interface, with assets size of
Rupees 100 crore or above, as on the date of the audited balance sheet of the previous financial year, or of any such
asset size as the RBI may prescribe, will come within the ambit, and shall comply with the provisions of the Ombudsman
Scheme for Non-Banking Financial Companies, 2018. w.e.f. 26.04.2019. The Non-Banking Financial Company
Infrastructure Finance Company (NBFC-IFC),Core Investment Company (CIC), Infrastructure Debt Fund-Non-Banking
Financial Company (IDF-NBFC) and an NBFC under liquidation, are excluded from the ambit of the Scheme.
The Scheme will continue to be administered from the offices of the Non-Banking Financial Companies Ombudsman
in four metro centers viz. Chennai, Kolkata, Mumbai and New Delhi for handling complaints from the respective
zones, so as to cover the entire country. 4. The extension of the Scheme to eligible Non-Deposit Accepting Non-
Banking Financial Companies shall come into effect and force from April 26, 2019.
Review of Instructions on Bulk Deposit -In terms of extant instructions of RBI, banks have been given
discretion to offer differential rate of interest (DRI) on the bulk deposits as per their requirements and Asset-
Liability Management (ALM) projections. In its February 2019 policy review, RBI decided to revise the definition
of ‘bulk deposits’ and provide operational freedom to banks in raising these deposits. Accordingly on 22.02.19,
RBI issued the following changes: Bulk deposit would mean single Rupee term deposits of Rs.2 cr and above for
Scheduled commercial Banks (excluding Regional Rural banks) and Small Finance Banks. The banks shall
maintain the bulk deposit interest rate card in their Core banking system to facilitate supervisory review.
Special Deposit Scheme (SDS)-1975 -Payment of interest for calendar year 2018 RBI informed banks that
gazette notifications related to interest rates for SDS 1975 are available in Government of India website viz.
egazette.nic.in which can be perused for guidance. Banks have been advised on 06.12.18, to ensure that
interest for the calendar year 2018 for SDS 1975 is disbursed to the account holders as per the rates mentioned
in the gazette. RBI further added that interest for the calendar year 2018 may be disbursed to the SDS account
holders preferably through electronic mode on January 01, 2019 itself.
Discontinuation of Paper to Follow requirement for State Govt. Cheques To enhance efficiency in cheque
clearing, RBI had introduced Cheque Truncation System (CTS), facilitating the presentation and payment of
cheques without their physical movement. Paper to follow (P2F) was discontinued for Central Govt. cheques
from Feb 2016. RBI on 20.06.19, dispensed with the requirement of forwarding paid State Govt. cheques in
physical form to State Government departments/treasuries. The guidelines cover State Governments which
give their consent for withdrawal of P2F arrangement. In case any SG desires to have a parallel run, it may be
done for 3 months. Conditions: a. Presenting banks & drawee banks would continue to discharge their duties
prescribed under various Acts/ Regulations/Rules with respect to payment of cheques. The government
cheques would henceforth be paid in CTS clearing solely based on their electronic images. The paid paper
cheques would be retained by presenting bank. b. In case any drawee bank desires to verify the government
cheque in physical form before passing it for payment, the image would be returned unpaid under the reason
“present with document”. The presenting bank on such instances shall ensure that the instrument is presented
again in the next applicable clearing session without any reference to the account holder (payee). c. The
presenting banks are required to preserve the physical instruments in their custody securely for a period of 10
years as required under Procedural Guidelines for CTS. In case some specific cheques are required for the
purpose of any investigation, enquiry, etc., under the law, they may be preserved beyond 10 years. Drawee
banks shall make necessary arrangements to preserve the images of all government cheques for a period of 10
years with themselves or through the National Archival System put in place by National Payments Corporation
of India (NPCI). d. The government cheques paid by a drawee bank across its counter by way of cash
withdrawal or transfer also need to be truncated and preserved for 10 years. e. The branch handling the State
Government transactions shall continue to send the Payment Scrolls on a daily basis in the prescribed form to
Sub-Treasury/Treasury to whom they are attached as hitherto. The cheques will not be attached with the
payment scroll, but the electronic images of paid cheques (by way of cash, clearing and transfer), preserved by
the presenting bank, shall be provided to the Office of AG/State Govt. Departments/Treasuries/SubTreasuries
by way of secured electronic communication/ email, etc., as per their requirement. f. At any time during the
preservation period of cheques, Office of AG/State Government Departments/Treasuries/ Sub-Treasuries may
require any paid cheque in physical form. The dealing branch shall arrange to furnish the cheques paid by it by
way of cash and transfer immediately. Government cheques drawn on RBI / agency banks shall be presented in
the grid within whose jurisdiction the accredited/ authorised branch of paying bank is located.
Complaint Management System of RBI On 24.06.19, RBI launched The Complaint Management System (CMS). It
is a software application to facilitate RBI’s grievance redressal processes. Members of public can access the
CMS portal at RBI’s website to lodge their complaints against any of the entities regulated by RBI. CMS has
been designed to enable on-line filing of complaints. Salient Features: 1. It provides acknowledgement
through SMS/Email notification(s), status tracking through unique registration number, receipt of closure
advices and filing of Appeals. 2. It provides voluntary feedback on customer’s experience. 3. It facilitates the
regulated entities to resolve customer complaints received through CMS by providing seamless access to their
Principal Nodal Officers/Nodal Officers. 4. It generates a diverse set of reports to monitor & manage
grievances by Regulated Entities. They can use the information from CMS for undertaking root cause analyses
and initiating appropriate corrective action, if required. 5. RBI officials handling the complaints can track the
progress of redressal. The information available in CMS could also be used for regulatory and supervisory
interventions, if required. 6. With the launch of CMS, the processing of complaints received in the offices of
Banking Ombudsman (BO) and Consumer Education and Protection Cells (CEPCs) of RBI has been digitalized.
Expert Committee on Economic Capital Framework -RBI in consultation with the Government of India,
constituted an Expert Committee to review the extant Economic Capital Framework of the RBI with Dr. Bimal
Jalan (former RBI Governor) as Chairman. The terms of reference of the Committee are given below: Keeping
in consideration (i) statutory mandate under section 47 of the RBI Act that the profits of the RBI shall be
transferred to the Government, after making provisions ‘which are usually provided by the bankers’, and (ii)
public policy mandate of the RBI, including financial stability considerations, the Expert Committee would: 1.
review status, need and justification of various provisions, reserves and buffers presently provided for by the
RBI; and 2. review global best practices followed by the central banks in making assessment and provisions for
risks which central bank balance sheets are subject to; 3. suggest an adequate level of risk provisioning that
RBI needs to maintain; 4. determine whether RBI is holding provisions, reserves and buffers in surplus / deficit
of required level of such provisions, reserves and buffers; 5. propose a suitable profits distribution policy
taking into account all the likely situations of the RBI, including the situations of holding more provisions than
required and the RBI holding less provisions than required; 6. Any other related matter including treatment of
surplus reserves, created out of realised gains, if determined to be held. The Expert Committee will submit its
report within a period of 90 days from the date of its first meeting.
Withdrawal of exemptions granted to Housing Finance Institutions -Housing Finance Institutions as defined
under Clause (d) of Section 2 of the National Housing Bank Act, 1987 are currently exempt from the provisions
of Chapter IIIB of Reserve Bank of India Act, 1934. On a review, RBI decided (on 11.11.19) to withdraw these
exemptions and make the provisions of Chapter IIIB except Section 45-IA of Reserve Bank of India Act, 1934,
applicable to them.
COMPENSATION OF WHOLE TIME DIRECTORS / CEOs / MATERIAL RISK TAKERS BACKGROUND:  The
compensation practices, especially of large financial institutions, were one of the important factors which
contributed to the global financial crisis in 2008. Employees were often rewarded for increasing short-term
profit without adequate recognition of the risks and long-term consequences that their activities posed to the
organisations. These perverse incentives amplified excessive risk taking that severely threatened the global
financial system. The compensation issue has, therefore, been at the centre stage of regulatory reforms.  In
the wake of financial crisis, in order to address the issues in a coordinated manner across jurisdictions, the
Financial Stability Forum (later the Financial Stability Board i.e. FSB) brought out a set of Principles for Sound
Compensation Practices. The Principles are intended to reduce incentives towards excessive risk taking that
may arise from the structure of compensation schemes.  The Principles call for effective governance of
compensation, alignment of compensation with prudent risk taking, effective supervisory oversight and
stakeholder engagement. The Principles have been endorsed by the G-20 countries and the Basel Committee on
Banking Supervision (BCBS).  Taking into account the stipulations in these documents, RBI had issued the
Guidelines on compensation applicable to Whole Time Directors / Chief Executive Officers / Risk Takers and
Control Function Staff, etc. for implementation by private sector and foreign banks from the financial year
2012-13.  These Guidelines have since been reviewed based on experience gained and evolving international
best practices. The final guidelines, will be applicable for pay cycles beginning from / after April 01, 2020. 
Private sector banks, foreign banks operating under the Wholly Owned Subsidiary mode (WOS), and foreign
banks operating in India under the branch mode are required to obtain regulatory approval for grant of
remuneration (i.e. compensation) to WTDs/ CEOs in terms of Section 35B of the Banking Regulation Act, 1949
(B.R. Act, 1949).
 HIGHLIGHTS: a) The policy should cover all aspects of the compensation structure such as fixed pay,
perquisites, performance bonus, guaranteed bonus ( joining / sign-on bonus), severance package, share-linked
instruments e.g. Employee Stock Option Plan (ESOPs), pension plan, gratuity, etc. b) At least 50%, should be
variable and paid on the basis of individual, business-unit and firm-wide measures that adequately measure
performance. At higher levels of responsibility, the proportion of variable pay should be higher. The total
variable pay shall be limited to a maximum of 300% of the fixed pay for any given period. There are
exceptions to this.  In case variable pay is up to 200% of the fixed pay, a minimum of 50% of the variable pay;
and in case variable pay is above 200%, a minimum of 67% of the variable pay should be via noncash
instruments.  In the event that an executive is barred by statute or regulation from grant of sharelinked
instruments, his variable pay will be capped at 150% of the fixed pay, but shall not be less than 50% of the
fixed pay.  If a bank performs badly, the variable pay should be reduced.  A minimum of 60% of the total
variable pay must invariably be under deferral arrangements, minimum 3 years. At least 50% of the cash bonus,
if it is more than Rs.25 lakh, should also be deferred. The deferred remuneration should start vesting with
executive only at the end of the first year, on a pro rata basis.  If the bank has under-reported bad loans,
beyond the limit set by the RBI, the bank shall not pay the unvested portion of the variable compensation for
the assessment year. Further, no proposal for increase in variable pay (for the assessment year) shall be
entertained.  Banks are allowed to 'guarantee' only a joining bonus at the time of hiring. This would not be
part of the fixed pay or the variable part. Severance pay will include only accrued benefits except in cases
where a statute mandates it.  Risk control and compliance staff have been kept out of the new guidelines
mandating a minimum amount of variable pay.  Private sector and foreign banks operating in India are
required to obtain regulatory approval for grant of remuneration.  The compensation for material risk takers;
people whose decisions affect the risk, in any bank should be paid as much as the top 0.3% of the bank's staff,
or at least as much as the lowest paid person in the senior management.
 Malus / Clawback:  Malus allows the Remuneration Committee to reduce 'at risk' remuneration prior to
vesting. A clawback refers to the cancellation of unvested incentives, subject to applicable law, where some or
all the performance based remuneration should not be received.  The deferred compensation should be
subject to malus / clawback arrangements in the event of subdued or negative financial performance of the
bank and/or the relevant line of business in any year.  The banks shall identify a representative set of
situations in their Compensation Policies, which require them to invoke the malus and clawback clauses that
may be applicable on entire variable pay. When setting criteria for the application of malus and clawback,
banks should also specify a period during which malus and/or clawback can be applied, covering at least
deferral and retention periods.  Wherever the assessed divergence in bank‟s provisioning for Non-Performing
Assets (NPAs) or asset classification exceeds the prescribed threshold for public disclosure, the bank shall not
pay the unvested portion of the variable compensation for the assessment year under „malus‟ clause. 
Further, in such situations, no proposal for increase in variable pay (for the assessment year) shall be
entertained. In case the bank‟s post assessment Gross NPAs are less than 2.0%, these restrictions will apply
only if criteria for public disclosure are triggered either on account of divergence in provisioning or both
provisioning and asset classification.
 Guaranteed Bonus:  Guaranteed bonus is not consistent with sound risk management or the „pay for
performance‟ principles and should not be part of the compensation plan. Therefore, guaranteed bonus should
only occur in the context of hiring new staff as joining/sign-on bonus and be limited to the first year. 
Further, joining/sign-on bonus should be in the form of sharelinked instruments only, since upfront payments
in cash would create perverse incentives. Such bonus will neither be considered part of fixed pay nor part of
variable pay. Further, banks should not grant severance pay other than accrued benefits (gratuity, pension,
etc.) except in cases where it is mandatory under any statute.
 For Risk Control and Compliance Staff:  Members of staff engaged in financial and risk control, including
internal audit, should be compensated in a manner that is independent of the business areas they oversee and
commensurate with their key role in the bank.  Back office and risk control employees play a key role in
ensuring the integrity of risk measures. If their own compensation is significantly affected by short-term
measures, their independence may be compromised. If their compensation is too low, the quality of such
employees may be insufficient for their tasks and their authority may be undermined. The mix of fixed and
variable compensation for control function personnel should be weighted in favour of fixed compensation.
Therefore, the requirement of minimum 50% of total compensation to be paid in the form of variable pay will
not be applicable for this category of staff. However, a reasonable proportion of compensation has to be in the
form of variable pay, so that exercising the options of malus and/or clawback, when warranted, is not
rendered infructuous. Subject to the above, while devising compensation structure for such staff, banks should
adopt principles similar to principles enunciated for WTDs/CEOs, as appropriate.  Identification of Material
Risk Takers of the Bank: Banks should identify their Material Risk Takers (MRTs) whose actions have a material
impact on the risk exposure of the bank, and who satisfy the qualitative and any one of the quantitative
criteria given below:  Disclosure:  Banks are required to make disclosure on remuneration of
WTDs/CEOs/MRTs on an annual basis at the minimum, in their Annual Financial Statements.  To improve
clarity on disclosure, banks should make the disclosures in table or chart format and make disclosures for
previous as well as the current reporting year.
IFSC Banking Units - Activities RBI issued directions related to IFSC BankingUnits (IBUs) on 01.04.15. These
directions have been modified on 23.12.19 as under:
1. RBI will not prescribe any limit for raising short-term liabilities from banks. However, the IBUs must
maintain liquidity coverage ratio (LCR) as applicable to Indian banks on a stand-alone basis and strictly follow
the liquidity risk management guidelines issued by RBI to banks. Further, NSFR will also be applicable to IBUs
as and when it is applied to Indian banks.
2. IBUs are not allowed to open savings accounts. They can open foreign currency current accounts of units
operating in IFSC and of non-resident institutional investors to facilitate their investment transactions. They
can also open foreign currency current accounts (including escrow accounts) of their corporate borrowers
subject to the provisions of FEMA 1999 and regulations issued thereunder, wherever applicable. However, IBUs
cannot raise liabilities from retail customers including high net worth individuals (HNIs). Also, no cheque
facility will be available for holders of current accounts in the IBUs. All transactions through these accounts
must be undertaken via bank transfers.
3. IBUs can accept fixed deposits in foreign currency of tenor less than one year from non-bank entities and
can also repay fixed deposits prematurely without any time restrictions.
4. IBUs will be required to scrupulously follow “Know Your Customer (KYC)”, Combating of Financing of
Terrorism (CFT) and other anti-money laundering instructions issued by RBI from time to time, including the
reporting thereof, as prescribed by the Reserve Bank /other agencies in India. IBUs are prohibited from
undertaking cash transactions.
Review of Master Directions - Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve
Bank) Directions, 2017 RBI had issued the directions on 04.10.17. On a review, RBI decided on 23.12.19 that:
(i) The aggregate exposure of a lender to all borrowers at any point of time, across all P2P platforms, shall be
subject to a cap of Rs.50,00,000 provided that such investments of the lenders on P2P platforms are consistent
with their networth. The lender investing more than Rs.10,00,000 across P2P platforms shall produce a
certificate to P2P platforms from a practicing Chartered Accountant certifying minimum networth of
Rs.50,00,000. Further, all the lenders shall submit declaration to P2P platforms that they have understood all
the risks associated with lending transactions and that P2P platform does not assure return of
principal/payment of interest. (ii) Escrow accounts to be operated by bank promoted trustee for transfer of
funds need not be mandatorily maintained with the bank which has promoted the trustee.
LIMITS ON EXPOSURE TO SINGLE AND GROUP BORROWERS/PARTIES AND LARGE EXPOSURES - UCBs
 Large exposure of banks to single borrowers/parties or groups of connected borrowers/parties leads to credit
concentration risk. When large exposures to a few single parties/groups become non-performing, it affects the
capital / net worth of the concerned bank significantly and, at times, leads to liquidity and/or solvency risk for
the bank.  Credit exposure in many urban co-operative banks (UCBs), particularly scheduled/large UCBs,
predominantly comprises large ticket loans. Such predominance of large ticket loans in the bank’s portfolio
reduces diversification of credit risk and also reduces the scope for greater financial inclusion which is one of
the main roles of UCBs.  Keeping in view the above aspects, the extant single/group exposure limits of UCBs
have been reviewed by RBI and has decided to rationalize the single/group exposure limits for UCBs with a
view to containing the concentration risk.  The prudential exposure limits for UCBs for a single
borrower/party and a group of connected borrowers/parties shall henceforth be 10 per cent and 25 per cent,
respectively, of their Tier-I capital. The revised exposure limits shall apply to all types of fresh exposures
taken by UCBs.  UCBs shall bring down their existing exposures which are in excess of the revised limits to
within the aforesaid revised limits by March 31, 2023. However, where the existing exposure comprises only
term loans and non-fund based facilities, while no further exposure shall be taken on such borrowers, these
facilities may be allowed to continue as per their respective repayment schedule / till maturity.  UCBs shall
have at least 50 per cent of their loan portfolio comprising loans of not more than Rs.25 lakh per
borrower/party. UCBs which do not, at present, comply with the aforesaid limits shall take necessary steps to
align their loan portfolio in the above manner by March 31, 2023.  RBI has been clarified that ‘loans’ for the
purpose shall include all types of funded and non-funded exposures in the nature of credit.
ON-TAP’ LICENSING OF PRIVATE SECTOR SMALL FINANCE BANKS (SFBs)-The Reserve Bank of India has
released guidelines for ‘on-tap’ licensing of Small Finance Banks (SFBs) in the private sector. Major changes
from the earlier guidelines, are: a) The licensing window will be open on-tap; b) Minimum paid-up voting
equity capital / net worth requirement shall be Rs. 200 crore; c) For Primary (Urban) Co-operative Banks
(UCBs), desirous of voluntarily transiting into Small Finance Banks (SFBs) initial requirement of net worth shall
be at Rs.100 crore, which will have to be increased to Rs.200 crore within five years from the date of
commencement of business. Incidentally, the networth of all SFBs currently in operation is in excess of Rs. 200
crore; d) SFBs will be given scheduled bank status immediately upon commencement of operations; e) SFBs will
have general permission to open banking outlets from the date of commencement of operations; Payments
Banks can apply for conversion into SFB after five years of operations, if they are otherwise eligible as per
these guidelines.
RBI’s 'OPERATION TWIST'-Operation Twist is a market term for special open market operations (OMO)
conducted by RBI, where it purchases long-term government bonds and sells short-term bonds. Google searches
for "Operation Twist" surged after the RBI announced its version of the US Federal Reserve's unconventional
monetary policy. Most searches for the term came from Maharashtra, the state that's home to the financial hub
Mumbai. The benchmark 10-year yield plunged by the most in more than two months following the bank's
announcement. The Reserve Bank of India will buy longer-tenor bonds while selling shorter debt. The concept
is similar to ‘Operation Twist’ used by the Fed in 2011-2012 in an effort to cheapen long-term borrowing of 10
years and spur bank lending. RBI has conducted four rounds of purchase and sale of government bonds.
RBI RATE OF INTEREST ON FLOATING RATE BONDS-The rate of interest on the Floating Rate Bonds, 2020 (FRB
2020) applicable for the half year December 21, 2019 to June 20, 2020 shall be 5.15% per annum. It may be
recalled that the rate of interest on FRB, 2020 is set at the average (rounded off to two decimal places) of
implicit yields at the cut-off prices, of the last three auctions of GoI182 day Treasury Bills, held up to period
preceding the coupon reset date, which is December 21, 2019. The implicit yields will be computed by
reckoning 365 days in a year. The coupon rate has been fixed accordingly.
ASSIGNMENT OF UTLBC CONVENORSHIP The erstwhile State of Jammu and Kashmir has been reorganized into
Union Territory of Jammu and Kashmir and Union Territory of Ladakh with effect from October 31, 2019. In
view of the above, it has been decided to assign the Union Territory Level Bankers’ Committee (UTLBC)
Convenorship of the Union Territory of Jammu and Kashmir to Jammu & Kashmir Bank Ltd. and the Union
Territory of Ladakh to State Bank of India. There is no change in the State Level Bankers’ Committee (SLBC) /
UTLBC Convenorship of other States and Union Territories.
FINANCIAL BENCHMARK ADMINISTRATORS- RBI has notified benchmarks administered by Financial Benchmarks
India Pvt. Ltd. (FBIL) as a ‘significant benchmark’ as under: Overnight Mumbai Interbank Outright Rate
(MIBOR) Mumbai Interbank Forward Outright Rate (MIFOR) USD/INR Reference Rate Treasury Bill Rates
Valuation of Government Securities Valuation of State Development Loans (SDL) Further, in terms of
paragraph 3(ii) of the above directions, the person administering the ‘significant benchmark’, shall make an
application to the Reserve Bank within a period of three months from the date of this notification for
authorization to continue administering these benchmarks.
SETTING UP OF IFSC BANKING UNITS (IBUS) –PERMISSIBLE ACTIVITIES- The Task Force (TF) on Offshore Rupee
Markets chaired by Smt. Usha Thorat had recommended introduction of non-deliverable Rupee Derivatives in
IFSCs in a phased manner, starting with exchange traded currency derivatives (ETCD) to be followed by Over
the Counter (OTC) derivatives at a later stage. RBI’s decision to accept the above recommendation and permit
Rupee derivatives (with settlement in foreign currency) to be traded in IFSC was announced in para 2 of the
Statement on Developmental and Regulatory policies. IBUs are allowed to participate in exchange traded
currency derivatives on Rupee (with settlement in foreign currency) listed on stock exchanges set up at IFSCs.
Banks shall ensure that their IBUs have necessary expertise to price, value and compute the capital charge and
manage the risks associated with the products / transactions intended to be offered.
UNLAWFUL ACTIVITIES PREVENTION ACT (UAPA), 1967 Regulated Entities (REs)-shall ensure that in terms of
Section 51A of the Unlawful Activities Prevention (UAPA) Act, 1967, they do not have any account in the name
of individuals/entities appearing in the lists of individuals and entities, suspected of having terrorist links,
which are approved by and periodically circulated by the United Nations Security Council (UNSC).
KNOW YOUR CUSTOMER (KYC) AMENDMENTS-With a view to leveraging the digital channels for Customer
Identification Process (CIP) by Regulated Entities (REs), the Reserve Bank has decided to permit Video based
Customer Identification Process (V-CIP) as a consent based alternate method of establishing the customer’s
identity, for customer on boarding. A) Changes due to amendments to the PML Rules
a) “Digital KYC” has been defined as capturing live photo of the customer and officially valid document or the
proof of possession of Aadhaar, where offline verification cannot be carried out, along with the latitude and
longitude of the location where such live photo is being taken by an authorised officer of the Reporting Entity
(RE) as per the provisions contained in the Act. Steps to carry out the Digital KYC process have also been
stipulated.
b) “Equivalent e-document”: It is a electronic equivalent of a document, issued by the issuing authority of such
document with its valid digital signature including documents issued to the digital locker account of the
customer.
c) Section 16 has been amended and accordingly.
I) Customer, for the purpose of Customer Due Diligence (CDD) process, shall submit: • The Aadhaar number
where he is desirous of receiving any benefit or subsidy under any scheme. • The proof of possession of
Aadhaar number where offline verification can be carried out; or • The proof of possession of Aadhaar number
where offline verification cannot be carried out or • Any Officially Valid Document (OVD) or the equivalent e-
document thereof containing the details of his identity and address; and • The Permanent Account Number or
the equivalent edocument thereof or Form No. 60 as defined in Income-tax Rules, 1962; and • Such other
documents including in respect of the nature of business and financial status of the client, or the equivalent e-
documents thereof as may be required by the RE.
II. Provided that where the customer has submitted a) The bank or Reporting Entity (RE) notified under first
proviso to sub-section (1) of section 11A of the PML Act, such bank or RE shall carry out authentication of the
customer’s Aadhaar number using e-KYC authentication facility provided by the Unique Identification Authority
of India. b) Proof of possession of Aadhaar, where offline verification can be carried out, the RE shall carry out
offline verification c) An equivalent e-document of any OVD, the RE shall verify the digital signature as per the
provisions of the Information Technology Act, 2000. d) Proof of possession of Aadhaar number where offline
verification cannot be carried out. The RE shall carry out verification through digital KYC as specified under of
the Master Direction. e) Provided, for a period not beyond such date as may be notified by the Government for
a class of REs, instead of carrying out digital KYC, the RE pertaining to such class may obtain a certified copy of
the proof of possession of Aadhaar number or the OVD and a recent photograph where an equivalent e-
document is not submitted.
III. Equivalent e-document for accounts of non-individual customer.
IV. Where a customer has provided his Aadhaar number for identification and wants to provide a current
address, different from the address as per the identity information available in the Central Identities Data
Repository, he may give a self-declaration to that effect to the Regulated Entity.
B) Changes due to introduction of Video based Customer Identification Process (V-CIP)
a) Definition of V-CIP has been inserted in Section 3 of the Master Direction
b) The process of V-CIP has been specified in Section 18 in terms of which, REs may undertake live V-CIP, to be
carried out by an official of the RE, for establishment of an account based relationship with an individual
customer, after obtaining his informed consent and shall adhere to the following stipulations:
c) The official of the RE performing the V-CIP shall record video as well as capture photograph of the customer
present for identification and obtain the identification information as below: • Banks: can use either OTP
based Aadhaar e-KYC authentication or Offline Verification of Aadhaar for identification. Further, services of
Business Correspondents (BCs) may be used by banks for aiding the V-CIP. • REs other than banks: can only
carry out Offline Verification of Aadhaar for identification.
d)Image of PAN: RE shall capture a clear image of PAN card to be displayed by the customer during the
process, except in cases where e-PAN is provided by the customer. The PAN details shall be verified from the
database of the issuing authority.
e) Geotagging: Live location of the customer (Geotagging) shall be captured to ensure that customer is
physically present in India.
f) Matching Photo with Aadhaar: The official of the RE shall ensure that photograph of the customer in the
Aadhaar/PAN details matches with the customer undertaking the V-CIP and the identification details in
Aadhaar/PAN shall match with the details provided by the customer.
g) The official of the RE shall ensure that the sequence and/or type of questions during video interactions are
varied in order to establish that the interactions are real-time and not pre-recorded.
h) In case of offline verification of Aadhaar using XML file or Aadhaar Secure QR Code, it shall be ensured that
the XML file or QR code generation date is not older than 3 days from the date of carrying out V-CIP. i) All
accounts opened through V-CIP shall be made operational only after being subject to concurrent audit, to
ensure the integrity of process. j) RE shall ensure that the process is a seamless, realtime, secured, end-to-end
encrypted audiovisual interaction with the customer and the quality of the communication is adequate to allow
identification of the customer beyond doubt. RE shall carry out the liveliness check in order to guard against
spoofing and such other fraudulent manipulations. k) To ensure security, robustness and end to end encryption,
the REs shall carry out software and security audit and validation of the V-CIP application before rolling it out.
l) The audiovisual interaction shall be triggered from the domain of the RE itself, and not from third party
service provider, if any. The V-CIP process shall be operated by officials specifically trained for this purpose.
The activity log along with the credentials of the official performing the V-CIP shall be preserved. m) REs shall
ensure that the video recording is stored in a safe and secure manner and bears the date and time stamp. n)
REs are encouraged to take assistance of the latest available technology, including Artificial Intelligence (AI)
and face matching technologies, to ensure the integrity of the process as well as the information furnished by
customer. However, the responsibility of customer identification shall rest with the RE. o) RE shall ensure to
redact or blackout the Aadhaar number in terms of Section 16. p) BCs can facilitate the process only at the
customer end the official at the other end of V-CIP interaction should necessarily be a bank official.
LOANS & ADVANCES
REPORT ON THE REGULATORY AND SUPERVISORY FRAMEWORK FOR CICs:  The Working Group to Review
Regulatory and Supervisory Framework for Core Investment Companies (CICs) under the chairmanship of Shri
Tapan Ray, former Secretary, Ministry of Corporate Affairs submitted its report to the Governor, RBI.  A Core
Investment Company (CIC) is a Non-Banking Financial Company (NBFC) which carries on the business of
acquisition of shares and securities and holds not less than 90% of its net assets in the form of investment in
equity shares, preference shares, bonds, debentures, debt or loans in group companies. Further investments in
equity shares in group companies constitutes not less than 60% of its net assets. The Working Group (WG)
examined the current regulatory and supervisory framework for CICs with a view to identify and suggest
measures for limiting the risks posed by the CICs. The key recommendations of the Working Group are as
follows: i) Capital contribution by a CIC in a step-down CIC, over and above 10% of its owned funds, should be
deducted from its Adjusted Networth, as applicable to other NBFCs. Further, stepdown CICs may not be
permitted to invest in any other CIC, while allowing them to invest freely in other group companies; ii) The
number of layers of CICs in a group should be restricted to two. As such, any CIC within a group shall not make
investment through more than a total of two layers of CICs, including itself; iii) Every Group having a CIC
should have a Group Risk Management Committee (GRMC); iv) Constitution of the Board level committees viz.,
Audit Committee and Nomination and Remuneration Committee should be mandated; v) Offsite returns may be
designed by the RBI and may be prescribed for the CICs on the lines of other NBFCs. Annual submission of
Statutory Auditors Certificates may also be mandated; and vi) Onsite inspection of CICs may be conducted
periodically.
Reporting of Large Exposures to Central Repository of Information on Large Credits (CRILC) – Urban
Cooperative Banks (UCBs) On 27.12.19, RBI decided that Primary (Urban) Co-operative Banks (UCBs) having
total assets of Rs.500 crore and above as on 31st March of the previous financial year shall report credit
information, including classification of an account as Special Mention Account (SMA), on all borrowers having
aggregate exposures of Rs.5 crore and above with them, to Central Repository of Information on Large Credits
(CRILC) maintained by the Reserve Bank. Aggregate exposure shall include all fund-based and nonfund based
exposure, including investment exposure on the borrower. To start with, UCBs will be required to submit CRILC
Report on quarterly basis with effect from December 31, 2019.
PEER TO PEER LENDING PLATFORM-On a review, the Reserve Bank of India has decided as follows: a) The
aggregate exposure of a lender to all borrowers at any point of time, across all P2P platforms, shall be subject
to a cap of Rs. 50,00,000 provided that such investments of the lenders on P2P platforms are consistent with
their net-worth. b) The lender investing more than Rs. 10,00,000 across P2P platforms shall produce a
certificate to P2P platforms from a practicing Chartered Accountant certifying minimum net-worth of Rs.
50,00,000. c) All the lenders shall submit declaration to P2P platforms that they have understood all the risks
associated with lending transactions and that P2P platform does not assure return of principal/payment of
interest. d) Escrow accounts to be operated by bank promoted trustee for transfer of funds need not be
mandatorily maintained with the bank which has promoted the trustee.
EXTERNAL BENCHMARK BASED LENDING-RBI amended its instructions contained in Master Direction dated
03.03.2016, on 4.9.19, as under: (a) All new floating rate personal or retail loans (housing, auto, etc.) and
floating rate loans to Micro and Small Enterprises extended by banks from October 01, 2019 shall be
benchmarked to one of the following: 1. Reserve Bank of India policy repo rate 2. Government of India 3-
Months Treasury Bill yield published by the Financial Benchmarks India Private Ltd (FBIL) 3. Govt. of India 6-
Months Treasury Bill yield published by FBIL 4. Any other benchmark market interest rate published by FBIL. (b)
Banks are free to offer such external benchmark linked loans to other types of borrowers as well.
(c) In order to ensure transparency, standardisation, and ease of understanding of loan products by borrowers,
a bank must adopt a uniform external benchmark within a loan category; in other words, the adoption of
multiple benchmarks by the same bank is not allowed within a loan category. Spread under External
Benchmark Banks are free to decide the spread over the external benchmark. However, credit risk premium
may undergo change only when borrower’s credit assessment undergoes a substantial change, as agreed upon
in the loan contract. Further, other components of spread including operating cost could be altered once in
three years. Reset of Interest Rates under External Benchmark The interest rate under external benchmark
shall be reset at least once in three months. Transition to External Benchmark from MCLR/Base Rate/BPLR
Existing loans and credit limits linked to the MCLR/Base Rate/ BPLR shall continue till repayment or renewal:
Other conditions 1. Other existing borrowers shall have the option to move to External Benchmark at mutually
acceptable terms. 2. The switch-over shall not be treated as a foreclosure of existing facility. 3. Interest rates
on fixed rate loans of tenor below 3 years shall not be less than the benchmark rate for similar tenor. 4. There
shall be no lending below the benchmark rate for a particular maturity for all loans linked to that benchmark.
5. All floating rate rupee loans sanctioned and renewed between 1.7.2016 and 31.03.16, shall be priced with
reference to the Base Rate which will be the internal benchmark for such purposes. 6. All floating rate rupee
loans sanctioned and renewed w.e.f. April 1, 2016 shall be priced with reference to the Marginal Cost of Funds
based Lending Rate (MCLR) which will be the internal benchmark for such purposes subject to the provisions
contained in Master Direction. 7. The periodicity of the reset under MCLR shall correspond to the
tenor/maturity of the MCLR to which the loan is linked.
Levy of Foreclosure Charges /Pre-payment Penalty on Floating Rate Term Loans As per RBI circular dated
07.05.14, banks are not permitted to charge foreclosure charges / pre-payment penalties on home loans / all
floating rate term loans sanctioned to individual borrowers. On 02.08.19, RBI clarified that banks shall not
charge foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned, for purposes
other than business, to individual borrowers with or without co-obligant(s).
LEVY OF FORECLOSURE CHARGES / PRE-PAYMENT PENALTY ON FLOATING RATE TERM LOANS  As per the
extant guidelines, banks are not permitted to charge foreclosure charges / pre-payment penalties on home
loans / all floating rate term loans sanctioned to individual borrowers.  In this connection, RBI has clarified
that banks shall not charge foreclosure charges/ pre-payment penalties on any floating rate term loan
sanctioned, for purposes other than business, to individual borrowers with or without co-obligant(s).
LEVY OF FORECLOSURE CHARGES/PRE-PAYMENT PENALTY ON FLOATING RATE LOANS BY NBFCs As per the
extant guidelines pertaining to NBFCs, foreclosure charges/ prepayment penalty on all floating rate term loans
sanctioned to individual borrowers have been waived. RBI has now clarified that NBFCs shall not charge
foreclosure charges / pre-payment penalties on any floating rate term loan sanctioned for purposes other than
business to individual borrowers, with or without co-obligant(s). AMENDMENT IN KYC GUIDELINES The
Government of India, has notified amendment to the Prevention of Money-laundering (Maintenance of Records)
Rules, 2005. As per the amendment, where the individual is a prisoner in a jail, the signature or thumb print
shall be affixed in presence of the officer in-charge of the jail and the said officer shall certify the same under
his signature and the account shall remain operational on annual submission of certificate of proof of address
issued by the officer in-charge of the jail.
DEVELOPMENT OF SECONDARY MARKET FOR CORPORATE LOANS  The RBI has constituted a Task Force on
the development of Secondary market for corporate loans under the chairmanship of Shri T.N. Manoharan,
Chairman, Canara Bank.  Secondary loan market in India is largely restricted to sale to Asset Reconstruction
Companies and ad-hoc sale to other lenders including banks, and no formalised mechanism has been developed
to deepen the market.  The Task Force has been constituted realising the need for a formalised mechanism to
deepen the secondary market and the significance of a well-developed secondary market for greater
transparency of inherent riskiness of the debt being traded. Such price discovery is expected to spur
innovations in the securitisation market as well as invigorate dormant markets such as Corporate Default Swaps
(CDS).  These would in turn provide with early warning signals regarding the riskiness of the debt being held
by the banks which would incentivize improving the underwriting and origination standards. Terms of
Reference: To review the existing state of the market for loan sale / transfer in India as well as the
international experience in loan trading and, to make recommendations on:  Required policy/regulatory
interventions for facilitating development of secondary market in corporate loans, including loan transaction
platform for stressed assets;  Creation of a loan contract registry to remove information asymmetries between
buyers and sellers, its ownership structure and related protocols such as standardization of loan information,
independent validation and data access;  Design of the market structure for loan sales/auctions, including
online platforms and the related trading and transaction reporting infrastructure;  Need for, and role of, third
party intermediaries, such as servicers, arrangers, market makers, etc.;  Appropriate measures for enhanced
participation of buyers and sellers in loan sale/transfer;
DEVELOPMENT OF HOUSING FINANCE SECURITISATION MARKET  The RBI has constituted a Committee on the
development of Housing Finance Securitisation Market under the chairmanship of Dr. Harsh Vardhan to review
the existing state of mortgage backed securitisation in India, including the regulations currently in place, and
to make specific recommendations on suitably aligning the same with international norms.  The Mortgage
Securitisation market in India is primarily dominated by direct assignments among a limited set of market
participants on account of various structural factors impacting both the demand and the supply side, as well as
certain prudential, legal, tax and accounting issues.  It is imperative that the market moves to a broader
issuance model with suitable structuring of the instruments for diverse investor classes in order to ensure a
vibrant securitisation market.  The international experience shows that it is critical to address the issues of
misaligned incentives and agency problems resulting from information asymmetry problems between the
originators and investors in the market, which can exacerbate systemic risk. Thus, a careful design of a robust
and transparent securitisation framework assumes paramount significance.
Filing of Security Interest relating to Immovable (other than equitable mortgage), Movable and Intangible
Assets in CERSAI -In its circular dated 26.05.11, RBI had advised banks/financial institutions(FIs) to register the
transactions relating to securitization and reconstruction of financial assets and those relating to mortgage by
deposit of title deeds with CERSAI. The Government of India had subsequently issued a Gazette Notification
dated January 22, 2016 for filing of the following types of security interest on the CERSAI portal: a. Particulars
of creation, modification or satisfaction of security interest in immovable property by mortgage other than
mortgage by deposit of title deeds. b. Particulars of creation, modification or satisfaction of security interest
in hypothecation of plant and machinery, stocks, debts including book debts or receivables, whether existing
or future. c. Particulars of creation, modification or satisfaction of security interest in intangible assets, being
know how, patent, copyright, trademark, licence, franchise or any other business or commercial right of
similar nature. d. Particulars of creation, modification or satisfaction of security interest in any ‘under
construction’ residential or commercial or a part thereof by an agreement or instrument other than mortgage.
CERSAI had started registration of the data in respect of paragraphs 2 (a) to (c) above, for the security
interests created on or after January 22, 2016, w.e.f. May 25, 2016 for Scheduled Commercial Banks and w.e.f.
July 1, 2016 for all other entities registered with them. Further, the registration of data in respect of
paragraph 2(d) above was commenced since June 8, 2017 for all banks and FIs registered with CERSAI.
Meanwhile, the banks/ FIs have also started registering the security interests created before January 22, 2016
(subsisting records). However, RBI observed that the extent of registration on the CERSAI portal is very low,
both for current and subsisting records. On 27.12.18, Banks/FIs have been advised by RBI to complete filing the
charges pertaining to subsisting transactions by March 31, 2019. Banks/ FIs have also been advised to file the
current charges relating to all transactions with CERSAI on an ongoing basis.
External Benchmarking of New Floating Rate Loans by Banks: The Report of the Internal Study Group to
Review the Working of the Marginal Cost of Funds based Lending Rate (MCLR) System (Chairman: Dr. Janak Raj)
had recommended the use of external benchmarks by banks for their floating rate loans instead of the present
system of internal benchmarks [Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base rate
and Marginal Cost of Funds based Lending Rate (MCLR)]. RBI has proposed that all new floating rate personal or
retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from
April 1, 2019 shall be benchmarked to one of the following: (a) Reserve Bank of India policy repo rate, or (b)
Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL),
or (c) Government of India 182 days Treasury Bill yield produced by the FBIL, or (d) Any other benchmark
market interest rate produced by the FBIL. The spread over the benchmark rate — to be decided wholly at
banks' discretion at the inception of the loan should remain unchanged through the life of the loan, unless the
borrower's credit assessment undergoes a substantial change and as agreed upon in the loan contact.Banks are
free to offer such external bench mark linked loans to other types of borrowers as well. In order to ensure
transparency, standardisation, and ease of understanding of loan products by borrowers, a bank must adopt a
uniform external benchmark within a loan category. The adoption of multiple benchmarks by the same bank is
not allowed within a loan category.
Filing of Security Interest relating to Immovable (other than equitable mortgage), Movable and Intangible
Assets in CERSAI -In its circular dated 26.05.11, RBI had advised banks/financial institutions(FIs) to register the
transactions relating to securitization and reconstruction of financial assets and those relating to mortgage by
deposit of title deeds with CERSAI. The Government of India had subsequently issued a Gazette Notification
dated January 22, 2016 for filing of the following types of security interest on the CERSAI portal: a. Particulars
of creation, modification or satisfaction of security interest in immovable property by mortgage other than
mortgage by deposit of title deeds. b. Particulars of creation, modification or satisfaction of security interest
in hypothecation of plant and machinery, stocks, debts including book debts or receivables, whether existing
or future. c. Particulars of creation, modification or satisfaction of security interest in intangible assets, being
know how, patent, copyright, trademark, licence, franchise or any other business or commercial right of
similar nature. d. Particulars of creation, modification or satisfaction of security interest in any ‘under
construction’ residential or commercial or a part thereof by an agreement or instrument other than mortgage.
However, RBI observed that the extent of registration on the CERSAI portal is very low, both for current and
subsisting records. On 27.12.18, Banks/FIs have been advised by RBI to complete filing the charges pertaining
to subsisting transactions by March 31, 2019. Banks/ FIs have also been advised to file the current charges
relating to all transactions with CERSAI on an ongoing basis.
Guidelines on Loan System for Delivery of Bank Credit (December 5, 2018): 1. Objective: To enhance credit
discipline among the larger borrowers enjoying working capital facility from the banking system. 2.
Applicability: Borrowers having aggregate fund based working capital limit of Rs1500 million and above from
the banking system. 3. Method of delivery of bank credit: From In April, 2019, minimum 40% (60% from
1.7.2019) of the sanctioned fund based working capital limit, including ad hoc limits and TODs, should be by
way of 'Loan Component'. For such borrowers, drawings up to 40 percent (60% from 1.7.2019) of the total
fund based working capital limits shall only be allowed from the 'loan component'. Drawings in excess of the
minimum 'loan component' threshold may be allowed in the form of cash credit facility. The bifurcation of
the working capital limit into loan and cash credit components shall be effected after excluding the export
credit limits (pre-shipment and post-shipment) and bills limit for inland sales from the working capital
limit.
Investment by the bank in the commercial papers issued by the borrower shall form part of the loan
component, provided the Investment is sanctioned as part of the working capital limit. In case of consortium
finance, banks may frame ground rules for sharing of cash credit and loan components. 4. Amount and tenor of
the loan: Minimum tenor of thia Idan will be 7 days. Banks may split the loan component into WCLs with
different maturity periods as per the needs of the borrowers. 5. itepayment/RenewpRollover of Loan
Comoonerit: Banks will have the discretion to stipulate repayment of thcWCLs in instalments or by way of a
"bullet" repayment. Banks may consider rollover of the WCLs at the request of the borrower. 6. Risk weights
for undrawn portion of cash credit limits: From April 1, 2019, the undrawn portion of cash credit/ overdraft
limits sanctioned to the aforesaid large borrowers, shall attract a credit conversion factor of 20%. 7. Effective
Date: The guidelines will be effective from April 1, 2019 covering both existing as well as new relationships.
The 40% loan component will be revised to 60%, with effect from July 1, 2019.
3.FINANCIAL INCLUSION & Govt. Sponsored Schemes
REVISED GUIDELINES ON INCOME AND LOAN LIMITS TO CLASSIFY AN EXPOSURE AS AN ELIGIBLE ASSET: 
Taking into consideration the important role played by Micro Finance Institutions (MFIs) in delivering credit to
those in the bottom of the economic pyramid and to enable them play their assigned role in a growing
economy, RBI has decided to increase the household income limits for borrowers of NBFC-MFIs as follows: a)
From the current level of Rs.1,00,000 for rural areas and Rs.1,60,000 for urban / semi urban areas, the income
limit has been increased to Rs.1,25,000 and Rs.2,00,000 respectively. b) Further, the limit on total
indebtedness of the borrower has been increased from Rs.1,00,000 to Rs.1,25,000. c) In light of the revision to
the limit on total indebtedness, the limits on disbursal of loans have been raised from Rs.60,000 for the first
cycle and Rs.1,00,000 for the subsequent cycles to Rs.75,000 and Rs.1,25,000 respectively.
Direct Benefit Transfer (DBT) Scheme – Implementation Further to RBI directions dated 09.07.13, on use of
Aadhaar to facilitate delivery of social welfare benefits by direct credit to the bank accounts of beneficiaries,
banks have been advised by RBI (13.08.19) to ensure that opening of bank accounts and seeding of Aadhaar
numbers with existing or new accounts of eligible beneficiaries opened for the purpose of DBT under social
welfare schemes, is in conformity with the provisions listed in KYC Master directions dated 29.05.19 and
provisions of Prevention of Money Laundering (PML) Rules.
LENDING BY BANKS TO NBFCs FOR ON-LENDING  In order to boost credit to the needy segment of borrowers,
RBI has been decided that bank credit to registered NBFCs (other than MFIs) for on-lending will be eligible for
classification as priority sector under respective categories subject to the following conditions:  Agriculture:
On-lending by NBFCs for ‘Term lending’ component under Agriculture will be allowed up to Rs. 10 lakh per
borrower.  Micro & Small enterprises: On-lending by NBFC will be allowed up to Rs. 20 lakh per borrower. 
Housing: Enhancement of the existing limits for on-lending by HFCs from Rs. 10 lakh per borrower to Rs. 20
lakh per borrower.  Under the above on-lending model, banks can classify only the fresh loans sanctioned by
NBFCs out of bank borrowings. However, loans given by HFCs under the existing on-lending guidelines will
continue to be classified under priority sector by banks.  Bank credit to NBFCs for On-Lending will be allowed
upto a limit of five percent of individual bank’s total priority sector lending on an ongoing basis. Further, the
above instructions will be valid for the current financial year upto March 31, 2020 and will be reviewed
thereafter. However, loans disbursed under the on-lending model will continue to be classified under Priority
Sector till the date of repayment/maturity.
Banking Services – Basic Savings Bank Deposit Account (BSBDA) The Basic Savings Bank Deposit (BSBD)
Account was designed as a savings account which will offer certain minimum facilities, free of charge, to the
holders of such accounts. In the interest of better customer service, RBI decided (on 10.06.19) to make certain
changes in the facilities associated with the account. Banks are to offer the following basic minimum facilities
in the BSBD Account w.e.f 01.07.19, free of charge, without any requirement of minimum balance.
1. Cash deposit at branch or ATMs/CDMs ,2. Receipt/ credit of money through any electronic channel or by
means of deposit / collection of cheques drawn by Central/State Government agencies and departments , 3.
No limit on number and value of deposits that can be made in a month. 4. Minimum of four withdrawals in a
month, including ATM withdrawals, 5. ATM Card or ATM-cum-Debit Card The BSBD Account shall be considered
a normal banking service available to all. Banks can provide additional value-added services, including issue of
cheque book, beyond the above minimum facilities, which may/may not be priced (in non-discriminatory
manner). The availment additional services shall be at option of customers. Banks shall not require the
customer to maintain a minimum balance. Offering such additional services will not make it a non-BSBD
Account, if prescribed minimum services are provided free of charge. The holders of BSBD Account will not be
eligible for opening any other savings bank deposit account in that bank. If a customer has any other existing
savings bank deposit account in that bank, he/she will be required to close it within 30 days from the date of
opening a BSBD Account. Before opening a BSBD account, a bank to take a declaration from that he/she is not
having a BSBD account in any other bank.
Applicable Average Base Rate to be charged by NBFCMFIs for the Quarter Beginning April 01, 2019 On
07.02.14, RBI had informed NBFC-MFIs regarding pricing of credit, stating that RBI will, on the last working
day of every quarter, advise the average of the base rates of the 5 largest commercial banks for arriving at
the interest rates to be charged by NBFC-MFIs to its borrowers in the ensuing quarter.
On 29.03.19, RBI communicated that the applicable average base rate to be charged by Non-Banking Financial
Company – Micro Finance Institutions (NBFC-MFIs) to their borrowers for the quarter beginning April 01, 2019
will be 9.21 per cent.
BASEL, RISK MANAGEMENT & PRUDENTIAL NORMS

Risk Weight for Consumer Credit except credit card receivables As per extant instructions, consumer credit,
including personal loans and credit card receivables but excluding educational loans, attracts a higher risk
weight of 125 per cent or higher, if warranted by the external rating of the counterparty. On a review, RBI
decided (12.09.19) to reduce the risk weight for consumer credit, including personal loans, but excluding
credit card receivables, to 100%. Other stipulations remain the same.
Basel III Regulations- Implementation of Leverage Ratio On Jun 28, 2019, RBI decided that the minimum
Leverage Ratio shall be 4% for Domestic Systemically Important Banks (DSIBs) and 3.5% for other banks. Both
the capital measure and exposure measure along with Leverage Ratio are to be disclosed on a quarter-end
basis. Banks must meet the minimum Leverage Ratio requirement at all times. These guidelines become
effective from the quarter commencing October 1, 2019.
CHIEF RISK OFFICER FOR NBFCs  The Reserve Bank of India has decided that, since the NonBanking Financial
Companies (NBFCs) play an important role in direct credit intermediation, NBFCs with asset size of more than
Rs. 50 billion shall appoint a Chief Risk Officer (CRO) with clearly specified roles and responsibilities. The
CRO will function independently to ensure highest standards of risk management. As per the guidelines, the
CRO shall be a senior official in the hierarchy of an NBFC and shall possess adequate professional
qualification/experience in the area of risk management. The CRO shall be appointed for a fixed tenure with
the approval of the Board and can be transferred / removed from his post before completion of the tenure only
with the approval of the Board. Any premature transfer/ removal shall be reported to the Department of
Non-Banking Supervision of the Regional Office of the RBI under whose jurisdiction the NBFC is registered. In
case the NBFC is listed, any change in incumbency of the CRO shall also be reported to the stock exchanges.
Risk Weights for exposures to NBFCs -At present claims on rated as well as unrated Non-deposit Taking
Systemically Important Non-Banking Financial Companies (NBFC-ND-SI), other than Asset Finance Companies
(AFCs), Non-Banking Financial Companies – Infrastructure Finance Companies (NBFCs-IFC), and Non-banking
Financial Companies – Infrastructure Development Funds (NBFCs-IDF), have to be uniformly risk weighted at
100%. Exposures to AFCs, NBFCs – IFC, NBFCs – IDF and other NBFCs which are not NBFC-ND-SI, are risk weighted
as per rating assigned by the rating agencies accredited by the Reserve Bank of India.On 22.02.19, RBI decided
that exposures to all NBFCs, excluding Core Investment Companies (CICs), will be risk weighted as per the
ratings assigned by the rating agencies registered with SEBI and accredited by the Reserve Bank of India, in a
manner similar to that of corporates. Exposures to CICs, rated as well as unrated, will continue to be risk-
weighted at 100%.
Basel III Capital Regulations- Review of transitional arrangements
As per extant RBI guidelines, last tranche of 0.625% of Capital Conservation Buffer (CCB) was to be implemented by
31.03.2019. On 10.01.19, RBI decided to defer the implementation of this tranche from March 31, 2019 to March
31, 2020. Accordingly, minimum capital conservation ratios as applicable from March 31, 2018 will also apply from
March 31, 2019 till the CCB attains the level of 2.5% on March 31, 2020.
The pre-specified trigger for loss absorption through conversion / writedown of Additional Tier 1 instruments
(PNCPS and PDI) shall remain at 5.5% of RWAs and will rise to 6.125% of RWAs on March 31, 2020.
Basel III Framework on Liquidity Standards - Liquidity Coverage Ratio (LCR), FALLCR against credit disbursed
to NBFCs and HFCs On 19.10.18, banks were permitted by RBI to reckon government securities as Level 1 HQLA
under FALLCR within the mandatory SLR requirement upto 0.5 per cent of the bank’s NDTL in respect of their
incremental lending to NBFCs and HFCs after October 19, 2018. This facility is available up to December 31,
2018. Further, the single borrower limit for NBFCs (not financing infrastructure) was increased from 10 per
cent to 15 per cent of capital funds till December 31, 2018. In order to further facilitate banks to lend to
NBFCs and HFCs as indicated above, RBI decided on 28.12.18, to extend the aforesaid facilities upto March 31,
2019. It may be noted that with effect from April 1, 2019, banks shall be guided by the instructions as per
circular dated 01.12.16, in terms of which banks’ exposures to a single NBFC shall be restricted to 15 percent
of their eligible capital base (Tier-1 capital).
NSFR norms for banks from April 2020: RBI -Net stable funding ratio (NSFR) norms, which mandate banks to
maintain a stable funding profile vis-à-vis the composition of their assets and off-balance sheet activities, will
be operational from April 2020. NSFR is defined as the amount of available stable funding relative to the
amount of required stable funding. After the global financial crisis of 2007, the Basel Committee on Banking
Supervision (BCBS) proposed certain reforms to strengthen global capital and liquidity regulations for
promoting a more resilient banking sector.
Revised norms for LCR to boost liquidity to lenders - RBI has provided an additional 2% liquidity window within the
mandatory Statutory Liquidity Ratio (SLR) requirement to the lenders, by tweaking Liquidity Coverage Ratio (LCR)
norms. This move will harmonize the liquidity requirements of banks with LCR; will improve the banks’ cash
position; will help release additional liquidity for lending by banks; and will also hopefully make forex transactions
easier by increasing the last-mile touch points of regulated entities to sell foreign exchange for non-trade current
account transactions.
LIQUIDITY RISK MANAGEMENT FRAMEWORK FOR NBFCs & CICs:  In order to strengthen and raise the
standard of the Asset Liability Management (ALM) framework applicable to NBFCs, RBI has decided to revise
the extant guidelines on liquidity risk management for NBFCs.  All non-deposit taking NBFCs with asset size of
Rs. 100 crore and above, systemically important Core Investment Companies and all deposit taking NBFCs
irrespective of their asset size, shall adhere to the set of liquidity risk management revised guidelines.
However, these guidelines will not apply to Type 1 NBFC-NDs, Non-Operating Financial Holding Companies and
Standalone Primary Dealers.  It will be the responsibility of the Board of each NBFC to ensure that the
guidelines are adhered to. The internal controls required to be put in place by NBFCs as per these guidelines
shall be subject to supervisory review. Further, as a matter of prudence, all other NBFCs are also encouraged
to adopt these guidelines on liquidity risk management on voluntary basis.
 Maturity Profiling: a) For measuring and managing net funding requirements, the use of a maturity ladder
and calculation of cumulative surplus or deficit of funds at selected maturity dates is adopted as a standard
tool. The Maturity Profile should be used for measuring the future cash flows of NBFCs in different time
buckets. The time buckets shall be distributed as under: 1) 1 day to 7 days 2) 8 day to 14 days 3) 15 days to
30/31 days (One month) 4) Over one month and upto 2 months 5) Over two months and upto 3 months 6) Over
3 months and upto 6 months 7) Over 6 months and upto 1 year 8) Over 1 year and upto 3 years 9) Over 3 years
and upto 5 years 10) Over 5 years b) NBFCs would be holding in their investment portfolio, securities which
could be broadly classifiable as 'mandatory securities' (under obligation of law) and other 'non-mandatory
securities'. In case of NBFCs not holding public deposits, all investments in securities, and in case of NBFCs
holding public deposits, the surplus securities (held over and above the requirement), shall fall in the category
of 'non-mandatory securities'. Alternatively, the NBFCs may also follow the concept of Trading Book as per the
extant prescriptions for NBFCs. c) Within each time bucket, there could be mismatches depending on cash
inflows and outflows. While the mismatches up to one year would be relevant since these provide early
warning signals of impending liquidity problems, the main focus shall be on the short-term mismatches, viz., 1-
30/31 days. The net cumulative negative mismatches in the Statement of Structural Liquidity in the maturity
buckets 1-7 days, 8-14 days, and 15-30 days shall not exceed 10%, 10% and 20% of the cumulative cash outflows
in the respective time buckets. NBFCs, however, are expected to monitor their cumulative mismatches
(running total) across all other time buckets upto 1 year by establishing internal prudential limits with the
approval of the Board. NBFCs shall also adopt the above cumulative mismatch limits for their structural
liquidity statement for consolidated operations. d) The Statement of Structural Liquidity may be prepared by
placing all cash inflows and outflows in the maturity ladder according to the expected timing of cash flows. A
maturing liability shall be a cash outflow while a maturing asset shall be a cash inflow. e) In order to enable
the NBFCs to monitor their short-term liquidity on a dynamic basis over a time horizon spanning from 1 day to
6 months, NBFCs shall estimate their short-term liquidity profiles on the basis of business projections and other
commitments for planning purposes.  Liquidity Risk Measurement – Stock Approach: NBFCs shall adopt a
“stock” approach to liquidity risk measurement and monitor certain critical ratios in this regard by putting in
place internally defined limits as approved by their Board. The ratios and the internal limits shall be based on
an NBFC‟s liquidity risk management capabilities, experience and profile.  Granular Maturity Buckets and
Tolerance Limits: The 1-30 day time bucket in the Statement of Structural Liquidity is segregated into
granular buckets of 1-7 days, 8-14 days, and 1530 days. The net cumulative negative mismatches in the
maturity buckets of 1-7 days, 8-14 days, and 15-30 days shall not exceed 10%, 10% and 20% of the cumulative
cash outflows in the respective time buckets. NBFCs, however, are expected to monitor their cumulative
mismatches (running total) across all other time buckets up to 1 year by establishing internal prudential limits
with the approval of the Board. The above granularity in the time buckets would also be applicable to the
interest rate sensitivity statement required to be submitted by NBFCs.
 Liquidity Risk Monitoring Tools: NBFCs shall adopt liquidity risk monitoring tools/metrics in order to capture
strains in liquidity position, if any. Such monitoring tools shall cover a) concentration of funding by
counterparty/ instrument/ currency, b) availability of unencumbered assets that can be used as collateral for
raising funds; and, c) certain early warning market-based indicators, such as, book-to-equity ratio, coupon on
debts raised, breaches and regulatory penalties for breaches in regulatory liquidity requirements.
 Adoption of “Stock” Approach to Liquidity: In addition to the measurement of structural and dynamic
liquidity, NBFCs are also mandated to monitor liquidity risk based on a “stock” approach to liquidity. The
monitoring shall be by way of predefined internal limits as decided by the Board for various critical ratios
pertaining to liquidity risk. Indicative liquidity ratios are short-term liability to total assets; short-term liability
to longterm assets; commercial papers to total assets; non-convertible debentures (NCDs) (original maturity
less than one year) to total assets; short-term liabilities to total liabilities; long-term assets to total assets;
etc.
 Extension of Liquidity Risk Management Principles: In addition to the liquidity risk management principles
underlining extant prescriptions on key elements of ALM framework, RBI has decided to extend relevant
principles to cover other aspects of monitoring and measurement of liquidity risk, viz., off-balance sheet and
contingent liabilities, stress testing, intra-group fund transfers, diversification of funding, collateral position
management, and contingency funding plan.
 Introduction of Liquidity Coverage Ratio (LCR): The following categories of NBFCs shall adhere to the
guidelines on LCR including disclosure standards: (a) All non-deposit taking NBFCs with asset size of Rs. 10,000
crore and above, and all deposit taking NBFCs irrespective of their asset size, shall maintain a liquidity buffer
in terms of LCR which will promote resilience of NBFCs to potential liquidity disruptions by ensuring that they
have sufficient High Quality Liquid Asset (HQLA) to survive any acute liquidity stress scenario lasting for 30
days. The stock of HQLA to be maintained by the NBFCs shall be minimum of 100% of total net cash outflows
over the next 30 calendar days. The LCR requirement shall be binding on NBFCs from December 1, 2020 with
the minimum HQLAs to be held being 50% of the LCR, progressively reaching up to the required level of 100%
by December 1, 2024, as per the time-line given below:
From December 1, 2020 Dec 1, 2021 Dec 1, 2022 Dec 1, 2023 December 1, 2024
Minimum LCR 50% 60% 70% 85% 100%
(b) All non-deposit taking NBFCs with asset size of Rs. 5,000 crore and above but less than Rs. 10,000 crore
shall also maintain the required level of LCR starting December 1, 2020, as per the time-line given below:
From December 1, 2020 Dec 1, 2021 Dec 1, 2022 Dec 1, 2023 December 1, 2024
Minimum LCR 30% 50% 60% 85% 100%
(c) Core Investment Companies, Type 1 NBFC-NDs, NonOperating Financial Holding Companies and Standalone
Primary Dealers are exempt from the applicability of LCR norms.
 Currency Risk: Exchange rate volatility imparts a new dimension to the risk profile of an NBFC‟s balance
sheets having foreign assets or liabilities. The Board of NBFCs should recognise the liquidity risk arising out of
such exposures and develop suitable preparedness for managing the risk.  Managing Interest Rate Risk (IRR):
NBFCs shall manage interest rate risk as per the extant regulatory prescriptions.
OPERATIONAL RISK MANAGEMENT: PRICE / YIELD RANGE SETTING IN E-KUBER-There have been a few
instances of Fat Finger, Big Figure errors on the part of market participants in G Sec auctions. To prevent the
losses to the bidders, Reserve Bank of India has developed a “Price / Yield range setting” facility on its Core
Banking Solution (CBS) platform, viz. e-Kuber. The facility allows a participant to define a range i.e. a
maximum and a minimum value for bids they intend to submit. The range can be set in either price or yield
terms, for each security, for every auction which can be set before the auction and can also be modified
during the auction. Once the limits are set by the participating entity, auction bids will be automatically
validated against the set limits.
NPA AND RECOVERY MANAGEMENT

SIDE-POCKETING- Segregation of bad debts or illiquid debt instruments from liquid portfolio is known as
“Side-pocketing”. SEBI, recently allowed mutual fund, this facility based on credit events to soothe the nerves
of Indian players who were worried over the fact that the illiquid bad debts were overshadowing the returns
generated by their liquid portfolio.
PERMISSION TO ACQUIRE FINANCIAL ASSET FROM OTHER ASSET RECONSTRUCTION CO’s In view of
amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest
Act, 2002, RBI has decided to permit ARCs to acquire financial asset from other ARCs on following conditions:
a) The transaction is settled on cash basis; b) Price discovery for such transaction shall not be prejudicial to
the interest of Security Receipt holders; c) The selling ARC will utilize the proceeds so received for the
redemption of underlying Security Receipts; d) The date of redemption of underlying Security Receipts and
total period of realisation shall not extend beyond eight years from the date of acquisition of the financial
asset by the first ARC.
RELAXATION ON THE GUIDELINES TO NBFCS ON SECURITISATION TRANSACTIONS  In order to encourage
NBFCs to securitise / assign their eligible assets, RBI had in Nov, 2018 decided to relax the Minimum Holding
Period (MHP) requirement for originating NBFCs, in respect of loans of original maturity above 5 years, to
receipt of repayment of six monthly instalments or two quarterly instalments (as applicable), subject to the
requirement that Minimum Retention Requirement (MRR) for such securitization / assignment transactions shall
be 20% of the book value of the loans being securitized / 20% of the cash flows from the assets assigned.  On a
review, RBI has decided to extend the dispensation provided therein till December 31, 2019.
ACQUISITION OF FINANCIAL ASSETS BY ASSET RECONSTRUCTION COMPANIES-The Asset Reconstruction
Companies (ARCs) shall not acquire financial assets from the following on a bilateral basis, whatever may be
the consideration: a) A bank/ financial institution which is the sponsor of the ARC; b) A bank/ financial
institution which is either a lender to the ARC or a subscriber to the fund, if any, raised by the ARC for its
operations; c) An entity in the group to which the ARC belongs. However, they may participate in auctions of
the financial assets provided such auctions are conducted in a transparent manner, on arm’s length basis and
the prices are determined by market forces.
FOREIGN EXCHANGE AND INTERNATIONAL TRADE

Re-export of unsold rough diamonds from Special Notified Zone of Customs without Export Declaration
Form (EDF) formality RBI decided (on 22.11.19) to modify the provisions of A.P. (Dir Series) Circular dated
02.07.15, as under: For the lot/ lots cleared at the center/s which are duly notified under Customs Act, 1962 /
specified by the Central Board of Indirect Taxes & Customs, Department of Revenue, Ministry of Finance,
Government of India for the above purpose, Bill of Entry shall be filed by the buyer. AD bank may permit such
import payments after being satisfied with the bona-fides of the transaction. Further, AD bank shall also
maintain a record of such transactions.
Special Non-Resident Rupee Account SNRR account -RBI modified certain provisions of SNRR account scheme
on 13.11.19. Who can open : Any person resident outside India, having a business interest in India, may open
SNRR account with an AD for the purpose of putting through bona fide transactions in rupees, not involving any
violation of the provisions of the FEMA, rules and regulations made thereunder. The business interest, apart
from generic business interest, shall include the following INR transactions: i. Investments made in India in
accordance with FEMA Rules dated October 17, 2019; ii. Import of goods and services in accordance with
Section 5 of FEMA; iii. Export of goods and services in accordance with Section 7 of FEMA; iv. Trade credit
transactions and lending under External Commercial Borrowings (ECB) framework in accordance with FEMA
(Borrowing and Lending) Regulations, 2018; and v. Business related transactions outside International Financial
Service Centre (IFSC) by IFSC units at GIFT city like administrative expenses in INR outside IFSC, INR amount
from sale of scrap, government incentives in INR, etc. The account will be maintained with bank in India
(outside IFSC). The restriction of 7 years for the account shall not be applicable to accounts opened for the
purposes stated above. 2. The SNRR account shall carry the nomenclature of the specific business for which it
is in operation. Indian bank may, at its discretion, maintain separate SNRR Account for each category of
transactions or a single SNRR Account for a person resident outside India engaged in multiple categories of
transactions provided it is able to identify/ segregate and account them category-wise. 3. The operations in
the account shall not result in the account holder making available foreign exchange to any person resident in
India against reimbursement in rupees or in any other manner. 4. The account shall not bear any interest. 5.
Debits and credits in shall be specific/ incidental to the business proposed to be done by the account holder. 6.
ADs shall ensure that the balances are commensurate with the business operations of the account holder. 7. All
the operations in the account should be in accordance with the provisions of FEMA rules and regulations. 8. The
tenure of the account shall be concurrent to the tenure of the contract / period of operation / the business of
the account holder and in no case shall exceed 7 years. Approval of RBI shall be obtained in cases requiring
renewal: 9. The balances in the account shall be eligible for repatriation. 10. Transfers from any NRO account
to the SNRR account are prohibited. 11. All transactions in the SNRR account will be subject to payment of
applicable taxes in India. 12. SNRR account may be designated as resident rupee account on the account holder
becoming a resident. 13. The amount due/ payable to non-resident nominee from a/c of a deceased account
holder, shall be credited to NRO/ NRE account of the nominee with an AD / authorised bank in India or by
remittance through normal banking channels. 14. The transactions in the accounts shall be reported to RBI in
accordance with directions issued from time to time. 15. Opening of SNRR accounts by Pakistan and Bangladesh
nationals and entities incorporated in Pakistan and Bangladesh requires prior approval of RBI.
INTRODUCTION OF RUPEE DERIVATIVES AT IFSCs-The Task Force (TF) on Offshore Rupee Markets chaired by
Smt. Usha Thorat had recommended introduction of non-deliverable Rupee Derivatives in IFSCs starting with
exchange traded currency derivatives (ETCD). RBI’s has accepted the above recommendation and allowed
Rupee derivatives (with settlement in foreign currency) to be traded in IFSC. The salient features of these
Directions are as below: a) Currency derivatives in any currency pair involving the Rupee or otherwise are
permitted on recognised stock exchanges set up in IFSCs; b) Contracts in the Rupee shall be settled in a
currency other than the Indian Rupee; and c) Any person resident outside India may undertake these derivative
contract.
VOLUNTARY RETENTION ROUTE’ (VRR) FOR FPIs INVESTMENT IN DEBT–RELAXATIONS-Under FEMA
notification, some changes are made to the Directions governing investment through the Voluntary Retention
Route (VRR). a) The investment cap is increased to Rs.1,50,000 crores from Rs. 75,000 crores. b) FPIs that have
been allotted investment limits under VRR may, at their discretion, transfer their investments made under the
General Investment Limit to VRR. c) FPIs are also allowed to invest in Exchange Traded Funds that invest only
in debt instruments.
INVESTMENT BY FOREIGN PORTFOLIO INVESTORS (FPI) IN DEBT-FPI investments in Security Receipts are
currently exempted from the short-term investment limit and the issue limit. These exemptions shall also
extend to FPI investments in the following securities: Debt instruments issued by Asset Reconstruction
Companies; and Debt instruments issued by an entity under the Corporate Insolvency Resolution Process as per
the resolution plan approved by the National Company Law Tribunal under the Insolvency and Bankruptcy
Code, 2016.
OTC CURRENCY DERIVATIVE TRANSACTIONS- Now all client transactions in currency derivatives, including
those with notional amount of below USD 1 mn, shall now be reported to the Trade Depository (TR), with
effect from January 06, 2020. As a one-time measure, in order to update the transactions in the Trade
Repository, AD Category – I banks shall report all outstanding client transactions with notional amount below
USD 1 mn to the TR by January 31, 2020.
NON-RESIDENT RUPEE ACCOUNTS – REVIEW OF POLICY -Any person resident outside India, having a business
interest in India, may open a Special Non-Resident Rupee A/c (SNRR A/c) with an authorised dealer for the
purpose of putting through bona fide transactions in rupees. With a view to promote the usage of INR products
by persons resident outside India, RBI in consultation with the Government of India, to expand the scope of
SNRR Account by permitting person resident outside India to open such account for: External Commercial
Borrowings in INR; Trade Credits in INR; Trade (Export/ Import) Invoicing in INR; and Business related
transactions outside International Financial Service Centre (IFSC) by IFSC units at GIFT city like administrative
expenses in INR outside IFSC, INR amount from sale of scrap, government incentives in INR, etc. The account
will be maintained with bank in India (outside IFSC). Rationalised certain other provisions for operation of the
Special Non Resident Rupee (SNRR) Account: Remove the restriction on the tenure of the SNRR A/c opened for
the purposes given as stated above as the proposed transactions are more enduring in nature. Apart from Non-
Resident Ordinary (NRO) Account, permit credit of amount due / payable to non-resident nominee from
account of a deceased account holder to Non-Resident External (NRE) A/c or direct remittance outside India
through normal banking channels. The directions are issued under section 10(4) and 11(2) of the Foreign
Exchange Management Act, 1999 (42 of 1999).
EXPORT OF UNSOLD ROUGH DIAMONDS FROM SPECIAL NOTIFIED ZONE OF CUSTOMS WITHOUT EXPORT
DECLARATION FORM (EDF) FORMALITY For the lot / lots cleared at the center/s which are duly notified
under Customs Act, 1962 / specified by the Central Board of Indirect Taxes & Customs, Department of
Revenue, Ministry of Finance, Government of India for the above purpose, Bill of Entry shall be filed by the
buyer. AD bank may permit such import payments after being satisfied with bona-fides of the transaction.
Further, AD bank shall also maintain a record of such transactions. The directions contained in this circular
have been issued under Section 10(4) and Section 11(1) of the FEMA, 1999 (42 of 1999).
Priority Sector Loans - Export Credit-In order to boost the credit to export sector, RBI decided (on 20.09.19)
to effect following changes pertaining to export credit: 1. Enhance the sanctioned limit, for classification of
export credit under PSL, from Rs.250 million per borrower to Rs.400 million per borrower. 2. Remove the
existing criteria of ‘units having turnover of up to Rs.1 billion’ The existing guidelines for domestic scheduled
commercial banks to classify ‘Incremental export credit over corresponding date of the preceding year, upto 2
per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher’ under PSL
will continue.
Voluntary Retention Route (VRR) for Foreign Portfolio Investors (FPIs) investment in debt
1.RBI drawn attention of (AD Category-I) banks to the following regulations: i. Foreign Exchange Management
(Permissible Capital Accounts Transactions) Regulations, 2000 notified vide Notification No. FEMA 1/ 2000-RB
dated May 03, 2000; ii. Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 notified vide
Notification No. FEMA 3(R)/2018-RB dated December 17, 2018; iii. Foreign Exchange Management (Transfer or
Issue of Security by a Person Resident outside India) Regulations, 2017 notified vide Notification No.
FEMA.20(R)/2017RB dated November 07, 2017; and iv. Foreign Exchange Management (Foreign Exchange
Derivative Contracts) Regulations, 2000 notified vide Notification No. FEMA 25/RB – 2000 dated May 03, 2000.
RBI referred (on 24.05.9) to circular dated 01.03.19 on ‘Voluntary Retention Route’ (VRR) for Foreign Portfolio
Investors (FPIs) investment in debt. Based on the feedback received, the directions have been revised. These
changes include, inter alia, the following:a) Introduction of a separate category, viz., VRR-Combined. b) The
requirement to invest at least 25% of the Committed Portfolio Size within one month of allotment has been
removed. c) FPI are provided with an additional option at the end of the retention period, viz., continue to
hold their investment until the date of maturity or the date of sale, whichever is earlier. FPIs that were
allotted investment limits under the ‘tap’ open during March 11, 2019 - April 30, 2019 may, at their discretion,
convert their full allotment to VRR-Combined.
Export and Import of Indian Currency -As per extant regulation, a person may take or send out of India to
Nepal or Bhutan and bring into India from Nepal or Bhutan, currency notes of Government of India and Reserve
Bank of India for any amount in denominations up to Rs.100. Further, an individual may carry to Nepal or
Bhutan, currency notes of Reserve Bank of India denominations above Rs.100, i.e. currency notes of Rs.500
and/or Rs.1000 denominations, subject to a limit of Rs.25,000. On 20.03.19, RBI decided that an individual
travelling from India to Nepal or Bhutan may carry RBI currency notes in Mahatma Gandhi (New) Series of
denominations Rs.200 and/or Rs.500 subject to a total limit of Rs.25,000. Instructions regarding currency notes of
Government of India and RBI for any amount in denominations up to Rs.100/- shall continue as hitherto.
Establishment of Branch Office (BO) / Liaison Office (LO) / Project Office (PO) or any other place of
business in India by foreign entities -
The extant Regulations (31.03.16) regarding requirement of prior approval of RBI, for opening of a Branch
Office (BO) / Liaison Office (LO) / Project Office (PO) or any other place of business in India, where the
principal business of the applicant falls in the Defence, Telecom, Private Security and Information and
Broadcasting sector, have been reviewed by RBI.On 28.03.19, RBI informed AD banks that for opening of a BO/
LO/PO or any other place of business in India, where the principal business of the applicant falls in the Defence,
Telecom, Private Security and Information and Broadcasting sector, no prior approval of RBI shall be required, if
Government approval or license/permission by the concerned Ministry/ Regulator has been granted. Further, in the
case of proposal for opening a PO relating to defence sector, no separate reference or approval of Government of
India shall be required if the said non-resident applicant has been awarded a contract by/entered into an
agreement with the Ministry of Defence or Service Headquarters or Defence Public Sector Undertakings. It is
clarified that the term “permission” used in the Notification does not include general permission, if any, available
under Foreign Direct Investment in the automatic route, in respect of the above four sectors.
Compilation of R-Returns: Reporting under FETERS -
To facilitate compilation of estimates of bilateral trade in services, RBI decided (20.03.19) to incorporate an
additional field for capturing the country code of ultimate exporter/importer in the BoP file-format under FETERS.
For export of services, banks may use the transaction information available with them to report country-code of
the ultimate exporting country. Further Form-A2 has also been revised for capturing the required country
information for import of services. The revised format is for reporting of R-Returns on fortnightly basis (15th and
end-month) for forex transactions performed w.e.f. April 01, 2019. AD Banks should make the required changes in
their work-flows and information systems to capture the required additional data accordingly to comply with the
guidelines.
Investment by Foreign Portfolio Investors (FPI) in Government Securities Medium Term Framework
Revision of investment Limits for 2019-20 -
1. FPI investment limit in Central Government securities (G-secs), State Development Loans (SDLs) and
corporate bonds shall be 6%, 2%, and 9% of outstanding stocks of securities, respectively, in FY 2019-20.
2.The allocation of increase in G-sec limit over the two sub-categories – ‘General’ and ‘Longterm’ – has been set
at 50:50 for the year 2019 20. The entire increase in limits for SDLs has been added to ‘General’ sub-category of
SDLs.
3. The Coupon reinvestment arrangement for G-secs extended to SDLs. Accordingly, the revised limits for the
various categories, after rounding off, would be as under :
Revised Limits for FPI Investment in Debt - 2019-20 (Rupees billion)
G-Sec G- Sec SD L S DL Corp Total Ge ner al Long Term Ge ner alLo ng T ermBo nds D ebt
Current Limit 2,233 923 381 71 2,891 6,499
New Limit : HY Apr-Sep, 2019 2,347 1,037 497 71 3,031 6,983
New Limit : HY Oct 19-Mar 2020 2,461 1,151 612 71 3,170 7,465
Non-resident Participation in Rupee Interest Rate Derivatives Markets (Reserve Bank) Directions, 2019
RBI issued the Directions on 27.03.19. These Directions shall be applicable to Rupee interest rate derivative
transactions in India, undertaken on recognized stock exchanges, electronic trading platforms (ETP) and Over-
the-Counter (OTC) markets to the extent stated herein. A non-resident can undertake transactions in the
Rupee interest rate derivatives markets to hedge an exposure to Rupee interest rate risk and for purposes
other than hedging.
Transactions for the purpose of hedging interest rate risk: A nonresident may undertake these derivatives in
India to hedge interest rate risk using any permitted interest rate derivative product transacted on recognized
stock exchanges, ETPs or OTC markets.
Transactions for purposes other than hedging interest rate risk i. Non-individual Non-residents may
undertake Overnight Indexed Swaps (OIS) transactions :
(a) These transactions may be undertaken directly with a market-maker in India, or by way of a ‘back-to-
back’ arrangement through a foreign branch/ parent/group entity (foreign counterpart) of the market-
maker. (b) A market-maker shall enter into a ‘back-to-back’ arrangement.
1) The Price Value of a Basis Point (PVBP) of all outstanding OIS positions undertaken by all non-residents shall
not exceed the amount of INR 3.50 billion (PVBP cap).
2) The PVBP of all outstanding OIS positions for any non-resident (including related entities) shall not exceed
10% of the PVBP cap.
3) Clearing Corporation of India Ltd. (CCIL) shall publish the methodology for calculation of the PVBP and monitor
as well as publish utilization of the PVBP limit on a daily basis.
Foreign Portfolio Investors (FPIs), collectively, may also transact in interest rate futures (IRF) up to a limit of net
long position of INR 50 billion.
Remittance/Payments : All payments of a non-resident may be routed through a Rupee account of the non-
resident or, where the non-resident doesn’t have a Rupee account in India, through a vostro account maintained
with an AD bank in India. The market-maker shall maintain complete details of such transactions.
KYC for the non-resident: Market-maker shall ensure that non-resident clients are from an FATF compliant
country. Market-makers shall also ensure that non-resident clients comply with the KYC requirements.
Investment by Foreign Portfolio Investors (FPI) in Debt -
In terms of AP (DIR Series) Circular No. 31 dated June 15, 2018, no FPI shall have an exposure of more than 20%
of its corporate bond portfolio to a single corporate (including exposure to entities related to the corporate).
As per circular dated 15.02.19, in order to encourage a wider spectrum of investors to access the Indian
corporate debt market, RBI decided to withdraw this provision with immediate effect.
ECB facility for Resolution Applicants under Corporate Insolvency Resolution Process As per ECB policy dated
16.01.19, ECB proceeds cannot be utilised for repayment of domestic Rupee loans, except when the ECB is
availed from a Foreign Equity Holder as defined in the aforesaid framework.
On a review on 07.02.19, RBI, to relax the end-use restrictions for resolution applicants under the Corporate
Insolvency Resolution Process (CIRP) decided and allow them to raise ECBs from the recognised lenders, except
the branches/ overseas subsidiaries of Indian banks, for repayment of Rupee term loans of the target company
under the approval route. Accordingly the resolution applicants, who are otherwise eligible borrowers, can
forward such proposals to raise ECBs, through their AD bank, to RBI, for approval.
Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit
Government of India decided to include merchant exporters also, w.e.f. January 2, 2019, under the ongoing
Interest Equalisation Scheme for Pre and Post Shipment Rupee Export Credit and allow them interest equalisation
at the rate of 3% on credit for export of products covered under 416 tariff lines identified under the Scheme.
Limit for the stock of External Commercial Borrowings -On 20.12.2018, RBI decided, in consultation with the
Government of India to have a rule-based dynamic limit for outstanding stock of External Commercial
Borrowings (ECB) at 6.5 per cent of GDP at current market prices. Based on the GDP figures as on March 31,
2018, the stock limit works out to USD 160 billion for the current financial year. The outstanding stock of ECB
as on September 30, 2018 stood at USD 126.29 billion.
Licensing as Authorised Dealer- Category II : A large segment of population is increasingly getting connected
with forex transactions on individual accounts. In order to increase the accessibility and efficiency of services extended
to the members of the public for their day-to-day non-trade current account transactions, RBI decided on 16.04.19,
that Systemically Important Non-Deposit taking Investment and Credit Companies shall be eligible for Authorized
Dealer- Category II (AD-Cat II) licence, subject to meeting the following conditions: NBFCs offering such services shall
have a ‘minimum investment grade rating’.
NBFCs offering such services shall put in place a board approved policy on (a) managing the risks, including currency risk,
if any, and (b) handling customer grievances arising out of such activities. A monitoring mechanism, at least at monthly
intervals, shall be put in place for such services. The eligible NBFCs desirous of undertaking AD-Cat II activities
shall approach the Reserve Bank of India, Foreign Exchange Department, Central Office, Mumbai for the AD-Cat II
licence.
Investment by Foreign Portfolio Investors (FPI) in Debt – Review -Further to RBI circulars dated 07.11.17 and
15.06.18, as a measure to broaden access of non-resident investors to debt instruments in India, Foreign
Portfolio Investors (FPI) have been permitted by RBI on 25.04.19, to invest in municipal bonds. FPI investment in
municipal bonds shall be reckoned within the limits set for FPI investment in State Development Loans (SDLs).
ECB facility for Resolution Applicants under Corporate Insolvency Resolution Process As per ECB policy dated
16.01.19, ECB proceeds cannot be utilised for repayment of domestic Rupee loans, except when the ECB is
availed from a Foreign Equity Holder as defined in the aforesaid framework. On a review on 07.02.19, RBI, to
relax the end-use restrictions for resolution applicants under the Corporate Insolvency Resolution Process (CIRP)
decided and allow them to raise ECBs from the recognised lenders, except the branches/ overseas subsidiaries
of Indian banks, for repayment of Rupee term loans of the target company under the approval route.Accordingly
the resolution applicants, who are otherwise eligible borrowers, can forward such proposals to raise ECBs,
through their AD bank, to RBI, for approval.
DIGITAL BANKING
RBI WAIVES NEFT, RTGS TRANSFER CHARGES FOR SAVINGS ACCOUNT HOLDERS: The Reserve Bank of India
has waived NEFT, RTGS transfer charges for Savings Account holders. In an order, RBI instructed banks to make
all online payments done through RTGS and NEFT free of cost for savings account holders. The new rule will be
effective from January 1, 2020.
Enhancing facilitation of National Electronic Toll Collection (NETC) system India is progressing ahead with
NETC gaining large scale acceptance. Currently, the NETC system allows linking of FASTags with bank accounts
– savings, current and prepaid. In order to further broad base this system by allowing more payment choices for
the customers, as well as for fostering competition among the system participants, RBI allowed (30.12.19) all
authorised payment systems and instruments [nonbank PPIs, cards and Unified Payments Interface (UPI)] for
linking with the FASTags, which can be used for various types of payments (vehicle toll, parking fee, etc.). The
Turn Around Time (TAT) for resolving failed transactions shall also be applicable to the transactions carried out
in the NETC system. The transactions in the NETC system can be performed without any Additional Factor of
Authentication (AFA) and / or pre-transaction notification / alert. NPCI shall facilitate requests received from
banks / non-banks in this regard.
Introduction of a new type of semi-closed Prepaid Payment Instrument (PPI) – PPIs upto Rs.10,000/- with
loading only from bank account To give impetus to small value digital payments and for enhanced user
experience, on 24.12.19, RBI decided to introduce a new type of semiclosed PPI with the following features: 1.
Such PPIs shall be issued by bank and nonbank PPI Issuers after obtaining minimum details of the PPI holder. 2.
The minimum details shall necessarily include a mobile number verified with One Time Pin (OTP) and a self-
declaration of name and unique identity / identification number of any ‘mandatory document’ or ‘officially
valid document’ (OVD) listed in KYC directions. 3. These PPIs shall be reloadable in nature and issued in card or
electronic form. Loading / Reloading shall be only from a bank account. 4. The amount loaded in such PPIs
during any month shall not exceed Rs.10,000 and the total amount loaded during the financial year shall not
exceed Rs.1,20,000. 5. The amount outstanding at any point of time in such PPIs shall not exceed Rs.10,000. 6.
These PPIs shall be used only for purchase of goods and services and not for funds transfer. 7. PPI issuers shall
provide an option to close the PPI at any time and also allow to transfer the funds ‘back to source’ (payment
source from where the PPI was loaded) at the time of closure. 8. The features of such PPIs shall be clearly
communicated to the PPI holder by SMS / e-mail / post or by any other means at the time of issuance of the
PPI / before the first loading of funds. 9. The minimum detail PPIs existing as on the date of this circular can
be converted to the above type of PPI, if desired by the PPI holder.
Furthering Digital Payments – Waiver of Charges – National Electronic Funds Transfer (NEFT) System -In
order to give further impetus to digital retail payments, on 16.12.19, RBI decided that member banks shall not
levy any charges from their savings bank account holders for funds transfers done through NEFT system which
are initiated online (viz. internet banking and/or mobile apps of the banks).
PROCESSING OF E-MANDATE IN UPI FOR RECURRING TRANSACTIONS-RBI has extended the ambit of guidelines
issued for Processing of e-mandate on cards for recurring transactions to cover UPI transactions as well. It
means that Additional Factor of Authentication (AFA) is required during e-mandate registration, modification
and revocation, as also for the first transaction, & simple / automatic subsequent successive transactions.
ENHANCING SECURITY OF CARD TRANSACTIONS-To increase the security of card transactions, following
changes have been made by RBI: a) At the time of issue / re-issue: All cards (physical and virtual) shall be
enabled for use only at contact-based points of usage [viz. ATMs and Point of Sale (PoS) devices] within India.
Issuers shall provide cardholders a facility for enabling card not present (domestic and international)
transactions, card present (international) transactions and contactless transactions.
b) For existing cards: Issuers based on their risk perception decide: Whether to disable the card not present
(domestic and international) transactions, card present (international) transactions and contactless transaction
rights. Existing cards which have never been used for online (card not present) / international / contactless
transactions shall be mandatorily disabled for this purpose.
c) Additionally, the issuers shall provide: Facility to switch on / off and set / modify transaction limits (within
the overall card limit, if any, set by the issuer) for all types of transactionsdomestic and international, at PoS /
ATMs / online transactions / contactless transactions, etc.; The above facility on a 24x7 basis through multiple
channels - mobile application / internet banking/ATMs/ Interactive Voice Response (IVR); this may also be
offered at branches / offices; Alerts / information / status, etc., through SMS / e-mail, as and when there is
any change in status of the card; These provisions are not mandatory for prepaid gift cards and those used at
mass transit systems.
MOBILE AIDED NOTE IDENTIFIER (MANI)-The Reserve Bank of India has launched the ‘Mobile Aided Note
Identifier’, a mobile application for aiding visually impaired persons to identify the denomination of Indian
Banknotes. The Reserve Bank has introduced several currency notes, under 'Mahatma Gandhi Series', with
significant changes in the sizes and designs after the demonetization. Under the new series, of bank notes of
Rs.10, Rs.20, Rs.50, Rs.100, Rs.200, Rs.500 and Rs.2,000 have been released in the past couple of years.
However, there were reports of problems faced by visuallychallenged people in identifying these new currency
notes. Indian banknotes contain several features which enable the visually impaired (colour blind, partially
sighted and blind people) to identify them, viz., intaglio printing and tactile mark, variable banknote size,
large numerals, variable colour, monochromatic hues and patterns. Technological progress has opened up new
opportunities for making Indian banknotes more accessible for the visually impaired, thereby facilitating their
day to day transactions. Features: a) Capable of identifying the denominations of Mahatma Gandhi Series and
Mahatma Gandhi (New) series banknote by checking front or reverse side/part of the note including half folded
notes at various holding angles and broad range of light conditions (normal light/day light/low light/ etc.). b)
Ability to identify the denomination through audio notification in Hindi/English and non-sonic mode such as
vibration (suitable for those with vision and hearing impairment). c) After installation, the mobile application
does not require internet and works in offline mode. d) Ability to navigate the mobile application via voice
controls for accessing the application features wherever the underlying device & operating system combination
supports voice enabled controls. e) The application is free and can be downloaded from the Android Play Store
and iOS App Store without any charges/payment. f) This mobile application does not authenticate a note as
being either genuine or counterfeit.
Ombudsman for Digital Transactions RBI introduced the Ombudsman Scheme for Digital Transactions, 2019 u/s 18 Payment and
Settlement Systems Act, 2007, w.e.f. January 31, 2019. Objective : To provide an expeditious and cost-free apex level
mechanism for resolution of complaints regarding digital transactions undertaken by customers of the System
Participants. Appointment of Ombudsman: He/she is a senior official, appointed (max for 3 years) by RBI. 21
Ombudsman have been appointed by RBI located mostly in State Capitals. (Sacretariat cost borne by RBI).
Ombudsman is to send report to Governor RBI as on 30th Jun every year on general review of activities. Entities
covered : System Participants (SP) are the entities (other than a bank) participating in the payment system
excluding system provider. Grounds of complaints: Deficiency in services and nonadherence of RBI instructions
by System Participants such as Prepaid Payment Instruments; Mobile / Electronic Fund Transfers; 3) Payment
through Unified Payments Interface (UPI) / Bharat Bill Payment System (BBPS) / Bharat QR Code / UPI QR
Code: Grounds of complaint generally include: Failure in crediting merchant’s account within reasonable
time;Failure to load funds within reasonable time in wallets / cards; Unauthorized electronic fund transfer;
a) Non-Transfer / Refusal to transfer/ failure to transfer within reasonable time, balance in PPI to the holder’s
‘own’ bank account or back to source, expiry of validity period etc., of PPI;
b) Failure or refusal to refund within reasonable time in case of unsuccessful / returned / rejected / cancelled
/ transactions;
c) Non-credit / delay in crediting the account of PPI holder as per the terms and conditions;
d) Failure to effect online payment / fund transfer within reasonable time;
e) Unauthorized electronic fund transfer;
f) Failure to act upon stop-payment instructions;
g) Failure to reverse the amount debited from customer account in cases of failed payment transactions within
prescribed timeline;
h) Failure in crediting funds to the beneficiaries’ account; NOTE: For digital transactions done on third party
platforms, it will be the responsibility of the Payment Service Provider to resolve customer disputes arising out
of such transactions.
Time to file a complaint: For redressal, the complainant must first approach the System Participant
concerned. If the System Participant does not reply within a period of one month, or rejects the complaint, or if
the complainant is not satisfied with the reply given, the complainant can file the complaint with the
Ombudsman within whose jurisdiction the branch or office of the System Participant complained against, is
located. For complaints arising out of services with centralized operations, it shall be filed before the
Ombudsman within whose territorial jurisdiction the billing / declared address of the customer is located.
Grounds of rejection by the Ombudsman: If SP is not covered under the Scheme. If one has not approached
SP concerned in the first instance for redressal.If the subject matter is not pertaining to the grounds of
complaint. Complaint not made within prescribed period. (Ombudsman may accept a complaint made after such
period, before the expiry of limitation period under Limitation Act, 1963). Complaint is pending for disposal / dealt
with at any other forum (court, consumer court etc.) Complaint settled through Ombudsman in any previous
proceedings.Complaint is frivolous or vexatious.Complaint falls under the disputes covered under Section 24 of
the Payment and Settlement Systems Act, 2007.The complaint pertains to dispute arising from a transaction
between customers.
Procedure for filing the complaint : A complaint can be filed by complainant or authorized representative
(other than Advocate), written on a plain paper and sending it by post/ fax/hand delivery or by email. A
complaint form is available on RBI’s website, though, it is not mandatory to use this format. There are no
charges or any fee for filing / resolving customers’ complaints.Types of settlement of complaint : It can be
settlement by agreement or conciliation and mediation or by way of passing of award. Action by Ombudsman
on a complaint:
The proceedings will be summary in nature.
1) Effort shall be made by Ombudsman to promote settlement through conciliation/ mediation by agreement
between parties. Based on such agreement, Ombudsman will pass an order as per terms of settlement which
becomes binding on both parties.
2) If the system Participant is found to have adhered to the norms and the complainant is informed about this
and complainant does not raise objections, within the time frame provided, the Ombudsman may pass an
order to close the complaint.
2) Ombudsman can pass an Award after providing reasonable opportunity. It is upto the complainant to accept
the Award as full and final settlement or reject it.
Award and compensation: Ombudsman can award compensation limited to loss arising directly out of omission
or commission of SP, or Rs.20 lac
(two million) whichever is lower. The compensation shall be over and above the disputed amount. Additional
compensation up to Rs.1 lac (0.1 million) can be awarded for effort, time, mental agony and harassment. The
award shall lapse, if complainant does not send acceptance for full and final settlement, to System
Participant, within 30 days of receipt of copy of award.
The System Participant shall comply with the award, within 30 days of receipt of such acceptance and send
compliance report to Ombudsman. The System Participant shall send a report of compliance to RBI within 15
of award becoming final.
If System Participant does not implement the award, the complaint can approach RBI.
Appeal : A person aggrieved by such Award can approach the Appellate Authority (Deputy Governor-in-Charge
of the department of the RBI implementing the Scheme) within 30 days of the date of receipt of
communication of Award or rejection.
System Participant can appeal (with permission of CMD/CEO/ED) within 30 days from the date, when
acceptance was received from complainant.
The Appellate Authority may allow a further period not exceeding 30 days. Nodal officer : SP shall appoint nodal
officer at their Regional/Zonal Office who shall be responsible to provide information to Ombudsman concerned.
OPENING OF FIRST COHORT UNDER THE REGULATORY SANDBOX (RS) The Reserve Bank announces the
opening of first cohort under the Regulatory Sandbox (RS) with ‘Retail Payments’, as its theme. The adoption
of ‘Retail Payments’ as the theme is expected to spur innovation in digital payments space and help in offering
payment services to the unserved and underserved segment of the population. Migration to digital modes of
making a payment can obviate some of the costs associated with a cash economy and can give customers a
friction-free experience. The innovative products/services which, among others, shall be considered for
inclusion under RS are as follows: • Mobile Payments including feature phone based Payment Services: General
innovation in mobile payment services has focussed on or supported appbased access, limited to smartphones
and such devices. • Offline Payment Solutions: Providing an option of off-line payments through mobile
devices for furthering the adoption of digital payments is required. • Contactless Payments: Contactless
payments, while decreasing the time taken for payment checkout, also ease payments for small ticket
payment transactions. Tokenisation technologies often form the basis of facilitating seamless e-commerce
experiences fuelled by mobile and other connected devices. The rapid growth in devices provides a significant
opportunity for payments through any form factor and anywhere.
FURTHERING DIGITAL PAYMENTS RBI has stated that efforts have resulted in a rapid growth in the retail
digital payment systems. To further empower every citizen with an Exceptional (e) Payment Experience, and
provide her access to a bouquet of options, the RBI proposes to take the following steps: • Mandate banks not
to charge savings bank account customers for online transactions in the NEFT system with effect from January
2020. • Operationalise the Acceptance Development Fund to increase acceptance infrastructure w.e.f. January
1, 2020. • Constitute a Committee to assess the need for plurality of QR codes and merits of their co-existence
or convergence from both systemic and consumer viewpoints. • Permit all authorised payment systems and
instruments (non-bank PPIs, cards and UPI) for linking with National Electronic Toll Collection (NETC) FASTags.
Going forward, this will facilitate the use of FASTags for parking, fuel, etc.
Expanding and Deepening of Digital Payments Ecosystem With a view to expanding and deepening the digital
payments ecosystem, RBI decided (07.10.19) that all State/ UT Level Bankers Committees (SLBCs/ UTLBCs)
shall identify one district in their respective States/ UTs on a pilot basis in consultation with banks and
stakeholders. The identified district shall be allotted to a bank having significant footprint which will
endeavour to make the district 100% digitally enabled within one year, in order to enable every individual in
the district to make/ receive payments digitally in a safe, secure, quick, affordable and convenient manner.
This would, inter alia, include providing the necessary infrastructure and literacy to handle such transactions.
SLBCs/ UTLBCs shall endeavour to ensure that to the extent possible, districts identified are converged with
the ‘Transformation of Aspirational Districts’ programme of the Government of India. The allotment of the
identified district to a bank should be done, as far as possible, through mutual consultation and voluntary
acceptance by the bank. Further, SLBC/ UTLBC Convenor Banks are to monitor the progress made in this regard
on a quarterly basis and report the same to concerned Regional Offices/ SubOffices of the Reserve Bank of
India.
Bank / Branch details under the Central Information System for Banking Infrastructure (CISBI) RBI maintains
the directory of all bank branches / offices / Non-Administratively Independent Offices (NAIOs) / Customer
Service Points (CSPs) in India, [known as the “Master Office File” (MOF) system], which is updated based on
Proforma-I and ProformaII, submitted by banks through e-mail. The system allots Basic Statistical Return (BSR)
code / Authorised Dealer (AD) code to bank branches / offices / NAIOs / CSPs. Consistent with the needs of
branch licencing and financial inclusion policies as well as the need for requisite coverage of additional
dimensions / features, a new reporting system, viz., Central Information System for Banking Infrastructure
(CISBI) (https:// cisbi.rbi.org.in), has been web-deployed by RBI (11.10.19) to replace the legacy MOF system.
Under the new system, all co-operative banks are required to submit their information in a single Proforma
online on CISBI portal, as compared with the earlier system of submitting Proforma-I & Proforma-II separately
through e-mail. All the past information reported by banks has been migrated to CISBI and additional
information should be reported in CISBI henceforth. The CISBI portal contains the relevant circulars, user
manuals and other relevant documents to facilitate reporting. RBI has provided login credentials to Nodal
Officers of banks for submitting their information in CISBI. Banks should submit information on CISBI portal as
per guidelines and thereafter bank branch / office / NAIO / CSP codes would be allotted by CISBI after due
validations. In case of status change, banks need to edit only the relevant part. All cooperative banks should
submit immediately and in any case not later than one week, the information relating to opening, closure,
merger, shifting and conversion of bank branches / offices / NAIOs / CSPs online through CISBI portal. To
ensure correctness of data on CISBI, in the last week of every month, banks shall generate a ‘NIL Report’ in
CISBI for position as on last day of the previous month, indicating the total number of functioning branches,
offices, NAIOs, CSPs; and submit it through CISBI after authenticating its correctness. Banks can also use the
facility to access / download the data related to them. RBI further advised that CISBI also has provision to
maintain complete bank level details (e.g. bank category, bank-group, bank code, type of license issued,
registration details, area of operation, addresses of offices, contact details of senior officials, etc.) and history
of all the changes with time stamp. After gaining first time access of the system, banks shall ensure to submit
correct and updated Bank Level information in all the fields where submission / updation rights are available
with the bank. After initial submission of information on CISBI portal, a one-time confirmation stating that
“Correct and updated Bank level information has been submitted on CISBI” shall be sent by banks to the
concerned Regional Office of Department of Co-operative Bank Supervision within one month of issuance of
this circular. Any subsequent changes in the bank level information shall be submitted for updation on the
CISBI portal on immediate basis by the banks.
ON-TAP AUTHORISATION OF PAYMENT SYSTEMS- With intention of encouraging competition and encourage
innovation, RBI has been decided to offer ontap authorisation for the following entities: • Bharat Bill Payment
Operating Unit (BBPOU). • Trade Receivables Discounting System (TReDS). • White Label ATMs (WLAs). The KYC
requirements for retail payment systems shall be as per the Master Directions on Know Your Customer (KYC).
The payment system operators should ensure interoperability among different retail payment systems. The
authorisation would be given based on (a) merits of the proposal, and (b) Reserve Bank’s assessment of
potential for additional entities in that segment. The RBI, after reviewing the bank’s liquidity position and its
ability to pay its depositors has decided to further enhance the limit for withdrawal to Rs. 40,000/- (Rupees
Forty Thousand only), inclusive of Rs. 25,000 allowed earlier. The name of "The Catholic Syrian Bank Limited"
has been changed to "CSB Bank Limited" in the Second Schedule to RBI Act, 1934 w.e.f. June 10, 2019.
Bharat Bill Payment System - Expansion of biller categories As per RBI guidelines dated 28.11.14, BBPS, is an
interoperable platform for repetitive bill payments, which currently covers bills of five segments viz. Direct to
Home (DTH), Electricity, Gas, Telecom and Water. RBI decided (on 16.09.19) to expand the scope and
coverage of BBPS to include all categories of billers who raise recurring bills (except prepaid recharges) as
eligible participants, on a voluntary basis.
Usage of ATMs – Free ATM transactions – Clarifications It came to notice of RBI that transactions that have
failed due to technical reasons, nonavailability of currency in ATMs, etc., are also included in number of free
ATM transactions. On 14.08.19, RBI clarified that transactions which fail on account of technical reasons like
hardware, software, communication issues; non-availability of currency notes in the ATM; and other declines
ascribable directly / wholly to the bank / service provider; invalid PIN / validations; etc., shall not be counted
as valid ATM transactions for the customer. Consequently, no charges therefor shall be levied. Further, the
non-cash withdrawal transactions (such as balance enquiry, cheque book request, payment of taxes, funds
transfer, etc.), which constitute ‘on-us’ transactions (i.e., when a card is used at an ATM of the bank which
has issued the card) shall also not be part of the number of free ATM transactions.
CASH WITHDRAWAL AT PoS DEVICES -The Reserve Bank of India has issued a circular wherein they have said
that it has come to their notice that the instructions pertaining to Cash withdrawal at Point of Sale (PoS) have
not been implemented in letter and spirit. The central bank has reiterated the instructions with a view to
provide for cash withdrawals at PoS devices enabled for all debit cards / open loop prepaid cards issued by
banks. The instructions outlined therein, limit:  Cash withdrawal to Rs. 1000/- per day in Tier I and II centres
and Rs. 2,000/- per day in Tier III to VI centres;  Customer charges, if any, on such cash withdrawals to not be
more than 1% of the transaction amount.  The facility is made available at merchant establishments
designated by the bank after a process of due diligence. Such merchant establishments may be advised to
clearly indicate / display the availability of this facility along with the charges, if any, payable by the
customer.  The facility is available irrespective of whether the card holder makes a purchase or not. In case
the facility is availed along with the purchase of merchandise, the receipt generated shall separately indicate
the amount of cash withdrawn.  Banks offering this facility shall have an effective customer redressal
mechanism. Complaints in this regard will fall within the ambit of the Banking Ombudsman Scheme.  Earlier
this month, RBI said that banks also can't include noncash withdrawal transactions like balance enquiry, cheque
book request, payment of taxes and funds transfer under free ATM transactions.  Banks are also advised to
submit data on cash withdrawals at PoS devices to the CGM, Deptt of Payment and Settlement Systems,
Mumbai, on quarterly basis within 15 days of the end of quarter as per the format enclosed.
Transaction limit and velocity check:  The cap / limit for e-mandate based recurring transactions without
AFA will be Rs. 2,000/- per transaction. Transactions above this cap shall be subject to AFA.  The maximum
permissible limit for a transaction under this arrangement shall be Rs. 2,000/-.  No charges shall be levied or
recovered from the cardholder for availing the e-mandate facility on cards for recurring transactions.  The
limit of Rs. 2,000/- per transaction is applicable for all categories of merchants who accept repetitive
payments based on such e-mandates. Suitable velocity checks and other risk mitigation procedures shall be put
in place by issuers.
Withdrawal of e-mandate:  The issuer shall provide the cardholder an online facility to withdraw any e-
mandate at any point of time following which no further recurring transactions shall be allowed for the
withdrawn e-mandate. (Note: The exception to this will be a pipeline transaction for which pre-transaction
notification has already been sent to the cardholder, but the debit has not been communicated to or received
by the cardholder, and the emandate withdrawal happens during the interregnum.) Information about this
facility to withdraw e-mandate at any point of time, shall be clearly communicated to the cardholder at the
time of registration and later on whenever felt necessary. The withdrawal of any e-mandate by the cardholder
shall entail AFA validation by the issuer. In respect of withdrawn e-mandate/s, the acquirers shall ensure that
the merchants on-boarded by them, delete all details, including payment instrument information.
Dispute resolution and grievance redressal:  An appropriate redress system shall be put in place by the
issuer to facilitate the cardholder to lodge grievance/s. Card networks shall also put in place dispute resolution
mechanism for resolving these disputes with clear Turn Around Time (TAT). The card networks shall make
suitable arrangements to separately identify chargebacks / dispute requests in respect of e-mandate based
recurring transactions. RBI instructions on limiting liability of customers in unauthorised transactions shall be
applicable for such transactions as well.
USAGE OF ATMS – FREE ATM TRANSACTIONS -  RBI has informed that it has come to their notice that
transactions that have failed due to technical reasons, nonavailability of currency in ATMs, etc., are also
included in the number of free ATM transactions.  RBI has clarified that transactions which fail on account of
technical reasons like hardware, software, communication issues; non-availability of currency notes in the
ATM; and other declines ascribable directly / wholly to the bank / service provider; invalid PIN / validations;
etc., shall not be counted as valid ATM transactions for the customer. Consequently, no charges therefor shall
be levied.  Non-cash withdrawal transactions (such as balance enquiry, cheque book request, payment of
taxes, funds transfer, etc.), which constitute ‘on-us’ transactions (i.e., when a card is used at an ATM of the
bank which has issued the card) shall also not be part of the number of free ATM transactions.
National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS) systems – Waiver of
charges RBI reviewed the various charges levied by it on the member banks for transactions processed in the
RTGS and NEFT systems. To provide an impetus to digital funds movement, RBI on 11.06.19, decided that with
effect from July 1, 2019, processing charges and time varying charges levied on banks by Reserve Bank of India
(RBI) for outward transactions undertaken using the RTGS system, as also the processing charges levied by RBI
for transactions processed in NEFT system will be waived by RBI. The banks are advised to pass on the benefits
to their customers for undertaking transactions using the RTGS and NEFT systems with effect from July 1,
2019.
Security Measures for ATMs RBI decided to implement following recommendations of Committee on Currency
Movement (CCM) [Chair: Shri D.K. Mohanty] as per circular dated RBI-14.06.2019:
a) All ATMs shall be operated for cash replenishment only with digital One Time Combination (OTC) locks. b)
All ATMs shall be grouted to a structure (wall, pillar, floor, etc.) by Sept 30, 2019, except ATMs installed in
highly secured premises such as airports, etc. which have adequate CCTV coverage and are guarded by state /
central security personnel. c) Banks may also consider rolling out a comprehensive esurveillance mechanism at
the ATMs for timely alerts and quick response.
Discontinuation of the requirement of Paper to Follow (P2F) for State Government Cheques With a view to
enhancing efficiency in cheque clearing, Reserve Bank has introduced Cheque Truncation System (CTS) for
clearance of cheques, facilitating the presentation and payment of cheques without their physical movement.
P2F was discontinued for Central Govt. cheques with effect from February 2016. Taking this initiative forward,
RBI decided (20.06.19) in consultation with the Office of the Comptroller & Auditor General of India (C&AG),
Government of India, to dispense with the current requirement of forwarding the paid State Government
cheques in physical form (commonly known as P2F) to the State Government departments/treasuries
INCREASE IN RTGS OPERATING HOURS -Presently, for customer transactions, RTGS is available for from 8:00
am to 6:00 pm and for inter-bank transactions from 8:00 am to 7:45 pm. To increase the availability of the
RTGS system, RBI decided (21.08.19) extended operating hours of RTGS and commence operations from 7:00
am. RTGS time window w.e.f Aug 26, 2019 will be as under: Sr. No. Event Time 1. Open for Business 07:00
hours 2. Customer transactions (Initial Cut-off) 18:00 hours 3. Inter-bank transactions (Final Cut-off) 19:45
hours 4. IDL Reversal 19:45 - 20:00 hours 5. End of Day 20:00 hours
The RTGS time window with effect from August 26, 2019 will, therefore, be as under :
Event Time
Open for Business 07.00 hours
Customer transactions (Initial Cut-off) 18.00 hours
Inter-bank transactions (Final Cut-off) 19.45 hours
IDL Reversal 19.45 hours – 20.00 hours
End of Day 20.00 hours
TECHNICAL SPECIFICATIONS : ACCOUNT AGGREGATOR (AA) ECOSYSTEM The NBFC-AA consolidates financial
information of a customer held with different financial entities, spread across financial sector regulators
adopting different IT systems and interfaces. In order to ensure that such movement of data is secured, duly
authorised, smooth and seamless, it has been decided to put in place a set of core technical specifications for
the participants of the AA ecosystem. Reserve Bank Information Technology Private Limited (ReBIT), has
framed specifications for all and published the same on its website. All regulated entities of the Bank, acting
either as NBFC-AA or Financial Information Providers (FIP) or Financial Information Users (FIU) are expected to
adopt the technical specifications published by ReBIT. It shall be the responsibility of the NBFC-AA to ensure
that its IT systems have all features necessary to carry out its functions strictly in conformity with the NBFC.
WITHDRAWAL OF EXEMPTIONS HOUSING FINANCE INSTITUTIONS Housing Finance Institutions as defined under
Clause (d) of Section 2 of the National Housing Bank Act, 1987 are currently exempt from the provisions of
Chapter IIIB of Reserve Bank of India Act, 1934. RBI has withdrawn these exemptions and make the provisions
of Chapter IIIB except Section 45-IA of Reserve Bank of India Act, 1934, applicable to them.
RBI allows WLATM operators to source cash, generate income from ads: In a bid to enhance the viability of
white-label ATMs (WLATMs), the RBI has allowed them to buy wholesale cash from RBI and currency chests, source
cash from any scheduled bank, and display advertisements pertaining even to non-financial products/services
within the WLATM premises. Further, banks can issue co-branded ATM cards with the authorized WLATMs, and,
may extend the benefit of ‘on-us’ transactions where the customer/cardholder and ATM are of the same bank to
their WLATMs. The permission given to WLATM operators aka WLAOs in December 2016 to source cash from retail
outlets, has been withdrawn. WLAOs can buy wholesale cash, above a threshold of one lakh pieces (and in
multiples thereof) of any denomination, directly from its issue offices and currency chests, against full payments.
They can offer bill payment and interoperable cash deposit services, subject to technical feasibility and
certification by the National Payments Corporation of India (NPCI). They can display advertisements pertaining to
non-financial products/services anywhere within the WLATM premises, including the WLATM screen, except the
main signboard.
PAYMENT AND SETTLEMENT SYSTEM IN INDIA : VISION 2019-2021
The Reserve Bank of India has placed on its website the “Payment and Settlement Systems in India: Vision 2019 –
2021”. The Payment Systems Vision 2021 with its core theme of ‘Empowering Exceptional (E) payment Experience’
aims at empowering every Indian with access to a bouquet of e-payment options that is safe, secure, convenient, quick
and affordable. It envisages to achieve a ‘highly digital’ and ‘cash-lite’ society through the goal posts of Competition,
Cost effectiveness, Convenience and Confidence (4Cs).
OBJECTIVES: Enhance Customer experience, including robust grievance redressal; Empower payment System
Operators and Service Providers; Enable the payments Eco-system & Infrastructure; Put in place Forward-looking
Regulations; and Undertake Risk-focused Supervision. The ‘no- compromise’ approach towards safety and
security of payment systems remains a hallmark of the Vision.
TARGETS UNDER VISION 2019-2021: Increase digital payment transaction of GDP by 15%. Increase payment system
operators fourfold increase in digital transactions.Increase debit card transactions by 35% & increase total card
acceptance infrastructure to six times. Reduce currency in circulation with no specific target. Reduce the volume of
cheque-based payments to less than 2%. Reduce pricing of electronic payment services by at least 100 basis
points. Improve the security of digital payment systems. Facilitate mobile-based payment transactions.
GENERAL BANKING
Revision of Interest Rates on Small Savings Schemes w.e.f. 01.10.2019 to 31.12.2019 and also same wef
01.01.2020 to 31.03.2020
Scheme Revised Rate of Interest Compounding frequency
Senior Citizen Savings Scheme (SCSS) 8.6 % p.a. Quarterly and paid
Public Provident Fund Scheme (PPF) 7.9 % p.a. Annually
KisanVikasPatra (KVP) 7.6 % p.a. Annually
(will mature in 113 months)
SukanyaSamriddhi Account Scheme 8.4 % p.a. Annually
Rationalisation of Agency Commission Payable to Banks on Government Transactions with effect from July
01, 2019 : Reserve Bank of India, has informed that the Agency Commission rates on eligible Government
transactions has been revised as under, and has to be carried out with effect from July 01, 2019:
Sl Type of Transaction Unit Existing Rates Revised Rates
No
1 Receipts - Physical Per transaction Rs 50/- Rs 40/-
2 Receipts – e-mode Per transaction Rs 12/- Rs 9/-
3 Pension Payments Per transaction Rs 65/- Rs 75/-
4 Payments other than Pension Per Rs 100 turnover 5.5 Paise 6.5 Paise
Claim: A review of claim process was done. Based on review and also taking into consideration, the references
received from agency banks in this regard, RBI decided to replace the current process of centralised claims
submission with a system whereby applicable GST (18% at present) shall be paid along with agency commission
by respective ROs of RBI / CAS, Nagpur. For eligible government transactions done with effect from July 01,
2019, agency banks shall submit the agency commission claims, including applicable GST amount, as per
revised agency commission rates indicated above, to RBI at respective ROs / CAS, Nagpur as per the extant
instructions issued by RBI in this regard. TDS on GST shall be deducted as applicable by RBI at the time of
making agency commission payment.
Remittance of government receipts (physical receipts) to Government account Office of Controller General
of Accounts, Ministry of Finance has prescribed revised timelines (on 19.09.19) for credit of physical
government receipts into government accounts at RBI, in supersession of earlier instructions on this matter. As
per these time lines, the period is T + 1 day (including put through). For branches in North Eastern States the
period is T + 2 days (including put through). There is no change e-receipts time line which continues to be T + 1
working day as per Govt. circular dated 9.3.16. The instructions become effective from October 1, 2019.
Recovery of Interest on delayed remittance of Government Receipts into Government Account As per RBI
circular dated 13.02.13, in order to bring uniformity in the procedure of reporting both central and State
government transactions to Reserve Bank, it was advised that the petty claims of delayed period of penal
interest involving amount of Rs.500/- or below will be ignored and excluded from the purview of penal
interest. To bring further uniformity in the procedure for reporting both central and state government
transactions to RBI, it decided (26.09.19) with the approval of Comptroller and Auditor General of India that
instructions given in para 7.4 of CGA’s OM S-11012/1(31)/AC(22)/2015/ RBD/332-424 dated March 9, 2016, will
be made applicable to State government transactions also i.e ignoring petty claims of penal interest involving
an amount of Rs.500/or below and excluding them from the purview of penal interest, and applying the limit
of penal interest of Rs.500/- on per transaction basis.
Disclosure on Exposure to Infrastructure Leasing & Financial Services Limited (ILFS) and its group entities
RBI has advised banks to refer to the National Company Law Appellate Tribunal’s (NCLAT) order dated February 25, 2019
in respect of I.A No. 620 of 2019 in Company Appeal (AT) No. 346 of 2018, in terms of which “no financial institution will
declare the accounts of ‘Infrastructure Leasing & Financial Services Limited’ or its entities as ‘NPA’ without prior
permission of this Appellate Tribunal”. In this context, banks and AIFIs have been advised by RBI on 24.04.19, to
disclose in their notes to accounts, the information in the prescribed proforma.
Wholesale Price Index (WPI) WPI measures the average change of the price of a fixed set of goods at first
point of bulk sale in a commercial transaction in the domestic market over a given period of time. The monthly
WPI presented in the table are compiled and published by the Office of the Economic Adviser, under the
Ministry of Commerce and Industry, Govt. of India. The current WPI series (Base 2011-12 = 100) has 697 items
in the commodity basket, for which 8,331 price quotations are obtained. All items having large transactions in
the economy are considered for compilation of the index to the extent feasible. Thus the series has a
representative basket of commodities as well as their varieties/grades and markets. These items are
aggregated at sub-group/group/ major group/all commodities index. The first release of monthly WPI is
generally after two weeks at the month-end, which is ‘provisional’ in nature because some price quotations
are received belatedly. The ‘final’ index is released a month after the provisional index, as by that time almost
all the required price quotations become available. The index numbers are compiled on the basis of Laspeyres’
formula as weighted average of price relatives.
Incentive for improving service to non-chest branches On 23.05.19, RBI decided to allow the large modern
Currency Chests to increase the service charges to be levied on cash deposited by non-chest bank branches
from the existing rate of Rs.5/- per packet of 100 pieces to a higher rate subject to a maximum of Rs.8/- per
packet. For this purpose, only a Currency Chest fulfilling the Minimum Standards for a Currency Chest as
detailed (details given hereunder) shall be eligible to be classified as a large modern Currency Chest. Banks
may approach the Issue Office of Reserve Bank under whose jurisdiction the Currency Chest is located for such
classification. The increased rates can be charged only after such classification by the Issue Office concerned.
The Non-Chest bank branches linked with such large modern Currency Chests may be advised of the
applicability of the increased rates at least 15 days in advance.
Minimum Standards for a Currency Chest (08.04.19) RBI decided to have following minimum standards for
setting up new CCs: i. Area of the strong room/ vault of at least 1500 sq. ft. For those situated in hilly /
inaccessible places (as defined by central / state government/ any appropriate authority), the strong room/
vault area of at least 600 sq. ft. ii. Processing capacity of 6,60,000 pieces of banknotes per day. For those
situated in the hilly/ inaccessible places, capacity of 2,10,000 pieces of banknotes per day. iii. Amenability to
adoption of automation and adaptability to implement IT solutions. iv. CBL of Rs.10 billion, subject to ground
realities and reasonable restrictions, at the discretion of the Reserve Bank.
SETTING UP NEW CURRENCY CHESTS  The Reserve Bank of India has issued guidelines for banks to set
up new currency chests. Currency chest is place where currency and coins are stored. It can be strong
room or a vault. When cash is taken out of vault, it becomes cash of bank and it can be used for the
payments. RBI on its behalf authorises few selected bank branches to stock rupee notes and coins. It acts as
distributives of RBI cash and enables RBI to take back soiled notes and mutilated notes from the public. As per
RBI’s annual report of 2017-18, currency management infrastructure consists of network of 19 issue offices of
RBI, 3,975 currency chest and 3,654 small coin depots of commercial, regional rural and co-operative banks
spread across the country. Guidelines Issued by RBI: Area of the strong room/vault of currency chests should
be at least 1,500 sq ft. In case they are situated in hilly/ inaccessible places, then strong room/ vault area
should be least 600 sq ft. Processing capacity of new chests should of 6.6 lakh pieces of banknotes per day.
If they are situated in hilly/ inaccessible places, it should then have processing capacity of 2.1 lakh pieces of
banknotes per day. Currency chests should have Chest Balance Limit (CBL) of Rs.1,000 crore. But this CBL will
be subject to ground realities and reasonable restrictions, at discretion of RBI.
Deferral of Implementation of Indian Accounting Standards (Ind AS)
On 05.04.18, the implementation of Ind AS was deferred by one year pending necessary legislative
amendments to the Banking Regulation Act, 1949 and level of preparedness of many banks. RBI informed on
22.03.19 that the legislative amendments recommended by the Reserve Bank are under consideration of the
Government of India. Accordingly, RBI has decided to defer the implementation of Ind AS till further notice.
LATEST GUIDELINES ABOUT REPORTING OF CURRENCY CHEST TRANSACTIONS
1) REPORT OF CURRENCY CHEST TRANSACTIONS The minimum amount of deposit into / withdrawal from
currency chest will be Rs.1,00,000 and thereafter, in multiples of Rs.50,000.
a) Time Limit for Reporting The currency chests / Link Offices should invariably report all transactions through
CyM – CC portal on the same day by 7 pm. The Sub-Treasury Offices (STOs) should report all transactions
directly to the Issue Office of the Reserve Bank by 7 pm on the same day. b) Relaxation in respect of strike
period in banks Relaxation in the reporting period on account of strike situation will be considered on case-to-
case basis.
2) LEVY OF PENAL INTEREST: a) Delay in Reporting: In the event of delay in reporting currency chest
transactions, penal interest at the rate indicated in paragraph 3 of this circular will be levied on the amount
due from the chest holding bank for the period of delay. Penal interest will be calculated on T+0 basis i.e.
penal interest will be levied in respect of transactions not reported by currency chests / Link Offices to the
Issue Office on the same business day within the time limit prescribed above. Penal interest will also be
charged for delay in reporting by STOs directly linked to Issue Department of the circle.
b) Wrong Reporting: Penal interest will be levied in respect of cases of wrong reporting in the same manner till
the date of receipt of corrected advice by RBI. As debits/credits to banks' current accounts are raised on the
basis of the transactions reported by the currency chests / Link Offices, penal interest will invariably be levied
in all cases of wrong reporting by the currency chests. It is expected that currency chests / Link Offices would
ensure the correctness of figures reported on the CyM - CC portal. Particular care should be taken to ensure
that remittances of fresh notes/notes to the currency chests are not reported as 'deposit' transactions on the
portal.
c) Penal interest for inclusion of ineligible amounts in the currency chest balances
(i) Penal interest will be levied in all cases where the bank has enjoyed 'ineligible' credit in its current account
with RBI on account of wrong reporting/delayed reporting/ non-reporting of transactions. Penal measures will
also be taken in cases of shortages in chest balances/remittances, shortages due to pilferage/ frauds,
counterfeit banknotes detected in chest balances/remittances as per the prevailing “Scheme of Penalties”.
(ii) Further, only cash held in the custody of joint custodians and 'freely available' to them is eligible for
inclusion in the chest balances. Thus, cash kept for safe custody in sealed covers for whatever reasons/cash in
trunks/bins under the lock and key of any official/s other than the Joint Custodians or bearing a third lock put
by any official in addition to the two locks of the Joint Custodians is not eligible for being included in the chest
balances. If such amounts are included in chest balances, these will be treated as instances of wrong reporting
and will attract penal interest at the rate specified.
(iii) In all the above cases, penal interest will be levied from the date of inclusion of 'ineligible' amounts in
chest balances till the exclusion of such amounts from chest balances. Penal measures for shortages in chest
balances / remittances, shortages due to pilferage / frauds, counterfeit banknotes detected in chest
balances/remittances will be taken on the basis of prevailing “Scheme of Penalties”.
3) LEVY OF PENALTY : a) Reporting of Soiled note remittances to RBI: Soiled note remittances to RBI should
not be shown as withdrawal by chests/link offices. In case such remittances to RBI are wrongly reported as
'withdrawals', a penalty of Rs.50,000 will be levied irrespective of the value of remittance and period of such
wrong reporting.
b) Reporting of diversions in CyM – CC portal: All currency chest diversions (both between chests of the same
bank and between chests of different banks) have to be reported through ‘Diversion Module’ of CyM-CC Portal.
The CC sending the diversion should initiate the diversion entry. The receiving CC should acknowledge the
same. Diversions must not be reported as Deposit / Withdrawal. A penalty of Rs.50,000 will be levied for such
wrong reporting.
c) Delayed reporting where currency chests had “Net Deposit”: Penal interest at the prevailing rate for
delayed reporting of the instances where the currency chest had reported “net deposit” may not be charged.
However, in order to ensure proper discipline in reporting currency chest transactions, a flat penalty of
Rs.50,000 may be levied on the currency chests for delayed reporting irrespective of the value of net deposit.
4) RATE OF PENAL INTEREST
Penal interest shall be levied at the rate of 2% over the prevailing Bank Rate for the period of delayed
reporting / wrong reporting/non-reporting / inclusion of ineligible amounts in chest balances. Levy of penal
interest in respect of currency chests at treasuries: The above instructions shall be applicable to currency
chests at treasury/sub-treasury offices also.
5) REPRESENTATIONS
a) Delayed Reporting: As the sole criterion for levy of penal interest for delayed reporting is the number of
days of delay, there should ordinarily be no occasion for banks to request for reconsideration of the Reserve
Bank's decision in individual cases. However, representations, if any, on account of genuine difficulties faced
by chests especially in hilly/remote areas and those affected by natural calamities, etc., may be made to the
Issue Office concerned through the Head / Controlling office of the bank concerned within a month from the
date of debit of the bank concerned.
b) Wrong Reporting: In the case of wrong reporting representations for waiver will not be considered. c) As the
intention behind the levy of penal interest is to inculcate discipline among banks so as to ensure prompt /
correct reporting, pleas by banks for waiver of penal interest on grounds that delayed/wrong/non-reporting did
not result in utilization of the Reserve Bank's funds or shortfall in the maintenance of CRR/SLR or that they
were the result of clerical mistakes, unintentional or arithmetical errors, first time error, inexperience of staff
etc., will not be considered as valid grounds for waiver of penal interest. Further, we will take a serious view
of all such lapses.
RBI GOVERNOR MEETS CEOs OF PSBs  The Governor, Reserve Bank of India held a meeting with the CEOs of
the public sector banks and the Chief Executive of Indian Banks Association (IBA) on July 19, 2019.  In his
opening remarks, the Governor acknowledged discernible improvements in the banking sector while
underscoring that several challenges still remain to be addressed, particularly with regard to the stressed asset
resolution and credit flows to needy sectors. During the meeting the following issues were discussed:  Less
than desired level of transmission of monetary policy rates;  Credit and deposit growth on the back of a
slowing economy; flow of credit to needy sectors while following prudent lending, robust risk assessment and
monitoring standards;  Improving recovery efforts;  Giving impetus to resolution of stressed assets facilitated
by revised framework for resolution announced by the RBI.  Strengthening internal control mechanism for
improved fraud risk management;  Recent initiatives to address issues relating to NBFCs and the role banks
can play in mitigating lingering concerns;  Deepening digital payments.  The Governor also underlined the
importance of expanding and deepening digital payments ecosystem in line with the recommendations of the
Report of the Committee on Deepening of Digital Payments headed by Sh. Nandan Nilekani and RBI’s Payment
System Vision Document 2021.  In this context, on the suggestion of the Governor, Banks agreed to identify
one district in each state to make it 100% digitally enabled within a time frame of one year in close
coordination and collaboration with all stakeholders, including SLBCs, State Governments, Regional offices of
RBI, etc.  To the extent feasible, such districts may be converged with the 'Transformation of Aspirational
Districts' programme of the Government of India.
SUPERVISORY ACTION FRAMEWORK FOR PRIMARY UCB’s:

The Reserve Bank of India has decided to rationalize Supervisory Action Framework (SAF) for UCBs to make it
more effective in bringing about the desired improvement in the UCBs and also expeditious resolution of UCBs
experiencing financial stress. The Reserve Bank will continue to monitor asset quality, profitability and capital
/ net worth of UCBs under the revised SAF.
MAIN FEATURES OF THE REVISED SAF:
THRESHOLDS / TRIGGERS AND SUPERVISORY ACTION: The revised SAF envisages initiation of corrective action
by the UCB and / or supervisory action by the RBI on breach of the specified thresholds (triggers) in respect of
the specified financial parameters / indicators.
1) Asset Quality: A UCB may be placed under SAF when its Net NPAs exceed 6% of its net advances. Depending
on the severity of stress, Reserve Bank may take one or more of the following actions: a) Advising the UCB to
submit a Board-approved Action Plan for reducing its Net NPAs below 6%. b) Advising the Board of Directors of
the UCB to review the progress under the Action Plan on quarterly/monthly basis. c) Advising the UCB to
submit the post-review progress report to Reserve Bank. d) Restriction on declaration/payment of
dividend/donation without prior approval of RBI. e) Curtailment of sanction/renewal of credit facilities to
sectors/segments having high proportion of NPAs/defaults. f) Reduction in exposure limits for fresh loans and
advances. g) Restriction on fresh loans and advances carrying risk-weights more than 100%.
2) Profitability: A UCB may be placed under SAF when it incurs losses for two consecutive financial years or
has accumulated losses on its balance sheet. Depending on the severity of stress, RBI may take one or more of
the following actions: a) Advising the UCB to submit a Board-approved Action Plan for restoring the
profitability and/or wiping out the accumulated losses. b) Advising the Board of Directors of the UCB to review
of progress under the Action Plan on quarterly (or more frequent) basis. c) Prohibition on declaration/payment
of dividend/donation. d) Restriction on incurring capital expenditure beyond a specified limit, without prior
approval of the RBI. e) Measures for reduction in interest and operating /administrative expenses.
3) Capital to Risk-weighted Assets ratio (CRAR): A UCB may be placed under SAF when its CRAR falls below
9%. Depending on the severity of stress, RBI may take one or more of the following actions: a) Advising the UCB
to submit a Board-approved Action Plan for increasing the CRAR to 9% or above within 12 months. b) Advising
the Board of Directors of the UCB to review the progress under the Action Plan on quarterly/monthly basis and
submit the post-review progress report to Reserve Bank. c) Seeking a Board-approved proposal for merging the
UCB with another bank or converting itself into a credit society. d) Prohibition on declaration/payment of
dividend/donation. e) Restriction on incurring capital expenditure beyond a specified limit, without prior
approval of the RBI. f) Measures for reduction in interest and operating/administrative expenses. g) Reduction
in exposure limits for fresh loans and advances. h) Restriction on fresh loans and advances carrying risk-weights
beyond the specified limit. i) Restriction on expansion of size of the balance sheet. j) Restriction on fresh
borrowings, except for meeting temporary liquidity mismatches. k) Prohibition on sanction/disbursal of fresh
loans and advances other than loans against collateral security of term deposits / NSCs / KVPs / insurance
policies. l) Prohibition on expansion of size of the deposits.
4) Actions such as imposition of all-inclusive directions under section 35-A of the Banking Regulation Act,
1949 (as applicable to co-operative societies) and issue of show cause notice for cancellation of banking
license may be considered by the Reserve bank when continued normal functioning of the UCB is no longer
considered to be in the interest of its depositors / public.
IMPLEMENTATION OF THE REVISED SAF:  Supervisory action will normally be initiated on the basis of the
financial position of UCBs as assessed during the statutory inspection. However, action may also be taken on
the basis of the reported/audited financial position which may be subsequently reviewed, if necessary, on the
basis of the statutory inspection findings.  RBI will not be precluded from taking appropriate supervisory
action in case stress is noticed in other important indicators / parameters.
CASH WITHDRAWAL USING POS TERMINALS
 As per the extant guidelines, banks are required to obtain one time permission from the RBI for offering the
facility of cash withdrawal at PoS terminals deployed by them.  The RBI has now decided that the
requirement of obtaining permission from the RBI be dispensed with and that henceforth, banks may, based on
the approval of their Board, provide cash withdrawal facility at PoS terminals. The designated merchant
establishments may be advised to clearly indicate / display the availability of this facility along with the
charges, if any, payable by the customer.
CRILC – (UCBS) (Central Repository of Information on Large Credits)

 In terms of the instructions, Primary (Urban) Co-operative Banks (UCBs) having total assets of Rs.500 crore
and above as on 31st March of the previous financial year shall report credit information, including
classification of an account as Special Mention Account (SMA), on all borrowers having aggregate exposures of
Rs.5 crore and above with them to Central Repository of Information on Large Credits (CRILC) maintained by
the Reserve Bank.  Aggregate exposure shall include all fund-based and nonfund based exposure, including
investment exposure on the borrower. The operational guidelines for reporting the CRILC– UCBs return are as
follows: a) To start with, the reporting frequency of the CRILC– UCBs return is quarterly. The banks need to
submit the data on large exposures within 30 days from the end of the quarter through XBRL reporting
platform of RBI. At the latter stage, the banks will have to submit the return on a more frequent periodicity.
b) CRILC – UCBs return will comprise of three sections namely:  Section 1: Exposure to Large Borrowers, the
bank needs to report the credit information of all borrowers having aggregate exposures (fund-based, non-
fund based and investment exposure) of Rs.5 crore and above.  Section 2: Reporting of Technically /
Prudentially Written-off Accounts, the bank needs to report the data on the amount written off, if any, for
borrowers whose technically/prudentially written off amount is Rs.5 crore or more and which are not reported
in Section 1.  Section 3: Reporting of balance in Current Account, the bank needs to report the data on
Current Account holders whose (i) Balance (either credit or debit) in current account as on reporting date is
Rs.1 crore and above or (ii) Total of credit summation (sum of all credit transactions) during the reporting
quarter is Rs.5 crore and above or (iii) total of debit summation (sum of all debit transactions) during the
reporting quarter is Rs.5 crore and above. The detailed instructions for each Section is provided in the CRILC-
UCBs return installer (macro enabled excel template).
CURRENCY DERIVATIVE TRANSACTIONS

 As per the extant guidelines a threshold of USD 1 million, and equivalent thereof in other currencies, was
stipulated for reporting client transactions in currency derivatives (currency swaps and FCY FRA/IRS) to the
Trade Repository (TR).  The RBI has now decided that all client transactions in currency derivatives, including
those with notional amount of below USD 1 million, shall now be reported to the TR, with effect from Jan. 6,
2020.  As a one-time measure, in order to update the transactions in the Trade Repository, AD Category – I
banks shall report all outstanding client transactions with notional amount below USD 1 million to the TR by
Jan. 31, 2020.
SBI CARDS & PAYMENT SERVICES - IPO SBI Cards and Payment Services, the credit card arm of SBI, will open
the Rs. 9,000 crore initial public offering (IPO) of on March 2, according to its prospectus. SBI Cards is the
second-largest credit card issuer in India with an 18 per cent market share. The price band of the offer has
been set at Rs 750-755 per equity share. The Co plans to issue new shares worth Rs.500 crore and will offer
up to 130.5 million shares for sale. The bidding process will close on March 5.
Technical Specifications for all participants of the Account Aggregator (AA) ecosystem-The Non-Banking
Financial Company - Account Aggregator (NBFC-AA) consolidates financial information of a customer held with
different financial entities, spread across financial sector regulators adopting different IT systems and
interfaces. In order to ensure that such movement of data is secured, duly authorised, smooth and seamless,
RBI decided (on 08.11.19) to put in place a set of core technical specifications for the participants of the AA
ecosystem. Reserve Bank Information Technology Private Limited (ReBIT), has framed these specifications and
published the same on its website (www.rebit.org.in). All regulated entities of the Bank, acting either as NBFC-
AA or Financial Information Providers (FIP) or Financial Information Users (FIU) are expected to adopt the
technical specifications published by ReBIT, as updated from time to time. It shall be the responsibility of the
NBFC-AA to ensure that its IT systems have all features necessary to carry out its functions strictly in
conformity with the NBFC-AA Master Directions, as updated from time to time.
Liquidation of Aditya Birla Idea Payments Bank Limited- RBI advised on 18.11.19 that on a voluntarily
winding up application by Aditya Birla Idea Payments Bank Limited, the Hon’ble Bombay High Court has passed
an order on September 18, 2019 and has appointed Shri Vijaykumar V. Iyer, Senior Director of Deloitte Touche
Tohmatsu India LLP as the Liquidator of Aditya Birla Idea Payments Bank Limited.
D. LOANS & ADVANCES

1.MSMEs in India -Opportunities, Issues and Challenges
The MSME sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five
decades. It contributes significantly in the economic and social development of the country by fostering
entrepreneurship and generating the largest employment opportunities at comparatively lower capital cost,
next only to agriculture. It has played a crucial role in not only providing large employment opportunities and
increasing exports but also in promoting industrialisation of rural and backward areas, thereby reducing
regional socio-economic imbalances. MSMEs are complementary to large industries as ancillary units, and this
sector contributes significantly in the inclusive industrial development of the country.
The UN General Assembly in its 74th Plenary held on April 6, 2017 declared June 27 as MSMEs Day, recognising
the importance of MSMEs in achieving sustainable development goals and in promoting innovation, and
sustainable work for all.
MSME defined
MSMEs are defined under Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006), on
the basis of the original cost of investment in plant and machinery / equipment as mentioned in Table 1. The
Government of India (GoI) has introduced the Bill to redefine MSMEs from ‘investment in plant and machinery /
equipment’ to ‘annual turnover’ as follows: • A Microenterprise will be defined as a unit where the annual
turnover does not exceed INR 5 crores. A Small enterprise will be defined as a unit where theannual turnover is
more than INR 5 crore but does not exceed INR 75 crore.
• A Medium enterprise will be defined as a unit where the annual turnover is more than INR 75 crore but does
not exceed INR 250 crore. After passing of the Bill in the Parliament, Section 7 of the MSMED Act, 2006 will
accordingly be amended to define units producing goods and rendering services in terms of annual turnover as
above.
Mission to redefine MSMEs
Taking turnover as a criterion can be pegged with reliable figures available eg in GST Network and other
methods of ascertaining which will help in having a non-discretionary, transparent and objective criteria and
will eliminate the need for inspections, make the classification system progressive and evolutionary, help in
overcoming the uncertainties associated with the classification based on investment in plant and machinery /
equipment and employment and improve the ease of doing business and the consequent growth and will pave
the way for increased direct and indirect employment in the MSME sector of the country.
It has also received criticism, to redefine MSME on the turnover basis, on the ground that:
• It will end the distinct identity of the MSME; • There should be an arm’s length to the large industry so that
MSME can evolve with all support from the government;
• Nowhere in the world, turnover is the sole criterion to define MSME.
MSME in Indian Economy – Potentialities for growth and opportunities
Globally, the MSMEs segment plays a crucial role in employment generation and contributes significantly to
overall economic activity. In India, the MSME sector: • Constitutes a vast network of over 63 million units.
• Employs around 111 million people.
• The share of MSME in overall GDP is around 30 percent (GoI,2018).
• Contributes 40 percent of total exports of the country.
• Accounts for 45 percent of manufacturing output.
MSMEs, as above, have significantly contributed to the development of Indian economy. MSMEs have greater
opportunities to grow as ancillary industries to unleash higher industrial growth. MSMEs being less capital
intensive and more employment-friendly have easier access to raw-materials, subsidies and other incentives
under cluster programmes. Development of this sector is, therefore, extremely important as it holds the key to
inclusive growth and plays a pivotal role in the economic development of the country.
The MSME sector has the potentialities to emerge as the backbone of the Indian economy and to continue as an
engine of growth, must be provided with an environment-friendly policy framework and enabling
infrastructural support.
MSME issues Credit flow to MSMEs
As per a quarterly report by Transunion Cibil and Small Industries Development Bank of India (SIDBI), the
overall credit to the MSME segment grew 16.1 percent for the year to June 2018, in which, PSBs reported a
growth of 5.5 percent, compared with 23.4 percent for the private sector competitors. Data given in Chart 2
and Chart 3 reveal that the credit to MSME has shown an increasing trend during and after 2017.
As per the (Mint Street Memo No 13) RBI report dated August 17, 2018, credit growth in the MSME sector had
started decelerating even before demonetisation and declined further during the demonetisation phase. In
contrast, GST implementation does not seem to have had any significant impact on credit.
Overall, MSME credit and especially microcredit to MSMEs including loans by banks and NBFCs shows a healthy
rate of growth in recent quarters. During the quarter April-June 2018, bank credit to MSMEs increased on
average by 8.5 percent (y-o-y). The Reserve Bank of India (RBI) observed ‘Despite significant contribution to
economic growth, MSMEs face several bottlenecks inhibiting them from achieving their full potential. A
majorobstacle for the growth of MSMEs is their inability to access timely and adequate finance as most of them
are in niche segments where credit appraisal is a major challenge.
The challenges faced by MSMEs in accessing finance are due to lack of comprehensive formal documentation
relating to accounts, income and business transactions. As a result, loans are provided to the MSMEs mainly
through the appraisal of their collaterals rather than assessing their true business potentials.
Further, banks do not trust start-ups, view such loans as risky and thus do not prefer extending finance to
MSMEs’.
Private Banks, NBFCs outdo PSBs in lending to SMEs
In a study conducted by Transunion Cibil, it is found that there has been an increase in the Turn-Around Time
(TAT) for loan processing across all the three segments as mentioned in Table 3:
In order to improve the TAT for processing of MSME loan proposals, the Finance Minister on 25th September,
2018 while reviewing the performance of PSBs announced a common online portal for MSMEs credit space. ‘The
web portal (www.psbloansin59minutes.com) will enable in principle approval for MSME loans up to INR 1 crore
within 59 minutes, without entrepreneurs having to visit branches, from SIDBI and five Public Sector Banks
(PSBs)’.
• The share of credit extended to MSMEs in overall bank credit declined steadily to around 14 percent by end-
March 2018 from about 17 percent in 2007.
This could be partly due to over-lending to large corporates (now stressed) in the second half of the 2000s.
Additionally, within the credit to the industrial sector, the share of credit to medium enterprises has dropped
significantly as compared to the share of micro and small enterprises.
From from the data collected by Transunion Cibil and SIDBI, the share of 21 PSBs has fallen to 50.7 percent as
of June 2018, from 55.8 percent in June 2017 and 59.4 percent in June 2016.
Non-Performing Assets (NPAs)
From the data in chart 6, it is clear that the growth of credit by PSBs during the past three years has declined.
Conversely, the NPAs has increased. The credit growth was 7 percent, and NPA increase was 13.1 percent. In
the case of Private sector banks, the credit growth toMSME sector registered 14.3 percent, and NPA level is
contained at a manageable level of 2.7 percent. As per the data obtained by Transunion Cibil, despite
aggressive growth, private sector banks and NBFCs far better on asset quality as well. The PSBs (NPAs) from
the MSME book increased to 15.2 percent (June 2018) from 14.5 percent(June 2017), while in case of private
sector banks, the ratio decreased marginally to 3.9 percent in June 2018 from 4 percent in June 2017.
Documentation
Many of the MSMEs, particularly the Micro units, do not have adequate documentation to match the rigours of a
formal financial system. The absence of documentation drives the small entrepreneurs to informal sources that
are willing to provide credit with minimum documentation.
Further, a vast majority of the MSMEs are informal, which brings down the credit score of the entrepreneur and
hinders the ability of the formal financial system to lend to them.
Banks, on their part, will need to leverage modern technology algorithms and big data so that they can
differentiate between a good borrower and not so good one even in the absence of conventional
documentation.
Documentation has now, of late, not posed a problem since most of the banks have adopted simple common
loan application forms for extension of credit facilities to MSMEs up to credit limit of INR 2 crore.
Further, Financial Literacy Centre (FLC) have been started by different banks which help in capacity building in
existing and potential entrepreneurs.
Similarly, (RSETIs) Rural Self Employment Training Institutes, is initiated as an initiative of Ministry of Rural
Development (MoRD) to have dedicated infrastructure in each district of the country to impart training and
skill upgradation of rural youth geared towards
entrepreneurship development.
RSETIs are managed by banks with active co-operation from the GoI and State Governments. MSME –
Challenges: In spite of substantial contributionsmade by MSME enterprises for the development of the
economy, they face following common challenges which prove obstacles in the path of their growth and
development:
1. Lack of adequate capital and credit. 2. Poor and inadequate infrastructure. 3. Market access.
4. Lack of skilled human resources. 5. Inadequate access to new technology. 6. Cumbersome regulatory
practices.
MSME challenges – A breather
Following are some of the solutions provided by GoI, RBI, Ministry of MSME, Banks and others for mitigating the
challenges of MSME:
1. Capital is the lifeblood of business. Without adequate capital and credit, MSME units will either not come
forward or die prematurely.
(a) Now MSME units are provided with working capital facility @ 25 percent of turnover and in case of MSME
units that transact digitally @ 30 percent of turnover instead of 20 percent earlier.
(b) Guarantees are provided by Credit Guarantee Trust Micro and Small Enterprises (CGTMSE) for extending
collateral free lending to MSMEs through Banks and financial institutions (Fis) including NBFCs.
(c) ‘Credit Linked Capital Subsidy Scheme (CLCSS)’ provides a capital subsidy on institutional finance.
(d) Various credit rating agencies like Small and Medium Enterprises Rating Agencies (SMERA) has been
established for a rating of MSME units which help banks in the assessment of credit facilities. Such ratings
also enable MSME units to get interest concessions from various banks and Fis.
(e) In terms of the recommendations of the Prime Minister’s Task Force on MSMEs, banks are advised to
achieve:
• 20 percent year–on–year growth in credit to micro and small enterprises;
• 10 percent annual growth in the number of microenterprise and accounts; and
• 60 percent of total lending to the MSE sector as on corresponding quarter of the previous year to
microenterprises.
(f) As per the RBI guidelines, banks are mandated not to accept collateral security in the case of loans up to
INR 10 lacs extended to units in the MSE units. Further, banks may, on the basis of good track record and
financial position of the MSE units, increase the limit to dispense with the collateral requirement for loans up
to INR 25 lacs (with the approval of the appropriate authority).
(g) A composite loan limit of INR 1 crore can be sanctioned by banks to enable the MSE entrepreneurs to avail
of their working capital and term loan requirement through Single Window. The Ministry of MSMEs has vide
their GazetteNotification dated May 29, 2015 had notified a ‘Framework for Revival and Rehabilitation of
MSMEs’ to provide a simpler and faster mechanism to address the stress in the accounts of MSMEs and to
facilitate the promotion and development of MSMEs.
2. (a) SFURTI – Scheme of Fund for Regeneration of Traditional Industries is the scheme to organise traditional
industries and artisans into clusters to make them competitive and provide support for their long term
sustainability.
(b) Scheme for Micro and Small Enterprises Cluster Development Programme (MSE-CDP): The Ministry has
adopted the cluster development approach as a key strategy for enhancing productivity and competitiveness as
well as capacity building of MSEs.
3. The government has introduced a flexible growth stimulating and artisan oriented Market Development
Assistance (MDA) scheme, in place of the erstwhile system of Rebate. Under MDA, financial assistance is
provided to the institutions @ 20 percent of the value of production of khadi and polyvastra, to be shared
among artisans, producing institutions and selling institutions in the ratio of 40:40:20.
As a boost for marketing assistance, Special Marketing Assistance Scheme (SMAS) has been launched in which
SC / ST entrepreneurs shall be allowed reimbursement under SMAS for a maximum of 2 international events
and four domestic events in a financial year.
4. Under the Ministry of MSME, A Scheme for Promotion of Innovation, Rural and Entrepreneurship (ASPIRE)
has been developed to:
• Create new jobs and reduce unemployment; • Promote entrepreneurship culture in India; • Grassroots
economic development;
• Facilitate innovative business solution for unmet social needs; and
• Promote innovation to strengthen the competitiveness of the MSME sector.
National Small Industries Corporation (NSIC) is an ISO 9001-2008 certified Government Enterprise under Ministry
of MSME is a premier organisation fostering the growth of MSMEs. It promotes and supports MSMEs by providing
integrated support services encompassing, Marketing, Finance, Technology and other Services.
National Institute for MSMEs (NIMSME) has been in existence since 1960. Enterprise promotion and
entrepreneurship development being the central focus of NIMSME’s functions, the Institute’s competencies
converge on the following aspects:
• Enabling enterprise creation
• Capacity building for enterprise growth and sustainability
• Creation, development and dissemination of enterprise knowledge
• Empowering the underprivileged through enterprise creation.
While inaugurating the Udyam Sangam – 2018 in New Delhi on International MSME Day 2018, the President of
India Ram Nath Kovind launched Udyam Sakti portal of the MSME Ministry and said that it would empower
women and weaker sections by providing training to 80 lac women.
5. The Ministry of MSMEs, GoI has launched on 18th October, 2016 a new scheme ‘Financial support to MSMEs in
ZED Certification scheme’ for the benefit of MSMEs. The scheme envisages promotion of Zero Defect and
Zero Effect (ZED) manufacturing amongst MSMEs for developing an ecosystem for Zero Defect
manufacturing in MSMEs, promoting adaption of quality tools / systems and energy efficient manufacturing
without impacting the environment.
6. (a) To enable ease of registration of MSMEs, the Ministry of MSME has notified a simple one-page
registration form ’Udyog Aadhaar Memorandum’ (UAM) on 18th September, 2015.
(b) To facilitate the enterprises to take benefit of various schemes by the Office of Development Commissioner
(MSME), his office has launched a web-based application module, namely, MyMSME.
(c) The Ministry has started an MSME internet grievance monitoring system (e-SAMADHAN) to track and
monitor othergrievances and suggestions received in the Ministry. MSME SAMADHAAN launched on8th
December, 2017 under the MSMED Act, 2006 deals with addressing the issues relating to the Delayed
Payments to MSEs by the buyers to the MSE supplier.
(d) MSME-SAMBANDH: The Ministry of MSMEs MSME-SAMBANDH launched on 8th December, 2017 notified the
public procurement policy for MSMEs which mandates 20 percent of annual procurement from MSEs
including 4 percent from enterprises owned by SC / ST entrepreneurs by the Central Ministries /
Departments of Central Public Sector Enterprises.
(e) Banking Codes and Standard Board of India (BCSBI) prepared code in place in 2008 and revised in 2015 in
which it sets minimum standards of banking practices for banks to follow while dealing with MSEs.
(f) Banking Ombudsman Scheme: Within 30 days of lodging a complaint with the bank, if MSEs do not get a
satisfactory response from a bank and MSEs wish to pursue other avenues it may approach Banking
Ombudsman. Conclusion MSME sector is a platform of nursery for entrepreneurship development and a school
of innovation.
Countless medium and large corporates in India have evolved out of being micro and small entrepreneurs.
MSME sector is crucial for the success of the national agenda of Financial Inclusion. Technology and innovation
will continue to play a pivotal role in creating a businessfriendlyatmosphere for the MSMEs.
This sector has exhibited enough resilience to sustain itself on the strength of our traditional skills and
expertise and by infusion of new technologies, capital and innovative marketing strategies and possesses
enough potential and possibilities for accelerated industrial growth in our developing economy and well poised
to support various national programmes like ‘Make in India’.
All stakeholders – whether banks, MSME firms or the policymakers- must make efforts in their respective
domains to seize the opportunity that the MSME sector provides. For a healthy and mutually beneficial
relationship between the banks and borrowers, it would be essential for both parties to understand and
appreciate each other’s point of view and work proactively.
2. Strengthening MSMEs - Policy Innovations
Credit growth picked up faster than deposit growth during the last fiscal with more uptick in the offing. Many
banks including newly entered small finance banks are eyeing on lending opportunities to the sector that can
provide better risk-adjusted return. The massive capital infusion in Public Sector banks (PSBs), three PSBs
coming out of the Prompt Corrective Action (PCA) mode, many banks posting better asset quality status in Q3
of FY19, the recent repo rate cut, improved macroeconomic dimensions on the back of benign inflation and
crude prices are some of the positive headwinds that can be harnessed to support growth. Based on the
evolving macroeconomic setting, the RBI has projected GDP growth in FY 2019-20 to be at 7.4 percent. It
should range between 7.2 -7.4 percent in H1 and 7.5 percent in Q3.
The capacity utilisation in the manufacturing sector is showing a shade higher at 74.8 percent in Q2, up from
73.8 percent in Q1. The Gross Value Added (GVA) during the year is expected to be 7 percent in FY 19
compared to 6.9 percent in FY18. The RBI industrial outlook survey (IOS) for Q3 indicates weakening demand
conditions in manufacturing, while the business expectations index (BEI) points towards improvement in Q4.
Similarly, the uptick in manufacturing purchasing managers’ index (PMI) for January 2019 is stacked with
increased output supported by a new stream of orders.
Among the sector-specific credit growth, the lingering impact of asset quality woes and ongoing litigations
surrounding debt resolution cases pending in National Company Law Tribunals (NCLTs) and National Company
Law Appellant Tribunals (NCLAT) under Insolvency and Bankruptcy Code (IBC) - 2016, banks are apprehensive in
taking exposure to the corporate sector. The ongoing spree of debt waivers and agitating mood of the farm
sector is making it difficult to lend to large size agro-based loans. Seen from prudent perspectives, the most
attractive sector to diversify credit growth is to target Micro Small and Medium Enterprises (MSMEs). It has
immense scope after all many of the MSME units are digitally connected with the formal economy after the
introduction of Goods and Services Tax (GST). Connecting with GST has a multiplier impact on business growth
and MSME forums are educating to them to make the units ‘Future ready’.
1. Growth and prospects of MSME In view of immense employment potentiality and prospects in the MSME
sector, the strategies for growth and sustenance of MSME continue to be at centre stage of the new policy
initiatives. Looking to the added challenges arising from demonetisation and implementation of GST,
the industry forums and representative bodies have been harbouring increased support, and the regulators are
receptive to it. Moreover, the MSME sector is globally acknowledged as the lifeline of the economy with an
estimated 90 percent of all enterprises falling in this segment. The reforms in the MSME centric policies have
been a continuous journey with federal and state governments providing a compatible ecosystem to take care
of their needs to fulfil the unfinished agenda for the growth of MSME sector. It is daunting to revamp MSME,
which is mired with several challenges that call for deep-rooted simplification to reach out to them. The latest
data suggests that the number of working MSMEs in India stands at around 51.3 million units. The
crux of the problem lies in the fact that, of these, a whopping 96 percent are unregistered. In terms of the size
of enterprises, 89.6 percent are micro-enterprises, 10 percent are small enterprises, and 0.4 percent are
medium sized industrial units. During FY15, the sector accounted for 7-8 percent of the GDP, 33 percent of the
manufacturing sector output and about 45 percent of the country’s exports. It provided employment to 117.1
million people in FY15. Employment in MSMEs grew by 4.9 percent per annum during FY11-FY15. The
investment and capacity expansion of the sector in the form of fixed assets had worked out to annualised
growth at 7.2 percent. There are 205 SMEs listed in BSE and 94 in NSE having a combined market capitalisation
of INR 175.9 billion by October 2017. Considering their pain points and employment intensity, relief is accorded
to the sector at various points of time. Similarly, the recent spate of relief should have a multiplier impact.
2. Global status of SME Though enactment of MSME Act 2006, changed the nomenclature of SMEs in India into
MSMEs from June 16, 2006 but globally they are recognised as SME sector, and many economies use the sector
interchangeably - SME or MSME. A report on the MSME country indicators released by International Finance
Corporation (IFC) a World Bank group publication (December 2014) that reflects the growing significance of the
sector. The global network of formal MSME units is 162.8 million, of which 96.3 million units are in emerging
market economies. There are about 28.7 million formal SMEs, with about 18.6 million of them
operating in emerging markets. Similarly, of 131.4 million formal microenterprises, 77 million of them are in
emerging markets. It accounts for a very large share of world economic activity in both developed and
developing countries. The SME share of economic activity is typically larger in OECD economies rather than in
emerging-market economies, reflecting a mix of stronger SME productivity levels in the former and higher rates
of economic informality in the latter. In emerging-market economies, SMEs are responsible for up to 45 percent
of jobs and up to 33 percent of national GDP. These numbers are significantly higher when informal businesses
which are often more than half of the total enterprise population, are included in the count. When the
informal sector is included, SMEs in emerging-market economies account for 90 percent of total employment.
Continued thrust on the MSME sector will enable reaching Sustainable Development Goals (SDGs) launched by
the United Nations in 2015 and can help reduce inequality and unemployment. When a omparison is made, the
majority of MSME units in India are not in a formal map that deprives them of the multiplier impact of various
supportive policies enunciated from time-to-time. It is therefore essential to educate and bring more units
under the formal sector to tap the growth opportunities. 3. Multiple policy initiatives.Taking a cue from the
global best practices and in order to empower the sector, a multifaceted outreach programme was launched
on November 2, 2018 with a comprehensive makeover plan. It encompasses a steady focus on five key aspects
that include: (i) access to credit, (ii) access to market, (iii) technology upgradation, (iv) ease of doing business
and (v) to provide a sense of security for employees of MSME sector. In order to broaden these five areas a 12-
point ‘Support and Outreach’ (12SO) policy initiatives have been calibrated. As part of access to credit,2
percent interest subvention for all GST registered was proposed to MSMEs, on fresh or incremental loans.
Accordingly, a new scheme – ‘Interest Subvention Scheme for Incremental credit to MSMEs 2018’ will be
implemented over 2018-19, and 2019-20 rolled out by the RBI on February 21, 2019.
Recently, the RBI also permitted a one-time restructuring facility to the sector for loan accounts up to INR 25
crores to be implemented by March 31, 2020. The identified loan accounts should be standard as on January 1,
2019 and registered with GST. The banks and non-banking financial companies (NBFCs) should have an internal
boardapproved policy to undertake such restructuring. They will be downgraded and may slip progressively to
lower asset classification if they are not revived by the end of the restructuring period of one year. In the same
league to support the MSME sector, the RBI had already granted forbearance in their classification of non-
performing asset (NPA). It relaxed recognition criterion for banks and NBFCs for some of their exposure to the
sector. Banks and NBFCs can continue to classify loans to MSME as a standard asset even if the dues are paid
within 180 days from their respective original due dates instead of 90 days and 120 days respectively.
3.The relaxed NPA classification norms shall apply if (i) the aggregate exposure, including non-fund based
facilities does not exceed INR 25 crore on January 31, 2018; (ii) the loan account should be standard on August
31, 2017. Also,the cap on loans to the sector that can be classified as priority sector loans, has been removed.
However, a provision of 5 percent is to be made by banks / NBFCs against such loan accounts falling in the
relaxed category. As broader frame of 12SO initiative, MSME entrepreneurs can seek loans up to INR 1 crore
through a specially designed electronic portal which provides ‘in-principle’ sanction of loans in 59 minutes by
collecting and collating borrower credit history and turnover data from income tax and GST portals online,
evaluating credentials, and it summarises the creditworthiness of the borrower. The portal generates an ‘In
principle sanction letter’ to the ‘entrepreneur – applicant’ which can be taken to a bank for further Processing
of credit decision. However, it will then be up to the lender to take a credit decision on the preprocessing
done by the portal. How it pans out as speedy credit dispenser has to be watched. But innovation is always
welcome to reach out to the ailing MSME sector that calls for special treatment.
Similarly, the rate of interest subvention on pre- / post-shipment export credit is raised from 3 percent to 5
percent. It is also suggested that Public sector units should buy a third of their products from MSME units
increasing it from 20 percent. They should also procure 3 percent of their needs from women MSME
entrepreneurs. All central public sector entities will have to procure through ‘Government’s E-Market place
(GeM)’where 1.5 lac suppliers are registered, of which 40000 are MSME units.
The government has allocated INR 6000 crores to upgrade the technology of MSME units. The spent will be
routed through 20 hubs and 100 tool rooms to be set up for the purpose. Moreover, efforts were made to
address cash flow problems of MSME units with ‘Trade Receivables e-Discounting System (TReDS)’ that can
allay fears of delayed payments by companies.Going further the government has raised the exemption
limit from GST for the units with annual turnover from INR 20 lacs to INR 40 Lacs. The corpus of the Credit
Guarantee Trust (CGT MSME) fund has been raised from INR 25 billion to INR 75 billion. CGT coverage of loan
limits under guarantee is raised from INR 10 million to INR 20 million now. Such CGT cover is available to
NBFCs. The government has implemented various schemes for the promotion of MSMEs. The total expenditure
on these schemes as on October 31, 2017 was INR 33.5 billion as against 4.5 billion till October 2016.
With kind of policy reinforcements now put in place, the MSME sector can be transformed into a robust
economic vehicle to increase employment and contribute to augmenting exports and enhance its share in GDP.
But these can happen, provided lenders recognise the merits in financing them. Since MSME is a buoyant
portfolio with a large number of borrowers having their challenges, banks will have to find out ways and means
to use technology to service them. Else, MSME portfolio could have a larger transaction cost which banks may
not be able to afford.
4. Diminishing flow of Credit Bank credit to MSMEs sector currently works out to about 15 percent of total
credit that is far less than its potentiality. The reason for subdued credit is lack of financial literacy
among the large number of unregistered units which access credit from informal sources. However, another
added cause of concern is the diminishing flow of bank credit to the MSME sector. The RBI data indicates that
in the last two years, the absolute amount of flow of bank credit to the sector could post merely a shade
higher from INR 25793 billion in November 2016 to INR 27084 billion in November 2018. Effectively, the growth
rate of credit to MSME units is just at one percent in FY17 and four percent during FY18 as against overall
credit growth of 8.5 percent and 13.5 percent respectively during the same period. Compared to other sectors,
the flow of credit has been low to MSME. In its Financial Stability Report (December 2018), the RBI
cautioned about the spike in bad loans of the sector, more coming from Mudra loans. The stakeholders should
take a cue from the RBI concern and improve quality of credit origination but should not slow down the flow of
credit to the sector that can exacerbate gaps in cash flows to the detriment of their long term interest.
Creditworthy borrowers should not be deprived of timely credit fearing a rise in NPAs. NPAs should be dealt
with independently by intense follow-up, disseminating financial literacy on how to inculcate better lending
practices and in ensuring end use of funds. The budding enterprise should not be curbed just that the business
of lending is risky. Risk mitigation is to be professionally tackled, and lenders must develop compatible skill
sets and acumen to manage it. The status of the sector needs to be gauged in the context of how it
thrives globally to assess its significant role in strengthening the economy.
5. Challenges of MSME entrepreneurs Among a host of challenges, critical challenges of MSMEs are well in the
knowledge of major stakeholders. They relate to (i) non-availability of adequate, timely and low cost credit,
(ii) lack of skilled manpower, (iii) lack of basic managerial traits and knowledge in dealing with government
agencies, banks and tax matters – the people management skills, (iv) unable to comprehend account keeping
and cannot afford engaging subject experts –financial literacy, (v) inadequate marketing support and
infrastructure facilities to take the products to the right spot to get right price and profits, (vi) lack of
understanding of merits of digitisation and modernisation of production methods, (vii) the degeneration of
unique geography specific art, culture and skills by next-generation micro-entrepreneurs due to continued
poverty and suffering witnessed in their family. They prefer to turn out to be labour in cities than continuing
making of artefacts, (viii) lack of supply of water, electricity and civic amenities to host MSME units in
hinterland, (ix) lack of road connectivity and transportation facilities from the point of manufacturing to the
point of sale leads to proliferation of middlemen who eat into the fragile profits of the entrepreneurs, and (x)
lack of free access to raw materials and accessories to improve productivity and lower input costs. These
challenges have turned out to be the major dampener for the growth of MSMEs in India, and hence need to be
resolved.
6. Emerging lending opportunities to banks Access to finance is one of the major challenges faced by the MSME
sector in India. The MSME Census of 2006-07 revealed that almost 87 percent of MSMEs did not have access to
secure formal finance. They are constrained often to rely on meagre internal sources or approach friends or
relatives to meet their financial requirements. Alternately to borrow from local moneylenders on exorbitant
terms that takes away the benefits of enterprise. One of the major reasons for this demand-supply mismatch in
MSME financing can be seen as an opportunity to lend where the credit risk is well disbursed. This is primarily
due to nonavailability of valid invoices, proper accounting systems and a dearth of known buyers. In order to
mitigate such perceived credit risk, higher collateral is sought, which cannot be brought in by many MSMEs. In
order to assuage such protracted sufferings, simplification of formal lending systems and dissemination of
financial and digital literacy to entrepreneurs will be needed. The financial literacy and credit counselling
centres set up by the RBI should be utilised, and lead bank of the district must take up the responsibility to
educate masses on bank’s various schemes and how they can be connected. Even the large base of Pradhan
Mantri Jan Dhan Yojna (PMJDY) can be used as leads to reach out to the budding entrepreneurs. The more
important is to bring informal units into the formal domain with a simpler registration process. They should
know the various schemes of the government and banks to shed inhibitions to approach the formal channels.
The litmus test for the government agencies / NGOs will be to convert informal MSME units into formally
registered units so that they can avail finance from banks, expand their operations to prosper. It is necessary
to look beyond the policy formulation to ensure that more units get connected to the system to avail the
various government supported schemes. Extending facilities to an existing small base of entrepreneurs will not
serve the larger purpose of expanding MSME base to harness full potentiality of the sector.
7. Way forward Using the synergy of such strong and supportive policy framework put in place; SIDBI and
commercial banks can lead coordinated action at various levels so that the intended outcome of transforming
MSME units into economic growth centres could be achieved. But such a move is not simple. While accelerating
lending to MSME, banks will have to coordinate with many stakeholders and work together. The most important
is to rope in the services of local NGOs to educate entrepreneurs. With the help of education department, the
industries department should use the government schools should serve as ‘MSME Pathshala / Entrepreneurial
Schools’ in the evening or weekends to teach them the nuances of using simple arithmetic and use of digital
devices so that they are made capable of interacting with formal government and financial system. The
available lending schemes and subsidies, interest subventions should be explained to them so that more and
more bankable projects reach bank branches. The financial and digital literacy must be able to change the
mindset of MSME units and drift them from informal high-cost finance options to formal low-cost funding.
Banks should be able to identify the potential MSME clusters and maintain liaison with the industries
department and SIDBI to intensify financing activity. With such a robust banking system and differentiated
banks, credit growth of one to four percent in a year indicates a lot of unfilled gaps in extending loans. Banks
should find out methods to float activity-specific, ‘over the counter’, readyto-use, low-value MSME loan
products of say up to INR 1 crore with simplified procedures, so that loan growth picks up speed. It is the
immense cross-selling opportunities that can help in augmenting savings deposit growth. Looking at the
interest evinced by the government and regulators, it is the right opportunity for banks to step up MSME credit
growth and help the economy realise its potentiality.
3.Rural and Agriculture Finance: Critical Input to Achieve Inclusive and

Sustainable Development (Valedictory address by DG(MKJ) on November 13, 2019)
1. Mr Senarath Bandara, Chairman, APRACA (Asia Pacific Rural and Agricultural Credit Association), Dr Harsh
Kumar Bhanwala, Chairman National Bank for Agriculture and Rural Development (NABARD) and Vice-Chairman,
APRACA, Dr Prasun Kumar Das, Secretary General, APRACA, all other dignitaries present here, ladies and
gentlemen, good afternoon!
2. At the outset, I would like to thank APRACA and NABARD for inviting me to give the valedictory address to
the participants visiting from different countries here at the 6th World Congress. I would like to congratulate
the organisers for having chosen the theme, i.e., ‘Rural and Agriculture Finance: Critical Input to Achieve
Inclusive and Sustainable Development’ with the aim of getting insights into the global best approaches to rural
and agricultural finance. The topics of the business sessions are befitting the overarching objective of this
forum for deliberating on policy priorities in developing sustainable and viable financial services to support and
help in achieving the Sustainable Development Goals (SDGs) of the United Nations. Needless to say, all the
topics resonate strongly with the development agenda of the Government and financial inclusion strategy of
the Reserve Bank of India (RBI). We have been pursuing the goal of financial inclusion for a long time to ensure
that access to formal finance becomes a greater enabler to achieve economic wellbeing of all sections of the
economy. It is indeed a great pleasure for me to share my views on this subject.
3. The RBI’s financial inclusion efforts can be traced back to the 1960s when the focus was on channelizing of
credit to the neglected sectors of the economy and weaker sections of the population. While the Government
of India nationalized banking operations of few commercial banks in two tranches in 1969 and 1980; RBI took
initiatives like laying down priority sector lending requirements for banks, formulation of the Lead Bank
Scheme, establishment of Regional Rural Banks (RRBs-1975-76), Service Area Approach (1989), Self-Help Group-
Bank Linkage Programme (1989-90), setting up of Local Area Banks and of late, Small Finance Banks and
Payment Banks, all aimed at making available banking services to all. All these developments brought in a sea
change in the flow of institutional credit to the rural population, including population dependant on
agriculture. Gradually the country moved towards a multiagency approach to meet the credit needs of the
rural areas including farmers.
4. I am sure all distinguished panellists, international and local participants and the organisers have had
fruitful discussions and deliberations during the last two days and have been able to draw upon actionable
points for formulating strategies and the way forward.
Sustainable Development Goals
5. The sustainable development framework, adopted by the global community consists of 17 SDGs and 169
targets, to be achieved by 2030. While Goal 2 of the SDGs includes targets on agricultural productivity and
sustainability, yet agriculture is also critical to achieve many other SDGs relating to hunger, malnutrition,
climate change, gender equality, natural resources protection and jobs. Hence, to attain the SDGs of ending
poverty and bringing in inclusive growth, policy measures related to agriculture need to be closely integrated
with the SDG targets. Further, the policies should focus on a combination of resource efficient methods,
dynamic cropping patterns, farming that is adaptive and responsive to climate change and intensive use of
Information & Communication Technology (ICT). Against this backdrop, let me dwell upon the Indian
agriculture sector and the existing institutional framework for providing credit to the farming community.
A brief on Indian Agriculture
6. Agriculture plays a significant role in the Indian economy and provides employment and livelihood to a large
section of the Indian population. Approximately 44% (as per ILO estimate of 2018) of the working population is
employed in agriculture and allied sector1. However, the contribution of agriculture to GDP has been declining
from 52% in the 1950s to 30% in the 1990s and further below 20% from 2010 onwards as per data from Ministry
of Statistics and Programme Implementation (MoSPI)2. In 2018-19, the share of Agriculture & Allied Gross Value
Added (GVA) in overall GVA was 16% (Ministry of Agriculture and Farmers’ Welfare (MoA&FW) Annual Report
2018-19). Economic Survey 2018-19 suggests that the growth rate in GVA (at 2011-12 prices) over past five-six
years has been higher for livestocks, fishing and aquaculture as compared to crops3. Allied activities contribute
approximately 40% to agricultural output, whereas only 6-7% of agricultural credit flows towards allied
activities4. One important characteristic of Indian agriculture is that it is mainly small holders’ farming with
an average landholding size of 1.08 hectares5. The small and marginal farmers account for 86 per cent of all
holdings and 47 percent of the operated area6. They contribute more than 50% of the total agricultural and
allied output. In smallholder farming, it remains a challenge to raise agricultural productivity and farmers’
incomes. It requires appropriate solutions starting with easy access to modern inputs and then selling the
produce in most remunerative markets. Institutional credit at reasonable cost all along the value chain is one
such catalytic instrument that can facilitate the process by converting many subsistence farmers into vibrant
commercial farmers. They can then diversify their agricultural operations in growing high value crops like fruits
and vegetables, and engage in allied activities, like dairy, poultry, fishery, honey, beekeeping, etc. Allied has
huge potential, which can be capitalised by improving credit flow towards it and by encouraging farmers to
move towards allied activities.
7. From time to time, Government has given various policy thrusts, as a result of which, the Indian agriculture
sector has not only become self-sufficient but has emerged as a net exporter of several commodities like rice,
marine products, cotton, etc. Some of the important initiatives taken by the Government include the
implementation of Interest Subvention Scheme (ISS) for providing credit for crop production at reduced
interest rate, Soil Health Cards (SHC) for improving agricultural productivity, Pradhan Mantri Krishi Sinchai
Yojana (PMKSY) to ensure irrigation facilities, Pradhan Mantri Fasal Bima Yojana (PMFBY), for providing a safety
net against natural calamities and National Agriculture Market Scheme (e-NAM) for providing better price
discovery through transparent auction process. There is also a renewed focus on allied activities to aid income
of farmers.
8. Despite these initiatives, there are several challenges confronting Indian agriculture such as diminishing and
degrading natural resources, rapidly growing demand for food (not just for quantity but also for quality),
stagnating farm incomes, fragmented land holdings and unprecedented climate change, which need to be
tackled for long term sustainability and viability of Indian agriculture.
What has been the role of institutional credit in Indian agriculture?
9. Banks in India have made commendable progress in terms of scale and outreach of formal credit to the
agriculture sector. From `31.71 billion in 1981, the outstanding advances to agriculture and allied activities
have grown significantly to `13694.56 billion in 2017-18 (16 per cent of total bank credit). The long-term trend
in institutional agricultural credit revealed that over time, significant progress has been achieved in terms of
scale. Agricultural credit as a percentage to Agriculture GDP increased from 10% in 1970s to 52% by 2018,
which shows that banks have made significant progress in lending to agriculture. In India, scheduled
commercial banks (79%) are the major players in supplying credit to agriculture sector followed by rural
cooperative banks (15%), regional rural banks (5%) and micro finance institutions (1%). Small finance banks set
up with the objective of deepening financial inclusion have started their operations recently. They would be
catering to small and marginal farmers, low income households, small businesses and other unorganised
entities.
Challenges in agriculture financing
10. Despite the impressive growth in formal agricultural credit, there are still several challenges that need to
be tackled. Data on the average loan taken by agricultural households, as per the NABARD’s Financial Inclusion
Survey Report 2016-17, indicated that 72% of the credit requirement was met from institutional sources and
28% from non-institutional sources. The report further states that out of the total agricultural households,
approximately 30 percent still avail credit from noninstitutional sources. The problem of financial exclusion
gets aggravated due to lack of legal framework for landless cultivators as the absence of documentary
evidence becomes a major hindrance for extending credit to this segment of the farming community, who take
up cultivation work on oral lease. Further, the analysis of state wise flow of institutional agricultural credit has
revealed uneven distribution of credit amongst states compared to their corresponding share in overall output.
To a certain extent, such regional disparity is on account of variation in credit absorption capacity of these
regions. Funds like Rural Infrastructure Development Fund (RIDF) have been created out of priority sector
lending shortfall of banks and established with NABARD with the underlying philosophy of lending to state
governments to facilitate creation of enabling rural infrastructure to deepen the credit absorption capacity in
rural areas.
11. An analysis of sanctions from RIDF indicates that states with higher credit flow made higher demands for
resources under the fund. On the contrary, states with lower credit flow were lagging in borrowing funds from
RIDF. Thus, the least developed states which are already credit starved are getting lower share of funds from
the RIDF. This highlights the need to break this vicious cycle and think of certain measures by which funds can
be earmarked to the most backward/ credit starved regions to ensure speedier development of the most
backward areas in the country. We may also have to think of ways to incentivise banks to lend in these
backward areas so that both demand and supply side issues are addressed. These issues and challenges impinge
on the efficiency, inclusiveness and sustainability of the agricultural credit system, which is a matter of
concern.
Internal Working Group set up by RBI

12. Considering this, RBI had set up an Internal Working Group (IWG) in February 2019, to understand the issues
and recommend workable solutions to address the constraints. The IWG based on extensive data analysis and
research held extensive consultations and deliberations with experts and practitioners in the field and
submitted its report in September 2019.
13. The recommendations of the IWG include building up of an enabling ecosystem through digitisation of land
records, reforming of land leasing framework, creation of a national level agency to build consensus among the
state governments and central government with regard to agriculture-related policy reforms and innovative
digital solutions to bridge the information gap between the banks and farmers for expediting the credit
delivery process. Other policy interventions recommended are- suitable modifications in the Priority Sector
Lending guidelines applicable to all banks and strengthening of credit delivery channels through Kisan Credit
Cards, Self-Help Group Bank Linkage Programme, Farmer Producers Organisations, in a manner to make them
more effective and efficient in ensuring credit flow to the credit starved regions of the country, as also to the
excluded segments of the farming community. RBI would be initiating necessary steps for implementing these
recommendations as these would go a long way in ensuring the long-term sustainability and viability of the
Indian agriculture sector.
Financial Inclusion
14. Financial Inclusion (FI) is a policy thrust area for RBI and as a result of the various initiatives, tremendous
progress has been made in the domain of financial inclusion since the country set out in mission mode about 10
years ago. Further, with the launch of Pradhan Mantri Jan Dhan Yojana (PMJDY), almost every household has
been brought under the fold of formal financial system. Both in terms of deposit accounts and credit products
there has been a steady improvement over the years. RBI has initiated setting up a National Strategy for
Financial Inclusion with the objective of making financial products and services available, accessible, and
affordable to all citizens in a safe and transparent manner to support inclusive and resilient multistakeholder
led growth. The strategic pillars of the financial inclusion strategy would include universal access to financial
services, providing basic bouquet of financial services, access to livelihood and skill development, financial
literacy and education, customer protection and grievance redressal. The FI strategy aims for sustainable
financial inclusion by leveraging technology and adopting a multi-stakeholder approach.
15. The key highlights of the FI strategy is enhancing digital infrastructure in the country through better
networking of bank branches, Business Correspondent agents, Micro ATMs, PoS terminals and Internet
connectivity facilitating a move towards digital onboarding of customers. This would encourage adoption and
acceptance of digital payments and promote efficiency and transparency through digital transactions. The
strategy adopted has a customer centric approach, accompanied by appropriate efforts towards financial
literacy and awareness drive. Finally, for building of trust and confidence of the new entrants to the formal
financial system the strategy focusses on customer grievance and protection framework. The implementation
of the national level financial inclusion strategy would be successful by effective coordination of all the
stakeholders and encouraging decentralized approach by creating a forum to actively involve Gram
Panchayats/Civil Society/NGOs to accelerate financial Inclusion. We have come a long way in delivering
financial services to hitherto excluded sections and segments of our vast country. Going forward, the FI
strategy would focus on deepening the reach, usage and sustainability of financial inclusion.
Technology - A key driver for sustainable agriculture
16. Technology has powered Indian agriculture time and again by helping overcome productivity stagnation,
strengthening market linkages, and enhancing farm management. Globally, it has been established that
technology adoption modernizes farmers’ production practices and leads to uniform annual returns for
farmers, reduced risk of crop failure, and increased yields. Hence, at the macro level, the agricultural
development policies should focus on leveraging technology with the goals of (i) achieving high growth by
raising productivity (ii) inclusiveness by improving coverage of lagging regions, small and marginal farmers,
landless/tenant/oral lessee and women farmers, and (iii) sustainability of agriculture.
17. I feel that new age technological solutions in the form of product, service or application by agri-start-ups
can build up a smart agriculture value chain that will enhance the sustainability of agriculture. Agri-start-ups
may focus on some key areas such as supply chain, infrastructure development, finance related solutions, farm
data analytics and information platforms. In my opinion, agri-start-ups can succeed and can be scaled up only
in a conducive ecosystem, which is possible if agri-business industry comes forward and deepens its
engagement with agri-start-ups.
Conclusion
18. I would like to summarise that in the past, Indian agriculture faced a formidable challenge to grow more
food. Today, we are a food surplus country and a net exporter of many agriculture and allied products. This
requires the government policies related to agriculture to be shifted from that of managing food scarcity to
managing food surplus. Today, agriculture in India faces an even more demanding challenge: to grow agri-
produce sustainably, inclusively and responsibly. This can be achieved when all the stakeholders align their
policies and actions towards the SDGs. As far as financing of agriculture is concerned, going forward, banks will
have to integrate ‘sustainability’ into their business strategy and decision-making processes in order to support
environmentally responsible and sustainable projects in the agriculture sector. For this, banks will have to
undertake innovative agricultural financing models so that environment friendly and sustainable projects can
be supported.
4.Microfinance as the next wave of Financial Inclusion

(Keynote address by Shri M. K. Jain, Deputy Governor, Reserve Bank of India at the SIDBI National Microfinance
Congress 2019 on November 26, 2019 at Mumbai)
Shri Mohammad Mustafa, Chairman & MD, SIDBI, Dr. Charan Singh, CEO and Director, Foundation for Economic
Growth and Welfare, Mr. Gavin McGillivray Head, DFID India, other dignitaries, participants, Ladies and
Gentlemen. Good Morning to all! I am very happy that senior bankers, sector specialists, academicians and
practitioners are coming together on a single platform to deliberate on the Vision of Microfinance in India at
this National Microfinance Congress and the means to achieve the same in the backdrop of an evolving
regulatory, political and economic landscape. It is indeed a great pleasure to be amongst all of you here today.
2. This Congress is quite opportune and timely, as after nearly a decade and half of efforts in financial
inclusion, where banks, NBFCs, microfinance institutions (MFIs) and other financial institutions have played a
significant role, today we are at an inflection point needing to unleash the next set of financial inclusion
interventions for converting a large part of our population to efficient consumers of financial services. With the
technological transformation taking place in associated areas, I see a significant role for the microfinance
industry in this process, including in identifying, enabling and handholding a sizeable set of the last mile
population to consume financial services rationally, to grow out of poverty and become productive citizens of
the country.
3.The Indian microfinance sector has witnessed phenomenal growth over the past two decades. It is gratifying
to note that both the number of institutions providing microfinance as also the quantum of credit made
available to the financially excluded clients have increased significantly during this period. At this juncture, it
is equally important to discuss the way forward. Therefore, I understand that the deliberations in this Congress
will include emerging concerns / issues faced due to major changes in the sector in recent years; strategic
drivers, trends and possible solutions for stimulating industry growth, innovative, futuristic and high-impact
business models being adopted across the sector as also the opportunity areas of policy intervention and
technological transformation in the industry.
Role of microfinance in the economy
4. Microfinance, involving extension of small loans and other financial services to low income groups, is a very
important economic conduit designed to facilitate financial inclusion and assist the poor to work their way out
of poverty. It is argued that microfinance can facilitate the achievement of national policies that target
poverty reduction, empowerment of women, assisting vulnerable groups, and improving standards of living.
5. The journey of financial inclusion in the past two decades has been one of intensive efforts and incremental
experimentation. However, the quantum jump came when Pradhan Mantri Jan Dhan Yojana (PMJDY) was
launched in 2014, which enabled achievement of the objective of providing bank accounts to adult population
in almost every household. The reach of mobile phones and e-KYC has ensured these accounts are accessible to
those who have been included in the financial services milieu.
6. The Reserve Bank of India has been making sustained efforts to increase the penetration of formal financial
services in unbanked areas, while continuing with its policy of ensuring adequate flow of credit to productive
sectors of the economy and also ensuring the availability of banking services to all sections of people in the
country.
7.Till two decades ago, on the supply side, the absence of technology and infrastructure was a major
impediment as it restricted expansion of banking services to far-flung areas of the country comprising over 600
thousand villages. The institutionalization of the framework of Business Correspondents (BCs) has been a major
step towards enhancing access to banking services. The RBI advocated a combination of ‘Brick and Mortar’
structure with technology for extending financial inclusion in the geographically dispersed areas. With all these
measures, the number of banking outlets in villages has gone up significantly.
8. The new banking entities (i.e. two new universal banks and ten small finance banks) have also helped to
further the cause of financial inclusion in the country. Considering the strong linkage between financial
inclusion and payment systems, RBI has also taken several steps including encouraging use of mobile banking,
pre-paid instruments such as digital and mobile wallets, etc. For more than a decade now, banks have worked
hard to sustain the momentum for achieving the objective of financial inclusion.
9. Financial inclusion is becoming a focus area for banks, NBFCs, Financial Technology (FinTechs) and other
financial entities. Small Finance Banks have also been set up to further financial inclusion with a client base
comprising mainly of migrant labour workforce, low income households, small businesses and other
unorganised sector entities.Today, when it comes to financial inclusion and microfinance, there are several
channels such as universal banks, small finance banks, micro finance institutions, BCs, etc. Therefore, as a
country that is determined to achieve universal financial inclusion at affordable cost, this is a defining
moment, and we should seize the opportunity.
10. Several innovative measures have been undertaken by the RBI to facilitate the creation of a conducive
environment and increase the level of penetration of the banking system to serve the unserved and
underserved population for achieving the objective of sustainable and inclusive economic growth. A co-
origination model, which enables the scheduled commercial banks (excluding Regional Rural Banks and Small
Finance Banks) to co-originate loans with the non-deposit taking systemically important NBFCs has also been
rolled out for credit delivery to the priority sector. This is expected to boost lending to micro enterprises,
small and marginal farmers, Self Help Groups (SHGs), etc.
11. In order to boost credit to the needy segment of borrowers, the Reserve Bank has also advised all
Scheduled Commercial Banks (excluding Regional Rural Banks and Small Finance Banks) that bank credit to
registered NBFCs (other than MFIs) for on-lending will be eligible for classification as priority sector under
respective categories subject to certain conditions.
12. The Micro, Small and Medium Enterprises form a vital component of the economy in terms of their
contribution to employment generation, innovation, exports, and inclusive growth. In view of this, the Reserve
Bank had constituted an ‘Expert Committee on Micro, Small and Medium Enterprises’ (Chairman: Shri U. K.
Sinha) to identify causes and propose long-term solutions for the economic and financial sustainability of the
MSME sector. The Committee has made various recommendations in areas such as legislative and institutional
framework, access to finance, capacity building and new technological interventions for lending to MSME
sector. The recommendations are being examined for implementation.
13. Since 2006, the RBI has adopted a planned and structured approach to address the issues of financial
inclusion by focusing both the supply and demand side. Having spoken about the supply side, let me now
discuss the equally important, but less focussed, demand side aspects of financial inclusion. With the growing
formalisation of financial services, we must now intensify our efforts on the demand side, which is to focus on
enhancing capabilities so that individuals in the low income groups are in a position to not merely avail the
offered services, but are also capable of demanding preferred products and services suitable to their needs /
choices.
14. The MUDRA is a case in point. While such a massive push would have lifted many beneficiaries out of
poverty, there has been some concern at the growing level of non-performing assets among these borrowers.
Banks need to focus on repayment capacity at the appraisal stage and monitor the loans through their life
cycle much more closely.
15. The role and importance of the microfinance sector in our economy has also been steadily growing.
According to The Bharat Microfinance Report 2019 prepared by Sa-Dhan, MFIs operate in 29 States, 5 Union
Territories and 570 districts in India. The MFIs are also expanding into newer territories for reducing their
concentration risk.
16. Tailored products for providing credit to those without a credit score, entrepreneurial and consumption
credit, handholding, financial literacy, social occasion credits and insurance (life and non-life), are all waiting
to be tapped in scale and size. Limited forays have been made but are yet to achieve their full potential.
17. The RBI defines Financial Inclusion as the “process of ensuring access to appropriate financial products and
services needed by all sections of the society in general and vulnerable 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”. The National Strategy for Financial Inclusion (NSFI) 2019-24 has been framed by us. It
gives the Vision to make financial services available, accessible, and affordable to all citizens in a safe and
transparent manner to support inclusive and resilient multi-stakeholder led growth.
Potential of Microfinance
18. A major demographic change is taking place in our country with a huge and growing working population.
There is a big chunk aspiring to grow into the middle class with the support of institutional credit. Therefore,
microfinance can play a big role in meeting their requirements and fulfilling their goals.
19. The credit needs of low-income groups range from emergency loans, consumption loans, business loans,
working capital loans, housing, etc. In addition to credit, poor households would benefit from a combination of
financial services, including savings, remittances, loans, micro-insurance, micro-pensions, and the like.
20. In today’s world, technology is shaping the future of finance. All the key players are harnessing technology
to provide an efficient experience to the end user. In the Indian context, improving the accessibility of
financial platforms using FinTech is key. Therefore, designing suitable financial products that cater to specific
needs of the financially excluded population, and provide acilities like digital on-boarding, is vital in achieving
the objective of financial inclusion.
21. The goal of universal Financial Inclusion can be achieved only through synergistic efforts between the
mainstream financial entities and other players like MFIs, Fintech etc. as they play a complementary role in
championing this cause. Therefore, banks and NBFCs need to explore the possibility of establishing business
collaboration among themselves, and with FinTech firms as it could be pivotal in accelerating the agenda of
financial inclusion through innovation. In addition to incorporating emerging technology faster into their
businesses, the entities engaged in microfinance could also look at collaborating with FinTechs and other
entities who can help them mine customer and transaction data, crosssell products and introduce new
customer-centric products and services, and streamline operations. They will also have the opportunity and
need to raise the digital literacy of their customers that is not highly informed and aware and, therefore, can
be susceptible to frauds.
The way forward
22. Thanks to the growth of the internet and mobile phones, today we are seeing an explosion of data in
several sectors of our economy. Likewise, in microfinance, a lot of formal and informal data is becoming
available in the form of digital footprints by low income customers who also transact on e-commerce platforms
and use the internet. These digital footprints are being used by leading banks and online lending firms to lend
to individuals and micro and small enterprises. Artificial intelligence (AI) and machine learning are also finding
greater application in the Indian banking and financial services industry.
23. It is interesting to see that leading e-commerce companies have tied up with banks and NBFCs to offer
working capital loans to their suppliers at competitive terms. Most of the suppliers are micro and small
entrepreneurs
24. The introduction of GST, which is one of the largest and most significant tax reforms in the world, is also
helping formalise the informal economy in a significant way. As a result of a much-improved digital footprint,
individuals engaged in proprietary businesses, micro and small enterprises, now become attractive clients for
banks and NBFCs, thereby reducing their dependence on informal sources of funds. The cost of credit for the
micro and small enterprises will also decrease significantly as lending will shift from collateral-based to cash
flow-based.
25. While opening a new world of opportunities, the application of technology in finance has its own share of
risks and challenges for the regulators and supervisors. Early recognition of these risks and initiating action to
mitigate the related regulatory and supervisory challenges is key to harnessing the full potential of these
developments. This also brings in the need for a transparent, technology and data-driven approach. Similarly,
systemic risks may arise from unsustainable credit growth, increased inter-connectedness, pro-cyclicality, and
financial risks manifested by lower profitability. Data confidentiality and consumer protection are major areas
that also need to be addressed.
Summing up
26. To sum up, the microﬁnance sector is undergoing a multitude of changes amidst growing competition,
rising expectations of masses, technological advancements and an evolving regulatory landscape. The sector is,
therefore, expected to widen the horizon beyond micro credit to transform the livelihoods of the borrowers.
Being constantly mindful of the technological transformation in the banking and financial services industry, the
sector must continue to pursue the adoption of innovative, futuristic and high-impact business models. The
focus of the sector must be on Digital Microfinance.
27. Keeping in view the need to increase transparency, address customercentric issues and safeguard the
interests of low-income customers, microfinance lenders must put the interests of their clients first and
implement the Code for Responsible Lending and the Code of Conduct in both letter and spirit. Redressing
consumer complaints quickly and effectively should be on top of the agenda for MFIs and the Self Regulatory
Organisations (SROs).
28. The Microfinance institutions must broaden their client outreach to reduce concentration risk and to serve
a wider clientele base. From a financial inclusion perspective, they should also critically review their
operations to ensure that some of the regions do not remain underserved.
29. While the growth of the microﬁnance sector in the past few quarters has been quite healthy, we must be
cognizant of the vulnerability of the sector to factors such as external developments, technological changes,
event risks and income inconsistencies of the borrowers. The growing use of technology would give rise to
operational risks and there would be concerns related to client data protection which would need to be
addressed.
30. Banks, NBFCs and financial institutions are well placed to innovate in cutting-edge technologies be it AI,
machine learning, blockchain etc. SIDBI could handhold the micro finance providers in this process, specifically
with regard to lending to the micro and small enterprises, in areas such as alternate credit scoring methods,
predicting probability of default, etc. With fast changing technology, SIDBI could also take the lead in hosting
an ecosystem, within a well-defined regulatory sandbox, to create an infrastructure, which will reduce the
turnaround time and provide customer-centric products with robust risk mitigation. This could also act as a
crucible to test cutting-edge products for micro-entrepreneurs and a vehicle to provide feedback to regulators.
5. PARTIAL GUARANTEE SCHEME FOR NBFCs

The Union Minister of Finance & Corporate Affairs in the Budget Speech for the Union Budget 2019-20 had
made the following announcement to support fundamentally sound Non-Banking Financial Companies (NBFCs)
in getting continued funding from banks: “For purchase of high-rated pooled assets of financially sound NBFCs,
amounting to a total of Rupees One lakh crore during the current financial year, Government will provide one
time six months’ partial credit guarantee to Public Sector Banks for first loss of up to 10%.”  In pursuance of
the announcement made in the Budget, the Govt. has issued guidelines on operationalising Rs. 1 trillion partial
guarantee scheme under which Public Sector Banks can purchase high-rated pooled assets from financially
sound NonBanking Financial Companies (NBFCs) / Housing Finance Companies (HFCs).  NBFCs, including
housing finance companies (HFCs), came under stress following defaults by the group companies of IL&FS. The
Govt. took control of IL&FS late last year after it defaulted in a series of debt repayment obligations,
triggering wider concerns about risk in the rest of the country's financial system. RBI's report, dated March 22,
2019, found that NPA on IL&FS's books were as high as 70% of its total loans and advances by March 31, 2018.
HIGHLIGHTS:
 OBJECTIVE: The Scheme has been announced with the objective to address temporary asset liability
mismatches of otherwise solvent NBFCs / HFCs without having to resort to distress sale of their assets for
meeting their commitments. The partial guarantee would help rework the Asset Liability structure within three
months to have positive Asset Liability Management in each bucket.  The Scheme would enable the public
sector banks to purchase pooled assets of financially sound NBFCs amounting to Rs. One lakh crore. It is
expected that this measure would provide liquidity to the NBFC sector and, in turn, enable them to continue to
play their role in meeting the financing requirements of the productive sectors of economy including MSME,
retail and housing.
 VALIDITY OF THE SCHEME:
The window for one-time partial credit guarantee offered by Govt. will open from the date of issuance of the
Scheme by the Government for a period of six months, or till such date by which Rupees One lakh crore assets
get purchased by banks, whichever is earlier.
 OPERATIONAL GUIDANCE:
a) The assets shall be purchased by banks at fair value. b) Assets to be assigned by NBFCs/HFCs must be rated
by Credit Rating Agencies (CRAs) accredited by RBI. c) One-time guarantee provided by the Govt. on the
pooled assets will be valid for 24 months from the date of purchase and can be invoked on the occurrence of
default. The guarantee shall cease earlier if the purchasing bank sells the pooled assets to the originating
NBFC/HFC or any other entity, before the validity of the guarantee period. d) The purchasing banks may have
service level agreements with the originating NBFCs/HFCs for servicing, including administration of the
individual assets. e) The NBFCs/HFCs can have the option to buy back their assets after a specified period of 12
months as a repurchase transaction, on a right of first refusal basis.
 ELIGIBLE NBFCs/HFCs: a) The NBFCs registered with RBI under the Reserve Bank of India Act, excluding those
registered as Micro Finance Institutions and Core Investment Companies. b) HFCs registered with National
Housing Bank (NHB) under the National Housing Bank Act. c) The CRAR of NBFCs / CAR of HFCs should not be
below the regulatory minimum (i.e. 15% for NBFCs and 12% for HFCs) as on 31-3-2019. d) The net NPAs should
not be more than 6% as on 31-3-2019. e) They should have made a net profit in at least one of the last two
preceding financial years (i.e. FY 2017-18 and 2018-19). f) The NBFCs/HFCs should not have been reported
under SMA category by any bank for their borrowings during last one year prior to 1-8-2018. g) Micro Finance
Institutions and Core Investment Companies are not covered under the Scheme.
 ELIGIBLE ASSETS: a) Assets originated up to 31-3-2019 will only be eligible under this scheme. b) Assets
should be standard in the books of NBFCs/HFCs on the date of sale. c) The pool of assets should have minimum
rating of 'AA' or equivalent at fair value prior to the partial credit guarantee by Govt. d) Each account under
the pooled assets should have been fully disbursed and security charge should have been created in favour of
the originating NBFCs/ HFCs. e) NBFCs/HFCs can sell up to a maximum of 20% of their standard assets as on 31-
3-2019 subject to a cap of Rs. 5,000 crore at fair value. Any additional amount above the cap of Rs. 5,000
crore will be considered on pro rata basis, subject to availability of headroom. f) The underlying assets should
represent the debt obligations of a homogeneous pool of obligors and individual asset size in the pool is capped
at Rs. 5 crore (i.e. asset pool should be sufficiently granular). g) Originating NBFCs/HFCs cannot assign a)
Revolving credit facilities; b) Assets purchased from other entities; and c) Assets with bullet repayment
of both principal and interest.
 INVOCATION OF GUARANTEE: The purchasing bank can invoke the Govt. guarantee if the interest and / or
instalment of principal remains overdue for a period of more than 90 days (i.e. when liability is crystalised for
the underlying borrower) during the validity of such guarantee, subject to the condition that the guarantee is
for the first loss up to 10%.  REPORTING AND CLAIMS: a) There should be a process of real time reporting of
such transactions by the banks to Govt. and to get the information on remaining available headroom for
purchase of pooled assets. b) Govt. shall settle such claims by the banks within 5 working days from the date
of claim. c) Upon recovery of the accounts for which the purchasing bank had invoked the Govt. guarantee and
received the claim from Govt, the guarantee amount, or the amount recovered, whichever is lower, should be
passed on by banks to the Govt. within 5 working days from the days of receipt in its books, subject to the
condition that in case the guarantee amount is lower than the recovery shortfall the gap would be filled by the
bank receiving the guarantee, but when the recovered amount is higher than the guarantee amount, then the
excess over the guarantee amount would be kept by the bank. d) Any loss crystalised up to 24 months is
eligible for claim from Govt. under the Scheme, provided such pooled assets are not (a) bought back by the
concerned NBFCs/HFCs or (b) sold by the purchasing bank to other entities.
 GUARANTEE FEES: NBFCs/HFCs will pay a fee equivalent to 0.25% per annum of the fair value of assets
being purchased by bank under this Scheme to Govt., which must be routed through the purchasing bank. The
NBFCs / HFCs whose assets are sold under this Scheme shall undertake the following: a) It should rework the
Asset Liability structure within three months to have positive ALM in each bucket for the first three months and
on cumulative basis for the remaining period. b) At no time during the period for exercise of option to buy
back the assets, should the CRAR go below regulatory minimum.
 OTHER MEASURES RECENTLY ANNOUNCED: The steps taken by the RBI are as follows: a) The RBI permitted
banks to grant partial credit enhancement (PCE) to bonds issued by NBFCs and housing finance companies,
listed with the RBI and the National Housing Bank respectively. RBI has allowed this to enable NBFCs to obtain
funds from bond market on favourable terms to improve the bonds' credit rating. b) The Facility to Avail
Liquidity for Liquidity Coverage Ratio (FALLCR) was increased on July 5, 2019 by 0.50 per cent of NDTL each on
Aug. 1 and Dec. 1, 2019 to be frontloaded by banks for computing LCR to the extent of incremental
outstanding credit to NBFCs and Housing Finance Companies over and above the amount of credit to
NBFCs/HFCs outstanding in their books as on July 5, 2019 thereby enabling banks to raise additional liquidity by
selling their excess SLR securities.  The risk weights for banks’ exposure to NBFCs were harmonised with those
of other corporates.  The prudential limit on exposure of banks to NBFCs was also aligned with that of other
sectors, thereby increasing it from 10 per cent of the banks’ capital to 15 per cent.  The minimum holding
period for assets to be securitised or assigned was reduced from one year to six months, thereby enabling the
NBFCs and HFCs to raise funds by securitising their originations without having to wait for a longer period. 
The durable liquidity in the system was increased through a series of OMOs and Forex SWAPs. c) Harmonisation
of single counterparty exposure limit for banks’ exposure to single NBFCs:  Under the revised guidelines on
large exposure framework (LEF) that came into effect from April 1, 2019, a bank’s exposure to a single NBFC is
restricted to 15% of its Tier I capital, while for entities in the other sectors the exposure limit is, 20% of Tier I
capital of the bank, which can be extended to 25% by banks’ Boards under exceptional circumstances.  As a
step towards harmonisation of the counterparty exposure limit to single NBFC with that of the general limit,
RBI has decided to raise a bank’s exposure limit to a single NBFC to 20% of Tier-I capital of the bank. d) In
order to boost credit to the needy segment of borrowers, RBI has decided that bank credit to registered NBFCs
(other than MFIs) for on-lending will be eligible for classification as priority sector under respective categories
subject to the following conditions: a) Agriculture: On-lending by NBFCs for ‘Term lending’ component under
Agriculture will be allowed up to Rs. 10 lakh per borrower. b) Micro & Small enterprises: On-lending by NBFC
will be allowed up to Rs. 20 lakh per borrower. c) Housing: Enhancement of the existing limits for on-lending
by HFCs from Rs. 10 lakh to Rs. 20 lakh per borrower. d) Bank credit to NBFCs for On-Lending will be allowed
upto a limit of five percent of individual bank’s total priority sector lending on an ongoing basis.
6. CO-ORIGINATION OF LOANS
In a two-pronged strategy, State Bank of India has set up a ‘Non-Banking Finance Company (NBFC) alliances’
department so that it can co-originate loans with NBFCs for lending to the priority sector and buy priority
sector loan portfolios from NBFCs. This will help SBI to have more direct exposure to PSL, which will fetch
better yield on advances and cut down indirect exposure, where the yield on investment is low.  The State
Bank of India has also signed first co-origination loan agreement with PAISALO Digital Limited. The agreement
was signed with vision of empowering the AGRI, MSME segment and Small businesses. Under this co-origination,
SBI and PAISALO intend to enable customers to reach them with ease and use it for smooth loan disbursal and
repayment easily. Its platform will cater needs to last mile customer.
 CONCEPT OF CO-ORIGINATION OF LOANS: The Reserve Bank of India has permitted co-origination of loans
by banks and non-deposit taking non-banking financial companies (NBFCs) in the priority sector with the basic
aim at leveraging the reach of NBFCs to help banks meet their priority sector lending targets, leveraging the
reach of NBFCs. The co-origination arrangement entails “joint contribution of credit by both lenders" and also
involve “sharing of risks and rewards between banks and NBFCs". All Scheduled Commercial Banks (excluding
RRBs and Small Finance Banks) may engage with Non-Banking Financial Companies - Non-Deposit taking -
Systemically Important (NBFC-ND-SIs) to co-originate loans for the creation of priority sector assets. The bank
can claim priority sector status in respect of its share of credit while engaging in the co-origination
arrangement. However, the priority sector assets on the bank’s books should at all times be without recourse
to the NBFC.
 SHARING OF RISK AND REWARDS: Minimum 20% of the credit risk by way of direct exposure shall be on
NBFC’s books till maturity and the balance will be on bank’s books. The NBFC shall give an undertaking to the
bank that its contribution towards the loan amount is not funded out of borrowing from the co-originating bank
or any other group company of the partner bank.
 INTEREST RATE: NBFC would have the flexibility to price their part of the exposure, while bank shall price
its part of the exposure in a manner found fit as per their respective risk appetite / assessment of the
borrower and the RBI regulations issued from time to time.
 KYC COMPLIANCE: The co-originating lenders shall adhere to applicable KYC/ AML guidelines.
 LOAN SANCTION: The NBFC shall recommend to the Bank proposals as found relevant for joint lending. The
lenders shall be entitled to independently assess the risks and requirements of the applicant borrowers. The
loan agreement would be tripartite in nature, wherein, both the Bank and the NBFC shall be parties as lenders
to the loan agreement with the customer.
 COMMON ACCOUNT: The Bank and the NBFC shall open an escrow type common account for pooling
respective loan contributions for disbursal as well as to appropriate loan repayments from borrowers, without
holding the funds for usage of float. Regarding loan balances, the NBFC / Bank shall maintain individual
borrower’s accounts and should also be able to generate and share a single unified statement to the customer,
through appropriate sharing of required information with the Bank/ NBFC.
 MONITORING & RECOVERY: Both lenders shall create the framework for day to day monitoring and recovery
of the loan, as mutually agreed upon.
 SECURITY AND CHARGE CREATION: The lenders shall arrange for creation of security and charge as per
mutually agreeable terms.
 PROVISIONING/REPORTING REQUIREMENT: Each of the lenders shall follow its independent provisioning
requirements including declaration of account as NPA, as per the regulatory guidelines respectively applicable
to each of them. Each of the lenders shall carry out their respective reporting requirements including reporting
to Credit Information Companies, under respectively applicable law and regulations for their portion of
lending.
 ASSIGNMENT / CHANGE IN LOAN LIMITS: Any assignment of loans by any of the lenders can be done only
with the mutual consent of both the lenders. Further, any change in loan limit of the co-originated facility can
be done only with the mutual consent.
 GRIEVANCE REDRESSAL: Any complaint registered by a borrower with the NBFC and / or bank shall also be
shared. If the complaint is not resolved within 30 days, the borrower would have the option to escalate the
same with concerned Banking Ombudsman / Ombudsman for NBFCs.
7. Peer-to-Peer Lending
Peer-to-Peer lending is a form of crowd-funding which can be defined as the use of an on-line platform that
matches lenders with borrowers in order to provide unsecured loans. Sometimes abbreviated P2P lending,
involves lending of money to individuals or businesses particularly through online services. It may also be
termed as Social Lending or Marketplace Lending.  P2P is a method of debt financing that enables individuals
to borrow and lend money without the use of an official financial institution as an intermediary. Peer-to-peer
lending removes the middleman from the process, but it involves more time, effort and risk than the general
brick-and-mortar lending scenarios.
 INTERNATIONAL EXPERIENCE: Peer-to-Peer lending, though an uncommon concept in India, has been around
in the international markets since a decade. The various international countries having experience of P2P
lending is listed as follows:  UK: The first country to offer P2P loans in the world. Zopa, founded in February
2005, has issued loans in the amount of 500 million GBP and is the largest UK peer-to-peer lender with over
500,000 customers.  USA: P2P lending industry in US started in February 2006 with the launch of Prosper,
followed by Lending Club and many more. As of June 2012, Lending Club is the largest peer-to-peer lender in
US based upon issued loan volume and revenue, followed by Prosper.  China: P2P lending sprung into
existence in China only after the Internet and e-commerce took off in the country in the 2000s. The most
prominent among them are CreditEase, Lufax, Tuandai, China Rapid Finance and DianRong.
 INDIAN CONTEXT:  With a view to regulate the nascent peer-to-peer market in the country, the Reserve
Bank of India came out with a consultation paper that aims to classify P2P as an NBFC, with a minimum capital
requirement of Rs 2 crore. RBI wanted to create a platform that will operate only as an intermediary and that
no entity other than a company can undertake this activity.  According to RBI, considering the present stage
of development, the platform could be registered only as an intermediary, which means the role of the
platform would be limited to bringing the borrower and lender together without the lending and borrowing
getting reflected in the balance sheet.  The consultation paper outlined the pros and cons of regulating the
sector and proposes a suitable framework for regulating this activity, which includes minimum capital,
permitted activity, governance requirements, fair practices code for customer dealing and data security.
 CHARACTERISTICS: Peer-to-Peer lending, also termed as Marketplace Lending or Social Lending is not any
of the three traditional types of financial institutions namely deposit takers, investors, insurers. However, it is
sometimes categorized as an alternative financial service. Typical characteristics of Peer-to-Peer lending are:
 It is usually conducted for profit.  No necessary common bond or prior relationship between lenders and
borrowers.  Intermediation by a peer-to-peer lending company. Transactions take place online. Lenders may
often choose which borrowers to invest in, if the P2P platform offers that facility.  The loans can be
unsecured or secured and are not normally protected by government insurance but there can be protection
funds available also. Loans are securities that can be transferred to others, either for debt collection or profit,
though not all P2P platforms provide transfer facilities or free pricing choices and costs can be very high, tens
of percent of the amount sold, or nil.
 SERVICES OFFERED: Most peer-to-peer intermediaries provide the following services:  Online investment
platform to enable borrowers to attract lenders and investors to identify and purchase loans that meet their
investment criteria.  Development of credit models for loan approvals and pricing.  Verifying borrower
identity, bank account, employment and income.  Performing borrower credit checks and filtering out the
unqualified borrowers.  Processing payments from borrowers and forwarding those payments to the lenders
who invested in the loan. Servicing loans, providing customer service to borrowers and attempting to collect
payments from borrowers who are delinquent or in default, legal compliance and reporting.  Finding new
lenders and borrowers (marketing).
 OTHER DETAILS:  Beneficiary of loans: Can either be an individual or a business requiring a loan.  Lender:
The lender can also be a natural or a legal person.  Payment of fee: Fee is paid to the platform by both the
lender as well as the borrower. A one-time fee on funded loans from borrowers is collected and a loan
servicing fee is charged to investors or borrowers (either a fixed amount annually or a percentage of the loan
amount).  Type of loans: Peer-to-Peer loans are unsecured personal loans where most of large loans are lent
to businesses. Secured loans are sometimes offered by using luxury assets such as jewellery, watches, vintage
cars, fine art, buildings, aircraft and other business assets as collateral. They are made to an individual,
company or charity. Other forms of peer-to-peer lending include student loans, commercial and real estate
loans, payday loans, as well as secured business loans, leasing and factoring.  Interest rates: The interest
rates can be set by lenders who compete for the lowest rate on the reverse auction model, or fixed by the
intermediary company on the basis of an analysis of the borrower's credit.
 RBI GUIDELINES:  As per the extant guidelines, the aggregate limits for both borrowers and lenders across
all Peer to Peer Lending platform (P2P) platforms stand at Rs.10 lakh, whereas exposure of a single lender to a
single borrower is capped at Rs.50,000 across all NBFC-P2P platforms.  In order to give the next push to the
lending platforms, the RBI has revised the guidelines. The aggregate exposure of a lender to all borrowers at
any point of time, across all P2P platforms, shall be subject to a cap of Rs.50 lakh. Further, it is also proposed
to do away with the current requirement of escrow accounts to be operated by bank promoted trustee for
transfer of funds having to be necessarily opened with the concerned bank. This will help provide more
flexibility in operations.
 ADVANTAGES AND DISADVANTAGES: Peer-to-Peer lending platform offers the following benefits to
investors:  Unlike banks, the borrowers are not asked for a set of documents. Instead information is taken
from them and is then cross-verified with Aadhar, voter ID, PAN, utility bill payment details, etc.
Banks lend other people’s money, however in P2P lending, borrower lends his own money, assumes the risk and
gets the reward.  Since the peer-to-peer lending companies offer these services entirely online, they can run
with lower overheads and provide the service more cheaply than traditional financial institutions.  Lenders
often earn higher returns compared to savings and investment products offered by banks, while borrowers can
borrow money at lower interest rates.  Compared to stock markets, peer-to-peer lending tends to have both
less volatility and less liquidity. For investors interested in socially conscious investing, peer-to-peer lending
offers the possibility of supporting the attempts of individuals to break free from high-rate debt, assist persons
engaged in occupations or activities that are deemed moral and positive to the community, and avoid
investment in persons employed in industries deemed immoral or detrimental to community.  Unlike
depositing money in banks, peer-to-peer lenders can choose themselves whether to lend their money to safer
borrowers with lower interest rates or to riskier borrowers with higher returns.  The major disadvantages are:
 The lender has very little assurance that the borrower, who traditional financial intermediaries may have
rejected due to a high likelihood of defaults, will repay their loan. Furthermore, depending on the lending
system employed, in order to compensate lenders for the risk that they are taking, the amount of interest
charged for Peer-to-Peer loans may be higher than traditional prime loans.  Dealing with peer-to-peer lending
is connected with the problem of ownership. The person who owns the loans and how that ownership is
transferred between the originator of the loan (the person-to-person lending company) and the individual
lender cannot be clearly distinguished.  Limited operating history of P2P lending platforms.  Dependency of
P2P lending platforms on low interest rates to stimulate high transaction volumes.  P2P lending platforms are
not obligated to make any payments to investors if borrowers do not make payments on the underlying loans.
 PRESENT STATUS OF P2P IN INDIA: The Peer-to-Peer (P2P) lending market in India is in a nascent stage with
a rather modest size of about Rs.300 crore. However, it has the potential to scale up manifold. Rising investor
demand has fuelled the growth of P2P lending as a lucrative alternative to traditional investment instruments
such as mutual funds, stocks, bonds, bank deposits, etc. Moreover, online P2P lending has promoted
alternative forms of finance for those segments of the population which are unserved or underserved by the
formal banking and finance sector.
 Through robust financial technologies and entirely tech-driven processes, P2P lending platforms reduce their
operational costs significantly, as compared to traditional lending channels, thus enabling them to provide
affordable On-line Loan to consumers at lower lending rates.  The growth projections for the P2P lending
market, is projected to be worth $4-5 billion by 2023. India’s online P2P lending industry has disrupted the
consumer lending and asset class categories, with various factors such as the proliferation of digital
transactions, the development of financial technologies, and the lack of access to affordable credit
contributing to its rise. The sector’s inclusion into a larger regulatory ambit will help steer massive growth and
expansion for players, helping them gain greater traction in the mainstream financial market, and
strengthening confidence among borrowers and investors.
E. DIGITAL BANKING
1. Opportunities and Challenges of FinTech
(Keynote Address by Shri Shaktikanta Das, Governor, Reserve Bank of India)
I am extremely happy to participate in NITI Aayog’s FinTech Conclave 2019 and share my thoughts on the
technological revolution that is shaping the future of finance. I am particularly thankful to Shri Amitabh Kant,
CEO of NITI Aayog for having invited me to such an august gathering. As I understand, this Conclave is woven
around the theme of Indian FinTech ecosystem as well as steps required to help achieve the potential that the
sector offers towards growth, employment and inclusion. Given the wide canvas that FinTech encompasses, I
have organised my thoughts on some of the core issues in this area.
2. In general, FinTech stands for financial technology and describes technologically enabled financial
innovations. From ‘start-ups’ to ‘bigtechs’ to established financial institutions, all the key players are
harnessing this technological edge along the financial services’ value chain to provide agile, efficient and
differentiated experiences to the enduser. This movement has the potential to fundamentally transform the
financial-landscape where consumers will get to choose from a larger set of options at competitive prices and
financial institutions could improve efficiency through lower operational costs. As a country that is determined
to achieve universal financial inclusion at affordable costs, this is a defining moment for us, and we should
seize the opportunity.
FinTech Experience in India
3. India has been at the forefront of this revolution. A recent global survey ranks India second in terms of
FinTech adoption, with an adoption rate of 52 per cent1. It is reported that there are as many as 1218 FinTech
firms operating in India which have created a large number of jobs. They are also generating a healthy
appetite for investment.
4. The Reserve Bank has over the years encouraged greater use of electronic payments so as to achieve a “less-
cash” society. The objective has been to provide a payment system that combines the attributes of safety,
security, enhanced convenience and accessibility, leveraging technological solutions that enable faster
processing. Affordability, interoperability, and customer awareness and protection have also been other focus
areas. Banks have been the traditional gateway to payment services. However, with the fast pace of
technological changes, this domain is no longer the monopoly of banks. Non-bank entities are cooperating as
well as competing with banks, either as technology service providers to banks or by directly providing retail
electronic payment services. The regulatory framework has also encouraged this enhanced participation of
non-bank entities in the payments domain.
5. In recent years, a focussed effort has been made to develop a state of the art national payments
infrastructure and technology platforms, be it Immediate Payments Service (IMPS), Unified Payments Interface
(UPI), Bharat Interface for Money (BHIM), Bharat Bill Pay System (BBPS), or Aadhaar-enabled Payment System
(AePS). This has changed the retail payments scenario of the country. The total volume of retail electronic
payments witnessed about nine-fold increase over the last five years.
6. Let me now mention some numbers with regard to digital modes of payment. The NEFT system handled 195
crore transactions valued at around Rs.172 lakh crore in 2017-18 growing by 4.9 times in terms of volume and
5.9 times in terms of value over the previous five years. Similarly, the number of transactions carried out
through credit and debit cards in 2017-18 was 141 crore and 334 crore, respectively. Prepaid payment
instruments (PPIs) recorded a volume of about 346 crore transactions, valued at Rs.1.4 lakh crore. Thus, the
total card payments, in volume terms, stood at 52 percent of the total retail payments during the year 2017-
18.
7. Developments in the spheres of banking technology and trade finance have been commendable as well.
Alternative models of lending and capital raising are coming up and have the potential to change the market
dynamics of traditional lenders and the role of traditional intermediaries. Crowd-funding, which entails raising
external finance from a large group of investors, is at a very nascent stage in India. The peer-to-peer (P2P)
lending for which RBI has issued Master Direction in October 2017 has the potential to improve access to
finance for small and medium enterprises. Eleven entities have been licensed to operate P2P platform. The
Reserve Bank has also granted licenses and permitted seven purely digital loan companies (NBFCs) to
commence operations. Although they are purely digital players operating through mobile applications, we have
ensured that they have at least one physical presence for customers to reach out to in case of need.
8. Furthermore, seven payment banks have commenced operations. These technology-led banks use FinTech,
both while onboarding customers as well as while carrying out operations.
9. Invoice trading is another nascent area of FinTech application in India. It assists MSMEs which often have
working capital and cash flow problems due to delayed payments. The Reserve Bank has set up the Trade
Receivables Discounting System (TReDs), which is an innovative financing arrangement where technology is
leveraged for discounting bills and invoices. Three entities have been authorised for this purpose and the
volumes are slowly gaining traction.
10. Another initiative has been laying down a regulatory framework for Account Aggregators (AA). A total of
five entities have been given inprinciple approval as NBFC-AA and are expected to commence their operations
during 2019-20.
11. To further deepen digital payments and enhance financial inclusion through FinTech, the Reserve Bank of
India (RBI) has also appointed a five member committee under the chairmanship of Shri Nandan Nilekani.
12. While opening a new world of opportunities, the FinTech revolution has its own share of risks and
challenges for the regulators and supervisors. Early recognition of these risks and initiating action to mitigate
the related regulatory and supervisory challenges is key to harnessing the full potential of these developments.
I would, therefore, like to give a bird's eye view of these opportunities, risks and challenges, especially in the
Indian context as also the policy roadmap that we have in mind.
Opportunities, Risks and the Way Forward Let me first highlight the opportunities in the area of digital
onboarding and financial inclusion.
Digital onboarding and financial inclusion
13. There are two broad areas that merit attention in the Indian context: the first is regarding improving the
accessibility of financial platforms using FinTech; and the second is about analysing potential risks that may
arise out of FinTech adoption. Designing suitable financial products that cater to specific needs of the
financially excluded population, digital onboarding and boosting the quantum of investments are vital in
achieving the first objective. Effective utilisation of Aadhaar eco-system may provide incentives for the people
to adopt digital platforms as it is happening in the case of direct benefits transfer (DBT). The central KYC
registry is a significant step in this regard – about 100 million KYC records have already been uploaded onto this
platform. We also need to ensure multi-lingual financial literacy and a robust grievance redressal machinery to
effectively handle inter-regional disparities and to offer online dispute resolutions.
RegTech and SupTech
14. As regards potential risks and their mitigation, RegTech2 and SupTech3 have an important role. Regulators
and supervisors have to undertake accelerated off-site surveillance. This also brings in the need for a
transparent, technology and data-driven approach. To serve this need, new fields called RegTech and SupTech
are coming up. Both the technologies aim at improving efficiency through the use of automation, introducing
new capabilities and streamlining workflows. In the Reserve Bank, we have been using SupTech for data
collection and analysis. The examples are Import Data Processing and Monitoring System (IDPMS), Export Data
Processing and Monitoring System (EDPMS) and Central Repository of Information on Large Credits (CRILC), to
name a few. Also, the risk-based supervision of banks is extensively data-driven and is an example of SupTech.
The future of RegTech and SupTech technologies, however, lie in big data analytics, artificial intelligence,
machine learning, cloud computing, geographic information system (GIS) mapping, data transfer protocols,
biometrics, etc.
15. A strong risk culture - in which risk detection, assessment and mitigation are part of the daily job of bank
staff - will be central to the success of managing the emerging risks. Similarly, systemic risks may arise from
unsustainable credit growth, increased inter-connectedness, procyclicality, development of new activities
beyond the supervisory framework and financial risks manifested by lower profitability. Risks for FinTech
products may also arise from cross border legal and regulatory issues. Data confidentiality and customer
protection are major areas that also need to be addressed.
16. The Reserve Bank has encouraged banks to explore the possibility of establishing new alliances with
FinTech firms as it could be pivotal in accelerating the agenda of financial inclusion through innovation. It is
essential that flow of investments to this sector is unimpeded to realize its full potential. It is imperative to
create an ecosystem which promotes collaboration while carefully paying attention to the implications that it
has for the macroeconomy.
17. In order to ensure an orderly development of FinTech, to streamline their influence into the financial
system, to protect the customers and to safeguard the interest of all the stakeholders, we need to have
appropriate regulatory and supervisory frameworks. Such frameworks should address associated risks while
keeping in mind the growth requirements of this sector. The Reserve Bank’s working group on FinTech and
digital banking (Report of the working group on FinTech and digital banking, November 2017) suggested the
introduction of a 'regulatory sandbox/innovation hub' within a well-defined space and duration to experiment
with FinTech solutions, where the consequences of failure can be contained and reasons for failure analysed. A
‘Regulatory Sandbox’ would benefit FinTech companies by way of reduced time to launch innovative products
at a lower cost. Going forward, the Reserve Bank will set up a regulatory sandbox, for which guidelines will be
issued in the next two months.
Conclusion
18. In conclusion, I would like to say that FinTech has the potential to reshape the financial services and
financial inclusion landscape in India in fundamental ways. It can reduce costs and improve access and quality
of financial services. We have to strike a subtle balance between effectively utilising FinTech while minimising
its systemic impacts. By enabling technologies and managing risks, we can help create a new financial system
which is more inclusive, cost-effective and resilient.
2.Digital banking
In a bid to encourage digital banking, the RBI proposed to increase liquidity support to convert National
Electronic Funds Transfer (NEFT) remittance channel now available up to 7.45 pm into 24*7 mode from
December 2019 to remove time limitations in transfer of funds. RBI has also proposed an Acceptance
Development Fund (ADF) for better servicing of card infrastructure. The government has proposed to levy tax
deduction at source (TDS) of two percent on firms that draws cash withdrawals of over INR 1 crore in a year
from a bank / post office. It will not apply to government and interbank transactions. This will encourage
routing most payments of entities through electronic mode. Henceforth, Merchant Discount Rate (MDR) shall be
waived and will not be charged either from member establishment or customers. Banks and RBI will bear the
costs from out of potential savings from the reduction in transaction costs on account of handling less cash.
It will now be made mandatory for the firms with an annual turnover of over INR 50 crores to necessarily
provide low-cost digital modes of payment such as BHIM UPI, UPI, Adhaar Pay, debit cards, NEFT and RTGS to
its customers to strengthen the digital ecosystem. In the backdrop of robust digital infrastructure built in the
last five years, the digital transactions volume has increased from 796.7 million in October 2016 to 3323.4
million in March 2019. The volume of remittances has increased from INR 108 trillion to INR 258 trillion during
the period. The ATM base of over two lacs, 3.8 million POS terminals and a huge debit card base of 825 million
canindeed make a big difference to the banking system. With MDR already waived for transactions up to INR
2000 and NEFT / RTGS made free, a strong tone for incentivisation of digital banking is already set. Next
challenge for banks would be to increase the use of its strong network of customer base added after the
financial inclusion agenda was pursued through PMJDY. Just connect with the customer through a savings
account may not be able to deliver full value. Intense two-way use of bank relationship can only help banks to
reduce transaction costs, the broad purpose of digitisation from the point of banks. Efficiency in customer
service must, however, be ensured.
7. Way forward
With UB&Sps opening up multiple growth opportunities, banks including PSBs will have to do a lot of homework
to tap add-on business expected from the thrust areas. The corporate tax cut to the tune of INR 1.45 trillion
and softened GST rates will make available more funds with entrepreneurs that can plough back into the
banking system. To unleash digital capability, cybersecurity standards have to be upgraded keeping the
increase in transaction load and customer expectations for safety and security. The vendor interface, after-
sale service, standard of service level agreements and quality of maintaining the electronic hardware needs
more attention. Well-coordinated strategies will have to be put in place to disseminate financial and digital
literacy to the large mass of customers so that operational risks arising out of intense use of digital mode could
be better managed.
Firewalls and protection against fraudulent use of systems will have to be ensured. It may also be a high time
to consider institutionalising a separate loan policy for MSME instead of having a universal loan policy for the
bank. The customisation of the policy to suit the sector will be in the larger interest to protect the line
management. That precisely is the reason that despite several policy innovations, the MSME portfolio is not
picking up to its full potentiality. The growth rate of the MSME sector more often falls short of industry-level
credit growth.
The capacity building for human resources in banks in terms of recommendations of G GopalaKrishna
Committee merits full implementation to ensure that efficiency and skillsets of workforce improve in
specialised areas. Data mining, analytics, economic and market intelligence will have to be used in improving
methods of planning resource deployment. Handling business of the levels expected in the banking industry in
the next 3-4 years may not be possible with past methods and practices. A lot of workspace innovation, use of
technology such as blockchain technology, artificial intelligence (AI), robotics, machine learning and deep
learning where appropriate will be essential. Banks can take a cue from the economic survey that suggested
the use of the behavioural economics concept of ‘nudge’ to encourage desirable social and economic change.
Nudge theory is based on the rationale that human resources often need encouragement or intervention – a
nudge – to get going and to enable them to their best. In gist, tapping the umpteen new and innovative sources
of business would require equally well-designed business strategies supported by a strong network of
implementation and monitoring of performance. Stronger PSBs can stage a comeback to their rightful
leadership position in the industry if reforms in internal policies and processes are carried and people
competencies are built.
Seen from every perspective, the emerging economic slowdown should not be seen as adversity, but it should
be used as a wider growth canvass. More important for the PSBs under amalgamation to make efforts to
insulate dayto- day operations from any disruption and continue to put credit growth trajectory intact in the
long-term interest of protecting market share and customer patronage. Hence, it is more important to sustain
inclusive efforts of banks to revive the economy.
The future growth of banks will depend on how they act now based on well-articulated strategies and pave a
futuristic vision to position growth in next 4-5 years. The knack will depend on the ability of banks to link
synergy of business opportunities built around the innovative policies well articulated in the interim budget,
union budget, stimulus packages with a near term and long term vision.
The consolidation among PSBs could be used to attain greater economies of scale and efficiency that should
lend stability, sustainability and robust growth.
3. Artificial Intelligence (AI)

Artificial Intelligence (AI) is defined as the theory and development of computer systems able to perform tasks
that normally require human intelligence such as visual perception, speech recognition, decision-making, and
translation between languages. It is not a technology alone but rather a group of related technologies including
natural language processing, improving interactions between computers and human; machine learning,
computer programs that can “learn” when exposed to new data; and expert systems that help machines sense,
comprehend and act in ways similar to the human brain. In the above backdrop, a new innovation is emerged
i.e. Robotic Process Automation (RPA), in the financial market especially in banking operations. The usage of AI
is already in place in advanced counties especially in financial as well as other sectors. The new generation
Cobots is friendly and safe for human interaction and designed to work alongside people rather than replace
them. Technology companies have been showing increased interest in development of algorithms that track a
user’s online habits and experiences with the products and to suggest suitable services with required timely
information round the clock without human intervention.
Indian Experience: Though, all banks in India are operating on strong Core Banking platform, still whenever
customer contacts the branch over phone or visits the branch, banks do not have the ability to recognize the
customers by sight or voice and unable to provide desired personal services proactively. This can be addressed
through RPA which enable to provide intuitive and personalized customer service besides bringing down the
turnaround time and associated process costs significantly. At present, Indian Banks are processing huge
volumes of data to generate financial reports to satisfy regulatory and compliance requirements. Though, the
processes are standardized but still involve large numbers of workforce to perform low-value-added tasks such
as reconciliation, consolidation and reporting. The Robots are capable of providing the desired services on real
time basis with accuracy and also undertake the entire gamut of reporting as well as disclosure process in
time, which saves considerable costs and enables the banks to improve the bottom-line.
Recent Developments: The City Union Bank was the first Indian Bank introduced RPA by name “Lakshmi” in
November 2016 and later HDFC Bank launched robotic services through “Humanoids” and ICICI Bank with
“Software Robots” in select branches. SBI launched “Chatbot” which is called SBI Intelligent Assistant (SIA). It
will help in handling diverse customer queries related to banking services. M/s. G&D, a Reputed manufacture
of robot company, is closely working with RBI to introduce “Cobots” (Collaborative Robots) in the Indian
banking sector which safely work alongside humans and acts as a helping hand or a portable tool. Cobots are
ideally suited to undertake currency chest operations (pick and place) under supervision of RBI. ICICI Bank has
become the first commercial bank in the country in deployment of industrial robotic arm to automate
repetitive high-volume cash processing on high-end note sorting machines.
Way forward: AI provides Banks, Insurance Companies and Capital markets with an enormously powerful set of
tools to transform and streamline most of their financial processes to improve the operational efficiency which
is the need of the hour. However, the success depends on identification and adoption of the best technology,
talent development for optimum utilization of technology besides reshaping and rethinking of their existing
business models. Once the new system stabilizes, it is going to replace the existing verticals like May I Help You
counter at branch level and Knowledge Process Outsourcing (KPO) / Business Process Outsourcing (BPO) /
Interactive Voice Response (IVR) teams at apex level, in a phased manner which definitely be a win-win
situation to Banks and Customers. Further, it definitely may have adverse impact on the employment
opportunities. It is advisable to formulate guidelines to have alternate plans in place in case of failure to
protect the interests of all stakeholders.
4. BLOCK CHAIN TECHNOLOGY & BANKING

INTRODUCTION:  The Blockchain is an incorruptible digital ledger of economic transactions that can be
programmed to record not just financial transactions but virtually everything of value. Blockchains are an
open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and
permanent way.  Using this technology, certain innovative products such as Bitcoins have come into
existence. However, the technology of Blockchain is at present in the emerging stage implying that it is still
being tested.  Blockchain provides a decentralized database, or ‘digital ledger’, of transactions that
everyone on the network can see. All the nodes (computers) on the network approve a transaction before it is
recorded. Each participant in the network can alter the ledger, recording new data on to the chain. With each
transaction the entire existing chain gets analysed for discrepancies by every node to make sure that it is still
accurate. It is done instantaneously and simultaneously. Consensus mechanism is the key process for
verification of Blockchain network transactions
 CONCEPT OF BLOCKCHAIN:  People generally get confused between Blockchain and Bitcoin. However, the
two are different concepts. Blockchain is a technology that enables moving of digital currency from one
individual to other individual, whereas Bitcoins are digital currency. Blockchain is a chain of block that
contains information. It is a distributed ledger which is completely open to any one. Once data has been
recorded inside blockchain it becomes very difficult to change.  Blockchain’s decentralized, open and
cryptographic nature allows people to trust each other and transact peer to peer, making the need for
intermediaries obsolete. This also brings unprecedented security benefits. Hacking attacks that commonly
impact large centralized intermediaries like banks are virtually impossible to pull off on the blockchain. For
example, if someone wanted to hack into a particular block in a block chain, a hacker would not only need to
hack into that specific block, but all of the preceeding blocks going back to the entire history of that
Blockchain. For this the hacker would need to hack on every ledger in the network, which could be millions,
simultaneously. As such it is difficult to hack any blockchain.  Blockchain is a technology which aims at
providing security feature and a chain of blocks that enables user to access. It is just like an iphone and Bitcoin
is just a single application of it. Security comes from its creative use of hashing, consensus mechanism and
proof of work mechanism
 ELEMENTS OF BLOCKCHAIN: There are three major elements that every Blockchain contains namely a) Data
b) Hash c) Hash of previous Block.
a) DATA: Data is the raw form of information that is stored inside the block and it depends upon the type of
Blockchain. For Example: In Bitcoin blockchain, the data stored is that of sender, the receiver and amount of
coin.
b) HASH: Hash is a Unique ID which is generated for the block as input is inserted in it. It is just like a finger
print of human being, unique of its kind for every individual. Once the block is created its hash or timestamp
gets calculated. Changing something inside Block will cause the hash to change. In other words, Hash is very
useful element of the Blockchain as it provides major security from tampering and for detecting of any changes
in the block. If hash of the block changes, it no longer remains the same. A hash is a function that converts an
input of letters and numbers into an encrypted output of a fixed length. A hash is created using an algorithm,
and is essential to blockchain management in cryptocurrency.
c) HASH OF PREVIOUS BLOCK: Each subsequent Block has the Hash of previous block. This effectively helps in
creating chain of blocks. This technique makes the block chain secure. For Example: There is a chain of three
blocks - A, B, C. Each block has hash and hash of the previous block. In the figure below, Block Number C
points to Block number B hash, and Number B points to Number A hash. First Block is the major Block (i.e.,
Block A) as it does not point to any previous block. So it is unique of its kind. We call this block Genesis block.
Let’s say someone tempered with Block B, this will cause hash of the block to change. As a result block C and
all the following blocks become invalid. It is no longer valid hash of the previous block. So changes in single
block make all the other subsequent blocks invalid.
 P 2 P NETWORK: Using hash is not enough to prevent tempering. In order to rescue the block chain it has
one more process which is called as proof of work. Blockchain use P 2 P network and everyone is allowed to
join. When someone joins the network he gets the full copy of the Blockchain. He can use it and see everything
is in order. Proof of Work - for the block to be signed and added to the chain, the miner should find the
number which leads to the right hash ID. This number is used to seal the block. All transactions in the block are
now verified. It is a mechanism which slows down the creation of block. For Example: In case of Bitcoin,
Blockchain stores the details of every transaction of the digital currency, and the technology stops the same
Bitcoin being spent more than once. It takes around 10 minutes to calculate point of proof of work and new
block added to the chain. This mechanism makes it difficult to temper with the block. One needs to
recalculate proof of work for all the subsequent blocks.
CREATION OF NEW BLOCK: Every new block is sent to everyone on the network. Each node can verify and
ensure that the block has not been tempered. When everything is checked out, each node adds this block to
their block chain. All the nodes in the network create consensus. They agree as to which blocks are valid and
which are invalid. Block which is tempered is rejected by all the nodes on the network. So to successfully
temper with a block chain, one needs to temper with the all the chain -need to take control of the 50% on the
P2 P network. Only then the tempered work will be accepted by all the nodes present on the network as
Blockchains are constantly revolving.
HOW BLOCK CHAIN ADDRESS MONEY TRANSFER
OPEN LEDGER: Open ledger plays an important role in the development and establishment of the Blockchain.
In open ledger concept, all the information related to a particular block is openly available to every node on
the network. Every node on network can see how much amount of money each one has in his pocket and every
node can decide whether the transaction is valid or invalid in that particular block.
 DISTRIBUTED LEDGER: The main aim of Blockchain is to get rid of centralized Ledger. It is the other way to
secure itself by being distributed instead of using central Identity to manage chain. Thus it provides a facility
of open ledger which is distributed to everyone on the Network. Every single node on the Network can hold the
copy of the Ledger. Blockchain technology is used in a peer-to-peer network of parties, who participate in a
given transaction. At its core, blockchain technology uses a distributed ledger that is visible to all parties
involved in the transaction. Through a consensus mechanism, the ledger is guaranteed to be consistent.
By its very nature, Blockchain tackles all of the problems inherent in a business transaction:
 Trust: Through the use of blockchain, all the parties involved in a transaction only have to trust the
technology.  Transparency: Since the ledger is distributed, all peers involved in the transaction network can
view it (subject to security rights). Accountability – Since all parties in the transaction can view the distributed
ledger, everyone can agree on how the transaction is progressing while it is ongoing, and how it went once it is
complete.
 SYNCHRONIZATION OF LEDGER:  All the copies of the ledger are synchronized and everyone on the
network can see it and everyone can hold the same copy/same ledger. For example: If B wants to send Rs.5
lakh to C then B is going to publish and broadcast the transaction on the network. In order to get into the
ledger one must understand the concept of Miners in the Bitcoin.  Miners are special nodes which can hold
the ledger. For example A and B are miners. Now these two Miners are going to compete among themselves as
to who will be the first to take this transaction and validate it and put it in the ledger.  Miner needs to do two
things to win the transaction. 1) Validate 2) Key (code, unique ID.) Firstly, miner can see it from open ledger
whether B is able to do the transaction or not and give his validation regarding it. Secondly, Miner will find a
Special Key that will enable this miner to take the previous transaction. In this previous transaction, he will
lock the new transaction. In order to find this key, miner needs to keeps on guessing until he finds the perfect
key. The first miner who finds the perfect key gets the financial reward.
 BLOCKCHAIN & BANKING SECTOR IN INDIA:  Blockchain and distributed ledgers have a bright future. As
real-time, open-source and trusted platforms that securely transmit data and value, they can help banks not
only reduce the cost of processing payments, but also create new products and services that can generate
important new revenue streams. The biggest key to turning Blockchain’s potential into reality is a collaborative
effort among banks to create the network necessary to support global payments.  YES BANK, India’s private
sector bank as an issuing and paying agent (IPA), facilitated the issuance of a Commercial Paper (CP) of INR 100
Crores using Blockchain technology. This is the first time in Asia that a CP has been digitally issued using
Blockchain technology. The digital solution will ensure an efficient, transparent and secure mechanism for CP
issuance and redemption.
 As part of the business solutioning, the stakeholders in the CP issuance and redemption benefit from: 
Reduction in Turnaround Time (TAT) for issuance and redemption;  Immutable digital records of the entire
transaction documents thereby reducing operational risk;  Real-time Visibility of the CP issuance and
redemption;  Common Network for all participants in the CP issuance and redemption process.
 A group of 11 big Indian banks are proposing to launch India's first block-chain linked funding for small and
medium enterprises (SMEs), a move which may bring about a drastic change to lending practices. The idea of
having such an organisation is to remove any communication hurdle among the different banks. A consortium
called the Blockchain Infrastructure Company (BIC) is mediating this discussion between the participating
banks. The group will establish a live network to make supply-chain finance more transparent and secure.
Through this network, banks will be able to access public credit data, which will help them steer clear of high-
risk situations. It will also make information available for both large corporates and SME lenders to avail credit.
 State Bank of India is proposing to go in for full-fledged deployment of blockchain in its reconciliation,
remittances and trade finance operations. The move is expected to lower the costs associated with the three
functions by about 40-50%.  In February 2017, Bankchain, a consortium of banks led by SBI, was set up to
work on developing blockchain-based solutions for banking in India. Another area of technology-based
development for SBI is its banking and lifestyle app Yono. The app will also see larger merchants coming on
board. More and more complex merchants will be on-boarded, such as Indian Railway Catering and Tourism
Corporation, and the complete railway ticketing experience will be available on Yono. At the time of its
launch, Yono had partnerships with 60 e-commerce players, including Amazon, Uber, Ola, Myntra, Jabong,
Yatra, Airbnb, Swiggy and Byju’s to offer exclusive deals to users of the app.
5.ROLE OF TECHNOLOGY IN BANKING IN THE NEXT DECADE

Technology evolves, expands in area and scope, in small, or even infrequent large steps, and helps create new
products /services / processes. Technology is the enabler, the tool, the creator of differentiating edge over
competition, and even the driver of business, quite often. All the connected parties in a business are not equally
affected by any change, but market forces drive all to change business rules, roles and preferences, or products.
New skills and roles appear; older roles, jobs, routines and skills are rejected. In this way – technology brings new
learning, new communications, changes knowledge/ skill groups, as also, on the other hand - destroys, disrupts and
readjusts people, business and working relations. This is ongoing.
For the next decade now, the interplay of technologies in banking, and the newly arriving pieces of
technologies/processes that impact banking and business entities – will similarly impact the future course. In the
next few paragraphs, we try to venture some predictions on the nature and form of the change for the near future.
For this, we look at the existing as also a few new pieces of technology and business practices currently making
rounds.
Anyone in banking industry will tell that the technologies to definitely impact banking in the short or mid-term are
the ones like Blockchain, Cloud, P2P financing (marketplace lending), Digitisation, Analytics, AI, Bitcoin or its
equivalents, etc. These are the pieces of current phase of technological evolution in service industry. With changes
in this delivery or handling technologies, the basic business model or relationships in banking may change
somewhat only in the next decade, but the market realities may change significantly. With all of these, the depth
of the role of technology in banking will anyway increase.
Before detailed examination of the technology pieces, a few basic observations on technology–bank relationships
may be pertinent.
Firstly, all new activities in banking may not be upon a technology invented yesterday or a completely new technology
only. Often, the ingenuity of human minds creates new processes or relationships using existing technologies, may be
with small changes. For example, encryption and digital signatures have been there, but, using the same components,
the new Blockchain technique creates a new paradigm by removing the need of the banks at the two ends to be the
sole authenticators. It achieves a chain of trust of many intermediaries that can even exclude banks altogether. While
it has made waves, – the process is new – supported by technology with small amendments.
Secondly, existence of a technology to do a thing in a certain way, may not be sole criterion for its adoption.
Government control or overall business risk may compel to limit adoption of such a technology.
Thirdly, technology for business has been a platform, a tool, an enabler, and facilitator. This basic relationship
is not easily going to be jettisoned. However, roles of data processing message creation, as also human functions
like authentication of genuineness of a transaction/ communication are on technology. So, if the specific tech-tool
for one of such activities used faces changes in technologies, it may force adoption and process change in business,
changing functionality of related business roles. Technology thus changes business.
Fourthly, some technology developments may also open up possibilities of new service, like it has been for
credit cards or biometric micro ATMs and nationwide ATM switch.
Lastly, overall technology advancements quicken and improve speed of message exchanges, enables real time
multi –functionary participation for business decision, etc. These type of common infrastructural improvements
improve and enrich business, including banking, catalysing widespread small changes in ways to operate / plan /
act. This effect of technology slowly changing aspects of business always remains.
These seem to be the general features of the role of technology on banks, which perhaps will further
accentuate in the next decade.
A few dimensions of banks’ capacity to adopt technology, that impacts the role of technology in banks, are
also useful to understand here.
A new technological product at its arrival in the market often sees flurry of marketing activities. By vendor
interactions, bankers get idea of its capabilities. Many vendors offer new products adopting the same new
technology. At this stage, often, possible customers (say bank) develop heightened expectations and incomplete
knowledge. This is the ‘Hype Cycle’ phase of a product, after which things may settle, thoughts and understandings
crystallise and sober down, which further moderates after actual use of product. The same proven trend will most
likely be seen in play in the next decade also, hyped expectations of new technologies followed by sobering
actual experience.
Often a piece of a product or solution for a niche vertical of a business (say Interest Rate Risk Management
Package, or, a Nostro Account Reconciliation Tool) is developed by some small vendor and due to product’s merit,
a bank picks it up. It will need integration with rest of the banking system, that may leave a weak security link in
the first place. With change of technology in the main software, the small vendor may not be capable of re-
engineering the niche package. Further, with products like this, a situation of many disparate technical pieces at
work may arise. A new technology solution for some part of this (say even the Core Banking) even if available, may
not be possible to be adopted that easily, unless all the pieces can be technically brought at synch.
Sometimes a technological development may offer a better way to do things, but may need a structural change
in the solution calling for very major re-development that will need huge cost, time and effort, as also some
intermediate instability. This may not be desirable and not attempted; in most cases add-on solutions are placed
beside or as overlay, limiting technology adoption extent and speed.
Another situation is of a trend that some banks may often go for additional modules or products to be sourced from
existing vendors to minimise administrative problems, integration gaps or vendor conflicts. Unless, this present vendor
can graduate to the new technology, this bank will have a risk of wholesale systems changeover, huge learning and
integration loads to move to new technology, even if wished to have immediately. Same is the situation if a new
technology of choice, does not have servicing and support in the area of operation of an organization Also, the realm of
quick changes/additions in technological functionalities affects the pool of knowledge, skill, and so, spirit of the
manpower. With computerisation and new functionalities, those first exposed to / trained, may be better equipped to
handle the job. Old knowledge may get obsolete and the erstwhile ‘experts’ lose their skill, importance and even
work comfort, while new ‘experts’ arise- leading to workplace balance adjustment. For banks, continuous staff
training, update of training materials, work manuals, etc is a must to survive. Often failure to leverage latest
technology products well, can be due to poor implementation, data conversion errors, incomplete understanding,
absence of crucial data-fields that might not have been important earlier, etc. Data cleaning, deduplication etc.,
need to be done expeditiously, to enable good adoption and leveraging benefits of the fruits of technology progress.
The above trends and features perhaps will remain the features of the role of technology in banking, in the
next decade.
Technology adoption often is done to remain relevant in a changing age, doing what the competitors do. Banks with
bigger visions, knowledge culture, quick decisions, and early implementation are seen to be in a better position to be
able to articulate business plans and marketing pitch earlier and better in situations of change. This leadership often
makes a difference in market penetration and customer connect.
For the next decade, nobody can say if the present state of technical leaderships will continue as it is or there may be
change in rankings.
Following the above, we see that availability of technology alone is not going to cause adoption, adoption of a new
technology by a migration / switch-over does not mean successful use and leverage of a technology for best
business outcome.
The interplay of the factors above, and the newly arriving technologies will perhaps yield a set of mixed results
for impacts of the evolving technologies on the banks.
Now, as to the possible new technology interventions, we may consider a few important current tech-pieces
and the possible outcomes with them in the next decade: -
Blockchain – This has come following and intertwined with cryptocurrencies like Bitcoin. There are many
initiatives to use blockchain, but not necessarily in banking alone. The idea is of having the entire history of a
transaction data being available for encryption by the current user and leaving the whole chain available to the
next person in the transaction chain to process and then act similarly. This encryption will, so, fail, if any of
the previous record is tampered anywhere in the chain. The resulting data is, so to say, lying in a ’ public
ledger’ that no particular person (say Bank) involved in the transaction anywhere can alter.
This actually makes every participant equally responsible for data integrity of the whole chain, and no one like
a bank, is to solely assure all others in the system. This is so, as the purpose was to secure transaction outside
banks and Government, in Bitcoin type of cryptocurrencies.
Some banks have started projects on Block Chain technology. Block Chain, by its nature of open and
transparent community owned system to carry information (can be financial message, can be monetary
payment also), will have value in the public arena. For Banks, the questions will be whether to adopt it and
shift money transfers through it. If banks do not join will they be left out of some business? Are customers
otherwise wish to leave banks and shift to Block Chain based systems outside banking world?
A fair guess seems to be that as a technology based business process, Block Chain is here to stay. It is early to say
if its security cannot get breached or about other frauds around it. As it involves encryptions of entire data up to
the point of transaction by unknown/unregulated third parties, it will perhaps be used more for non-money
workflow jobs at banks. Fully bank-community owned blockchain as common channel for few banks can also come
up for some activities. Further, moves will be after RBI and Government position getting formed. Technology
alone creating trust outside legal and governmental controls, outside banking practices and established
international set ups, does not seem adequate for business.
Bitcoin etc. cryptocurrencies: - This item will be perhaps fair to be adopted only after RBI full clearance and
guidelines. These are money created without country’s control and also will remain so. The value of the
currency fluctuates abnormally and without relation to national or global economies, or transactions
underlying. May be for this fear only, most use of it are in illicit activities.
Marketplace Financing/Peer-to-Peer loans: - In this arrangement, people with surplus money can, through an
aggregator-cum-technical-platformprovider, lend it to any member. Accessing lender’s account for withdrawal,
appraisal model, loan delivery to borrower, recovery and accounting are in this intermediary’s web based platform.
Loan appraisal, purpose, end-use, follow up, etc are not like those of banks’. This is mostly an uncontrolled forum, easy
for participants, with minimum hassle, no journeys/ meetings, etc. and agreed risk taking.
What will the banks do? Lobby to RBI to remove this product? Develop a similar product from bank/s with relaxed
and automated procedures and try to capture a market slice? Package this product with others to create a foothold or
franchisee chain? Tie up with the existing or oncoming aggregators/service providers in the market and create a bigger
service including account-holders? Create franchisees of the intermediaries as their backend financiers. We really do
not know. The last two options perhaps may have more scope to get market acceptability.
Telcos, Mobile Payment platforms, e-payment vendors: - This does not need an introduction. With regulator support
and public preference, these new technologies based players (like say PayTM or PhonePe or Airtel Money or so many
others – the names indicate no preference), have taken away a chunk of remittance business from banks, due to their
obvious operational ease and simplicity. Banks have launched their own BHIM products to join this platform, though
these functionalities were mostly there in the banks already, spread around in menu options, biller arrangements, and
other parameters in the banks’ internet and mobile banking deliveries.
In the above disruptive developments, the new small players - nimble, fully on technology, and having very small
physical footprints, are able to plan, create and activate new services that take away customers from banks, and
affect banks’ business. Impact of technology is playing out here making these players the market makers or
customer acquirers putting the banks at background for customer to fetch /push money only optionally (otherwise,
the disruptors wallets do that). Banks face demands of being ready to develop complementary applications /
products to join them on the web/mobile or plug them in. Technology (or more customer centric deliveries on
technology), is pushing this role modification. This will perhaps further grow in scope and extent. These dynamics
may even lead the present set up into a different version with changes in roles, business rules, services and infra
–arrangements.
Cloud: - Cloud services and use, after slow start and hesitancy, is spreading. The most important motive seems
getting rid of lots of management overhead, and an expectation of saving costs in the long term. Public Cloud is
becoming the predominant format, leaving some crucial for Private Cloud. Till now, we cannot say if the expected
premise of ‘additional capacity on tap without limit’ sort of situations has really got tested; nor the measure of a
longer term cost savings.
Major rigours in auditing and certifying or grading the providers in the country have not yet been seen. Use of Cloud
is going to only increase. All what services will be in the cloud (SaaS, PaaS, IaaS, etc., and add on) and their
varieties and ranges will only increase. Client organisations’ capacity building in control, and oversight of Cloud
Providers are expected to get created somewhat. Information Security in the Cloud is another area upon which
client and regulatory activism is weak, but, expected to be seen. Data Centre quality support infrastructure in the
country need to improve in this period, for all these to happen, particularly as, now we expect to have a Data
Privacy law mandating data localisation (i.e. keep within the nation).
Biometrics, wearables etc.,
Biometrics is more used in low ticket Financial Inclusion products but, the big payments remain mostly as before, not
using safety of biometrics. Infrastructure creation and maintenance may perhaps be seen as the difficulty but, more
sensitivity to this issue may perhaps show that the call is actually not so tough. Further, for authentication and
invoking customer requests, the interaction front for customers may move, by customer preference, to biometrics
(say voice, hand) or wearables (smart watch, gadgets) Market will perhaps demand banks to get comfortable in
these diverse technologies and their integration into banking backend.
AI and Robotics: - In many services requiring much computation, crunching huge volume of data - machines have
started to be employed now, and use of Artificial Intelligence. Virtual Assistants and Chatbots are there in some
places. This start is not all pervasive and expected in the next decade to expand in scope and depth of coverage.
Robots are in use in large scale manufacturing industries to some extent, and some banks have started putting
Robots for limited guidance to customers. This trend is expected to increase.
Analytics and Big Data: - Customer Centricity is the favoured idea now. Customer information is considered the
source of business scope to direct banks’ efforts. This means offering granularly personalised product/services, say for
example, online loan with tailor-made terms of loan disbursal and repayment calendar. Change of product attributes,
introduction of new products, creating or accessing credit score online, and similar many changes are to be planned
and undertaken. Customer centricity will demand knowing the customer and studying customer habits for the bank
(mostly online activities). Repository of such data – will have to be used for analytic study of customer and then direct
messages, products etc. for that customer. The information acquired, and also many relevant environmental or
market information, will include Big Data (too huge to manipulate and include unstructured data), on which Business
Intelligence and Analytics need be performed. For this, Analytic and Data Science roles have started to get created,
activated and expertise grown. What has happened till now has been a start and the next decade is expected to see a
reasonable push in these areas Information Security: - Information Security challenges and diligences are expected to
expand well. As the future is predicated with non-bank nimble players with single products or small infrastructure, the
info security threat horizon expands significantly, bringing in the threats from gaps and compromises in the banks, the
non-bank tech players and online customers. The attack front, malware, defrauding tactics etc. will expand. Security
expertise, culture and compliances will be demanded more and more by the Regulators. Rigorous in-house security
routines and exercises, process security, App and Infra securities are to be practiced quite strongly. The SIEM centre in-
house or outsourced, have to be leveraged by granular check and immediate action on incidences. In-house expertise to
formulate and activate the granular security check components will remain a demand in the next decade. With Cloud
services spreading, in-house expertise and rigours of deriving assurances from the cloud set up and operations will also
be a big need in the next decade.
The banks are yet to involve the Security Heads in the top level planning of product or strategies to any reasonable
extent. Over time, security will have to be a key consideration for product, business process, employee ethics, and
business choices. This is expected to get initiated in the next decade.
Re-orienting bankers’ own attitude and understanding of business : - As the nature of ‘owning’ a customer,
customer loyalty, and the partner business entities are going for a churn, banks have to really internalise the market
threats and altered positioning of the bank over time. This will have to get reflected in altered processes, altered
control tasks, employee work manuals, in-house training materials, and overall attitude re-orientation at the top as
also in all layers below. Banks not willing to ride this wave
of changes, will run the risk of getting sidelined. Quite some services will get moved to machines from humans. The
customer facing exchanges in such scenarios as also problem handling, are to be planned and articulated. This
demand of self re-orientation and continuous agility for the bankers will perhaps get accentuated in the next
decade.
Re-orienting products, communication, etc., in the changing scenario: - The customers, especially the younger
generation have gone tech savvy. The platform of customer activity has moved reasonably from a bank counter to say
internet / mobiles. In the young customers’ world of Facebook or mobile games, ‘App’s and Virtual world, the
presentation and functionalities of items are very different than our banking world. A click takes him to the middle of
a game, another by its side opens study materials in a virtual library. Unknown e-entities are friends and persons to
share thoughts and trust. The same ease and wide canvas of versatile services waiting for a click, is not happening for
his banking, and despite having internet banking, the customer is not able to avail a loan in such short and effortless
activities of clicks with about no questions raised. How less taxing and harassing it can be made for him to buy a
service without risking the bank? This will not get solved by providing a link or so. This will call for change of product
properties, processing workflows, security checking sequences, etc. as also customer grading, recall and fact based
interactions online. With some virtual assistants or tailor-made modules, some automated routines are being put in
place in the industry very slowly. Expectedly, thorough and in-depth work in this area, involving lots of re-design, can
remain a need throughout the next decade.
We have considered possible areas of major activity in the next decade for banks now. Further, new disruptions can
appear. Some areas may have more activities than others depending on progress, early success, competition.
As a result of these multiple push and pull, the role of technology in banking will actively grow and transform,
in some combination of most of the factors above in the next decade. The extent of predominance of one factor
above other, is hard to guess, and will - as always, keep the future
unpredictable and, as well unknown.
6. Banking: Stepping into the next decade – Reinvention
A tidal wave of change is sweeping across the banking industry, transforming it and shaking its core foundations.
That wave is called Fin Tech and it is reshaping the world of financial services in general, and banking in particular.
The soaring expectations of customers spurred by GAFA (Google, Amazon, Facebook and Apple) and other Big Tech
firms seems to have been further whetted by Fin Tech firms, who have quickly stepped into the gap left by
traditional firms, and whose drive towards customer centricity and seamless and delightful customer experiences
seems to have forced incumbent players to re-assess what products they must offer and how those products must
be delivered to each and every customer in a personalized manner.
Fin Tech is a portmanteau of Financial Technology and refers to the innovative use of technology in the design and
delivery of financial services and products. Fin Tech mostly refers to the startup firms that spring up every other day
and challenge the might of traditional firms like Banks and other legacy financial institutions by offering low-cost,
innovative, seamless and personalized products to customers. But, that is not the right way to describe Fin Tech.
Fintech is an ecosystem consisting of all the players that are a part of it and are referred to as A’s and B’s and C’s
and D’s of Fin Tech. The A’s are the incumbent players in the financial services industry, like JP Morgan and Citi
Bank, while the B’s are the Big Tech firms like Google, Apple, Facebook, Amazon and Twitter. The C’s are the
companies that provide the infrastructure or technology that provides financial services like Visa, MasterCard,
Fiserv, First Data and exchanges like NASDAQ etc. The D’s are the Disruptors, the startups and the innovative
technology firms like Paydiant and Stripe (mobile payments), Lending Club and Prosper (Peer-to-Peer lending),
Moven (Retail Banking), Atom Bank (Business Loans), Mint and Personal Capital (Smart Budgeting and Personal
Finance) and Lemonade and Celo (Insurance).
What are the technologies and trends that power Fintech?
Open Banking is a financial services concept that refers to the use of APIs (Application Programming Interfaces) that
enables third-party service providers to build applications and services around the incumbent financial institutions. APIs
are simply third party applications that enable customers to talk to their banks. Open Banking got a new impetus
because of pressure from EU regulators with the enactment of the Revised Payment Services Directive (PSD2) which
allows Fintech firms to access the database of the incumbent banks and financial services firms. This is akin to a
financial earthquake, because customer data was a closely guarded fortress, and that was the ultimate competitive
advantage upon which traditional Banks held sway over predators. With Banks forced to provide access to third-party
processors (TPPs), the walls are crumbling and the monopoly of banks over customer data will end and the control will
shift to the rightful owners- the customers. The open banking initiative has many advantages. It will not only lead to
secure data exchange with TPPs but, will also enable them to use another very important technology, Artificial
Intelligence, to provide services in a more personalized way.
Artificial Intelligence (AI) combines three very important technologies-machine learning, natural language processing
and cognitive computing. The purpose of artificial intelligence is to transfer the complex thinking of humans into
machines using the algorithms of machine learning and natural language processing, to overcome the barriers of
scalability that humans face. Artificial intelligence enables machines to perform computations much faster than
humans can ever contemplate. How is AI relevant to banking? There many important applications that can transform
banking. First, chatbots are AI based software applications that mimics written or spoken human speech that
simulates a conversation with a real human. They are used to solve customer problems before human beings get
involved. AI can improve the Bank’s customer service exponentially. AI can aggregate all the information about the
customer and can tailor the interactions accordingly. Voice recognition and facial recognition could be used instead of
passwords or PIN to identify customers. A few banks are using voice powered devices like Amazon Echo, Google Home
and Apple’s Siri to drive their customer service. Second, AI has the potential to make banks smarter. It can study the
mass of data and reveal better customer insights and intelligence and thus, offer better customer experience, which
is key to differentiating banks. Suggestions offered to customers can be unique for every customer and timely. The
recommendations pop up just when the customer is about to take a decision. Third, AI can be used detect patterns
that ferrets out terrorist financing and money laundering activities, including financial fraud. Fourth, invisible robots
can carry out investment trades based on algorithms. AI will undoubtedly transform banking in many ways but, the
easiest to predict is that AI can cut costs substantially by eliminating almost 50 to 70 percent of the current jobs in
banking. AI works best with unstructured customer data-emails, recorded phone conversations, social media
interactions, and legal documents. AI manages this data and then applies analytics to glean hidden insights.
The third revolutionary technology that can radically change the face of banking is the Distributed Ledger Technology
or DLT as it is known. What is DLT? A distributed ledger is a digital database that is held and updated by each
participant in a consensual group. Each participant in the group is called a node (a computer terminal). The heart of
the DLT and this seems to be a sore point for banks is that each record is constructed independently and held by each
node without the intervention of a central registry or trusted third party. There is no central validating agent. Every
single node is responsible for processing every transaction and validating the same. Once there is a consensus, after
everyone has validated the transaction, the distributed ledger is updated and each node has a copy. The distributed
ledgers are dynamic and engender new kinds of relationships in the digital world. The key technological gain is that
the ledger is shared amongst parties that may not trust one another. The crux of DLT is how it sidesteps the trusted
intermediary (the banks) and completely avoids the cost of trust. DLT is a more robust and consensual trusted system.
A distributed ledger, thus, increases the speed of transactions and reduces their complexity because no third party is
required to validate the transactions. It enhances data accuracy and transparency because, all changes are consensual
and no single node can alter the data. DLT is highly resilient because there is no central database and hence, no single
point of attack. Privacy and safe storage can be handled with technologies such as asymmetric encryption,
asymmetric authentication and hashing. Block chain is one version of distributed ledgers and used mainly in
distributing cryptocurrencies.
DLT dealt a body blow to banks because, it completely negates the role of banks as trusted third parties. It is to
their credit that not only have banks accepted this radical change but, have moved away from the custodianship
of databases to leveraging the enormous benefits of extracting value from databases. So, how can Banks
leverage DLT? Banks have preferred to use private, permissioned, DLT, through which reading rights and
writing permission are given to those who have been pre-approved. This can be used by banks to give writing
permissions to fellow banks and viewing rights to select customers. The banking industry can use DLT for
efficient and cheaper KYC (Know-your-customer process), faster cross-border payments and improved
detection of money-laundering and financial frauds. Ripple net, is a block chain network that enables seamless
cross-border payments and has signed up about 100 clients, some of which are big names like Standard
Chartered Bank, Santander, Unicredit and UBS. Ripple net is a competitor to SWIFT. Bank Chain, an Indian
Block chain consortium has launched a new KYC system, Clear chain that facilitates sharing of KYC data of
customers amongst network participants. Other areas that can use DLT, are, clearing and settlement of
securities transaction on the bourses; the Australian Securities Exchange has decided to shift its securities
clearing and settlement to a block chain system. Trade Finance is another area which is tailor-made for
restructuring through DLT. The same set of information, bill of lading, letters of credit, commercial invoices
and insurance policies need to be accessed by different parties and block chain is the obvious solution. The
difficulty in block chaining trade finance is that in order to be reap its benefits, the entire ecosystem has to be
on boarded- the shipping companies, the freight forwarders, other transporters, insurance companies,
inspection agents, ports and customs. Block chain trade first, if you want to block chain trade finance. That
would be a remarkable effort, truly a game changer, if it succeeds.
However, DLT is yet to become mainstream because of some unresolved issues. Since, Distributed ledgers are cross-
border, how will they be regulated? Do they need to be audited? What happens if there is dispute? These
questions are unresolved but they are not insurmountable.
A fourth technology, the Internet of Things (IOT) has the capacity to revolutionize banking in myriad ways. Gartner
predicts that by 2020, there will be 25 billion connected devices and this shows how machine connectivity can be a
powerful force that alters societal behavior. Machine-to-machine connectivity can help banks to gather data about
customers and offer an enriched, contextual and personalized experience. It will be possible for Banks to identify a
customer through IOT and Artificial Intelligence, the moment a customer enters the branch and anticipate his
requirements. IOT can also help banks to track assets financed by the bank. However, IOT can pose major security
risks, including privacy issues for banks and this has to be managed.
Will banking and banks survive the onslaught of Fin Tech?
First, let us understand the unique position of the Bank in the financial markets. Banks have existed for so many
years, uncontested but, we need to understand why that moat might be breached. The primary model of banking is
based on three very important principles- Intermediation, Fractional Banking and Credit Creation. Banks primarily
issue liabilities in the form of checking accounts and fixed deposits and then originate non-marketable assets in the
form of loans. Since, the liabilities are highly liquid and may be withdrawn by depositors, it is possible that the
Bank might face a liquidity crisis. Banks have been able to manage this liquidity risk because they have the unique
advantage of information asymmetry or insider information about borrowers. They are able to predict future
outlays of funds and likelihood of satisfying those outflows because of insider information from borrowers.
Can the capabilities of deposit taking and lending be duplicated? Many Fin Techs and others like Mutual Funds
already offer deposit and transactional facilities and there is no bar on lending by non-banks. Also with requirement of
greater disclosures by corporates, insider information is no longer a competitive advantage for Banks. What if non-
banks offer deposit-taking and loaning services simultaneously? Can they replicate banks? The answer is not yet!!
One of the biggest competitive advantage Banks have is the facility of credit creation or creation of money. Credit
creation is possible because banks are “not” subject to “client money rules”. According to client money rules, non-
banks are required by statute to segregate customer deposits from their own monies and deposit customers monies
with a bank or an approved institution in segregated accounts. Banks are not subject to client money rules. This is
what enables them to create money and tide over liquidity mismatches by using one depositor’s funds to pay another
departing depositor. Non-banks are not able to do that. Can this unique advantage be lost?
Central Banks are already experimenting with the issue of digital money by using block chain technology. It should be
possible for Central Banks to, then, take over responsibility for all transaction accounts and allow transactions using
Distributed Ledger Technology. All Current and Savings Accounts (CASA), may then migrate from commercial banks to
Central Bank. Banks will then have to abide by client money rules and bid for deposits like other non-banks. Hence,
perhaps in the next decade, Banks will lose the ability to create money and that will end Banking as we know it. Banks
will then become just another financial services firm.
Banking and Banks as we know them, will never be the same again. There may be no bank branches, no tellers, no
cheques, no ATMs and perhaps no current and savings accounts and no credit cards. But, surely people will still need
to save money, take loans and perhaps make payments? How will it all change? Banks today, are in the same position
as stage coach
companies of the 1860s. It was possible to correctly predict then, that the market for transportation and travel would
rise by leaps and bounds; but it would have been grossly erroneous to predict such a growth in stage coaches. Banking
and Financial services will grow exponentially but will banks survive? That will depend upon how banks reinvent
themselves?
F. NPA & RECOVERY MANAGEMENT
1. RESOLUTION OF STRESSED ASSETS – PRUDENTIAL FRAMEWORK.

In view of the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), RBI has on June 7, 2019
substituted the existing guidelines with a harmonised and simplified generic framework for resolution of
stressed assets.  The extant instructions on resolution of stressed assets such as Framework for Revitalising
Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project
Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR, and Scheme for
Sustainable Structuring of Stressed Assets stand withdrawn with immediate effect. Accordingly, the Joint
Lenders‟ Forum as mandatory institutional mechanism for resolution of stressed accounts also stands
discontinued.  The lenders shall not reverse the provisions maintained as on April 2, 2019 in respect of any
borrower unless the reversal is a consequence of an asset classification upgrade or recovery or resolution
following these guidelines. Any RP under consideration as on 7th June, 2019 may be pursued by lenders under
this revised framework subject to meeting the requirements/conditions specified in this framework. 
APPLICABILITY: The directions are issued in terms of the provisions of Section 35AA of the Banking Regulation
Act, 1949, for initiation of insolvency proceedings against specific borrowers under the Insolvency and
Bankruptcy Code, 2016 (IBC). The Guidelines apply to Scheduled Commercial Banks (excluding RRBs); All India
Term Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI); Small Finance Banks; and, Systemically
Important Non-Deposit taking NonBanking Financial Companies (NBFC-ND-SI) and Deposit taking Non-Banking
Financial Companies (NBFC-D).
OBJECTIVES: For providing a framework for early recognition, reporting and time bound resolution of stressed
assets.
I) FRAMEWORK FOR RESOLUTION OF STRESSED ASSETS:
A) EARLY IDENTIFICATION AND REPORTING OF STRESS:
 Lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as
special mention accounts (SMA) as per the following categories:
SMA Basis for classification – Principal or interest payment or any other amount overdue
SubCategories between
SMA-0 1-30 days

SMA-1 31-60 days
SMA-2 61-90 days
In the case of revolving credit facilities like cash credit, the SMA sub-categories will be as follows:
SMA Basis for classification – Outstanding balance continuously in excess of the
SubCategories sanctioned limit or drawing power, whichever is lower, for a period of:
SMA-1 31-60 days

SMA-2 61-90 days
 Banks shall report credit information, including classification of an account as SMA to Central Repository of
Information on Large Credits (CRILC), on all borrowers having aggregate exposure of Rs. 50 million (Rs. 5 crore)
and above with them.  The CRILC-Main Report shall be submitted on a monthly basis. In addition, the lenders
shall submit a weekly report of instances of default by all borrowers (with aggregate exposure of Rs. 50 million
and above) by close of business on every Friday, or the preceding working day if Friday happens to be a
holiday.
B) IMPLEMENTATION OF RESOLUTION PLAN (RP):
 Resolution Plan (RP): All lenders must put in place Board-approved policies for resolution of stressed assets,
including the timelines for resolution. Since default with any lender is a lagging indicator of financial stress
faced by the borrower, the banks should initiate the process of implementing a resolution plan (RP) even
before a default.
 Review Period: Once a borrower is reported to be in default by any of the lenders, they should undertake a
prima facie review of the borrower account within thirty days from such default (“Review Period”). During this
Review Period of thirty days, lenders may decide on the resolution strategy, including the nature of the RP,
the approach for implementation of the RP, etc. The lenders may also choose to initiate legal proceedings for
insolvency or recovery.
 Inter-Creditor Agreement (ICA):  In cases where RP is to be implemented, all lenders shall enter into an
intercreditor agreement (ICA), during the above-said Review Period, to provide for ground rules for finalisation
and implementation of the RP in respect of borrowers with credit facilities from more than one lender.  The
ICA shall provide that any decision agreed by lenders representing 75% by value of total outstanding credit
facilities (fund based as well non-fund based) and 60% of lenders by number shall be binding upon all the
lenders.  The ICA may, provide for rights and duties of majority lenders, duties and protection of rights of
dissenting lenders, treatment of lenders with priority in cash flows/differential security interest, etc. In
particular, the RPs shall provide for payment not less than the liquidation value due to the dissenting lenders.
 ‘Reference Date‟:  In respect of accounts with aggregate exposure above a threshold with the lenders, on
or after the „reference date‟, RP shall be implemented within 180 days from the end of Review Period.  The
Review Period shall commence not later than the reference date, if in default as on the reference date; or the
date of first default after the reference date.
The Reference dates for the above purpose shall be as under:
AGGREGATE EXPOSURE OF THE BORROWER TO LENDERS Reference Date
Rs. 20 billion and above Date of these Directions
Rs. 15 billion and above, but less than Rs. 20 billion January 1, 2020
Less than Rs. 15 billion To be announced in due course
 The RP may involve any action / plan / reorganization including, but not limited to, regularisation of the
account by payment of all overdues by the borrower entity, sale of the exposures to other entities / investors,
change in ownership and restructuring. The RP shall be clearly documented by the lenders concerned (even if
there is no change in any terms and conditions).
C) IMPLEMENTATION CONDITIONS FOR RP:  RPs involving restructuring / change in ownership in respect of
accounts where the aggregate exposure of lenders is Rs. 1 billion and above, shall require independent credit
evaluation (ICE) of the residual debt by credit rating agencies (CRAs) specifically authorised by the RBI for this
purpose.  While accounts with aggregate exposure of Rs. 5 billion and above shall require two such ICEs,
others shall require one ICE.  Only such RPs which receive a credit opinion of RP4 or better for the residual
debt from one or two CRAs, as the case may be, shall be considered for implementation. Further, ICEs shall be
subject to the following:  The CRAs shall be directly engaged by the lenders and the payment of fee for such
assignments shall be made by the lenders. If lenders obtain ICE from more than the required number of CRAs,
all such ICE opinions shall be RP4 or better for the RP to be considered for implementation.  RP deemed to
be Implemented: In respect of borrowers to whom the lenders continue to have credit exposure, shall be
deemed to be „implemented‟ only if the following conditions are met:
a) A RP which does not involve restructuring / change in ownership shall be deemed to be implemented only if
the borrower is not in default with any of the lenders as on 180th day from the end of the Review Period. Any
subsequent default after the 180 day period shall be treated as a fresh default, triggering a fresh review.
b) A RP which involves restructuring / change in ownership shall be deemed to be implemented only if all of
the following conditions are met:  All related documentation, including execution of necessary agreements
between lenders and borrower / creation of security charge / perfection of securities, are completed by the
lenders concerned in consonance with the RP being implemented;  The new capital structure and / or changes
in the terms of conditions of the existing loans get duly reflected in the books of all the lenders and the
borrower; and,  Borrower is not in default with any of the lenders.
c) A RP which involves lenders exiting the exposure by assigning the exposures to third party or a RP involving
recovery action shall be deemed to be implemented only if the exposure to the borrower is fully extinguished.
D) DELAYED IMPLEMENTATION OF RESOLUTION PLAN:
 Additional Provisions: Where a viable RP in respect of a borrower is not implemented within the timelines
given below, all lenders shall make additional provisions as under:
Timeline for implementation of viable RP Additional provisions to be made as a % of total outstanding,
if RP not implemented within the Timeline
180 days from the end of Review Period 20%
365 days from the commencement of 15% (i.e. total additional provisioning of 35%)
Review Period
The additional provisions shall be made over and above the higher of the following, subject to the total
provisions held being capped at 100% of total outstanding:
a) The provisions already held; or, b) The provisions required to be made by all the lenders with exposure as
per the asset classification status of the borrower account.
 Reversal of Additional Provisions: The above additional provisions may be reversed as under: a) Where the
RP involves only payment of overdues by the borrower, the additional provisions may be reversed only if the
borrower is not in default for a period of 6 months from the date of clearing of the overdues with all the
lenders; b) Where RP involves restructuring / change in ownership outside IBC, the additional provisions may
be reversed upon implementation of the RP; c) Where resolution is pursued under IBC, half of the additional
provisions made may be reversed on filing of insolvency application and the remaining additional provisions
may be reversed upon admission of the borrower into the insolvency resolution process under IBC; or, d) Where
assignment of debt/recovery proceedings are initiated, the additional provisions may be reversed upon
completion of the assignment of debt / recovery.
E)PRUDENTIAL NORMS APPLICABLE TO RESTRUCTURING /CHANGE IN OWNERSHIP UNDER IBC FRAMEWORK
OR OUTSIDE THE IBC:  Restructuring is an act in which a lender, for economic or legal reasons relating to the
borrower's financial difficulty, grants concessions to the borrower.  Restructuring may involve modification of
terms of the advances / securities, which would generally include, among others, alteration of payment period
/ payable amount / the amount of instalments / rate of interest; roll over of credit facilities; sanction of
additional facility/ release of additional funds for an account in default to aid curing of default / enhancement
of existing credit limits; compromise settlements where time for payment of settlement amount exceeds three
months. In order to enable lenders to frame respective policies for determination of financial difficultly, RBI
has provided nonexhaustive indicative list of signs of financial difficulties: a) A default, as per the definition
provided in the framework, shall be treated as an indicator for financial difficulty, irrespective of reasons for
the default. b) A borrower not in default, but it is probable that the borrower will default on any of its
exposures in the foreseeable future without the concession, for instance, when there has been a pattern of
delinquency in payments on its exposures. c) A borrower‟s outstanding securities have been delisted, are in the
process of being delisted, or are under threat of being delisted from an exchange due to noncompliance with
the listing requirements or for financial reasons. d) On the basis of actual performance, estimates and
projections that encompass the borrower‟s current level of operations, the borrower‟s cash flows are assessed
to be insufficient to service all of its loans or debt securities (both interest and principal) in accordance with
the contractual terms of the existing agreement for the foreseeable future. e) A borrower‟s credit facilities are
in non-performing status or would be categorised as nonperforming without the concessions. f) A borrower‟s
existing exposures are categorised as exposures that have already evidenced difficulty in the borrower‟s ability
to repay in accordance with the bank‟s internal credit rating system. The Bank should complement the above
with key financial ratios and operational parameters which may include quantitative and qualitative aspects.
1) PRUDENTIAL NORMS: A) Asset Classification:  In case of restructuring, the accounts classified as 'standard'
shall be immediately downgraded as non-performing assets (NPAs), i.e., „sub-standard‟ to begin with.  The
NPAs, upon restructuring, would continue to have the same asset classification as prior to restructuring.  In
both cases, the asset classification shall continue to be governed by the ageing criteria as per extant asset
classification norms.
B) Conditions for Upgrade:  Standard accounts classified as NPA and NPA accounts retained in the same
category on restructuring by the lenders may be upgraded only when all the outstanding loan / facilities in the
account demonstrate „satisfactory performance during the period from the date of implementation of RP up to
the date by which at least 10 per cent of the sum of outstanding principal debt as per the RP and interest
capitalisation sanctioned as part of the restructuring, if any, is repaid („monitoring period‟).  The account
cannot be upgraded before one year from the commencement of the first payment of interest or principal
(whichever is later) on the credit facility with longest period of moratorium under the terms of RP.
Additionally, for accounts where the aggregate exposure of lenders is Rs. 1 billion and above at the time of
implementation of RP, to qualify for an upgrade, in addition to demonstration of satisfactory performance, the
credit facilities of the borrower shall also be rated as investment grade (BBB- or better), at the time of
upgrade, by CRAs accredited by the RBI for the purpose of bank loan ratings.  While accounts with aggregate
exposure of Rs. 5 billion and above shall require two ratings, those below Rs. 5 billion shall require one rating.
If the ratings are obtained from more than the required number of CRAs, all such ratings shall be investment
grade for the account to qualify for an upgrade.  If the borrower fails to demonstrate satisfactory
performance during the monitoring period, asset classification upgrade shall be subject to implementation of a
fresh restructuring/ change in ownership under this Framework or under IBC.  Lenders shall make an
additional provision of 15% for such accounts at the end of the Review Period. This additional provision, along
with other additional provisions, may be reversed as per the norms specified above.  Provisions held on
restructured assets may be reversed when the accounts are upgraded to standard category.  Any default by
the borrower in any of the credit facilities with any of the lenders (including any lender where the borrower is
not in “specified period”) subsequent to upgrade in asset classification as above but before the end of the
specified period, will require a fresh RP to be implemented within the above timelines as any default would
entail. However, lenders shall make an additional provision of 15% for such accounts at the end of the Review
Period.  “Specified period” means the period from the date of implementation of RP up to the date by which
at least 20% of the sum of outstanding principal debt as per the RP and interest capitalisation sanctioned as
part of the restructuring, if any, is repaid.
C) Provisioning Norms:
 Accounts restructured under the revised framework shall attract provisioning as per the extant guidelines on
Asset Classification and Provisioning.  In respect of accounts of debtors where a final RP, as approved by the
Committee of Creditors, has been submitted by the Resolution Professional for approval of the Adjudicating
Authority (in terms of section 30(6) of the IBC), lenders may keep the provisions held as on the date of such
submission of RP frozen for a period of six months from the date of submission of the plan or up to 90 days
from the date of approval of the resolution plan by the Adjudicating Authority in terms of section 31 (1) of the
IBC, whichever is earlier.  The above facility of freezing the quantum of the provision shall be available only
in cases where the provisioning held by the lenders as on the date of submission of the plan for approval of the
Adjudicating Authority is more than the expected provisioning required to be held in the normal course upon
implementation of the approved resolution plan, taking into account the contours of the resolution plan
approved by Committee of Creditors/ Adjudicating Authority, as the case may be, and extant prudential
norms.  However, lenders shall not reverse the excess provisions held as on the date of submission of the
resolution plan for approval of the Adjudicating Authority at this stage.  In cases where the provisioning held
is lower than the expected required provisioning, lenders shall make additional provisioning to the extent of
the shortfall. Subsequent to the lapse of above mentioned period, provisioning shall be as per the extant
guidelines on Asset Classification and Provisioning.  The facility of freezing of provisions shall also lapse
immediately if the Adjudicating Authority rejects the resolution plan thus submitted. Asset classification in
respect of such borrower shall continue be governed by the extant asset classification norms.
D) Additional Finance:  Any additional finance approved under the RP (including any resolution plan approved
by the Adjudicating Authority under IBC) may be treated as 'standard asset' during the monitoring period under
the approved RP, provided the account demonstrates satisfactory performance - that the borrower entity is not
in default at any point of time during the period concerned) during the monitoring period.  If the
restructured asset fails to perform satisfactorily during the monitoring period or does not qualify for up-
gradation at the end of the monitoring period, the additional finance shall be placed in the same asset
classification category as the restructured debt.  Similarly, any interim finance extended by the lenders to
debtors undergoing insolvency proceedings under IBC may be treated as „standard asset‟ during the insolvency
resolution process period as defined in the IBC. During this period, asset classification and provisioning for the
interim finance shall be governed as per the extant guidelines on Asset Classification and Provisioning. 
Subsequently, upon approval of the resolution plan by the Adjudicating Authority, treatment of such interim
finance shall be as per the norms applicable to additional finance.
E) Income Recognition Norms:  Interest income in respect of restructured accounts classified as 'standard
assets' may be recognized on accrual basis and that in respect of the restructured accounts classified as
'nonperforming assets' shall be recognised on cash basis.  In the case of additional finance in accounts where
the prerestructuring facilities were classified as NPA, the interest income shall be recognised only on cash basis
except when the restructuring is accompanied by a change in ownership.
F) Conversion of Principal into Debt / Equity and Unpaid Interest into 'Funded Interest Term Loan' (FITL),
Debt or Equity Instruments:  An act of restructuring might create new securities issued by the borrower
which would be held by the lenders in lieu of a portion of the pre-restructured exposure. The FITL / debt /
equity instruments created by conversion of principal / unpaid interest, as the case may be, shall be placed in
the same asset classification category in which the restructured advance has been classified.  The provisioning
applicable to such instruments shall be the higher of: a) The provisioning applicable to the asset classification
category in which such instruments are held; or b) The provisioning applicable based on the fair valuation of
such instruments.
Debt / Quasi-debt / equity instruments acquired by the lenders as part of a RP shall be valued as under:
a) Debentures/ bonds and conversion of debt into Zero Coupon Bonds (ZCBs) / low coupon bonds (LCBs) shall
be valued as per the extant instructions on Classification, Valuation and Operation of Investment Portfolio by
Banks. b) Equity instruments, where classified as standard, shall be valued at market value, if quoted, or else,
should be valued at the lowest value. ) Equity instruments, where classified as NPA shall be valued at market
value, if quoted, or else, shall be collectively valued at Re.1. d) Preference Shares shall be valued on
discounted cash flow (DCF) basis.
G) Change in Ownership:  In case of change in ownership of the borrowing entities, credit facilities of the
concerned borrowing entities may be continued/upgraded as „standard‟ after the change in ownership is
implemented, either under the IBC or under this framework.  If the change in ownership is implemented
under this framework, then the classification as „standard‟ shall be subject to the following conditions: a)
Lenders shall conduct necessary due diligence in this regard and clearly establish that the acquirer is not a
person disqualified in terms of Section 29A of the IBC. b) Additionally, the „new promoter‟ should not be a
person/entity/subsidiary/associate etc. (domestic as well as overseas), from the existing promoter/promoter
group. c) Lenders should clearly establish that the acquirer does not belong to the existing promoter group as
defined in SEBI guidelines. d) The new promoter shall have acquired at least 26 per cent of the paid up equity
capital as well as voting rights of the borrower entity and shall be the single largest shareholder of the
borrower entity. e) The new promoter shall be in „control‟ of the borrower entity as per the definition of
„control‟ in the Co‟s Act, 2013.  Upon change in ownership,all the outstanding loans/credit facilities of the
borrowing entity need to demonstrate satisfactory performance during the monitoring period. If the account
fails to perform satisfactorily at any point of time during the monitoring period,it shall trigger a fresh Review
Period.  The quantum of provisions held (excluding additional provisions) by the bank against the said account
as on the date of change in ownership of the borrowing entities can be reversed only after the end of
monitoring period subject to satisfactory performance during the same.
2) PRINCIPLES ON CLASSIFICATION OF SALE AND LEASE BACK TRANSACTIONS AS RESTRUCTURING: A sale
and leaseback transaction of the assets of a borrower or other transactions of similar nature will be treated as
an event of restructuring for the purpose of asset classification and provisioning in the books of lenders with
regard to the residual debt of the seller as well as the debt of the buyer if all the following conditions are met:
a) The seller of the assets is in financial difficulty; b) Significant portion, i.e more than 50 per cent, of the
revenues of the buyer from the specific asset is dependent upon the cash flows from the seller; and c) 25% or
more of the loans availed by the buyer for the purchase of the specific asset is funded by the lenders who
already have a credit exposure to the seller.
3) PRUDENTIAL NORMS RELATING TO REFINANCING OF EXPOSURES TO BORROWERS: If borrowings/export
advances (denominated in any currency, wherever permitted) for the purpose of repayment/refinancing of
loans denominated in same/another currency are obtained: a) From lenders who are part of Indian banking
system (where permitted); or b) With the support (where permitted) from the Indian banking system in the
form of Guarantees/Standby Letters of Credit/Letters of Comfort, etc., such events shall be treated as
„restructuring‟ if the borrower concerned is under financial difficulty.
(i) Supervisory Review:  Any action by lenders with an intent to conceal the actual status of accounts or
evergreen the stressed accounts, will be subjected to stringent supervisory / enforcement actions as deemed
appropriate by the RBI, including, but not limited to, higher provisioning on such accounts and monetary
penalties.
(ii) Disclosures:  Lenders shall make appropriate disclosures in their financial statements, under „Notes on
Accounts‟, relating to RPs implemented.
(iii) Exceptions:  Restructuring in respect of projects under implementation involving deferment of date of
commencement of commercial operations (DCCO) shall continue to be covered under „Prudential norms on
Income Recognition, Asset Classification and Provisioning pertaining to Advances‟.  The framework shall not
be applicable to revival and rehabilitation of MSMEs.  Restructuring of loans in the event of a natural
calamity, including asset classification and provisioning, shall continue to be guided as per the extant
instructions.  The framework shall not be available for borrower entities in respect of which specific
instructions have already been issued or are issued by the RBI to the banks for initiation of insolvency
proceedings under the IBC. Lenders shall pursue such cases as per the specific instructions issued to them.
REGULATORY EXEMPTIONS:
Exemptions from RBI Regulations:  Acquisition of non-SLR securities by way of conversion of debt is
exempted from the restrictions and the prudential limit on investment in unlisted non-SLR securities prescribed
by the RBI.  Acquisition of shares due to conversion of debt to equity during a restructuring process will be
exempted from regulatory ceilings/restrictions on Capital Market Exposures, investment in Para-Banking
activities and intra-group exposure. However, these will require reporting to RBI (reporting to DBS, CO every
month along with the regular DSB Return on Asset Quality) and disclosure by banks in the Notes to Accounts in
Annual Financial Statements. However, banks will have to comply with the provisions of Section 19(2) of the
Banking Regulation Act, 1949.
CASES OF FRAUDS/WILFUL DEFAULTERS:  Borrowers who have committed frauds / malfeasance / wilful
default will remain ineligible for restructuring.  However, in cases where the existing promoters are replaced
by new promoters, and the borrower company is totally delinked from such erstwhile promoters/management,
Banks may take a view on restructuring such accounts based on their viability, without prejudice to the
continuance of criminal action against the erstwhile promoters/management.
MARKET REACTION: Legal experts and analysts have welcomed the new RBI framework for NPA resolution
saying that the new norms offer leeway to both capital-starved lenders as well as borrowers at the same time
ensure that credit discipline is maintained. It provides relief to businesses facing temporary financial issues,
empower lenders to take decisions, improve credit availability in the economy and protect jobs, thereby
boosting the economy.
SYMBOLS ICE SYMBOLS / DEFINITION
RP1 Debt facilities/instruments with this symbol are considered to have the highest degree of safety
regarding timely servicing of financial obligations. Such debt facilities/instruments carry lowest
credit risk.
RP2 Debt facilities/instruments with this symbol are considered to have high degree of safety
regarding timely servicing of financial obligations. Such debt facilities/instruments carry very
low credit risk.
RP3 Debt facilities/instruments with this symbol are considered to have adequate degree of safety
regarding timely servicing of financial obligations. Such debt facilities/instruments carry low
credit risk.
RP4 Debt facilities/instruments with this symbol are considered to have moderate degree of safety
regarding timely servicing of financial obligations. Such debt facilities/instruments carry
moderate credit risk.
RP5 Debt facilities/instruments with this symbol are considered to have moderate risk of default
regarding timely servicing of financial obligations.
RP6 Debt facilities/instruments with this symbol are considered to have high risk of default
regarding timely servicing of financial obligations
RP7 Debt facilities/instruments with this symbol are considered to have very high risk of default
regarding timely servicing of financial obligations
2. Insolvency and Bankruptcy Code: A Big Game-Changer in Banking?
‘..defaulter‘s paradise is lost…economy‘s rightful position has been regained. ..’-Justice R F Nariman
The above are the words of Justice R F Nariman about the introduction of Insolvency and Bankruptcy Code
(IBC) in banking space. The bench consisting of Justice R F Nariman and Justice Navin Sinha of Supreme Court
of India has upheld the constitutional validity of IBC in Swiss Ribbons Private Limited and Anr. Vvs Union of
India & Orsi. While writing the judgement, Justice R F Nariman observed that the experiment contained in IBC
had passed the constitutional muster. Justice R F Nariman further observed that to stay experimentation in
economic affairs is a grave responsibility and denial of the right to experiment is fraught with serious
consequences to the nation.
The introduction of IBC was termed as the most powerful weapon in the hands of the bankers to reduce the
frightening level of non-performance assets (NPAs). It is expected that the IBC will change the game plan of
NPA Management in the Indian banking space. Main objectives of the code are time-bound reorganisation,
maximisation of value of assets, promote entrepreneurship, availability of credit and balance interests of all
stakeholders. The first order objective is resolution. The second-order objective is maximisation of value of
assets of the firm, and the thirdorderobjective is promoting entrepreneurship, availability of credit and
balancing the interests.
The euphoria around IBC may prompt many to ask – whether IBC is a big game-changer in banking space vis-àvis
the previous recovery laws such as Civil Courts, Debt Recovery Tribunal (DRT) Act and Securitisation and
Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act? Prior to IBC,
Indianbanking space was being dominated by legal measures such as Civil Courts, DRT Act and SARFAESI Act.
These measures have been extensively used by Indian Bankers to bring down the level of NPA.
A diagrammatical representation of the evolution of recovery laws is given in Figure 1.
As represented in Figure 1, the evolution of recovery laws in the banking sector can be grouped primarily into
four basic stages. During stage-I, only remedy available with the bankers was to approach the Civil Courts.
During this period, bankers were required to wait for long years to obtain decrees and execute the decrees. As
the Civil Courts Comparative analysis of IBC – SARFAESI – DRT -Civil Courts Though IBC, SARFAESI, DRT and Civil
Courts have got its own uniqueness in enabling the bankers to recover their dues, an attempt is made here to
do a comparative analysis by touching upon the fundamental core competitiveness of the above-said acts.
IBC – Paradigm shift from ‘debtor-in-possession’ to ‘creditor-in-control’
The biggest advantage of the IBC is the paradigm shift in taking the possession of the assets from the corporate
debtor to the creditors. This behavioural change has made phenomenon change in the prescription of the
borrowers towards recovery laws. This new scenario has been aptly described by the former Finance Minister
Arun Jaitley in his blog that IBC has changed the debtor-creditor relationship – creditor no longer chases the
debtor – it is otherwise – those who drive the companies to insolvency, exit from management.
IBC – Recognises spirit of entrepreneurship
India is one of the youngest republics in the world with a high concentration of the most dynamic
entrepreneurs.
IBC may be the first Act which recognises the spirit of entrepreneurship. The economy of any country shall
flourish only if it recognises the spirit of entrepreneurship.
The contribution of Silicon Valley in the growth of the United States is immense and laudable. It is not
surprising that most of the tech companies which rule the world today started their journey from Silicon
Valley.
In fact, SICA and Board for Industrial and Financial Reconstruction (BIFR) had been formulated to treat the
liquidation of assets of the business only after it lost all its value. In stark contrast to such an approach, IBC
has been formulated to treat the business of borrower as a going concern. IBC envisaged business continuity
concept and moratorium was introduced to enable the smooth transition of business. By rescuing viable
businesses and closing nonviableones, the Code releases the entrepreneurs from failure. It enables them to get
in and get out of business with ease, undeterred by failure.
IBC – Recognises judicial hands-off
It is judicially accepted norm that in the matter of economic legislation, Courts will interfere only if it is
absolutely necessary. IBC has recognised the concept of Judicial hands-off, which means lesser judicial
interference.
In IBC, it is interesting to understand that judiciary wing under IBC, ie Adjudicating Authority (AA) has no role
to play in approval or rejection of resolution plan- it is purelya financial decision to be taken by financial
creditors. The role of judiciary is limited to judicial adjudication and not on credit-related matters.
IBC – Recognises the dominant role of creditors The concept of crown debts and its priority over banker’s rights
has been a debating issue for long in banking circle.
The bankers fought several rounds of litigation with government / tax authorities for getting the priority rights.
It is a relief for bankers that the IBC recognised their priority rights over government dues. Though section 31B
of the Recovery of Debts and Bankruptcy Act and section 26 E of SARFAESI Act accorded the right of priority to
bankers over government dues vide amendment made on 1st September, 2016, we are yet to witness
substantial progress in this regard.
However, IBC has accorded not only priority rights to bankers but also accorded low priority to government
dues in specific terms – unlike Companies Act, 2013 where government dues are being paid alongside
employees and unsecured financial creditors. Now, government dues are being paid after secured creditors,
unsecured creditors, employees, and workmen. IBC viewed government only as a facilitator and regulator and
not an active participant in the affairs of commercial entities.
IBC – Expediting decision-making process
The credit decisions to be made by banks under IBC were instantaneous and quick compared to the time-
consuming decisions bankers used to take during previous regimes.
Going by the level of hierarchy in PSBs, taking an instantaneous decision is quite difficult. Banks were forced to
take quick calls on huge haircuts. However, it is amazing to see that even PSBs have lived up to expectations
and deliver decisions within the given time frame of the IBC.
The Code endeavours resolution of insolvency at the earliest, preferably at the very first default, to prevent it
from ballooning to un-resolvable proportions. In the early days of default, enterprise value is typically higher
than the liquidation value, and hence the stakeholders would be motivated to resolve insolvency of the firm
rather than liquidate it. Therefore, it entitles the stakeholders to initiate Corporate Insolvency Resolution
Process (CIRP) as soon as there is threshold amount of default.
IBC – Time is the essence
The Code mandates resolution in a time-bound manner, as undue delay is likely to reduce the enterprise value
of the firm. When the firm is not in sound financial health, prolonged uncertainty about its ownership and
control maymake the possibility of resolution remote. Time is the essence of the Code. It provides a mandatory
timeline of 180 days for Committee of Creditors (CoC) to conclude CIRP, extendable by a one-time extension of
up to 90 days.
One of the biggest challenges with respect to the litigation in India is the uncertainty over the time period of
disposal of cases. Though both DRT / SARFAESI proceedings stipulated time limit for disposal of appeals /
applications, seldom it happens. The failure to comply with the time limit is reflected in majority of cases. It
appears that the time-bound resolution process under the IBC is more realistic. IBC recognises that speed is the
essence of its proceedings.
An analysis of the status of admitted claims, approved resolution plans and liquidation proves that the IBC is
really delivering results. It is reported that a total number of 1858 CIRPs have been admitted by National
Company Law Tribunals (NCLTs), out of which resolution plan of 94 have been approved by the CoC and NCLT.
In 378 cases, since a resolution plan could not work out, liquidation process has been commenced. A
diagrammatical representation of the above analysis is given in Figure 2.
IBC – No more stay orders
In previous recovery regime, the borrowers / guarantors could obtain stay orders frequently and continued to
remain in possession on the strength of stay orders for a long period. However, under the IBC, borrowers /
guarantors finding it difficult to obtain stay orders and even if it was obtained it was short-lived. The
borrowers / guarantors realised that there was no way out from ‘losing control of business’ on admission of
application.
IBC – Option to select better and efficient managers Under IBC, the financial creditors were given liberty to
select better and efficient managers to run debtor company in stark contrast to previous regimes where the
same borrower who has failed on multiple occasions have been given further chance to run the company. The
SICA (Special Provisions), 1985, which made provision for rehabilitation of sick companies and repayment of
loans availed by them, were found to have completely failed.
IBC – Separation of powers between commercial and judicial domains
The Code separates commercial aspects of insolvency and bankruptcy proceedings from judicial aspects. Under
IBC, the Adjudicatory Authority has been given only powers to pass judicial decisions and not on credit
decisions. The financial creditors have been given absolute freedom to accept or reject a resolution
application.
The Civil Court / DRT / SARFAESI have envisaged judicial centric proceedings leaving little role for other
stakeholders. However, under IBC, important roles have been provided to financial creditors and operational
creditors and corporate debtors. Under DRT / SARFAESI, courts control the entire process of resolution /
recovery, leaves no scope for decision making by stakeholders. The failure is being penalised under previous
regime apart from prescribing cumbersome legal proceedings.
The Code segregates commercial aspects of insolvency resolution from judicial aspects and empowers the
stakeholders and AA to decide matters within their respective domain expeditiously. It puts the entire process
at the disposal of the stakeholders and motivates them with incentives and disincentives to complete the
process at the earliest. The commercial decisions of the CoC are not generally open to any analysis, evaluation
or judicial review by the AA or the appellate authority.
IBC – More realistic approach
It is unrealistic to believe that all business enterprises will succeed and generate income and earn a profit.
Many business enterprises ought to fail due to factors which are beyond one’s own control. So, more realistic
approach would be to admit business failures and formulate legal framework to provide quick solution to such
failures. The previous recovery laws concentrate its attention more on recovery of debts rather than re-
organisation or restructure of business enterprises.
IBC has envisaged a more realistic approach towards revival of the business units. It envisaged a mechanism
whereby the management of firm and its assets vest in aninsolvency professional (IP), who runs the firm as a
going concern and a CoC is constituted to evaluate options for the firm. The IP invites feasible and viable
resolution plans from eligible and credible resolution applicants for resolution of insolvency of the firm. If the
CoC approves a resolution plan within the stipulated time with 66 percent majority, the firm continues as a
going concern.
If the CoC does not approve a resolution plan with the required majority within this period, the firm
mandatorily undergoes liquidation. The Code makes an attempt, by divesting the erstwhile management of its
powers and vesting them in a professional, to continue the business of the firm as a going concern until a
resolution plan is drawn up. Then the management is handed over under the plan so that the firm can pay back
its debts and get back on its feet. All this is done within a period of 6 months with a one-time extension of up
to 90 days or else liquidation process begins.
IBC- Going concern concept
The Code envisages resolution of the firm as a going concern, as the closure of the firm destroys organisational
capital and renders resources idle till reallocation to alternate uses and make the possibility of resolution
remote. It, therefore, facilitates continued operation of the firm as a going concern during CIRP, which is
paradigm shift from the previous recovery laws. It makes available a cadre of competent and empowered Ips to
manage the affairs of the firm under resolution as a going concern, to protect and preserve the value of its
property, help in retrieval of value lost through fraudulent and preferential transactions and assist the CoC to
arrive at the best resolution plan. In previous recovery regimes, concept of going concern and person to
manage the affairs of the ailing company or firm were absent.
In order to ensure the smooth management of the corporate debtor, IBC mandates the firm, its promoters and
any other person associated with its management to extend all assistance and cooperation to the IP. It
envisages information utilities to make available authentic information required for completing the process
expeditiously. It enables raising interim finances and includes the cost of interim finance in insolvency
resolution process cost, which has got more priority. It envisages moratorium on institution or continuation of
suits or proceedings against the firm during the resolution period. It prohibits suspension or termination of
supply of essential services to the firm to keep it going. It prohibits any action to foreclose, recover or enforce
any security interest during CIRP and thereby prevents a creditor(s) from maximising its individual interest. So,
altogether, IBC provides a different experience from the previous recoverylaws. IBC values entrepreneurship,
while previous regimes look at default company / firm merely as physical assets for recovery only.
IBC- Instils a better sense of credit discipline IBC has instilled a better sense of credit discipline as there is a
sense of urgency and seriousness among defaulting borrowers because of losing their asset is much a possibility
if the resolution process fails. This gets reflected in slower accretion of new NPAs or bad loans in the Indian
banking system. Credit Rating Information Services of India Limited (CRISIL) estimates that the banking sector’s
gross NPA has declined to 10 percent in the end- March 2019 from 11.5 percent the year before.
IBC – Projects team efforts
There are many players having defined, complementary roles for completion of the process. It is a team
responsibility to complete the process in time, though one has the prime responsibility for a task in the
process. IBC doesn’t envisage an adversarial system of proceeding. There are no pleading or defending parties,
and the terminologies like petitioner, respondent, plaintiff and defendant are not present under the Code.
However, in previous recovery regimes, team efforts were absent, and it was a legal fight between bankers on
the one hand and borrowers / guarantors on the other hand.
IBC balances the interests of stakeholders in the resolution process. It aims to balance the interests of all
stakeholders and does not maximise value for Financial Creditors (FC).
Since it does not envisage recovery during CIRP, it does not provide for a waterfall in the distribution of
recovered amount among the creditors, as it provides the order of priority for distribution of proceeds from
sale ofliquidation assets. It, however, incorporates the principle of fair and equitable dealing of rights of all
stakeholders.
It is interesting to note that 920 numbers of CIRPs have been initiated by operational creditors, 718 by
financial creditors and 200 by the corporate debtor.
A diagrammatical representation of the proportion of the resolution process initiated by various creditors is
given in Figure 3. Under IBC, Resolution Professional plays an important role. While under SARFAESI and DRT,
there is no role for a resolution professional. At the most, receivers were appointed to take custody of the
assets of the borrowers / guarantors, but the role of such receivers is limited. They were not given the power
to prepare resolution plan or liquidate the borrower company.
IBC vs DRT / SARFAESI / Lok Adalat
• Recovery in real terms recent report by the Reserve Bank of India (RBI) on the trends and progress of
banking in India 2017-18 has shown an interesting comparison on the efficacy of the IBC in improving the
recovery rate and in providing the lenders with a better realisation in comparison to the erstwhile regime of
recovery laws. As per the CRISIL data reported in May, 2019, the recovery through the IBC was at INR 70,000
crore and twice the INR 35,000 crore recovered through previous resolution mechanisms like DRT, SARFAESI
and Lok Adalat. After taking into accounts the inputs received from RBI and CRISIL data, Figure 4 has been
prepared for better understanding of the recovery position of IBC vis-a-vis DRT, SARFAESI and Lok Adalat.
The secretary, Ministry of Corporate Affairs, Injeti Srinivas, Government of India has reported on 26th
December, 2018 that creditors recovered INR 49,783 crore or almost 56 percent of their admitted claims from
32 stressed companies where insolvency resolution plans were approved by the NCLT. He further stated that
IBC had catalysed the recovery of around INR 3 lac crore from various default cases, directly or indirectly,
since its inception in 2016.
It is reported that 3,500 cases involving defaults of INR 1.2 lac crore were withdrawn from the NCLTs before
applications were admitted by the AA, suggesting that creditors might have recovered money from debtors by
just issuing threats of the IBC. The NPAs worth another INR 45,000 – 50,000 crore were converted to standard
accounts after the borrowers had paid back, ostensibly due to fears of the IBC being invoked by the lenders.
Twelve large accountsOut of the 12 large accounts where the resolution was initiated by banks as directed by
the RBI, resolution plan in respect of 6 accounts have been approved. The outcome of six large accounts is
given in Table 1.
Conclusion
It is true to state that IBC has matured over the last two years. The IBC ecosystem has been developed over
the period of time and now comprises 15 benches of AA, 2500 Ips, 3 insolvency professional agencies, 50
insolvency professional entities, one information utility, 1200 registered valuers and 11 registered valuer
organisations.
The Judicial Forums like AA, the NCLAT and the Courts have been very active in implementation of the Code.
The Supreme Court, High Courts and NCLTs have settled several critical legal issues and brought clarity to the
roles of various stakeholders in the resolution process. It appears that the IBC is going to the largest body of
case laws.
The Government has demonstrated its leadership role in insolvency reforms. RBI has pushed very large
corporates with very high NPAs into the resolution process. The proactiveefforts of the RBI to clean up the
NPAs of banks have also achieved reasonable result. Though the judgement of the Honourable Supreme Court
declaring the RBI circular issued on 12th February, 2018 as ultra vires of Section 35AA of the Banking Regulation
Activ has posed serious legal issues, the underlying fact is that the constitutional validity of IBC has been
upheld by the Supreme Court.
IBC has enabled India to record a big a jump of 23 positions against its rank of 100 in 2017 in ease of doing
business index. Now India stands at 77th rank among 190 countries assessed by the World Bank.
However, IBC has to go a long way in ensuring the smooth functioning of the resolution of corporate debts. In
2016, insolvency resolution in India took 4.3 years on an average, while it took 1 year in United Kingdom and 2
years in South Africa. Large burden on NCLT to resolve a large number of cases, clarity on priority of claims,
limited number of information utilities and creation of a secondary asset market needs to be addressed. IBC
ecosystem is indeed strengthening at a fast pace. In future, success will hinge on timely resolution of stressed
assets and a conducive system. Insolvency and Bankruptcy Board of India (IBBI’s) proactive stance in seeking
and acting on feedback from stakeholders augurs well as testified by the fact that the IBC has undergone two
major amendments already. We may state that the IBC is an evolving piece oflegislation, which has shown
results in 2 years, especially in comparison to the erstwhile recovery and distress resolution framework. IBC
reinvigorated stressed asset space with strategic as well as financial investors being bullish about the prospects
of investment.
The chairperson, IBBI has stated: ‘Though the IBC is a potentweapon in the fight against stressed assets, it is
not to a panacea ofall ills and relying solely on it to set right every case isn’t advisable.
There is a need to strengthen the other recovery mechanisms along with the IBC. Since IBC has taken within its
fold large corporateresolutions, distinctively it was able to show progress in terms andvolume and capacity.
However, other recovery mechanisms such as DRT, SARFAESI,Civil Court, Lok Adalat have got its own role to
play in debtresolution. There is equally a need to strengthen other recovery lawsalong with the IBC.’
3.The Need for Innovations in NPA Recovery

Banking sector is based on a strong foundation of intermediation process- mobilising resources and optimum
use / deployment of the same thereby earning a spread which we call profit. Banks should always continue to
be sound and stable and enjoy the trust of the public for the efficient discharge of this intermediation
function. The banking sector plays a pivotal role in the growth and financial stability of the country. The
strength and soundness of the banking system primarily depend upon the quality of the assets. The asset
quality has an impact on profitability, liquidity, intermediation costs, credibility, income generating capacity
and overall performance of the banks. But it is a truism that Non-Performing Assets (NPAs) is one of the major
concerns for the banking system in India. The problem of NPAs is not only affecting the banks but also the
whole economy. The level of the NPA indicates the efficiency of a bank's credit risk management and
allocation of resources.
Status of NPAs in banks
Gross NPAs of Scheduled Commercial Banks (SCBs) increased to INR 7918 billion as of March end, 2017 from INR
6120 billion as of March end, 2016. Net NPAs as of March end, 2017 amounted to INR 4331 billion as compared
with INR 3498 billion as of March end, 2016. While the percentage Gross NPAs to Gross advances of SCBs
remained at 9.3 percent for the fiscal 2017 and 7.5 percent for fiscal 2016 respectively, the percentage of Net
NPAs of SCBs increased from 4.4 percent as of March end, 2016 to 5.3 percent as of March end, 2017. SCBs’, gross
non-performing advances (GNPA) ratio raised from 10.2 percent in September 2017 to 11.6 percent in March
2018. However, their net non-performing advances (NNPA) ratio registered only a smaller increase during the
period due to the increase in provisioning. The provision coverage ratio (PCR) increased across all bank groups in
March 2018 from its level in September 2017. Among the bank groups, FBs had the highest PCR (88.7 percent)
followed by PvBs (51.0 percent) and PSBs (47.1 percent).
The Report on Trend and Progress of Banking in India 2016-17 shares the information about the Composition of
Loan Assets of SCBs. It is worthwhile to note that the share of NPAs in ‘Doubtful’ category increased from INR
3603 billion as of March 2016 to INR 5505 billion as of March 2017, the ‘loss category’ increased from INR 260
billion as of March 2016 to INR 316 billion as of March, 2017 and the share of sub-standard assets witnessed
decline from INR 2252 billion as of March, 2016 to INR 2081 billion as of March, 2017.
The share of large borrowers in SCBs’ total loan portfolios, as well as their share in GNPAs, declined marginally
between September 2017 and March 2018. In March 2018, large borrowers accounted for 54.8 percent of gross
advances and 85.6 percent of GNPAs. The category 2 of special mention accounts (SMA-2) as a percentage of
gross advances have decreased across bank-groups. Top 100 large borrowers accounted for 15.2 percent of gross
advances and 26 percent of GNPAs of SCBs. The GNPAs plus restructured standard advances in the banking
system remained elevated at 12.1 percent of gross advances at end-March 2018.
Importance of management of NPAs
It is generally observed that the high level of NPAs is associated with contraction of credit, the slowdown of GDP
growth and depreciation of exchange rates, inflation and unemployment. NPAs create pressure on the income
statement and balance sheet of banks. NPAs can worsen the financial performance of a bank by way of its
adverse impact on the bank’s interest income, higher provisioning requirements and higher carrying cost which
results in excess and avoidable management attention.
Apart from this, a high level of NPAs also puts a strain on a banks’ net worth because banks are under pressure to
maintain the desired level of capital adequacy and in the absence of comfortable profit level, they eventually
look towards their internal financial strength thereby slowly eroding the net worth. NPAs also impair liquidity,
growth and banks’ ability to raise funds from the market. All these can have an adverse effect on the solvency as
well as stock prices of the bank. High NPAs will also raise corporate governance issue where every stakeholder is
keen to know the reasons of the high level of NPAs.
In this article, an attempt is made to analyse developments in the area of recovery and prevention of NPA and
also suggest reforms / innovation in the management of NPAs with the special thrust on recoveries of amount
blocked in this segment of ‘Contaminated Assets’.
The problem of NPAs is related to several internal and external factors confronting the borrowers. The internal
factors are diversion of funds for expansion / diversification / modernisation, taking up new projects, helping /
promoting associate concerns, time / cost overruns during the project implementation stage, business
(product, marketing etc) failure, inefficient management, strained labour relations, inappropriate technology /
technical problems, product obsolescence, etc, while external factors are recession, nonpayment in other
countries, inputs / power shortage, price escalation, accidents and natural calamities etc.
Weakness in credit origination, an accommodative stance of the banks during credit monitoring by
restructuring to avoid large scale slippages are also contributory factors for the surge in NPAs. Further, there is
a lack of enough sensitisation among even corporate borrowers towards hedging currency risk / business risk.
As a result, the business risk gets transmitted to banks diluting the asset quality. Though RBI directs banks to
monitor the exchange rate risk of borrowers, the wherewithal of some of the banks is inadequate and needs to
be upgraded to peep into the hedging policies of borrowers. The sporadic announcement of debt waiver
schemes benefitting the defaulters and not incentivising prompt repayment of bank’s loans creates a
detrimental culture of debt repayment.
All these led to a situation where banks had ‘sick units and affluent borrowers enjoying profligate lifestyle’.
The alarming growth of NPAs causes serious stress on profitability. Banks can neither afford to make more
provisions nor can they stop lending. The maxim should be ‘Lend and Recover’. The banks have to lend
judiciously and approach to recovery should be professional and innovative. The strategy of ‘One size fits all’
can’t be considered viable. In this context, it is worthwhile at the stage to discuss various recovery measures
adopted by banks and financial institutions (FIs) for reducing the level of NPAs. Recovery of NPAs has become
the critical performance area for banks in India.
The recovery measures can be classified into Non-Legal and Legal measures. The measures are discussed in detail
along with the suggestion for recovery management.
Non-Legal Measures
1.Reminder system
This is the cheapest mode of recovery by sending reminders to the borrowers before the loan instalment falls
due. With the migration of branches of banks to the Core Banking Solution (CBS) and internet facility being
available, reminders can be sent through e-mail. Generally, the response to this recovery measure particularly
from honest borrowers is encouraging.
2.Visiting borrower’s business premises / residence
This is a more dependable measure of recovery. Visits need to be properly planned. Involvement of staff at all
levels is to be ensured. Frequent visits by branch officials and meetings with senior officials from corporate office
are called for in case of hardcore and recalcitrant borrowers. Costs involved in the recovery need to be kept to the
minimum. Branches should maintain a record of such visits made and amount of recovery collected. Regional /
Zonal Heads should look into how the visits are organised at the branches during their periodical inspection which
will provide much-needed momentum to the recovery process.
3.Recovery camp
To take maximum advantage, recovery camps should be organised in a planned way, ie, in respect of agricultural
advances during harvest season. It is also essential to take the help of outsiders, particularly, revenue officers in
the state government, local Panchayat officials etc and to motivate the staff to get involved in recovery drive.
Banks need to give wide publicity of the recovery camps to be organised in the areas. During the camp, those
who are very regular in loan repayment should be honoured. This would send out a positive message across the
people.
4.Rehabilitation of sick companies
By rehabilitating a sick unit successfully, recovery of the bank dues takes place. But the success rate is very
low. However, banks should continue to rehabilitate because the cost of rehabilitation is lower than restarting
a new unit on the closure of the same. Causes of sickness should be genuine, and viability study should justify
the benchmark ratios and rehabilitation package should be prepared realistically in terms of the RBI guidelines.
The implementation should be closely monitored.
5.Debt restructuring
In April 2015, the RBI stopped providing regulatory forbearance on any restructured loans, which probably
explains why the size of NPAs increased to 8.3 percent of total loans in June 2016, up from 4.3 percent by end-
March 2015? RBI has discontinued all forms of debt restructuring schemes like JLF, CDR, S4A, SDR and 5/25
scheme and put in place revised and harmonised guidelines for the resolution of stressed assets.
However, its success depends upon both banks and borrowers. The borrowers should know that the debt
restructuring is a rare opportunity provided to them. Banks need to create a conducive environment for loan
recovery through collective efforts. Credit counselling to the borrower by the banker is a must to make debt
restructuring more result oriented.
6. Loan compromise
Compromise settlement should be considered as a last resort or recovery. It should be voluntary and calls for a
professional approach in preparing the compromise proposals for which each bank is given autonomy by the RBI.
Many banks have set up a Settlement Advisory Committee (SAC), enlisting the services of external domain experts
and Retired Judges to have better transparency, collective wisdom and professional expertise in dealing with the
compromise proposals.
Efforts should also be made not to encourage good borrowers to seek compromise. It should be case specific
based on the ground realities. The successful outcome of a negotiation for a compromised settlement depends
much upon the abilities of the negotiator in exploiting the following key elements:
I. Identify what the borrower wants to have out of negotiation and motivate towards the same by focusing
his attention towards benefits / rewards and punishment he is likely to get from its success or
otherwise.
II. Knowledge about one’s position and position of other party, statistics related to both, the common
interest of both the parties and the conflict-prone areas between the banker and the borrower etc.
III. The timing of negotiation.
IV. Approach: positive vocabulary / phraseology that sounds positive, authoritative and confident is likely
to yield results.
7. Rephasement / Reschedulement
Banks need to be empathetic in case of small advances and more particularly in respect of sincere and
hardworking
borrowers. If such borrowers fail to pay loan instalments due to natural calamities or for some other convincing
reasons, unpaid loan instalments may be rephased or rescheduled.
Write-off
If it is going to be unremunerative either to file suit or to continue the account in the banks’ books, it is
advisable to go for waiver of legal action and / or write-off of dues. The write-off exercise is internal, and the
branch staff should continue the recovery process even after the write-off as the recovery in written-off
accounts adds directly to the profit of the bank. Banks have written-off a record INR 1,44,093 crore of bad
loans in the financial year ending March 2018 -- up 61.8 percent from INR 89,048 crore in the previous year.
The total loan write-off by private and public sector banks in the last ten years since 2009 has touched a
whopping limit of INR 4,80,093 crore as on March 31, 2018 out of which INR 4,00,584 crore, was from PSBs and
INR 79,490 crores was from PvBs. During the year 2017-18, INR 1,20,165 crore loans were written-off by PSBs
and INR 23,928 crore by PvBs respectively.
Recovery agents
Recovery agents shall be appointed to recover the amounts lying in various NPA accounts. While appointing the
recovery agents, their professional expertise, experience and qualification should be factored in. Banks must
ensure that recovery agents must adhere to codes under BCSBI so that Banks can promote good and fair banking
practices based on ethical principles of integrity and transparency Legal measures
Debt Recovery Tribunals (DRTs)
DRT is applicable in respect of debts of banks and FIs with outstanding of INR 10 lacs or more, and now the
threshold limit is increased to INR 20 lacs. The tribunals follow the summary procedure and are only guided by
the principles of Natural Justice. In the year 2015-16, as many as 24537 cases amounting to INR 693 billion were
referred, out of which INR 64 billion was recovered (9.2 percent). In the year 2016-17, as many as 28902 cases
amounting to INR 671 billion were referred, out of which INR 164 crore was recovered (24.4 percent). Also, six
new DRTs have been established to expedite recovery.
Lok Adalats
Bank suits involving claims up to INR 20 lacs may be brought before the Lok Adalats. Banks need to continue
putting in their efforts to convene Lok Adalats periodically apart from National Lok Adalat to quickly settle the
cases and recover the amount. During the year 2015-16, the recovery through Lok Adalat was INR 32 billion (4.4
percent) out of 4456634 cases involving INR 720 billion. The year 2016-17 witnessed the recovery of INR 38
billion (3.6 percent) through Lok Adalat out of INR 1058 billion involved in respect of 2152895 cases referred.
Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002
(SARFAESI Act)
The Act empowers the banks to take possession, manage and sell securities without the intervention of a court
/ tribunal. During the year 2015-16, 173582 cases were referred under SARFAESI Act. The total amount
involved was INR 801 billion and the amount recovered was INR 132 billion registering 16.5 percent recovery.
As many as 80076 cases involving an amount of INR 1131 billion were referred during the year 2016-17. The
recovery was INR 78 billion which was 6.9 percent.
Further, the SARFAESI Act, 2002 has been amended for faster recovery with a provision for three months
imprisonment in case the borrower does not provide asset details and for the lender to get possession of the
mortgaged property within 30 days.
It may be noted here that during the year 2016-17, DRTs made the highest recovery, followed by the SARFAESI
Act and Lok Adalats. The significant improvement in the case of DRTs was due to the opening of new tribunals,
strengthening of existing infrastructure and computerised processing of court cases.
Sale of NPAs to Asset Reconstruction Companies (ARCs)
An alternate option for banks for enforcement of security interest is the sale of NPAs to securitisation
companies / reconstruction companies (SCs/RCs) registered under the SARFAESI Act, 2002 with the banks
taking some haircut on every sale. Analysis of purchase of NPAs by SCs / RCs indicates that acquisition cost as a
proportion of the book value of assets increased from 28.7 percent in March 2014 to 36 percent in March 2017,
indicating that the banks had to incur lower haircuts on account of sale of NPAs. Recent years have witnessed a
sharp pickup in the sale of stressed assets to SCs / RCs by PVBs and FBs however, the sale of NPAs by PSBs
remains lukewarm.
Insolvency and Bankruptcy Code (IBC)
A number of measures have been taken to recover loan amount from NPAs, and wilful defaulters. As a result, PSBs
recovered an amount of INR 1, 58,259 crore, during the financial years 2015-16 to 2017-18. To avoid recurrence
and for stringent recovery, the Insolvency and Bankruptcy Code, 2016 (IBC) has been enacted to create a Unified
Framework for resolving insolvency and bankruptcy.
The Banking Regulation Act, 1949 was amended, to provide for authorisation to RBI to issue directions to the
banks to initiate the insolvency resolution process under IBC. Under this, by adopting a creditor-in-saddle
approach, with the interim resolution professional (IRP) taking over management of affairs of Corporate Debtor
at the outset, the incentive to resort to abuse of the legal system was taken away. This coupled with debarment
of wilful defaulters and persons associated with NPA accounts from the resolution process has effected a
fundamental change in the creditor-debtor relationship.
Further, as per the RBI’s directions, cases have been filed under IBC in the National Company Law Tribunal (NCLT)
in respect of 39 large defaulters, amounting to about INR 2.69 lac crore funded exposure (as of December
2017). The objective of the bankruptcy law is to resolve insolvency and revive an asset for the collective good
and not to maximise value for a chosen few, according to Insolvency and Bankruptcy Board of India Chairman M
S Sahoo. It recognises and balances the interest of all stakeholders, and seeks to resolve the issues in a time-
bound framework, while paving the way for credit availability, without impinging on entrepreneurship. The
IBC, 2016 is emerging as the lynchpin for resolving stressed assets in a time-bound manner.
Innovations / reforms in management of NPAs
The strategies for management of NPAs in banking must revolve around the various aspects like strengthening,
monitoring of assets for containing slippages, upgradation of NPAs and intensifying recovery efforts for optimising
recovery.
Innovation in recovery management of NPAs must cover all the elements involved in the recovery of NPAs. It
must take into account the various aspects from the bank’s angle ie its strengths and weaknesses, staff,
systems, apart from the environment and lastly the borrowers and guarantors (their strengths and weaknesses,
culture, habits, values and goals). Banks need to consider formulating strategies for each group or even for
individual accounts depending upon local factors as well as peculiarities of each case. Corporate defaulters can
be dealt with differently from rural defaulters. Area-wise, activity-wise, sector-wise, a segment-wise and
different policy of strategic management of NPAs is required.
Management of NPAs - Preventive aspects
‘Prevention is better than cure’, so goes the age-old maxim. Preventive steps can be taken at two different
stages Pre-sanction / disbursement and Post-disbursement.
A little care and prudence at the time of pre-sanction can help us in filtering out possible problems later. The
practising bankers need to spend the greater part of their time and energy at this stage. The pre-sanction
appraisal must focus on the cash generation ability of the prospective client and asset.
While risk-taking is the essence of banking, it must also be realised that we deal with other people’s money ie
depositors’ money and we have no right to take unknown risks. Risk and Return are often stated to be directly
proportional. ‘Know Your Customer’ (KYC) is the heart and essence of a healthy asset portfolio. Knowing your
customer can even insulate us against non-controllable risks.
Post-sanction stag e
Once an asset is created with the disbursement of loan / credit, the responsibility for maintenance of the
health of portfolio falls squarely on the shoulders of bankers.
Banks need to put in place system-driven ‘Early Alert System’. Most of the danger signals manifest in the
account. Scanning of account on a day-to-day basis is the best source of valuable information for prevention as
well as corrective action.
Practising bankers need to closely monitor the activities like issuance of cheques to suppliers, payment through the account, prompt
servicing of interest, regular repayment of instalments, regular submission of stock statements and inspection of securities, analysis
of financial data on regular basis, sporadic or seasonal request for Adhoc / Excess, and inspection of book debt.
Maintaining close rapport with borrowers, ensuring end-use verification, eliciting information, site visit are
important follow-up measures that have a major impact on the reduction of NPA. Further, a regular touch with
national and international developments is a pre-requisite in today’s world of unpredictable changes.
Newspapers, TV, Internet are the prime sources of data. However, the data has to be scanned and converted
into relevant information.
Innovations in recovery management
Suggested steps / innovations in recovery management are: Proactive approach
If proactive action is taken in the initial stage of an account turning NPA, losses can be minimised, and Bank’s
money can be recovered with speed. The opportunity cost of lost time should be analysed, and opportunities are
substantial in today’s world.
Regular follow-up
Regular follow-up in respect of suit filed and decreed accounts can yield unexpected results. Concerted efforts are to
be made for recovery in written-off accounts which will be a rich source of windfall as it increases profits directly.
Sharing success
Practising bankers should share success stories in the field of NPA recoveries, the methods and modus operandi
used. It can have the only result – success and more success.
Strengthening of Asset Recovery Management Branches (ARMBs)
ARMBs were intended to be the focal point of the recovery strategy. The Zonal / Regional Authorities must give all the
necessary infrastructures in these branches and evolve NPA Recovery Strategy. Smart and career conscious executives
with broad vision have to man these units to speed up the recovery of loans.
Teamwork
All staff members should be involved in the recovery of NPAs. It is not enough for Branch Head to be a great team
player, but it is equally important that he inspires others in the team with his brilliance and Togetherness
Quotient.
Capacity building for strengthening NPA management
Grooming of manpower is required on immediate priority to handle different phases of credit portfolio
management.
Realising such emerging need, RBI recently made it mandatory to plan ‘Capacity building in banks and non-banks’
as per recommendations of G Gopalakrishna Committee. It requires certification of competency of bankers in
functional areas. More specialisation will be needed for debt resolution.
Managing standard assets and managing NPA portfolio are two distinct functions with different rules. Setting up
back offices to manage a collection of regular instalments can shed routine work at branches so that they can
focus on granting new loans. Skills and competencies of employees need to be developed. They should be
imparted training in Legal matters and Recovery measures. The Public Relation Skill (PR Skill), communication
skills of practising bankers need to be developed to have a decisive impact on borrowers. It is an attitude
towards the critical aspect of NPA Management that will determine whether one can prosper or perish.
Accountability syndrome
The fear of accountability is hindering staff from taking a genuine financial decision in time. Some bankers are
very cautious in accepting even some of the commercially viable proposals due to fear of accountability at a later
date. banks need to have a positive and flexible approach in respect of genuine credit decision even if they turn
out to be NPA at a later date. Removal of fear psychosis, fear of staff accountability and empowerment of line
management in accepting compromise and quick settlement of problem loan should be facilitated. This will boost
the morale of line functionaries.
Departmental approach
NPA management should be accepted and pursued as an organisational goal. Proactive culture should be
developed in the Legal Department of banks. Incentive schemes should be introduced for the staff members
working in branches. There should be close coordination between the credit processing unit and credit
monitoring unit. Branches should guard against the takeover of weak accounts of other banks.
Banker - borrower relationship
A healthy Banker – Borrower relationship should be ensured. Assisting the borrowers in developing his
entrepreneurial skills will not only establish a good relationship between the borrowers but also help the bankers
to keep track of their funds. Borrowing community should also join in NPA management to create peer pressure
and bring delinquency as a negative point in their business relationship management. Borrowers must understand
that recycling of funds is in their long-term interest, and their next generation may not be able to avail funds
for their projects unless a good credit culture is maintained. Therefore, solution for NPA lies much beyond the
scope of lending and recovering bank loans. The ecosystem needs a complete overhaul.
Forensic audit
It is also wise for the banks to carry out a forensic audit of all financial and business transactions and books of
accounts of the borrower company when there is the possibility of diversion of the funds and mismanagement.
Monitoring of the restructured accounts
There should be close monitoring of restructured accounts because there is every possibility of loans slipping
into NPA category again.
Revamping organisational structure
Banks need to put a firm, more robust and compatible organisational structure that can follow-up the current
size of NPAs. The three separate phases of credit management need a complete change in skill sets.
Credit origination requires improved appraisal and market / economic intelligence techniques,
Credit monitoring will need perseverance and hand-holding tact and
Problem of Credit (NPA) resolution
These will need a grip on legal knowledge, latest provisions of seeking the help of IBC-2016 and negotiating skills
of the highest order. It is also essential to strengthen the same by providing additional staff besides developing
expertise on credit appraisal, credit monitoring and legal areas.
In addition, under the PSB Reforms Agenda announced by the Government, PSBs have committed to strengthen
recovery mechanism by setting-up Stressed Asset Management Verticals for focused recovery, clean and effective
post-sanction follow-up on large-value accounts by tying up with Agencies for Specialised Monitoring for loans of
INR 250 crore and above, and strict segregation of pre- and post-sanction roles for enhanced accountability.
Risk management
Revisiting approval system from time-to-time in accordance with the changing profile of the lender and the
borrower is a must. Needless to mention that Risk management system also needs to be strengthened. Risk
Mitigation Techniques should be adopted so that slippages can be avoided in the first place. Moreover, it is felt
essential to de-risk balance sheets by reducing excessive exposure to large corporate accounts.
Better balance sheet
Recoveries are an essential / integral part of the operation of the bank without which these get into liquidity
problems as recycling of funds is adversely affected. It is only through constant recoveries of interest /
instalment that the portion performing asset in the total portfolio could be kept high. This alone can ensure
better balance sheets.
Setting-up of Asset Intelligence Cell
As a pro-active institutional follow-up mechanism, banks may establish an Asset Intelligence Cell (AIC) wherein
tools like stress tests, backtesting, asset quality analysis, in-house research on the industry performance,
analysis of exposure, implications of industry performance on the portfolio and other surveillance tools be used
to monitor the quality of assets. Banks should closely interact with the merchant associations, industrial clubs,
and business houses, participate in their meetings and functions, understand their business cycles, and identify
pain points with an intention to trigger positive intervention.
Creating fast track rescue unit
Further, banks may create a separate fast track unit within the Recovery Department only to deal with sub-
standard assets having the high potentiality for upgradation. The type of soft skills, persuasive efforts,
sometimes timely interventions to help the entrepreneur come out of bad patch should be worked out in the
larger interest of the industry, economy and banking system. For this, banks may avail the services of experts
in working out a solution to revitalise the unit with the support of the entrepreneur. If all such supportive
actions and persuasions during the one year life of an asset in the sub-standard category do not yield the
desired results, the stressed asset could be shifted to the main Recovery Department for further recovery
action.
Maintaining and organising granular data on NPAs
When the efforts are on to upgrade the NPA, the data on such assets charged to the bank should be
systematically collated into a support MIS. Many times, the recovery enforcing team finds difficulty in
identifying the securities charged to the bank. It is necessary to have a location map, description of the unit,
contact details of site / borrower /guarantors / co-bankers, latest valuation reports (where necessary), details
of enforceability of mortgage, details of action taken by other member banks (if any), last inspection report
and so on. Once the chances of revival are ruled out, any time lost in taking action will lead to deterioration in
the asset value and its realisability. Therefore, a great deal of data preparedness is needed to take prompt
legal action.
Standardising recovery action with strict timelines
Though the recovery measures depend on the nature of NPA and the concomitant intricacies, the Recovery
Department should have its codified policy of the Standard Operating Procedure (SOP) indicating a broad
framework with defined timelines for each action to avert erosion in the value of underlying assets. Reasons for
deviations can be recorded with proper approval of action to maintain consistency in policy.
The recovery team should immediately get into suitable action evaluating various legal options such as the
invocation of SARFAESI Act - 2002, filing cases in DRT, approaching courts, filing recovery certificates etc. The
process of moving against guarantors, attaching personal properties, filing FIR against delinquent borrowers,
using services of detectives for identifying linkages of wilful defaulters with other properties, availing services
of lawyers, valuers, enforcing agencies, auctioneers and all other related activities need to be fully
standardised and made time bound. The service level agreements with all related vendors / service providers
for outsourced expertise should be well thought and documented. The actions for recovery should be put on
auto mode with the least human intervention. The progress of recovery action beyond a cut-off limit should be
run on mission mode. Each step should be tracked as a project mapping the actions / outcomes on a dashboard
so that accountability for delay can be identified and addressed.
Creating call centres for small ticket / mid-size loans
Banks may consider setting-up of call centres either manned by dedicated bank staff or outsourced agency for
recovery of small ticket / mid-size loans. The cut-off of the amount may be decided by the banks depending on
the size of the portfolio. This will help speed up the recovery of small loans and decongest the branches with
the retail recovery work and enable them to concentrate on core business development.
Project Sashakt – a Positive Debt Resolution Model
With an aim to resolve the problem of the stressed assets of public sector banks, the Government unveiled
another strategy, called ‘Project Sashakt’. The five-pronged ‘Sashakt’ strategy is designed to address bad loans
and strengthen credit capacity, credit culture and portfolio of PSBs.
Project Sashakt sketches the resolution of bad loans, depending on their size. It includes an SME approach, a
bank-led approach, an AMC, or alternate investment fund (AIF)-led approach, an NCLT or IBC–led approach and
asset trading platform approach. The above approaches envisaged in Project Sashakt will not only reinforce the
resolution process but can also go a long way in eventually creating a sensitive credit culture.
Conclusion
Major challenges faced by banks today are as to how to cope with competitive forces and strengthen their
balance sheet. Today, banks are groaning with the burden of NPAs. It is rightly felt that these contaminated
debts, if not recovered, will eat into the very vitals of the banks.
Another major concern before the banking industry is the high transaction cost of carrying NPAs in their books.
The resolution of the NPA problem requires greater accountability on the part of the corporate, greater
disclosure in the case of defaults, an efficient credit information sharing system and an appropriate legal
framework pertaining to the banking system so that court procedures can be streamlined and actual recoveries
made within an acceptable time frame.
The banking industry cannot afford to sustain itself with such high levels of NPA’s thus, ‘lend and recover ought
to be the slogan for salvation.’ The reduction of NPAs has become synonymous with the functional efficiency of
Banks. Effective NPA Management must encompass the objectives of sound risk management, credit
administration and staff motivation.
Therefore, effective Recovery Management of NPAs as an organisational goal pursued in a missionary zeal is a
must to survive global competition. Any innovations / reforms in this area brook no delay for a sound / healthy
growth of Financial System in general and Banking Sector in particular in the country.
4. Prompt Corrective Action (PCA) Framework & Memorandum of Understanding (MOU)

PCA is a tool which involves monitoring of performance indicators of banks as an early warning exercise and is
initiated once the bank breaches the threshold relating to capital, asset quality and profitability. The RBI has
specified the following regulatory trigger points to commercial banks, as a part of prompt corrective action
(PCA) Framework. It has three risk threshold levels, with ‘1’ being the lowest and ‘3’ the highest, for three
important parameters viz., Capital Adequacy Ratio (CRAR), Asset Quality and Profitability.
1. CRAR: The key aspect of bank’s capital is its ability to absorb losses. Since majority of bank’s activities are
being funded by deposits and have to be repaid at future date. Thus, it is imperative for banks to ensure
adequate capital to remain viable. Essentially, banks with weak capital are put under watch. Banks whose
CRAR fall above 7.75% and below 10.25% is categorized as threshold-1; CRAR with above 6.25% and below 7.75%
fall under threshold-2 and banks with CRAR below 6.25% fall under threshold-3.
2. Non Performing Assets (NPA): The second parameter to gauge the health of the bank is its level of NPAs.
Banks that have a Net NPA of 6% or more but less than 9% fall under threshold-1; those over 9% but less than
12% fall under threshold-2; and banks over with 12% fall under threshold-3.
3. Profitability / Return on Asset (ROA): Banks with negative ROA for consecutive two, three and four years
fall under threshold-1, 2 and 3 respectively.
4. Leverage Ratio: The percentage of the capital measure to the exposure measure is called as Leverage
Ratio and normally it is over 25 times the Tier-1 capital which falls under threshold-1. Similarly, when it is
28.60 times, it comes under threshold-2.
PCA framework – Broad Parameters
Classification CRAR (%) Net NPA (%) Profitability (ROA%)
Threshold-1 <10.25% but >=7.75% >=6% but <9% Negative for 2 years
Of which Tier-I <6.75% but >= 5.125%
Threshold-2 <7.75% but >=6.25% >=9% but < 12% Negative for 3 years
Of which Tier-I <5.125% but >=3.625%
Threshold-3 <3.625% >=12% Negative for 4 years
A bank will be placed under PCA framework based on the audited Annual Financial Results and the Supervisory
Assessment made by RBI and the mandatory and discretionary actions are as under:
Classification Mandatory actions Discretionary actions
Threshold-1 Restriction on dividend distribution/ remittance of profits. Special Supervisory
Promoters/owners / parent in the case of foreign banks to interactions; Strategy
bring in capital. related; Governance
Threshold-2 In addition to mandatory actions of Threshold-1, restriction related; Capital related;
on branch expansion; domestic and/or overseas. Higher Credit risk related;
provisions as part of the coverage regime. Market risk related; HR
Threshold-3 In addition to actions as stated in Threshold-2, restriction related; Profitability
on management compensation and directors’ fees, as related; Operations
applicable. related
As most bank activities are funded by deposits which need to be repaid as and when requested by the
depositors. Thus, it is imperative that a bank carries a sufficient amount of capital to continue its activities.
PCA is intended to help alert the regulator as well as investors and depositors if a bank is heading for trouble.
The idea is to head off problems before they attain crisis proportions. It helps RBI to monitor key performance
indicators of banks, and taking corrective measures to restore the financial health of a bank. It also keeps the
RBI focused on such banks by engaging with their managements in ‘trouble areas’. PCA encourages banks to
avoid risky activities and focus on conserving capital to strengthen their balance-sheet. PCA’s core lies in a
sequence of increasingly harsh restrictions as the problem worsens so that banks have little incentive to delay
corrective action. It reduces moral hazard associated with the Lender-of-Last-Resort and makes banks liable to
improve their overall financial health.
MOU: The precondition to avail capital support was to enter in to tripartite Memorandum of Understanding
(MoU) between the government, Bank management and employees of the bank concerned. It is the
commitment by all the concerned parties to move towards to achieve the measurable milestones which can be
monitored on quarterly basis. The indicative list of initiatives include active NPA management and
strengthening of credit underwriting and monitoring process; arranging capital from the market; continuing
plan for disposal of non-core assets; divestment of subsidiary stake to closure of loss making
domestic/international branches. Another initiative is rationalisation and reduction of administrative,
operating expenses including temporary restructuring of employees’ benefits which can be reversed as the
bank manages to successfully turnaround. The MOU would be a commitment to an agreement for a time bound
plan starting with the financial year 2017-18 and it would be monitored quarterly.
Recent Developments: Many of the PSBs swept into PCA last year are already on the brink of crumple with
increased stressed assets, higher provisions and falling CRAR. Of late, the press reports indicate that there is a
rift between Government and Regulator (RBI) on implementation of PCA norms as the government is of the
view that the existing PCA norms are unduly harsh and causing an impediment to credit flows to certain sectors
of the economy. The revoke of all earlier CDR schemes in February 2018 followed by IBC resolution process led
to rebuff the chances of revival of many power sector companies. Further, the Government wishes to place a
special dispensation mechanism on NPA recognition and provisioning norms for MSME borrowers in the interest
of growth and employment opportunities. At the same time, the regulator is of the opinion “not to tinker the
existing PCA / NPA recognition & provisioning norms” in the interest of the financial stability of the country.
The regulator has been of the view that the financial health of weak and loss making banks can be restored
only by adhering structured and disciplined corrective process in a time bound manner. Thus, it is the time for
the regulator and policy makers to take a realistic call to keep the ailing banks on the track at the earliest to
achieve the desired economic growth.
G. BASEL & RISK MANAGEMENT

1.Risks and Capital of Public Sector Banks
A Comparative and Analytical Study
The control function in the banking industry is established at all levels. Division manager is the controller for
the division / department of the branch, the branch manager is the controller of the branch, and the regional
manager is the controller for all branches of the region. The zonal manager is the controller for the regions
under his control, and the general manager is the controller for the zones under his control. Similarly, chief
general managers, executive directors, MD and CEO (including the board of directors) are controllers to the
bank as a whole. If the control function is missing or diluted in any business organisations, then different types
of risks will start/arise/crop up. The risk is inversely proportionate to control function. If the control function
is not effective, the risk will increase vice versa. In the banking industry at all levels controllers are placed to
strengthen the overall banking system. The role of controllers is to mitigate various risks that are arising from
time-to-time in their area of operation and to take suitable solutions / strategies or remedial steps. Even
though so many controllers are placed at different levels in the banking system, ie, from the division of the
branch at branch level to the top level of the bank, there are three important risks in banking system ie,
credit, market and operational risks. The root cause of the increase in risks in the banking industry is the
dilution of the CONTROL function. If the control function is not effective from lower level management to top
level management of the banking system, then risks will crop up. So increase in efficiency of control function
or control systems in banks, reduces the various RISKS of banks. So control function is an important tool in ‘Risk
Management Process’ of the banking system, whether to mitigate credit, market or operation risk.
Credit risk
Credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments. In
the first resort, the risk is that of the lender and includes lost principal and interest, disruption of cash flows,
and increased collection costs etc.
Market risk
Market risk is the possibility of an investor experiencing losses due to factors that affect the overall
performance of the financial markets. Market risk, also called ‘Systematic Risk’, cannot be eliminated through
diversification, though it can be hedged against.
Operational risk
Operational risk is the prospect of loss resulting from inadequate or failed procedures, systems or policies,
employee errors, systems failures, frauds or other criminal activity or any event that disrupts business
processes. High operational risk results in higher capital requirements. Also, it leads to provisions and capital
requirements for credit and market risks.
The three risks are interrelated and effective control measures are required to mitigate these three risks.
Provisions should cover Expected Losses (EL)
while the capital charge should cover Unexpected Losses (UL). Capital requirements for operational risk vs
other risks and Profit / Loss of the Public Sector Banks (PSBs) for the financial year.
Analysis
- Out of the Total Capital Requirements of PSBs in India, Credit Risk Capital requirements percentage is in
the range of 71.87 percent to 88.00 percent, Market Risk percentage is in the range of 5.86 percent to 16.92
percent, and Operational Risk percentage is in the range of 5.63 percent to 11.20 percent. - Almost all PSBs
have incurred a loss as for the financial year ending 2018 except Vijaya Bank and Indian Bank.
Side effects
• The market value of shares of PSBs has dipped, there is a decrease in their credit rating and less or no
dividends for the shareholders.
• Difficult to mobilise additional capital from the market on account of decrease in financial health.
• Financial weakness may lead to an increase in the attrition rate of Staff of PSBs, thereby experienced
manpower may be lost and an increase in manpower cost for recruitment and slow pace of learning curve
and productivity levels.
• Due to the bad financial position of the banks, customers may shift to other banks, thereby Asset Liability
Management (ALM) may pose a problem, and it leads to higher borrowing of funds with a high cost to fill up the
gap of ALM mismatches.
• Expectations of shareholders who contributed capital are ‘Risk-Free Share Capital’. If their share capital is
allocated towards credit, market and operational risks by banks nothing is available to the shareholder in case
the bank is in financial crisis or liquidation. In such a situation, it is not a good investment from the
shareholder’s point of view.
• The minimum expectation of shareholders is assured dividends y-o-y basis, reasonable appreciation in the
market value of the share and secondary market for liquidity purpose. If banks are incurring losses, neither
he will get dividends nor appreciation in the market value of the share.The decrease in market value of
shares leads to no further investments by the prospective shareholders in share capital to banks. whenever
banks are going to mobilise additional capital through Initial Public Offering (IPO).
Analysis
- Credit Risk in capital requirements percentage in Total Advance is in the range of 5.75 percent to 11.44
percent, UCO Bank is the lowest and IDBI Bank is the highest.
- With regard to provisions for EL, the percentage in the range of 2.06 percent to 15.68 percent in total
advances, the lowest is in Vijaya Bank and the highest is in IDBI Bank.
- Capital requirement for credit risk in total capital of all banks is almost more than 80 percent, which needs
more attention to be paid by the banks to minimise the credit risk.
Side effects
• Poor credit management leads to an increase in provisions and capital requirements. PSBs have a good
training system, Standard Operating Procedures (SOPs) for credit products, Risk-Focused Internal Audit (RFIA)
system for credit, market and operations Risks, good appraisal system for career development. Still, advances
turn bad and the reason is due to an increase in operational risks.
• If the credit process like pre-sanction, sanction and post-sanction are not effectively implemented, the
operational risk arises which leads to credit risk also. If 90 percent of credit guidelines strictly implemented
at root level ie, at credit processing centres / branches, then slippage of loan accounts will reduce drastically.
Credit risk due to the economic slowdown or government policies is not under banks’ control.
• Increase in credit risk leads to an increase in recovery costs; thereby it reduces spreads and bottom-line of
the banks. Due to high credit risk, bank manpower has to spend more time on recovery / cost on NPA
Management instead of new loans ie, manpower spend more time on recovery process like attending DRT
Cases follow-up, initiation of SARFAESI Act, implementation of IBC, 2016 for large advances, compromise
proposals, writing-off loss assets etc these costs eats up the spreads of the bank, thereby making lending
activity of banks economically unviable.
• Narrow banking is one of the measures to control high credit risk in banks. But narrow banking reduces
spreads and gives rise to underutilisation of manpower and infrastructure created by the banks for lending
activity.
• ALM and Liquidity Management is a big challenge due to the increase in credit risk. To maintain fine
liquidity and minimise ALM mismatches, banks are forced to borrow funds from the money market at a
higher cost.
• Banks play a vital role in the economic development of the country through the lending process. Due to the
increase in credit risk, banks are forced to stop further lending and focus / attention on the recovery process.
Thereby, it affects the economic growth of the country.
Analysis
- Capital requirement for market risk is due to increase in interest volatility and market prices of various scrips
of investments made by the banks from time to time and in the range of 1.17 percent to 2.37 percent.
The lowest is in Bank of Maharashtra, and the highest is in UCO Bank.
- In addition to the capital requirement for Market Risk, banks have to provide depreciation on investment in
the range of 0.35 percent to 4.78 percent (the lowest in Punjab & Sind Bank and the highest in IDBI Bank).
Side effects
• Credit vs investment ratio is high in Vijaya Bank (75:25) and low in United Bank of India (58:42). Among PSBs,
Vijaya Bank Credit portfolio is high when compared to Investments and United Bank of India is low. In United
Bank of India, investments percentage ratio is more when compared to credit vis-à-vis with other PSBs.
Low credit portfolio reduces / losing interest income, as the yield on investments is lower than the yield
on advances.
• Depreciation on Investments provided by IDBI Bank is more ie, 4.78 percent in the investment portfolio and
Punjab & Sind Bank is low 0.35 percent. While investing surplus funds in money market instruments by the
treasury department of banks, a more analytical study is required on interest rate volatility and market price
trends of both SLR and non-SLR investments. Thereby, depreciation provisions on investments will reduce.
• More depreciation on investments provided by the banks means the quality of investments is not up to the
mark. One side the bank is losing interest on these investments and on the other side degree of risk is
high ie, in getting back the principal amount on the maturity date.
• While investing surplus funds by the banks, cardinal principles of investment are to be followed ie, Liquidity,
Profitability and Safety. Every investment in Investment Basket should satisfy these cardinal principles of
investments; thereby it mitigates the market risk.
• Strict follow-up of RBI and FIMMDA guidelines on treasury operations of the banks mitigates the
market risk.
Analysis
- Basic Indicator Approach (BIA) method followed by more PSBs to arrive capital requirements for operational
risk ie, Average Gross Income of previous three years multiplied by 15 percent.
- Per employee operational risk capital requirement is high at 0.4144 crores in Punjab National Bank and low
at 0.0307 crores in Central Bank of India. Higher per employee operational risk capital denotes more
operational risk to meet the un-expected losses of operational risks in the bank.
- Average manpower cost is high by 0.1257 crores per annum in State Bank of India followed by Bank of
Maharashtra 0.1251 crores per annum. Whereas, it is low by 0.0769 crores in UCO Bank.
- Manpower cost and operational risks are interrelated. When the manpower cost is increasing, it denotes that
the bank is hiring or having skilled and experienced manpower by offering higher salaries and perks,
thereby the credit, market and operational risks are within control.
Side effects
• More operational risk leads not only an increase in credit risk but also a market risk. Credit and market risk
are inversely proportionate to operational risk. The operational risk at the broadest level includes the
breakdown by four causes: - People, - Process, - Systems and - External factors
- Due to a decrease in growth rates of interest spreads, net interest income and non-interest incomes (ie,
exchange, commission and discount) of banks, the capital requirement for operational risk as per BIA may
not be sufficient to cover the future un-expected losses.
- ‘Credit, market, operational risks are interdependent’. Once banks are giving more focus /
attention in controlling operational risk areas, the automatic impact will be there in the reduction of
credit and market risks of banks. Hence, banks should give more focus on operational risk and in particular on
People, Process and Technology risk aspects. These three contribute a substantial amount in mitigation of
credit and market risks.
Examples
• People in the organisation have to adhere to the laid down systems and procedures with respect to all
operations of the bank.
For example, in credit process (pre-sanction, sanction and post-sanction formalities are very important), if
these are not properly followed by people working in the credit department, it not only increases the
operational risk of the bank but also credit risk.
• Processes in the organisation should support an increase in the quality of lending, productivity and
cost-effectiveness. If credit processes are not standardised or streamlined, then it leads to poor quality of
credit with the primary impact on operational risk and secondary impact on credit risk and market
risk of the bank simultaneously.
• Error-free and speedy technology supports are available in the delivery of credit to the customers.
If proper technology systems are not in place in the credit system, then it leads to operational risk and in
turn leads to the credit risk of the bank.
• The same types of strategies are applicable for ‘Treasury Operations’ of the bank. Quality personnel,
trained and those having good skill set are to be placed
in the ‘Treasury Operations’ of the bank, it will not only decrease the operational risk of the bank but also
the market risk of the bank. Challenges in identifying operational risks
• Credit and market risks are relatively easy to predict when compared to operational risk.
• Defined rules and systems are to be in place for quantifying the credit and market risks and not for
operational risk.
• Banks are equipped with good technology systems,processes in the identification and quantifying
credit and market risks, but for the operational risk, it is missing.
• The scope of operational risk scope is wider than credit and market risks. Quantifying in monetary terms of
operational risk is not as easy as in the case of credit and market risks.
• More money, time and efforts are required to control the operational risk areas.
• Training the people of the bank in ‘Operational Risk Management Modules’ requires more funds and time
and an extra focus on operational risk management which dilutes core activities of the bank.
• Incremental cost is more than incremental benefit in the implementation of mitigating measures of some
operational risks.
• Full-fledged IT tools in identifying or quantifying operational risk are not available in the banking industry,
and it is difficult to develop IT systems and it requires a lot of expertise and skills for both to IT developers and
bank domain experts.
• As research and development in operational risk areas in the banks are in the initial stages, it requires
some more time to develop full-fledged IT tools in this regard. Historical data requires quantifying the
operational risks of banks at least past five to ten years ie, type of operational risk and its loss to the bank.
Strategies to mitigate the operational risks in banks
• Standardisation of internal checks for critical processes in the bank (due to high volumes of business in
banks, operating staff are diluting the laid down norms, thereby frauds are increasing).
• One hundred percent adherence of systems and procedures designed by the bank are to be followed by
the operating staff.
• Strengthening ‘All Types of Audit’ and in particular ‘Risk Focused Internal Audit’ (RFIA).
• Training the staff on risk mitigation areas along with the product, process, marketing training.
• Inviting suggestions from staff on ‘Operational Risk Mitigation Areas’. Take feedback from the operational
level staff from time-to-time in respect of risk mitigation measures and tighten the processes / systems.
• Focus on high-risk areas and processes. Risks are to be classified through VED Analysis based on Risk Profile
(V=Vital, E=Essential and D=Desirable) and develop suitable systems to mitigate the same.
• Develop a matrix for quantifying the risks for various operational risk areas.
• Implement the best risk mitigation practices implemented by other banks both domestic and international
banks ie, inter-firm or intra-firm studies are required.
• Implement the rewards and punishments in high-risk prone processes.
• Develop a suitable system of annual appraisal report of the personnel to access the capabilities and skills of
the people in mitigating the various risks in their area of operations.
Conclusion
Systematic and proactive identification, assessment,measurement, monitoring, mitigation and reporting of the
operational risks are need of the hour in Banking Industry. Following are important aspects of mitigating
operational risks in banks:
• People working in the audit department of the bank are the best source in identifying operational risks areas
and failure of control systems. Audit department should fully involve in risk identification and mitigation
process of operational risks of the bank. Based on the audit reports and also feedback of auditors, banks can
develop good risk profiles and develop strategies to mitigate the same.
• Job family concept has to be introduced in the audit department of the bank. NO ‘Job Rotation’ of auditors
ie, from audit to general banking. This system contributes to increase the skills sets of the audit staff;
thereby they can contribute in identifying operational risks areas in the banks.
• Operational risk areas can be mitigated through coverage of suitable insurance policies for certain highrisk
operational areas. This is an opportunity for insurance companies in India to develop innovative insurance
products to the banks for various operational risks. Thereby, banks need not provide higher capital
requirements for operational risks and general insurance companies in India are having good knowledge on
various operational risk areas, and they can provide good suggestions and strategies to mitigate the various
operational risks of Indian banks. Calculating capital requirement for credit, market and operational risks is for
regulatory compliance. However, an efficient control function is the primary tool to mitigate the various risks
of the bank.
2. Risk Management in Banking in the next decade

Barings, Lehman, Northern Rock and Washington Mutual; what’s the common thread underpinning these names?
All have ceased to be part of today’s financial landscape. Risks, albeit of different genres, hit these banks hard.
Operational risk brought Barings down. Credit and Market related risks liquidated Lehman. Liquidity challenges
rocked Northern Rock. And Washington Mutual fell flat when home prices collapsed; subprime mortgages turned
out to be too fragile.
Taking Deposits to Lend Inherently Risky
The business of banking is inherently risky. In a classical sense, banks’ basic business is to take deposits to lend.
Depositors stay entitled to their money regardless of whether the money lent out comes back to the bank or not.
Repayments, let alone interest on the monies lent, almost always remain somewhat uncertain. Businesses may and
do fail. Individuals lose their jobs and earning streams. Industries get disrupted. Environmental or even political
issues force closure of functional units. Economies experience downturns, sinking many boats. As prices drop,
valuations tumble. Credit mitigation measures turn ineffective. No surprises why banking remains risky not only
under stressed economic conditions, but even in the best of times.
The odds stack up high when banks fund ventures chasing a bandwagon idea or finance business models with
fault lines that are not well understood. PPAs in the power sector are a case in point.
Choices made by Counterparties too impact risk
Banks usually carry out comprehensive pre-lending due diligence. Likewise, entrepreneurs too vet their
business models before committing funds. And yet, on the way, ambitious growth, forays into new areas and
other bets at times lead the otherwise thriving enterprises astray. An occasional Enron or a Satyam nearer home
also underline the risk that credit underwriters may unknowingly assume, when they lend to apparently successful,
growth oriented companies that decide to unhinge themselves off the usual conduct standards.
Operational Risk Flare-ups
We are all familiar with frauds, near-misses and other operational hazards that banks face. External fraudsters are
always a threat. A few black sheep here and there within the system are also a given. A certain amount of such risk
is therefore inevitable. But, at times, a single soul could just bet the house; lock, stock and barrel. Remember Nick
Leeson at Barings, Jerome Kerviel at Societe Generale, Kweku Adoboli at UBS and Bruno Iksil at JP Morgan – all
marquee names that, one thought, were well equipped to handle the operational risks, but ended up taking huge
hits.
RCSA & Best Practices
Risk literature teaches us to carry out RCSA (Risk & Control Self Assessment) exercises to spot cracks in controls to prevent
mishaps. We are also encouraged to learn and implement best practices from the industry.
And in any case, it’s better to learn from others’ mis-steps. Let’s now take a look at the timelines of these major risk
incidents and figure out if risk management practices changed for the better. Barings debacle happened in 1995. JP
Morgan (JPM) got hit by what’s popularly known as London Whale in 2012. Nearly two decades apart, the banking
industry majors’ capacity to handle risk perhaps remained static as incidents continued to recur and losses continued to
surge. A loss of USD 1.3 billion reportedly sunk Barings. London Whale incident is said to have dented JPM to the extent
of USD 6.2 billion. Reputation risk consequences were of course an additional downside.
GFC showcases what Risk build-up can lead to
Leaving aside the various incidents that have periodically popped up from nowhere, it would probably be in order to
say that the 2008 Global Financial Crisis (GFC) surfaced all sorts of risk and unravelled a stark reality. Risk
Management proved to be totally inadequate. In fact, one could argue that in 2008, Risk function either played along
or failed big time in influencing business verticals to follow the right path, despite all the complex models and
contribution of smart theorists. Tanking economies made it real scary.
Wave of Regulatory Reforms
GFC triggered a wave of regulatory reforms and risk acquired an altogether new dimension. Perhaps, realising that
banks, in their pursuit of revenues and ROI, may not listen to their own Risk function, regulators started mandating
independence and access to Boards for Risk. Dual hatting got thrown out of the window. Risk-based supervision
became the norm. Role demarcations acquired clarity. Three lines of defence approach gradually took centre stage.
Business or Line I not only turned more compliant (did hefty penalties help?), but also started listening better to Risk
function (Line II). Internal Audit, called Line III, turned rigorous, at times hawkish in testing controls and flagging
deviations. The era of lofty policies and lax practices probably ended for good.
Basel bolsters Capital Framework
In tandem, the Basel Committee on Banking Supervision (BCBS), backed by G-20 decision-makers, substantially
enhanced the Capital Framework. A variety of approaches and models got developed to determine the capital
required by banks vis-à-vis credit, market, operational and other risks. Internal Capital Adequacy Assessment Process
or ICAAP in short became the fulcrum around which a bank’s business had to be run. Pillar 2 scrutiny acquired
unprecedented heft. Pillar 3 disclosures gained currency amongst investors and analysts.
Liquidity steps up the risk hierarchy
Alongside capital, liquidity emerged as a major issue. Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio
(NSFR) got included in the risk tracking menu. Internal Liquidity Adequacy Assessment Process or ILAAP kicked in to
account for liquidity risk.
What if Risk management fails to protect the bank?
Risk function is expected to provide the alerts and pointers when thresholds are breached and risk levels get
elevated. The idea is timely course correction. However, a bank could still fail for want of responsive action or a
variety of other reasons, necessitating resolutions. Concern for orderly resolution of banks in case of failures
generated concept of living wills. Option of bail-ins as against bail-out by taxpayers’ money also got considered and
practised at least in one case in Cyprus.
Bouncing back
Post-GFC, two narratives are clearly discernible. The American Banks which recognised losses quickly and benefitted
from TARP have bounced back faster and are firmly back in business. Banks in some other jurisdictions have not been
as lucky, maybe partly due to differences in the underlying economic conditions. The other storyline relates to the
complex web of regulations and requirements that has developed for adherence by banks. Complexity is writ large all
across. CET1, AT1, MTC, CCB, CCCB, BIA, TSA, AMA, IRB-F and many other acronyms rule the world of banking today.
“Bankers’ plight versus consultants’ delight” could well be the headline that summarises risk management scenario
in many banks.
No doubt, thanks to the combined efforts and inputs of all stakeholders, Risk Management has evolved and evolved
rapidly into a full fledged discipline in its own right, but are we there yet? The honest answer is ‘No’. Risk function
therefore is set to develop and evolve as years go by.
Looking into the crystal ball
In view of the prevailing scenario in banking, what’s next is a natural question to ask. How does the ecosystem
steer banks to safety and stability? One approach could be to convert banks into utilities, but others could argue
that a ship may be safe in harbour, but that’s not what ships are built for. Risk function must find ways to support
the voyage better. Crystal balling into the next decade, one can list out a range of issues, approaches and ideas
that would occupy Risk professionals. Here are the Top Twelve strands that might define the risk management
landscape in banking:
The buy-in for what Risk function does would considerably improve. The ‘tone at the top’ is already set by the
leading CEO's and the next decade would see it percolate down to the last mile. Going forward, Risk
professionals would play a broader leadership role in the overall scheme of governance and, more importantly,
in building the right culture.
Hand-in-hand the regulatory overreach could also recede as BCBS tackles complexity and opts for effectiveness via
simplicity. Basel has kind of already started the re-alignment, if not roll back. The Advanced Measurement Approaches
(AMA) for operational risk stand withdrawn. All the three variants of the Standardised Approaches have been replaced
by a newly devised Standardised Approach. It’s akin to Basic Indicator Approach (BIA) in simplicity and yet augmented
adequately for risk sensitivity via a concept called Internal Loss Multiplier (ILM). Credit Risk Framework too is
simplified. The Advanced-Internal Rating Based (A-IRB) approach is practically out. Introduction of Input and Output
floor would make the Foundation-IRB (F-IRB) approach quite akin to the standardised approach (SA) in terms of RWA
levels. The new approach recognises the pitfalls of reliance on internal modelling alone. Old fashioned due diligence
for credit risk is sure to supplement reliance on external ratings.
The next decade would witness the roll-out of these simplified approaches. BCBS could and perhaps would spend
time streamlining, possibly further simplifying the architecture based on the experience. The lessons learnt from
the progressively shorter lifespan of each Basel variant and longer time taken for roll out would likely continue to
favour simplicity.
Markets would probably play a greater role in funding enterprises, yet credit risk is unlikely to be dethroned from being
the dominant risk that banks face. Credit would remain a capital guzzler.
Risk function is likely to be spending more time managing risks and less generating data and modelling risk. Analysis
and judgement will prevail over measurement as data collection will increasingly become routine. Data analytics
would provide sharper insights to Risk management. Banks that develop skills in data / risk analytics would be
better off.
The previous decade has augmented capital, reduced leverage, enhanced liquidity and improved identification,
measurement and disclosure of risks. Heavy lifting has happened in creating historical databases, writing policies,
drafting processes, building models, back-testing, stress testing and putting in place the various components of
the risk framework. The next decade has therefore, got the space to move away from routine ‘production’ to value-
added goals and containment of emerging risks.
We are set to grapple with elevated levels of risk in terms of cyber challenges, technology, data leakage,
talent availability and, possibly, a few more risks that are still in formative stages. Digital threats could be a
recurrent challenge. So called ‘black swans’ might also manifest more frequently as an outcome of butterfly
effects, digital ecosystem and yet unknown risks, raising demanding asks in terms of long term and yet agile
risk management practices. Disaster Recovery (DR) and Business Continuity Plans (BCP) may acquire an
altogether new dimension. Developments in the currency arena, including potential currency wars and crypto
currencies gaining currency under Central Bank aegis, could lead to exciting times in market risk management
practices as well. With data turning into a hot commodity, privacy concerns will call for effective safeguards
against any leakage. Data protection, a la General Data Protection Regulation (GDPR) in Europe, is likely to
emerge as a major theme soon. It is time risk function started studying and preparing for these risks.
Reputation Risk in the context of the always-on information culture would likely acquire zero tolerance in its true
sense. Risk-Reward equations might take a back seat when it comes to preventing reputation incidents. Next
decade is sure to witness sharper action on this front. Banks would do well to remind their staff that the Internet
never forgets. Right conduct is critical, each time and every time.
Risk function would move beyond measurement and quantification of capital charge to explore, suggest and
generate buy-ins for improvements
managed where it originates. Risk function would therefore, need to invest in creating a sharper risk awareness
among business verticals. As a Line II function, risk is well positioned to create a feedback loop that regularly pipes
actionable insights and foresights into risk originating business units for follow-on action.
Line III, i.e. Internal Audit currently generates a huge amount of data on deviations and control breaches that
are routinely addressed by Line I and ‘closed’ as ‘complied with’. These data points are likely to be the
‘fodder’ for risk to digest and come up with patterns, trends and insights that business verticals need to make
processes efficient, underwrite credit better, identify and contain operational risk hotspots or manage talent
risk. So look for sharper synergy between risk and audit in data flows in the next decade.
Another emerging synergy – the linkage between Risk and Finance would strengthen. These functions would be
talking more often. With ICAAP evolving into a strategy document, it’s only natural that finance consults and
draws inputs from risk to drive the target ROA, RAROC and RORWA. In a broader context, the connect between
Line 1 and Line 2 is also likely to improve as the perception about Line 2 as a spoilsport would change. Risk will
play a major coordinating and value enhancing role.
Fin Techs, Reg Techs, AI, Big Data, Chat Bots, Robotic Process Automation (RPA) and other technologies would
likely help drive Risk Management costs down as also enhance risk management at scale, but banks would need to
stay alert to the risks of continuing with legacy processes, harbouring surplus resources due to replication of
processes across the three Lines of Business, and even drowning in data lakes. It would be critical to maintain
prudence and judgement via expert overlays who are skilled at mixing small data and big data the right way to
get the right foresights. And that brings us to the biggest risk staring at us; talent risk.
xii. The best defence against risk is a knowledgeable and skilled manpower that understands how to follow
processes, learn fast and exercise prudence. Risk may need to work with HR to create the content that’s compact
and impactful. Mantra got to be to drill the ‘Need to Know’ stuff into muscle memory, while digital library supports
‘Nice to Know’ bits. Risk function would also spend time learning ‘communication’ or collaborating with Internal
Communication experts to spread the risk awareness across the organisation. Risk professionals will work to ensure
risk sensitivity gets into the DNA of the bank’s culture. That’s what will drive the ROI in a sustainable way over the
long term.
Conclusion
To conclude, risk management in the next decade is likely to build on the processes, policies and frame-works already
in place to step up to substantive management of risks - existing, emerging and new, as against data dicing and tick-
box process compliance. Collaboration and communication spanning the three lines of defence plus the platform
functions would in all probability drive the building of the right operating culture and embed risk into the way a
bank operates. Appetite for Reputation Risk is likely to tend to zero. Talent Risk would remain a big issue. Credit
would continue to guzzle capital, but occasional high impact operational risk events may continue to surface.
Technology usage in managing risk might help streamline routine processes, but might also lead to data deluge that
leads to incorrect inferences, making us miss the forest for the trees. Data would remain susceptible to leakage
too.
Basel reforms would most likely impose lesser complexity and better illumination. We can also expect
convergence between Risk and Business functions in approaching opportunities. Risk focus is likely to invariably
underpin search for revenues. Business will look for Risk-adjusted Return on Capital (RAROC) in all it does.
Risk function will be equally conscious of the ROI demands of business and, hopefully, lead the way to a scenario
when all employees, to borrow a phrase from Kenny Rogers, would ‘know when to walk away, and know when to
run.’ That’s the time when Risk Management would be a source of competitive advantage.
H. FOREX & TREASURY
1.Dimensions of India’s External Sector Resilience
(Keynote Address by Shri Shaktikanta Das, Governor, Reserve Bank of India Delivered at the Bloomberg India
Economic Forum 2019 in Mumbai on Thursday, September 19, 2019)
The international environment is clouded with very challenging conditions. Global growth is slowing down and
central banks across the world are bracing up to counter it by easing monetary policy; but there is no recession
as yet. Trade wars have pushed world trade into contraction and threaten to morph into tech and currency
wars, with no evidence of any significant gains accruing to anyone. Meanwhile, global commodity prices have
weakened, with collateral benefits to net commodity importers and terms of trade losses for commodity
exporters. The developments emanating from drone strikes on Saudi oil facilities are, however, still playing
out. Sporadic flights to safety are driving capital flows out of emerging markets into advanced economy assets;
but the universe of negative yielding bonds is growing disconcertingly large, posing a potential threat to
financial stability.
Strengths and Weaknesses
2. In this hostile environment, India’s external sector has exhibited resilience and viability. The current
account deficit has averaged 1.4 per cent of GDP over the last 5 years and remains comfortably financed in
spite of global spillovers imparting risk-on-risk-off volatility to portfolio flows. The level of foreign exchange
reserves was at US$ 429 billion on September 13, 2019, sufficient to cover close to 10 months of imports or 21
months of debt of residual maturity up to 1 year. The Indian economy remains a preferred habitat for foreign
direct investment (FDI) and is among the top 10 destinations for greenfield projects (Source: FDI Report,
Financial Times, 2018). Net foreign direct investment at US$ 18.3 billion in April-July 2019 was higher than US$
11.4 billion in the corresponding period of 2018-19.
3. Significant progress has been made in external debt management since the external payment difficulties
encountered in 1990 which triggered wide-ranging structural adjustments and reforms. The level of external
debt at 19.7 per cent of GDP and the debt service ratio (principal repayments and interest payments as a ratio
of current earnings) at 6.4 per cent of GDP are among the lowest in emerging market peers. This places India
among the least externally indebted countries of the world, by the World Bank’s classification. In terms of a
broader measure of external liabilities – the net international investment position (NIIP) which includes both
debt and equity liabilities, net of foreign assets – India’s exposure declined to 15.9 per cent of GDP at end-
March 2019 from a peak level of 18.3 per cent at end-March 2015. Foreign exchange reserves covered 76 per
cent of external debt and 94.6 per cent of the NIIP at end-March 2019, up from 68.2 per cent and 89.3 per
cent, respectively, at end-March 2014. Short-term debt by residual maturity declined to 57 per cent of foreign
exchange reserves at end-March 2019 from a peak level of 59 per cent at end-March 2013. Short-term debt by
original maturity constitutes barely 20 per cent of total external debt.
4. These healthy developments are underpinned by the innate strength of India’s underlying fundamentals. The
degree of openness of the economy, measured by the ratio of exports and imports of goods and services to
GDP, has risen from 20 per cent in the first half of the 1990s to 44 per cent in the latest five-year period from
2014-19. The share of India’s merchandise exports in world exports has gone up from 0.5 per cent in 1990 to
1.7 per cent in 2018.
5. In line with the expanding share of services in domestic output, India’s services exports have grown
rapidly over the past two decades. In fact, India’s services exports have shown a higher degree of resilience to
global shocks than merchandise exports. At US$ 81.9 billion, net services exports financed 45 per cent of
India’s trade deficit in 2018-19. In the area of traded services, India remains a world leader in software exports
and information technology (IT) enabled services, accounting for around 12 per cent of world software exports.
India’s IT sector, which earned US$ 78 billion through net exports in 2018-19, is leapfrogging into new
technologies including artificial intelligence, machine learning and robotics. The Indian diaspora is among the
largest in the world and reflecting this, India currently receives the highest amount inward remittances in the
world from Indians working abroad. Alongside, accretions to non-resident deposits have provided stable and
reliable support to the balance of payments over the years. Financial openness, measured by the ratio of gross
capital inflows and outflows to GDP, has increased three-fold from 15 per cent in the first half of the 1990s to
45 per cent during 2014-19.
6. Notwithstanding these achievements, there are several areas of concern as well which occupy centre-stage
in the conduct of external sector management. First, merchandise exports have lost momentum under the
weight of the slump in world trade. In spite of export volume growth averaging 4.2 per cent during 2013-18
(UNCTAD, 2019), India’s export growth in US dollar terms has weakened – as in a host of emerging and
advanced economies - to 2.2 per cent over the same period, as falling unit value realisations have taken their
toll. The slowdown in global demand has affected our exports of petroleum products as well – they constitute
14 per cent of total merchandise exports. Second, the deceleration in domestic demand has pulled imports,
especially non-oil non-gold imports, into contraction and this has reduced the inflow of intermediates, capital
goods and technology that is vital for modernising our infrastructure and industry. Third, portfolio flows, which
on average account for about 23 per cent of external financing in a normal year, have turned highly volatile,
with net outflows of US$ 0.6 billion in 2018-19. During 2019-20 so far (up to September 13), portfolio equity
outflows were of the order of US$ 1.4 billion but lower than US$ 2.9 billion in the corresponding period a year
ago. Net inflows into the debt market of US$ 4.1 billion have, however, provided relief. Moreover, these
portfolio capital movements have turned out to be conduits of global spillovers, impacting domestic equity,
debt and forex markets, and asset prices. Nonetheless, the underlying resilience of India’s external sector,
anchored by the positive features I set out earlier, have cushioned these shocks and insulated the domestic
economy.
Managing the External Sector
7. Against this backdrop, I would like to turn to several recent initiatives undertaken by the Reserve Bank of
India and the Government of India to fortify India’s external position and improve the capacity of the economy
to deal with the headwinds that confront us in these testing times.
Exports
8. Exports hold the key to a sustainable balance of payments position. In the final analysis, liabilities in the
form of debt and even equities cannot entirely substitute for foreign exchange earnings from exports of goods
and services that create import purchasing power and liability servicing capacity. Over the years, the policy
endeavour has been to secure a wide diversification in India’s export profile in terms of both products and
destinations. In particular, product diversification has enabled India to broaden its export basket relative to
BRICS peers and reduce its vulnerability to trade shocks. Apart from diversification, India is now exporting
sunrise products like electronics, chemicals and drugs and pharmaceuticals for which demand is expanding at
the global level. In the smart phone segment of electronic goods, India has transformed itself from being a net
importer to an exporter with the impetus from the phased manufacturing programme.
9. Looking ahead, several initiatives have been put in place and others are being launched on an ongoing basis
to enable export industries to regain productivity and cutting edge competitiveness. They include upgradation
of export facilities, integration of Indian farmers and their products with global value chains, and trade
facilitation measures. More recently, efforts are going into reimbursement of taxes and duties, including
electronic refund of input tax credits in GST. An action plan for 12 ‘champion’ services sectors, including IT,
tourism and hospitality, and medical services has been developed since February 2018. The Reserve Bank and
the Government are actively engaged in the promotion of ecommerce platforms that will boost the exports of
both merchandise and services. All these steps seek to create a more conducive climate for exports.
Capital Flows
10. With regard to capital flows, India has adopted an approach marked by progressive liberalisation but
calibrated to the realities of the domestic situation, including the evolution of financial markets. A diverse
range of instruments for managing exchange rate risk for an expanding investor base has come into play.
India’s hierarchical policy approach – preferring equity flows over debt flows, and preferring FDI flows over
portfolio flows within equity flows and long-term debt flows over short-term flows within total debt flows – has
influenced the composition of capital flows.
11. Turning to equity flows, FDI policy has been progressively liberalised across various sectors in recent years
to make India an attractive investment destination. Sectors that have been opened up in recent years include
defence, construction development, trading, pharmaceuticals, power exchanges, insurance, pensions, financial
services, asset reconstruction, broadcasting and civil aviation. 100 per cent FDI has also been allowed in
insurance intermediaries. In August 2019, FDI norms in single-brand retail trade have been further liberalised.
FDI up to 100 per cent has been permitted under the automatic route in contract manufacturing and coal
mining.
12. With regard to foreign portfolio investment (FPI), several measures have been undertaken to create an
investor-friendly regime and to put in place a more predictable policy environment. FPI limits are now being
revised on a half yearly basis under the medium-term framework. FPI has been allowed in municipal bonds
within the limits set for State Development Loans (SDLs).1 Greater operational flexibility has been granted to
FPIs under a Voluntary Retention Route (VRR) which facilitates investment in G-secs, SDLs, treasury bills and
corporate bonds while allowing investors to dynamically manage their currency and interest rate risks. The
initial response to the VRR scheme has been encouraging. The Union Budget 2019-20 proposed to ease KYC
norms for FPIs and also merge the NRI portfolio route with the FPI route for seamless investment in stock
markets. Outward direct and portfolio investment have also been progressively liberalised to give Indian
entities a global scan and presence.
13. External borrowing norms have also been simplified under two tracks: foreign currency denominated ECBs;
and rupee denominated ECBs. The list of eligible borrowers has been expanded to include all entities eligible
to receive FDI, registered entities engaged in microfinance activities, registered societies/trusts/cooperatives
and non-government organisations. A rule-based dynamic limit for outstanding stock of ECBs at 6.5 per cent of
GDP is in place. Rupee denominated bonds or Masala bonds under the ECB route offer an opportunity to
domestic firms to borrow from international markets without the need for hedging exchange rate risk. ECBs up
to US$ 750 million or equivalent per financial year are permitted under the automatic route. Recently, end-use
restrictions relating to external commercial borrowings have also been relaxed for specific eligible borrowers
for their working capital requirements, general corporate purposes and repayment of rupee loans. The
mandatory hedging requirement had earlier been reduced from 100 per cent to 70 per cent for ECBs with
minimum average maturity period between 3 and 5 years in the infrastructure space. Net disbursement of ECBs
rose to US$ 7.7 billion in April-July 2019, as against net repayments of US$ 0.8 billion in the corresponding
period of 2018-19.
Exchange Rate
14. Before concluding, it is only fair to say a few words about the exchange rate of the rupee. Over the last
couple of years, the exchange rate has seen large two-way movements with considerable volatility imparted
mainly by global spillovers. During 2019-20 so far, the rupee has traded in a narrow range, with modest
appreciation in Q1 giving way to some depreciation in August and the first half of September, accentuated by
drone attacks on Saudi oil facilities on September 14, 2019. In its External Sector Report of July 2019, the
International Monetary Fund (IMF) has employed a suite of models to assess the alignment of currencies with
their fundamentals. For the rupee, the IMF estimates the REER gap to be zero, implying that the currency is
fairly valued and broadly in line with fundamentals. India’s exchange rate regime is flexible and market-
driven, with the exchange rate being determined by the forces of demand and supply. The RBI has no target or
band for the level of the exchange rate. Interventions are intended to manage undue volatility. This is
reflected in the two-sided interventions conducted during the past two years – net purchases in 2017-18,
followed by net sales in 2018-19. In fact, it is in recognition of this flexibility that the US Department of the
Treasury has removed India from its watch list relating to currency manipulation.
Conclusion
15. Overall, the outlook for India’s external sector is one of cautious optimism, albeit with some downside risks
accentuated at this juncture. Among them, deepening of the global slowdown and escalation of trade and
geopolitical tensions appear to be the most significant. Volatile international crude prices also continue to
pose potential risks to the viability of the current account balance through trade and remittances channels.
Yet, there are underlying strengths that can be built upon to buffer the external sector from these risks. The
search for new export markets and new niches must go on so as to reap the benefits of changing dynamics of
global value chains. Indian IT companies need to accelerate market diversification and invest in new skills and
technologies to hone their comparative advantage. Remittances and non-resident deposits are likely to remain
shock-absorbers over the medium term and need to be assiduously cultivated, including by ease of
remitting/depositing and reducing transaction costs.
16. Ultimately, the strength of the external sector derives from domestic macro-fundamentals. Investors and
markets need to be credibly assured of our ability to maintain macroeconomic and financial stability through
continued focus on these areas. At the same time, we need to persevere with structural reforms in various
sectors of the economy to unlock productivity and competitiveness gains. The overarching objective should be
to keep the current account deficit within sustainable limits and financed by a prudent mix of debt and equity
flows. As I stated earlier, the global environment is challenging, but it offers opportunities as well. By the
IMF’s assessment, India will account for a sixth of global growth in 2020. Trade wars are presenting new
business relocation avenues that seem to be favourable to India from the point of view of the economies of
scale and scope. Indian entrepreneurship, the rupee and our people are progressively but inexorably
internationalising. Since 2018, India’s working age population has grown larger than the dependent population,
and this demographic advantage is expected to last till 2055. In this milieu, prudent external sector
management with a close and continuous vigil on areas of external vulnerability assumes critical importance
and will continue to receive RBI’s close attention.
2. FEDAI Rules 2019

Transfer of funds between VOSTRO Accounts with two banks (w.e.f. 1st April 2013)- i.The bank carrying out
interbank Vostro transfer by RTGS to send Form A3 separately. ii. Time limit is 5 working days for receipt of
form A3 at beneficiary bank’s end. Delay beyond 5 days would attract penalty on the remitting bank. iii. In
case, beneficiary bank does not get form A3 within 5 working days, they must lodge a claim with the remitting
bank within 15 days, from the date of transfer of funds. iv. Remitting bank would pay to beneficiary bank,
penalty of Rs. 1000 per day for period beyond 5 days from date of transfer of funds, till form A3 reaches the
beneficiary bank. v. If beneficiary bank lodges the claim after 15 days from the date of transfer of funds, the
claim amount will be capped at Rs. 10,000.
Foreign Exchange Dealers' Association of India (FEDAI), revised the rules which became effective from 01
April 2019. Salient features are: General Guidelines • The member banks can determine their own charges for
forex transactions. • Banks to display their card rates and threshold amount for card rates for FCs on website
and / or their B Category branches. 1.Hours of business Trading hours : Exchange trading hours for INR/FCY
transactions in Inter-bank forex market in India are from 9.00 a.m. to 5.00 p.m. (customer transactions up to
4.30 p.m.). For forex business, Saturday will not be treated as a working day. Known holiday is one which is
known at least 3 working days before the date. Suddenly declared holiday is a holiday that is not a known
holiday. Example: Days 1, 2, 3 and 4 are all working days. If day 4 is declared as a holiday on or after day 1, it
will be a suddenly declared holiday. If day 4 is declared as a holiday prior to day 1, it would be a known
holiday. 2. Post shipment Credit in Rupees Crystallisation: ADs to crystalize FC liability at TT selling rate, into
INR liability, for non-payment of bills of exchange on the due date. Interest for overdue period shall be
recovered on the date of crystallisation and then till date of recovery of the crystallized amount. Normal
Transit Period (NTP): Concepts of normal transit period and notional due date are linked to interest rate on
export bills and to arrive at due date of the bill/export credit. NTP comprises of the average period normally
involved from the date of negotiation/ purchase/discount till the receipt of bill proceeds. NTP is not to be
confused with the time taken for the arrival of the goods at the destination. NTP for different transactions: a)
Fixed Due Date – For export usance bills, where actual due date is known, NTP is not applicable. b) Bill drawn
on DP/At Sight Basis and not under Letter of Credit (LC) (i) Bill in Foreign Currencies – 25 days (ii) Bills in
Rupees not under Letter of Credit – 20 days 3. Application of exchange rate Crystallisation of Import Bill under
LC : Unpaid FC import bills drawn under LC shall be crystallised as per stated policy of the bank. 4. Outward
Remittance It shall be at TT selling rate on that date or at Fx contract rate. Compensation for delayed
payment : ADs shall pay or send intimation, to beneficiary in two working days from the date of receipt of
credit advice / NOSTRO statement. For delay, bank shall pay to beneficiary, interest @ 2 % over savings bank
interest rate. If beneficiary does not respond within five working days from receipt of credit intimation, the
bank shall initiate action to crystallize the remittance. Interest for delayed delivery For late delivery of any
currency (including INR) in Fx contract, interest for the number of days of delay shall be payable by the seller-
bank. The interest for the overdue period shall be payable at the rate of 2% over the benchmark rate of the
currency concerned. Time Limit for claim for delay : The claim for the delay in receipt of funds by the buyer
bank should be made within 15 working days from the due date of the contract. The seller bank in such a case
shall be liable to pay interest for the full period of delay. If the claim is not made within 15 working days, the
interest will be payable by the selling bank for the maximum period of 60 days only. Time Limit for settlement
of claim: The selling bank has to settle the claim (with interest for overdue period, as above) within 15
working days from the date of receipt of claim. If a claim is not settled within 15 working days, the seller bank
will be required to pay interest for the entire overdue period. The cap of 60 days for interest payment will not
apply in such cases. Settlement Date Change: When Maturity Date of a Fx contract falls on a month end and
the said day is declared as a holiday subsequently, the settlement should be preponed to preceding working
day, if the said day is “known holiday”. b) In all other cases, if the maturity date is declared as a holiday
subsequently, the settlement date should be postponed to the next working day.
3. NEW ECB FRAMEWORK

RBI circulated the new External Commercial Borrowing (ECB) policy on 16.01.2019. The salient features are as
under: There are 2 routes to raise ECB- (a) Automatic Route (cases examined by AD-1) and (b) Approval Route
(referred by banks and examined by RBI).
1. There are 2 tracks i.e. Foreign Currency (FC) denominated and Indian Rupee (INR) denominated.
FC Denominated ECB (any freely convertible FC) : Loans including bank loans; floating/ fixed rate notes/
bonds/ debentures (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years;
Financial Lease, FCCBs and FCEBs.
INR Denominated ECB : All the above except FCCB. and FCEBs. Eligible borrowers : All entities eligible to
receive FDI and a) Port Trusts; b) Units in SEZ; c) SIDBI; d) EXIM Bank; e) Registered entities engaged in micro-
finance activities.
Recognised lenders : Lenders from FATF compliant or International Organization of Securities Commission
(IOSCO) compliant country. Minimum Average Maturity Period (MAMP): 3 years. Manufacturing sector companies
may raise ECBs with MAMP of 1 year up to USD 50 million per financial year. For, ECB from foreign equity
holder and utilised for working capital purposes, general corporate purposes or repayment of INR loans, MAMP
will be 5 years. {Foreign Equity Holder means (a) minimum 25% direct equity holding or (b) minimum indirect
equity holding of 51%, or (c) group company with common overseas parent} The call and put option exercisable
on completion of minimum average maturity.
All-in-cost ceiling per annum : Benchmark rate plus 450 bps spread. Other costs : Prepayment charge/ Penal
interest, max 2% over and above the contracted rate.
End-uses (Negative list) : ECB proceeds cannot be utilized for a) Real estate activities b) Investment in capital
market c) Equity investment d) Working capital purposes except from foreign equity holder e) General
corporate purposes except from foreign equity holder f) Repayment of Rupee loans except from foreign equity
holder g) Onlending to entities for these activities.
FC Hedging provision: Infrastructure space companies are required to mandatorily hedge 70% of ECB with MAM
of less than 5 years. Change of FC – is allowed from one freely convertible FC to any other freely convertible
FC and to INR. (INR to FC is not allowed) Limit and leverage: All eligible borrowers can raise ECB up to USD 750
million per financial year under auto route. In FC denominated ECB from direct foreign equity holder, ECB
liability-equity ratio cannot exceed 7:1. This ratio is applicable if outstanding amount is above USD 5 million.
ECB for Oil Marketing Companies (OMC): Public Sector OMCs can raise ECB up to USD 10 billion, for working
capital purposes with MAM of 3 years under the automatic route without mandatory hedging and individual
limit requirements. ECB for Startups: Central Govt. recognised Startup entity can raise ECB up to USD 3 million
for MAM of 3 years.
ECB for restructuring: An entity under restructuring scheme/ corporate insolvency resolution process can raise
ECB. Issuance of Guarantee, investment in FCCB/FCEBs by Indian banks and FIs for ECB: Not permitted. Parking
of ECB proceeds abroad : For FC expenditure can be parked pending utilization in quality assets. Parking of ECB
proceeds in India: For Rupee expenditure FC should be repatriated immediately. Borrowers can park in term
deposits with AD I banks for a maximum period of 12 months cumulatively.
Reporting Requirements: Borrowings are subject to following reporting requirements: 1. Loan Registration
Number (LRN): Any draw-down should happen after obtaining the LRN from RBI. 2. Changes in terms and
conditions: Changes in parameters within ECB norms should be reported to RBI within 7 days. 3.Monthly
reporting of actual transactions : Borrowers are to report actual ECB transactions on monthly basis within 7
working days. 4. Late Fee for delay in reporting: For delay up to 30 days – Rs.5000, up to 3 years – Rs.50000 per
year, beyond 3 years – Rs.1 lac per year.
Refinancing of existing ECB: AD- I bank may allow refinancing of existing ECB by raising fresh ECB. Security
for raising ECB: AD I banks can allow creation/ cancellation of charge in favour of overseas lender / security
trustee, to secure the ECB.
4. SPECIAL NON-RESIDENT RUPEE ACCOUNT (SNRR)

 In a bid to boost internationalisation of the rupee, any person resident outside India have been allowed to
use Special Non-Resident Rupee (SNRR) accounts to maintain external commercial borrowings (ECBs) in rupees,
retain rupee trade credits, and conduct businessrelated transactions in domestic currency even outside
international finance centres.  A Task Force on offshore rupee markets headed by former deputy governor
Usha Thorat had recommended measures to incentivise non-residents to access the onshore foreign exchange
market.  The RBI relaxed norms for the opening of SNRR accounts and permitted direct remittance from India
into these accounts. SNRR accounts are designed for non-residents to enable them to undertake rupee
transactions that are legally permitted. Earlier, these accounts were subject to several restrictions which have
now been eased.
 WHO CAN OPEN SNRR ACCOUNT: Any person resident outside India, having a business interest in India, can
open a Special Non-Resident Rupee Account (SNRR account) with an authorised dealer for the purpose of
putting through bona fide transactions in rupees which are in conformity with the provisions of the Act, rules
and regulations.
 FEATURES OF THE SNRR ACCOUNT: a) The SNRR account will carry the nomenclature of the specific
business for which it is opened and not earn any interest. b) The debits / credits and the balances in the
account should be incidental and commensurate with the business operations of the account holder. c) The
tenure of the SNRR account should be concurrent to the tenure of the contract / period of operation / the
business of the account holder. d) Approval of the RBI shall be obtained in cases requiring renewal. e) The
operations in the SNRR account should not result in the account holder making available foreign exchange to
any person resident in India against reimbursement in rupees or in any other manner. f) The balances in the
SNRR account can be repatriated outside India. g) Transfers from any NRO account to the SNRR account are not
permitted. h) All transactions in the SNRR account will be subject to payment of applicable taxes in India. i)
SNRR account may be designated as resident rupee account on the account holder becoming a resident. j) The
amount due / payable to non-resident nominee from the account of a deceased account holder, will be
credited to NRO account of the nominee with an Authorised Dealers. k) Opening of SNRR accounts by Pakistan
and Bangladesh nationals and entities incorporated in Pakistan and Bangladesh requires prior approval of RBI.
 HOW IS SNRR DIFFERENT FROM NRO ACCOUNT: a) The SNRR can be held only as a non-interest earning
account, while an NRO account can earn interest. b) The balances in a NRO account are non-repatriable
(except for current income and to the extent permissible for NRIs / PIOs under FEMA, SNRR is a repatriable
account.
 LATEST CHANGES:  With a view to promote the usage of INR products by persons resident outside India, RBI
has decided to expand the scope of SNRR Account by permitting person resident outside India to open such
account for: a) External Commercial Borrowings in INR; b) Trade Credits in INR; c) Trade (Export/ Import)
Invoicing in INR; and d) Business related transactions outside International Financial Service Centre (IFSC) by
IFSC units at GIFT city like administrative expenses in INR outside IFSC, INR amount from sale of scrap,
government incentives in INR, etc. The account will be maintained with bank in India (outside IFSC).
RBI has also rationalised certain other provisions for operation of the SNRR Account: a) Remove the restriction
on the tenure of the SNRR account opened for the purposes. b) Apart from Non-Resident Ordinary (NRO)
Account, permit credit of amount due / payable to non-resident nominee from account of a deceased account
holder to Non-Resident External (NRE) Account or direct remittance outside India through normal banking
channels.
5. FOREX EXCHANGE RISK MANAGEMENT

The value of a currency changes frequently due to various factors in the market such as inflation, interest
rates, current account deficits, trade terms, political and economic performance etc. That ultimately affects
firms and individuals engaged in international transactions. Foreign exchange risk is a form of financial risk
that arises from the change in the price of one currency against another. Whenever investors or companies
have assets or business operations across national borders, they face forex risk. Such risk must be managed in
order to ensure better cash flows, manage unsystematic risks, avoid external financing, avoid financial
distress, enhance shareholders wealth, and increases investor confidence. What is meant by Exchange Risk? It's
is a potential gain or loss that occurs as a result of an exchange rate change. Uncovered claim in foreign
currency is called "long" and uncovered liability in foreign currency is called “short”. Participants in the
Foreign Exchange Foreign exchange dealers, individual and the firms, speculators and arbitragers, central
banks and the treasuries and the foreign exchange brokers.
Foreign Exchange Risks
1) Transaction Exposure: The transaction exposure risk is connected with, how change in exchange rates
affect the home currency value of anticipated foreign currency dominated cash flows relating to transaction
which have already been entered into. Or the amount of existing commitment to make or receive in outlays in
foreign currency or the risk that the cost of transaction or the translation or proceeds from transactions in
terms of domestic currency may change due to change in the exchange rate.
2) Translation Exposure: The net book value of assets and liabilities dominated in foreign currency arising out
of changes in the exchange. Or the Translation Exposure is also known as accounting exposure is that risk which
results from conversion of value of a firm’s foreign currency dominated assets and liabilities into a common
currency value. Translation Exposure arises as a result of the process of consolidation of foreign currency
dominated items into group financial statements dominated in the currency of present company.
3) Economic Exposure: The risks which are associated with the changes in the present value of a firm, and
assets or liability on account of exchange rate changes.
The tools of Foreign Exchange Risk Management Risk Sharing: The seller and buyer agree to share the
currency risk in order to keep the long-term relationship based on the product quality and supplier reliability.
Diversification: It can be done by firms by using funds in more than one capital market & in more than one
currency. Natural Hedging: The relationship between revenues and costs of a foreign subsidiary sometimes
provides a natural hedge, giving the firm ongoing protection from exchange rate fluctuations.
Payments Netting: This method can be used if the companies having exposed in the multiple currencies. This
method gives an easy control to the company at the time of conversion, because all the payments are netted
to one single transaction and allow the company follows a consistent policy and this also allows to reduce
transaction cost also.
Leading and Lagging: This method works by adjusting the payments required reflecting future currency
movements. It is a zero-sum game because if there is a receivable blocked in their respective currency it will
allow them to use it against payable in the same currency.
Cross Hedging: If a conversion consists of more than one currency then cross hedging is used for example if an
importer receiving payment in Chinese yuan, it cannot be directly converted into INR so it is first converted
into USD and then INR so in these type of transaction Cross Hedging is used.
Overseas Loans / Foreign currency: denominated debt: A Trade can avail the loan in two different
currencies. Credit in home currency which have exchange rate risk and other is in foreign currency which is
free from exchange rate risk. Usually, this method is used if your payments or receivables are in foreign
currency.
Money market Hedge: It is a costly and unused strategy, In this method, the companies borrow in foreign
currency and lends in same currency which will lead to losing on their spread. Instead of this strategy there
can use forward hedging.
Borrowing Policy: Every company needs to have a strong borrowing policy. It needs to know whether to go for
longterm loans or working capital loans.
Derivatives: Products whose values are derived from the underlying assets. The four different products are.
Forwards: It is a derivative product where contract holder enters into a forward contract made today for
delivery of an asset at a predefined time in future at a price agreed upon today. These contracts are custom
made; their quantity and time period can be adjusted according to the parties understanding. The basic
disadvantage in these type of contacts are found a suitable counterparty and if the rates move unfavorably
then the buyer ends up paying more.
Futures: These contracts work same as forwards but these contracts are traded through exchange and they
have fixed quantity and time period.
Options: These types of contracts give the buyer the right to buy or sell but it is not an obligation to buy or
sell. Options are considered as an appropriate hedging instrument because of it flexibilities in the conditions
and avoid losses. A buyer if this contracts can avail them buy just paying premium. Options always provide
unlimited gains and limited loss.
Currency Swaps: In this type of agreements two parties exchange there principle and interest amount into a
different currency. The equivalent principal amounts of the two parties are exchanged at the spot rate. Using
the right technique at the right time is the key step to be taken by businesses and individuals.
Sum Up: Forex markets are unpredictable and extremely volatile. Managing forex risk requires regular
monitoring of the forex markets and loads of patience.
I. GENERAL BANKING
1. Emerging Challenges to Financial Stability
(Inaugural Address by Shri Shaktikanta Das, Governor, Reserve Bank of India)
It is indeed a matter of great pleasure for me to be here today amidst the business and financial sector
leaders. My compliments go to the partners, namely, the Indian Banks’ Association, FICCI and the Boston
Consulting Group for spearheading this event. What really gives me the additional motivation to address you is
the earnestness with which you have themed this year’s conference, showing your appreciation of the need to
prepare ourselves for a new paradigm in banking. The happenings of the past, especially the not so remote
ones, have generated an attitude towards the financial sector that ranges from an existential angst to a more
positive outlook that hinges on the opportunities beckoning at us. I would like to believe that solutions to a
better future lie in unlearning from the practices which led to that angst and in relearning to befit ourselves in
the changing financial landscape. Prudent governance and emerging trends in the digital space have the
potential to reshape the way we perceive finance. Against these broad underpinnings, let me present my
thoughts highlighting emerging challenges to financial stability. This would be the theme of my address to this
august gathering.
2. A consensus on the definition of the term financial stability remains elusive even today. Broadly speaking,
the core principles governing financial stability can be thought of in terms of a financial system’s ability to
facilitate efficient allocation of economic resources; its effectiveness in assessing, pricing, and managing
financial risks; and in maintaining its capability to perform these key functions even when affected by external
shocks. In other words, as one IMF research paper of 2004 puts it, a financial system is in a range of stability
whenever it is capable of facilitating the performance of an economy, and of dissipating financial imbalances
that arise endogenously or as a result of significant adverse and unanticipated events1.
The Global Context
3. The global approach to financial stability changed significantly after the financial crisis of 2008 which made
it abundantly clear that financial strength of every financial institution does not add up to systemic stability.
The policy makers realised that micro-prudential regulations have to be complemented with systemic risk
measures; otherwise systemic stability could be at risk.
4. Ten years after the crisis, the major financial sector reforms, called for by the G20 and co-ordinated by the
Bank for International Settlements (BIS) and Financial Stability Board (FSB), are now mostly in place. Large
banks are better capitalised, less leveraged and more liquid. The banking system is, therefore, more resilient
to economic shocks. Implementation of Too-Big-To-Fail (TBTF) reforms is advancing, including via the
establishment of effective resolution regimes for banks. Over-the-counter (OTC) derivatives markets have been
made simpler and more transparent. The use of central clearing has increased, and collateralisation is more
widespread. Those aspects of non-bank financial intermediation that contributed to the financial crisis have
declined. However, the implementation of reforms is not yet complete and remains uneven, especially in the
non-banking space. It goes without saying that while dealing with all these issues, country specific situations
have to be factored in.
5. Recent developments in the global economy should be seen in this perspective. A weaker than expected
growth with signs of slowdown in major economies, as projected by multilateral institutions like the
International Monetary Fund (IMF), is one of the key risks to global financial stability at this juncture. Looming
trade-tensions, geo-political risks, and related uncertainties continue to exert pressure on the investment
outlook. The latest Global Financial Stability Report (GFSR) by the IMF warns that because of these
developments, vulnerabilities in the sovereign, corporate, and non-bank financial sectors are elevated by
historical standards in several systemically important countries and regions. Under these circumstances,
central banks and other regulators are required to follow the cardinal principle – the regulator never sleeps.
Cutting the hyperbole out, what it means is that the regulators and other authorities need to be constantly
vigilant and proactively take whatever steps that are necessary.
6. The current state of the global banking sector also presents a story of uncertainty. While bank capitalisation
has increased significantly in the post-crisis period primarily due to Basel III reforms, bank profitability has
been lacklustre. Both macroeconomic and bank-specific factors have contributed to this phenomenon.
Importantly, banks are also facing increasing competition from non-traditional players, such as FinTech and
BigTechs, which are taking advantage of digital innovation. These developments have implications for financial
stability in Emerging Market Economies (EMEs) like India. It is indeed imperative that banks capitalise on these
technological advances and the associated business models. Regulators on their part also need to provide
enabling frameworks for these endeavours by banks as well as the non-traditional players.
The Indian Scenario

7. The pursuit of financial stability has always been a policy priority in India. The twin concerns of monetary
and financial stability constitute the core objectives of the Reserve Bank. Similar to the global case, India also
responded to the crisis by introducing changes in the existing institutional architecture to further the cause of
financial stability. Recognising the various channels that could lead to systemic instability and the fact that
different segments of financial systems are regulated by different regulators, the institutional mechanisms of
the Financial Stability Development Council (FSDC), under the Chairmanship of the Finance Minister, and the
FSDC sub-committee, under the chairmanship of Governor, Reserve Bank, have been fully functional. The
biannual Financial Stability Report (FSR), a report of FSDC sub-committee, analyses the current state of
financial system, the extent of interconnectedness among its various segments and possible sources of
vulnerabilities that could impact domestic financial stability.
8. The headwinds to financial stability could emanate from various sectors of the economy, namely, (i) the
credit market; (ii) financial markets; (iii) external sector; and (iv) payment system. It may emanate from some
other sources as well. But today, I will focus on these four aspects.
Headwinds from Banking Sector
9. In India, the credit market is dominated by the banking sector which plays a key role in financial
intermediation in the economy. Soundness of the banking system may have a bearing on the financial stability
through various channels - excessive credit growth; maturity mismatches and liquidity issues; high proportion
of non-performing loans; and overleveraging, among others. Even if individual institutions are robust, the
overall behaviour of the financial sector can pose a systemic risk. Hence, monitoring the health of the banking
sector is crucial for financial stability.
10. In recent years, as a result of efforts by both the Reserve Bank and the Government, the overhang of
stressed assets in the banking system has declined. Going forward, the macro-stress tests for credit risk
conducted by the Reserve Bank indicate that under the baseline scenario, the GNPA ratio may decline further
by March 20202. Other indicators like the provision coverage ratio (PCR), capital adequacy and return on assets
have also improved. I have earlier stressed that the real test of performance, efficiency, internal stability and
governance improvement in public sector banks (PSBs) would be their ability to access capital markets rather
than looking at the Government as a recapitaliser of first and last resort.
11. Despite certain teething problems, the Insolvency and Bankruptcy Code (IBC) is proving to be a game
changer. New norms for resolution of stressed assets framed in June 2019 by the Reserve Bank provide
incentives for early resolution, with discretion to lenders on resolution processes. The objective is to ring-
fence future build-ups of NPA stress and protect the banking sector. The recent amendments to the IBC should
also be able to facilitate faster resolution of stressed assets.
12. As we have seen in the recent past, the build-up of risks among regulated entities due to
interconnectedness, exposure concentrations, non-transparent market practices, governance deficiencies, and
their contagion effects have repercussions for financial stability. In this regard, the Reserve Bank is keeping a
close watch on the interconnectedness of banks and non-banks. The Working Group on Core Investment
Companies (CICs) has already started its deliberations and based on its recommendations, the Reserve Bank
proposes to carry out necessary changes in the regulatory architecture for CICs. We are also in the process of
building a specialised regulatory and supervisory cadre for regulation and supervision of banks and non-banks.
13. Another important issue in this context is the immediate need to strengthen corporate governance
structure in banks, which I have elaborated earlier as well. This would include efficient functioning of their
boards and board sub-committees, especially audit and risk management committees; robust system for
monitoring of performance of MDs/CEOs; and, an effective performance evaluation system to improve the
financial and operating parameters of banks. We have already sent our suggestions to the Government for
governance reforms in PSBs. Overall, it is important that risk management systems, compliance functions, and
internal control mechanisms are strengthened and made more dynamic.
Non-Banking Sector
14. Coming to the NBFC sector, we all know that this sector complements the banking sector and aspires to
act as the bridge to provide last mile connectivity. Further, niche NBFCs fulfil the unmet and exclusive credit
needs of infrastructure, factoring, leasing and other such activities. Non-traditional and digital players are now
entering this space to deliver financial services by way of innovative methods involving digital platform. There
is a web of inter-linkages of the NBFC sector with the banking sector, capital market and other financial sector
entities. The Reserve Bank keeps a close watch on these inter-linkages to ensure financial stability. With a
view to strengthen the sector, maintain stability and avoid regulatory arbitrage, the Reserve Bank and the
Government have been proactively taking necessary regulatory and supervisory steps. It is our endeavour to
have an optimal level of regulation and supervision so that the NBFC sector is financially resilient and robust.
We will not hesitate to take whatever steps are required to maintain financial stability in the short, medium
and the long-term.
15. Our objective is to harmonise the liquidity norms between banks and NBFCs, taking into account their
unique business models. We are also looking at governance and risk management structures in NBFCs. Recently
in May 2019, NBFCs with a size of more than ₹5,000 crores have been advised to appoint a functionally
independent Chief Risk Officer (CRO) with clearly specified role and responsibilities. This is expected to bring
in professional risk management to the working of large NBFCs.
16. The move to bring Housing Finance Companies (HFCs) under the regulatory ambit of the Reserve Bank is
significant, given their asset liability profiles. Including HFCs, the size of the NBFC sector constitutes about 25
per cent of combined balance sheet of scheduled commercial banks. The Reserve Bank will take necessary
measures to deal with these challenges.
Headwinds from Financial Markets
17. Apart from banks and non-banks, headwinds to financial stability can also originate from financial markets.
The increasing frequency and severity of currency and debt crises globally and their ability to cause output loss
calls for careful regulation and surveillance of financial markets. Globalization of finance, by amplifying the
risk of contagion, and thereby constraining the policy space for effective regulation, has added to the difficulty
of this task. As a regulator of various market segments such as money markets, G-sec, forex and interest rate
derivatives, the Reserve Bank has followed calibrated, sequenced and careful approach to develop and
integrate these markets. The broad objective has been to keep pace with the requirements of fast-growing
Indian economy, while being vigilant of potential risks to financial stability. This is done through freeing up
market forces by moving away from prescriptive to principlebased regulation, whose core features are
simplification of processes, encouraging product innovation, removing regulatory differentiation across
participant categories and ensuring protection for retail market participants.
18. Let me give one example. Recently, we have permitted the creation of an electronic platform on which
one can buy or sell foreign currency at market rates. This platform is accessible over the internet and the
customers can get the best market price without having to approach any individual bank/broker. This is how
FinTech can be used to inject greater efficiency to financial markets.
19. As financial markets are opening up, stability concerns are addressed through capital flow control measures
(e.g., the overall cap on foreign investment in the debt market) or macro-prudential measures (e.g., cap on
total external borrowing as a percentage of GDP).
20. Adoption of global best practices to improve market integrity is another important aspect of regulation. In
the last couple of years, the Legal Entity Identifier (LEI) system has been implemented in a phased manner in
all financial markets, including derivative markets regulated by the Reserve Bank, as well as for bank loans.
We believe transparency of financial markets will greatly improve once the LEI system is used widely. The
recent regulations to control market abuse, upgrade the benchmark setting process are all consistent with
global standards.
21. A key feature of regulation of derivative markets has been the differential treatment of professional and
non-expert clients. Moreover, differential access to derivative markets is being gradually removed. Anyone -
resident or non-resident - can now access these markets for hedging on similar terms. In fact, alignment of
incentives for non-residents to gradually move to the domestic market is an important regulatory aim. As you
would be aware, the Task Force on Offshore Rupee Markets with Mrs. Usha Thorat, former Deputy Governor as
chairperson, has made important recommendations that are likely to improve participation of nonresidents in
the onshore market. Our aim is to make the onshore market more accessible and attract higher transaction
volumes.
External Headwinds and Domestic Financial Stability
22. With increased trade and financial linkages with rest of the world, India has become more susceptible to
the vagaries of heightened global economic uncertainties. While trade channels take some time to show a
tangible impact of global shocks, it is the financial and confidence channels that quickly transmit the global
shocks as was evident in the case of India during the taper tantrum period in mid-2013. In fact with negative
and low interest rates in major economies, net private capital flows to EMEs in the form of direct and portfolio
investments have nearly doubled in the post-crisis period. However, with high monetary policy uncertainties in
advanced economies, these flows have proved to be fluid and therefore posed considerable risk to EMEs. Just
a year back, EMEs like India faced financial market turbulence due to a faster-than-expected tightening in
monetary policies in advanced economies. Many EMEs including India witnessed portfolio capital outflows,
exerting downward pressure on domestic currencies.
23. In recent years, India’s external sector has benefited from a sustainable level of current account deficit,
largely financed by robust foreign direct investment inflows and flexible exchange rate policy. Improvement in
other vulnerability indicators during 2018-19 such as fall in external debt to GDP ratio (from 20.1 per cent at
end-March 2018 to 19.7 per cent at end-March 2019) and debt service ratio (from 7.5 per cent at end-March
2018 to 6.4 per cent at end-March 2019) also augur well for mitigating the spill over of external headwinds on
the domestic financial markets. Notwithstanding strong macroeconomic parameters, constantly changing
dynamics of external headwinds warrant policy preparedness in order to minimise spill overs of global shocks
and preserve financial stability. As a supplementary safeguard, the Reserve Bank has signed a bilateral
currency swap agreement with the Bank of Japan for US$ 75 billion with the objective of bringing greater
stability in foreign exchange and capital markets in the country.
Payment System and Financial Stability
24. A number of innovations have taken place in retail payments which have reshaped payment processes and
changed the retail payments landscape. India’s payment systems are considered to be efficient, safe and
secure. While acknowledging this and without trying to be complacent, the Reserve Bank has made an attempt
to benchmark domestic payment systems and practices with those prevalent in prominent countries worldwide.
The assessment of various indicators including regulation and oversight suggests that India has a strong and
robust regulatory structure.
25. However, new entrants into the financial services space, including FinTech and BigTech firms are altering
the universe of financial service providers. A range of new lending platforms, including P2P and marketplace
lenders, have appeared in jurisdictions around the world.
Highlighting some of the related challenges and opportunities, the recent Annual Economic Report of the Bank
for International Settlements (BIS) states that such firms can collect large amount of data at nearly zero costs,
which can be used to better assess the riskiness of borrowers and could reduce the need for collateral to
assure repayment. These new players have also made inroads in the provision of payment services, remittance
services and cross-border payments. Moreover, they have the potential to grow very quickly and become large
and systemically important financial institutions, raising concerns over financial stability and consumer
protection. 26. Faced with such profound changes, the policy makers’ dilemma is more than walking the
middle path between innovation and regulation. The public policy approach here needs to be more
comprehensive and holistic, taking into account issues such as financial regulation, competition policy and data
privacy regulation. Coordination among various authorities – such as financial regulators, competition
authorities and data protection supervisors – becomes critical at this juncture.
27. The Reserve Bank’s Vision-2021 for Payment and Settlement Systems in India visualises empowering every
Indian with access to a bouquet of e-payment options that is safe, secure, convenient, quick and affordable.
The Committee on Deepening of Digital Payments under the chairmanship of Shri Nandan Nilekani has
suggested to increase the volume of digital payments by 10 times in the next three years which can be
facilitated by initiatives such as removing transaction charges on digital payments, simplifying KYC processes,
and reducing KYC costs for banks. The Reserve Bank is taking necessary action based on the committee’s
recommendations.
Concluding Observations
28. At the end, I would like to highlight the significance of consumer protection which is not only important
from the point of view of access but also from a broader context of stakeholders’ trust. The trust of the
consumers that the services are fairly priced, the trust of the investors that the stakeholders are acting in their
best collective interest, the trust of the regulators that the audited financial statements do represent a fair
and reasonable assessment of the activities of a firm – all have intangible but substantial contribution to
national savings and financial stability. Post Lehman developments in the US financial markets are a prime and
sobering example of what happens when investor trust evaporates. In fact, consumer protection should be seen
as a key pivot around which all regulatory and supervisory initiatives are required to evolve.
29. Let me conclude by saying that much progress has been made in maintaining a stable financial system.
However, as we have seen, the financial landscape is continuously changing, and new challenges are emerging.
The Reserve Bank is continuously harnessing the regulatory and supervisory framework to better adapt to the
evolving scenario. The IBA, its members and other stakeholders should, therefore, be active partners in
ensuring that such a process evolves successfully
2. Concurrent Audit System - Revised RBI directions

Concurrent audit aims at shortening the interval between a transaction and its independent examination. It is
regarded as part of a bank’s early warning system to ensure timely detection of serious errors which helps in
averting fraudulent transactions and preventive vigilance in banks. Based on recommendations of Expert
Committee (headed by Shri Y H Malegam) RBI reviewed and the revised guidelines (18.09.19) as under:
A. Coverage -1. Can be decided by Head of Internal Audit of banks, with prior approval of Audit Committee of
Board (ACB) of the bank. 2. Minimum areas of coverage are given in Annex.
B. Appointment of Auditors -1. Concurrent audit can be done by bank’s own staff or external auditors
(including retired staff of that bank). 2. If any partner of a CA firm is a Director on bank Board, no partner of
the firm should be appointed as concurrent auditor in the same bank.
C. Accountability 1. In case of external firms if any serious acts are noticed in their working, appointments
may be cancelled after giving them reasonable time . 2. Bank should frame a policy for fixing accountability
noticed in working of bank’s own staff or retired staff, working as concurrent auditors.
D. Tenure ACB/ LMC of the bank can decide the maximum tenure of external concurrent auditors with the
bank. Generally, tenure of external concurrent auditors with a bank shall not be more than 5 years on
continuous basis. The age limit for retired staff engaged as concurrent auditors may be capped at 70 years. No
concurrent auditor shall be allowed to continue with a branch/business unit for a period of more than 3 years.
Annex - Minimum areas of coverage under Concurrent Audit 1. Cash transactions including physical verification
of cash, etc. 2. Loans & Advances including physical verification of securities, delegation of Powers for
sanction, Security Charge Creation, end use verification of funds, monitoring of accounts with excess drawings.
3. Adherence to KYC / AML guidelines including monitoring of transactions in accounts, FATCA and CRS,
monitoring of transactions in new accounts/ staff accounts, reporting of CTR/STR, etc. 4. Remittances/ Bills
for Collection including SWIFT transactions, monitoring of overdue statements. 5. House Keeping including
reconciliation of accounts, monitoring of General Ledger/Subsidiary General Ledger/Parking Accounts etc. 6.
Treasury operations. 7. Non fund based business. 8. Foreign Exchange transactions. 9. Clearing transactions.
10. Verification of Merchant Banking Business. 11. Verification of Credit Card / Debit card business. 12.
Conduct of employees, mis-selling of products, etc. 13. Compliance to RBI guidelines and internal Policy
guidelines issued from time to time.
3. Financial Stability Report (Dec. 2019)

 The Reserve Bank of India has released the 20th issue of the Financial Stability Report. The report comes at a
time when Indian economy is reeling under worrying trends in GDP growth figures & low rates of consumption.
 The FSR reflects the collective assessment of the Sub-Committee of the Financial Stability and Development
Council (FSDC) on risks to financial stability, as also the resilience of the financial system.
 OVERALL ASSESSMENT OF SYSTEMIC RISKS:  India’s financial system remains stable notwithstanding
weakening domestic growth. The resilience of the banking sector has improved following recapitalisation of
Public Sector Banks (PSBs) by the Government. Risks arising out of global / domestic economic uncertainties
and geopolitical developments, however, persist.
 GLOBAL AND DOMESTIC MACRO-FINANCIAL RISKS:  The global economy confronted a number of
uncertainties - a delay in the Brexit deal, trade tensions, whiff of an impending recession, oil-market
disruptions and geopolitical risks, leading to significant deceleration in growth. These uncertainties weighed on
consumer confidence and business sentiment, dampened investment intentions and unless properly addressed
are likely to remain a key drag on global growth.  As regards the domestic economy, aggregate demand
slackened further extending the growth deceleration. While the outlook for capital inflows remains positive,
India’s exports could face headwinds in the event of sustained global slowdown but current account deficit is
likely to be under control reflecting muted energy price outlook.
 TWIN ENGINES OF INDIA’S ECONOMIC GROWTH:  The RBI report states that reviving the twin engines of
India’s economic growth namely private consumption and investment, while being vigilant about developments
in global financial markets remain a critical challenge.  The report said aggregate demand slackened in the
second quarter of the current financial year, ending March 2020, adding to slowing economic growth.  While
the outlook for capital inflow remains positive, India’s exports could face headwinds in the event of sustained
global slowdown, but current account deficit is likely to be under control, reflecting muted energy price
outlook.  India’s financial system remains stable notwithstanding domestic growth. While the outlook for
capital inflows remains positive, India’s exports could face headwinds in the event of sustained global
slowdown but current account deficit is likely to be under control reflecting muted energy price outlook.
India's financial system remains stable notwithstanding domestic growth.  The uncertainties in global economy
weighed on consumer confidence and business sentiment, dampened investment intentions and unless properly
addressed are likely to remain a key drag on global growth.  Despite acknowledging the economic downturn,
the RBI has stated that India’s financial system remains stable. The resilience of the banking sector has
improved following recapitalisation of public-sector banks by the government, which aims to infuse Rs.70,000
crore into state-owned banks this fiscal.
 FALLING GOVT REVENUE:  The RBI has flagged falling govt. revenue as a threat to the overall fiscal
numbers with tax and non-tax revenues lagging way behind targets saying this along with weaker private
consumption and investment could prove to be a challenge in the current economic scenario.  The warning
assumes importance from many angles as revenue mop-up has been falling and budgeted expenditure (fiscal
deficit) has crossed 107% as of Nov., putting a big question mark on the govt. ability to meet the 3.3% fiscal
targets.  The negative comments are also prescient as GST collection which has been the mainstay of the
government has grown just 2.5 per cent so far this year, against a budgeted 14 per cent, while massive
corporate tax cuts have given away Rs 1.45 lakh crore of budgeted revenue and has slipped 5.2 per cent as of
the third quarter.  With respect to the divestment revenue, of the Rs 1.05 lakh crore budgeted for the year,
only 17 per cent have been achieved so far.  The only silver-lining is the personal income tax collection,
which has grown marginally to Rs 33,000 crore from Rs 24,000 crore. Cumulative advance tax collection till Q3
stood at Rs 2.51 lakh cr as against Rs 7.96 lakh cr year-on-year.  Direct tax collections, net of refunds, for this
fiscal grew a mere 0.7 per cent till December. The target is Rs 13.35 lakh crore. Refunds increased 26.6 per
cent compared to the same period last year.  While the fiscal deficit numbers have improved over the years,
revenue shortfall amidst weaker private consumption and investment could challenge fiscal parameter. The
nation's financial system remains stable notwithstanding weakening domestic growth, the FSR said, adding all
major risk groups such as global risks, risk perceptions on macroeconomic conditions, financial market risks and
institutional positions were perceived as medium risks affecting the financial system.  However, perception of
risks on various fronts like domestic growth, fiscal, corporate sector and banks' asset quality increased
between April and October 2019. Amidst all these, growth has been screeching south with GDP hitting a
25quarter low of 4.5 per cent in Q2 forcing a rash of growth revisions ranging from 4.6 to 5 per cent for the
year-a steep fall from 7.4 per cent by RBI itself.  This extended sequential quarterly deceleration was led by a
sharp slowdown in gross fixed capital formation and sluggishness in private final consumption expenditure. 
The report also notes that the slowdown would have more pronounced had it not been for government
consumption, which provided a cushion to slackening demand conditions.
 TRADE DEFICIT:  Noting that merchandise exports have contracted by 2 per cent in AprilNovember as
against an expansion of 10.9 per cent a year, the report warns that with global growth and trade projected to
slow down further, exports could face challenging demand conditions going forward.  All this has both trade
deficit and current account deficit rising to 2 per cent of GDP from 0.7 per cent in the preceding quarter. Net
capital flows were higher in Q1 with net FDI inflows of $13.9 billion compared to $9.6 billion in the
corresponding quarter of the previous year.  Overall, net capital flows exceeded CAD financing requirements
and led to an accretion of foreign exchange reserves, which is at an all-time high of $454.9 billion as of
December 20.
 FINANCIAL INSTITUTIONS: PERFORMANCE AND RISKS:  Scheduled commercial banks’ (SCBs) credit growth
remained subdued at 8.7 per cent year-on-year (y-o-y) in September 2019, though Private Sector Banks
registered double digit credit growth of 16.5 per cent.  SCBs’ capital adequacy ratio improved significantly
after the recapitalisation of public sector banks (PSBs) by the Govt.  SCBs’ gross non-performing assets (GNPA)
ratio remained unchanged at 9.3 per cent between March and September 2019.  Provision Coverage Ratio
(PCR) of all SCBs rose to 61.5 per cent in September 2019 from 60.5 per cent in March 2019 implying increased
resilience of the banking sector. Macro-stress tests for credit risk show that under the baseline scenario, SCBs’
GNPA ratio may increase from 9.3 % in Sept. 2019 to 9.9 per cent by Sept. 2020 primarily due to change in
macroeconomic scenario, marginal increase in slippages and the denominator effect of declining credit growth
The size of the inter-bank market continued to shrink with inter-bank assets amounting to less than 4 per cent
of the total banking sector assets as at end-September 2019. This reduction, along with better capitalisation of
PSBs led to a reduction in contagion losses to the banking system compared to March 2019 under various
scenarios relating to idiosyncratic failure of a bank/non-banking finance company (NBFC) /housing finance
company (HFC) and macroeconomic distress.
 TRANSMISSION OF POLICY RATE:  The RBI governor has warned against unbridled interest rate cuts, which
he said could cause a “cobra effect", when a wellintentioned solution ends up worsening the problem. The
challenge is to ensure transmission of monetary policy impulses to the advantage of real economies and not to
aid build-up of froth in financial markets. The RBI has cut policy rates by 135 basis points so far this year. 
RECORD RISE IN BANK FRAUDS:  Frauds reported by banks during the first half of the current fiscal touched an
all-time high amount of Rs 1.13 lakh crore, owing to delay in detection by lenders. This involved 4,412 fraud
cases of Rs. 1 lakh and above, as per the report.  In FY19, banks had reported 6,801 cases of fraud involving
Rs 71,543 crore. An analysis of the vintage of frauds reported during the FY19 and H1 FY20 shows a significant
time-lag between the date of occurrence of a fraud and its detection. The amount involved in frauds that
occurred between FY01 and FY18 formed about 90.6 per cent of the frauds reported in 201819 in terms of
value.  Similarly, 97.3 per cent of the frauds reported in the first half of FY20 by value occurred in previous
financial years. During the first half of 2019-20, banks reported 398 cases of large value frauds (above Rs 50
crore) worth Rs 1.05 lakh crore.  Lenders reported 21 cases of frauds above Rs 1,000 crore, worth a
cumulative Rs 44,951 crore. The report states that the loan-related frauds continued to dominate in aggregate,
constituting 90 per cent of all frauds reported in FY19 by value and 97 per cent of all frauds reported in H1
FY20.  The RBI is taking steps to integrate fraud reporting of NBFCs and urban co-operative banks in its
central fraud registry database. Such interlinking would serve as an invaluable resource in effective fraud
detection/monitoring, it said, adding, "a greater thrust has been put on improved governance.
 ASSET QUALITY OF BANKS:  As per FSR, the financial system remains resilient with the asset quality of
banks improving (NPAs remaining stable at 9.3% as of September as same as March 19) thanks to the efforts of
both banks and companies to clean up their balance sheets.  On the credit, the report states that gross loans
and advances noticeably slowed from 13.2 per cent in March 2019 to 8.7 per cent in September 2019.  But the
report warns that the gross NPA ratio may rise to 9.9 per cent by September 2020 from 9.3 in September 2019.
 The stress tests indicate that under the baseline scenario, the GNPA ratios of banks may increase to 9.9 per
cent by September 2020, due to change in macroeconomic scenario, marginal increase in slippages and the
denominator effect of declining credit growth.  RBI’s financial stability report warns that banks’ bad loan
ratios will worsen next year. Gross bad loans could rise to 9.9% by September, the report said. Then there is
the fact that banks have been able to bring down their bad loans largely by writing them off. This doesn’t
speak much about an improvement in their recovery.  The RBI said stress tests done on public sector banks
revealed that their gross non-performing asset ratio may rise from 12.7% in September 2019 to 13.2% by
September 2020. Private sector banks, too, could see an increase in gross NPAs from 3.9% to 4.2% in the period
under consideration. These stress tests for credit risk were done to test the resilience of Indian banks against
macroeconomic shocks. It encompassed one baseline and two (medium and severe) adverse macroeconomic
risk scenarios.  Among them, three banks may have capital adequacy below the minimum regulatory level of
9% by September 2020, without considering any further planned recapitalization. A severe shock could bring
down the capital adequacy of five banks below 9%, it added.  Das further said the performance of public
sector banks (PSBs) should be improved and that there was a need to build buffers against “disproportionate
operational risk losses". Private sector banks, on the other hand, need to focus on aspects of corporate
governance, he said.
RISING STRESS LOANS IN AGRICULTURE & INDUSTRY:  RBI Financial Stability Report states that stressed
loans to agriculture have risen since March 2017 and stressed loans now account for almost a quarter of their
advances to industry. Sector wise, stress has increased in infrastructure, engineering, food processing and
construction sectors. However, stressed assets are coming down in the services sector, while retail loans’ asset
quality remains robust.  LOAN GROWTH:  Another crucial factor is credit growth. Banks make money through
lending and a slowing economy hardly contributes to loan growth. ICRA Ltd has said loan growth would
plummet to a 58-year low of 8% in FY20. A slowing economy also makes recovery difficult. Unless economic
growth revives from a sixyear low of 4.5%, banks will find it tough to recover their dues. A little over Rs.3
trillion worth of dues are stuck in insolvency courts and lenders so far have been writing off nearly a quarter of
bad loans every year.
 SYSTEM-WIDE CREDIT LOSSES IN REALTY SECTOR:  In more troubles for the crippled realty sector, system-
wide credit losses to lenders have jumped to 7.33 per cent in June 2019 from 5.74 per cent in June 2018. This
spike has been led by state-run banks, whose impairment has jumped from 15 per cent in June 2018 to 18.71
per cent in June 2019.  While the aggregate exposure to realtors approximately doubled, the aggregate share
of HFCs and PVBs increased and PSBs' aggregate share came down sharply. This might, however, understate the
exposure of PSBs to the sector given their exposure to a few NBFCs well entrenched in the real estate sector. 
Fund flows to the sector have continued notwithstanding a general slowdown in credit growth. Since
September 2018 when the IL&FS induced risk aversion was noted, all categories of financial intermediaries
have increased their exposures to realtors, the sharpest being that of HFCs.  The aggregate impaired
exposures continued to rise steadily over the period, with delinquency levels of all financial intermediaries
higher as on June 2019 compared to their June 2018 levels. Given the structure of the sample this should be
indicative of the evolution of general industry-wide portfolio health rather than health of the real estate
exposure in specific financial intermediaries, says the report.  The report states that the analysis of 310 real
estate related borrowers show increased stress although the aggregate exposure to the sample firms continued
to increase, implying availability of credit.
DEPOSIT INSURANCE & CREDIT GUARANTEE CORPORATION:  The Deposit Insurance and Credit Guarantee
Corporation has received a total claim of about Rs.14,100 crore in case of defaulting co-operative banks amid
massive scam at the nowcrippled Punjab & Maharashtra Cooperative Bank.  However, the regulator, the
Financial Stability Report said, was quick to add that all the claims may not materialise at the same time and
some may even revive.  The extent of devolvement on the Deposit Insurance and Credit Guarantee
Corporation (DICGC) in the event of all the banks "under direction" or weak banks going into liquidation or
ordered to be wound up, would be Rs.14,098 crore as of September-end, said the RBI's Financial Stability
Report.  Cooperative banks have been under stress for long and the ongoing PMC Bank crisis, which involves a
scam of Rs.6,500 crore that is 73 per cent of its total assets of around Rs.9,000 crore, is related to a single
entity, the bankrupt HDIL, which has been gaming the bank since 2008.  Since January this year, nearly 30
cooperative banks have been placed under RBI administrators.  The break-up of the claim with DICGC shows
Rs.3,414 crore in the case of state cooperative banks and district central cooperative banks, and Rs.10,684
crore in the case of urban cooperative banks, including PMC Bank.
 MANAGEMENT OF NBFCs: The RBI said it has taken several policy measures to improve the condition of the
financial system. Reserve Bank has initiated policy measures to introduce a liquidity management regime for
NBFCs.  The RBI cancelled licences of 1,701 non-banking financial companies (NBFCs) in the year ended 31
March for failing to meet minimum capital requirements.  As many as 779 licences were cancelled in October
and November, just after the crisis in the shadow banking sector unfolded with Infrastructure Leasing and
Financial Services Ltd (IL&FS) defaulting on debt repayments. The defaults led to drying up of liquidity for
other non-banks, triggering a crisis in the sector. In comparison, RBI had cancelled the licences of 26 NBFCs in
FY18.  While NBFCs historically were loosely regulated, the situation is now changing, with the central bank
proposing new rules to monitor the asset-liability and risk management framework of these entities.  The
central bank said in its financial stability report that NBFCs depend largely on public funds, which account for
70% of the total liabilities of the sector. Bank borrowings, debentures and commercial papers are the major
sources of funding for NBFCs. Bank loans to total borrowings increased from 21.2% in March 2017 to 23.6% in
March 2018 and further to 29.2% in March 2019.  There were 9,659 NBFCs registered with RBI as on 31 March,
of which 88 were deposit accepting and 263 systemically important non-deposit accepting NBFCs.  The
consolidated balance sheet size of the NBFC sector grew 20.6% to Rs.28.8 trillion in FY19 as against an increase
of 17.9% to Rs.24.5 trillion in FY18. Data from RBI showed that gross bad loans of the NBFC sector as a
percentage of total advances increased from 5.8% in FY18 to 6.6% in FY19. However, the net non-performing
asset ratio declined marginally from 3.8% in 2017-18 to 3.7% in 2018-19.  On the other hand, the capital
adequacy of the sector declined 350 basis points year-on-year to 19.3% in FY19. The central bank mandated
non-banks to maintain a minimum capital adequacy ratio of 15%.
 HOUSING CREDIT GROWTH:  Despite higher housing credit growth and better bank lending rates, house
prices in the country have been cooling in the last five years, a Reserve Bank of India (RBI) report said.
According to the Financial Stability Report, the all-India housing price index reduced to 5.3 per cent during
April-June, 2018, while housing credit also declined to 15.8 per cent as compared to Q1 FY2015, which stood at
around 16 per cent and close to 17 per cent, respectively.  Housing prices have been cooling in the last five
quarters, despite accelerated housing credit growth and favorable bank lending rates. The large pile of unsold
homes resulting from tepid demand conditions gradually led to moderation in price increase. Notwithstanding
improved consumer sentiments consequent to stabilization of disruptions in the implementation of GST and
RERA, the recent spike in launches is mostly driven by government schemes to promote affordable housing.
 CORPORATE FINANCIAL STABILITY: The Report shows that corporate financial stability has deteriorated
since 2008 on all five major parameters -profitability, leverage, sustainability, liquidity and turnover. It
appears that corporate health is still much more robust than it was 10 years ago, though this could also be a
sign that there is scope for further deterioration till the business cycle actually turns.
 FINANCIAL SECTOR:
REGULATION & DEVELOPMENTS:  Reserve Bank has initiated policy measures: to introduce a liquidity
management regime for NBFCs; to improve the banks’ governance culture; for resolution of stressed assets and
for the development of payment infrastructure.  The Reserve Bank has accepted some of the key
recommendations of the Task Force on Offshore Rupee Markets viz., allowing domestic banks to freely offer
foreign exchange prices to non-residents and allowing rupee derivatives (with settlement in foreign currency)
to be traded in International Financial Services Centres (IFSCs).  The Securities and Exchange Board of India
(SEBI) has taken a number of steps to improve the financial markets including a revised risk management
framework of liquid funds, revised norms for investment and valuation of money market and debt securities by
mutual funds (MFs), revised norms for credit rating agencies (CRAs), facilitating new commodity derivative
products and setting up institutional trading platforms (ITPs) on stock exchanges to promote start-ups.  The
Insolvency and Bankruptcy Board of India continues to make steady progress in the resolution of stressed
assets.  The Insurance Regulatory and Development Authority of India (IRDAI) has taken initiatives for growth
of InsurTech and strengthening insurers’ corporate governance processes.  The Pension Fund Regulatory and
Development Authority (PFRDA) continues to bring more citizens under the pension net.  The Reserve Bank of
India plans to guide banks in their transition to Indian Accounting Standards (IndAS) from 1 April next year
particularly on bad-loan provisioning, which will be based on expected future losses.  The transition will be
challenging for banks in terms of the skills required to adapt to the new standards, as well as the higher
amount of provisioning that will be needed, RBI said in its Financial Stability Report (FSR), released last Friday.
 Under current rules, banks set aside money to cover losses incurred. Under IndAS, they must make provisions
after assessing expected losses, in line with international norms. As per RBI deputy governor S.S. Mundra,
migrating to IndAS may increase banks’ provisioning requirements by 30%.
4. RBI Vision 2022 (Utkarsh 2022)

RBI released Utkarash 2022, its vision documentduring July 2019. It provides information about, what RBI's
plans for future. A summary is provided. Mission: To promote the economic and financial well-being of the
people of India in terms of price and financial stability; fair and universal access to financial services; and a
robust, dynamic and responsive financial intermediation infrastructure.
Core Purpose : 1. To foster confidence in the internal and external value of the Rupee and contribute to
macro-economic stability 2. To regulate markets and institutions under its ambit, to ensure financial system
stability and consumer protection, 3. To promote the integrity, efficiency, inclusiveness and competitiveness
of the financial and payment systems, 4. To ensure efficient management of currency as well as banking
services to the Government and banks, 5. To support balanced, equitable and sustainable economic
development of the country
Values: RBI commits itself to the following shared values that guide organisational decisions and employee
actions in pursuit of the Bank’s core purpose.
Public Interest : RBI in its actions and policies, seeks to promote public interest and the common
good Responsiveness and Innovation: RBI seeks to be a dynamic organisation responsive to public needs.
Integrity and Independence: To maintain highest standards of integrity through openness, trust and
accountability
Introspection and pursuit of excellence: RBI is committed to self-appraisal, introspection and professional
excellence VISION 1: Excellence in performance of functions. A: Furthering the monetary policy framework and
operating procedure; enriching statutory publications; and striving for a ‘state-of-the-art’ data-intensive policy
research framework B : Creating a resilient financial intermediation ecosystem; refining the regulatory,
supervisory and financial inclusion framework. C : Strengthening resilience, integrity and efficiency of the
financial markets infrastructure with a focus on deepening digital payments D: Enhancing efficiency of the
‘Banker to Government’ function E: Broadening and widening debt markets. F: Revamping the currency
management system through enhanced efficiency in procurement and distribution.
VISION 2: Strengthened trust of citizens and other institutions. A : Strengthening external communication
framework. B: Creating an enabling environment to develop consumer-friendly financial services providers
C: Ensuring sound and comprehensive internal and external RBI policies D: Adopting a ‘less paper’ and virtual
workflow for external stakeholders
VISION 3: Enhanced relevance and significance in national and global roles A: Intensifying presence in national
forums to improve domestic financial infrastructure, B: Enhancing RBI’s brand equity. C: Amplifying
international financial engagement by articulating RBI’s stance and views on major global economic and
regulatory policy issues. D: Strengthening existing positions in supranational institutions.
VISION 4: Transparent, accountable and ethics-driven internal governance A: Reinforcing governance and code
of ethics, B: Upgrading internal controls through robust risk management, auditing & compliance functions
through international best practices C: Adopting ‘less paper’ & virtual internal workflows.
VISION 5: Best-in-class and environmentfriendly digital as well as physical infrastructure A: Automating
processes, achieving integration of information and ensuring cyber security.
VISION 6: Innovative, dynamic & skilled Human Resources A: Reviewing and reframing the organisational
structure to effectively implement all strategies B: Enhancing skills of human resources for creating a suitable
training framework C: Establishing an objective performance assessment system for efficient HRM. D: Using
technology and data analytics to promote research-based decision making by the workforce
5.Banking: Stepping into the next decade– Professionalism holds the key
Picture a group of bankers standing on the precipice of the global financial crisis a decade ago, scratching their
heads wondering where they would be today.
Some smart Alecs would simply want to know which shares to buy for their long-term portfolios. Damn the rest of
the world. Their own bonuses and big fat bank accounts were the be all and end all back then.
But, that was more than just a different time. The whole world has changed, with the seismic shifts still
reverberating as this article goes to press. The ongoing Royal Commission into Mis-conduct in the Banking,
Superannuation and Financial Services Industry is just one of a number of government-imposed inquiries in Australia
and around the world, affecting how bankers are going to be allowed to do business in the future. The imposition of
the BEAR regime has also placed greater responsibility on banks by making top executives wait for bonuses. Basel III
and its demand for tighter liquidity ratios has meant a much tougher approach to lending to customers.
So, while it’s still a little bit of a crystal ball gazing exercise to guess where we will be in 2020 - let alone 2028 -
there are definitely certain themes developing around culture and governance that will continue to impact on the
industry.
The ridiculous cartoon excesses of the fictional Gordon Gekko - that infamous Greed is Good dinosaur from the
1987 film about Wall Street - might have survived up to the time of the 2008 crash, when governments around the
world were forced to bail out failing banks, heralding the start of the worst recession since the Great Depression.
Steps brought in since mean he is certainly dead and buried.
Regulatory authorities around the world are determined not to go through the chaotic scenes that saw queues of
people in the UK, trying to get their savings out of collapsed Northern Rock. Fewer consumers would have felt sorry
for the investment bankers from Lehman Brothers who were turfed on to the street with just their family portraits in
cardboard boxes.
While Australia avoided the worst of the recession, government investigations and the hand-wringing that followed,
it has become apparent that consumers feel short changed here. The Royal Commission and a litany of examples of
poor performance and downright appalling behaviour have put that in sharp focus upon an almost monthly basis this
year. There is no getting away from that. Having CEOs of the Big Four Banks and beyond openly talking about how
ashamed they are to be associated with such questionable ways of doing business, is an illustration of the repair
work that needs doing. If that isn’t enough, headlines about farmers driven to suicide, charging customers who have
died and Aboriginal and Torres Strait Islander People being preyed upon because of their faith, prove the extent of
the scandal. The trust that was once synonymous with banking is certainly in short supply. The job of fixing that
trust deficit became FINSIA’s way of looking forward even before the Royal Commission.
The return of the core value of being prudent custodians of peoples’ money and the introduction of
professional, higher than regulation-required, standards is key to FINSIA’s strategy. It is certainly the
organisation’s belief that professionalisation is the way forward. It’s also our belief that it will also over-ride
the impact of digital technology and artificial intelligence.
As FINSIA Managing Director and CEO Chris Whitehead F FIN said, as some of the worst excesses of the Royal
Commission were being revealed, the only way to restore trust was to establish industry wide professionalism.
He said: “It needs to be a given that in financial services in Australia you will be treated fairly, you will be treated
with honesty and respect - and that customer interests will be put first, ahead of the institution’s own interests.
Integrity cannot be a differentiator between organisations. It has to be a common bond, which we all share.”
Moreover, he adds: “Every person working in financial services needs to take personal responsibility for ensuring
they act with the highest integrity, that they put the interests of customers first and very importantly that they
speak up when they see unacceptable behaviours going on around them.”
The reason for FINSIA’s focus on professionalism is backed up by research carried out before the Royal Commission.
It’s not a knee-jerk reaction. Restoring trust by investing in professional standards is clearly the way forward. Findings
showed that only one in two consumers highly trust the Australian banking industry whilst only two in five highly trust
the CEO and Senior Executive team at their banks. More than half of consumers believed the Australian banking
industry as a whole, did not have high ethical standards. Add to that the fact that close to a fifth of consumers aged
between 25 and 44 would change banks to be served by staff who were more professionally qualified, and the scale
of the task ahead becomes clearer.
There is no doubt that industry leaders are already taking steps to repair the trust deficit and also believe that the
adoption of rigorous professional standards is the way forward. Many will be at the FINSIA Summit 2018, in October,
where professionalisation will be front and centre of the discussion between policy makers, government,
regulators, academics and key influencers.
But, how do we go about instilling professionalism into the banking sector? Is it the only remedy? And how is it
important to the future?
FINSIA’s Head of Standards & Education Kylie Blundell says: “FINSIA recognises that while professionalism is not
going to fix all the problems we are facing, it is certainly a major part of the solution that sits in alignment
with other initiatives, including regulation. And that will continue to be the case in the future.”
If we look at three key elements that build professionalism – education and continuing professional development,
professional association membership and disciplinary procedures, education clearly will still be of paramount
importance in the future, according to Blundell.
Taking education and CPD first, if you cannot do the job competently, how can you be a professional? Now or
in the future? It will mean getting to grips with aspects of the new technology that is at the heart of the
financial services industry. Membership of an independent professional body is another crucial component. It
will open doors to new developments in the digital space and as well as career opportunities.That membership
also links into the third crucial element - where the consequences of a disciplinary process is vital for
professionalism into the future. Expanding on the importance of professionalisation, education and ethics, Blundell
adds: “The importance we place on education as part of our professionalisation process will allow our members to
develop skills that future proof their careers.
“Membership provides individuals with contacts and networks that will allow them to progress their careers
now and into the future.
“Again, being part of a membership body with a disciplinary process will give employers the reassurance that
their workforce is performing to the highest ethical levels.
“Ethical principles are to a degree future proof – they have been around for many many years.
“That’s why they don’t need to match the speed of technology, the principles that are applied remain the
same.”
So, when we pose the question about how much of an impact digital technology and artificial intelligence will have
on today’s jobs - and whether it will decimate the workforce within banking - it’s a moot point. Forget the fact that
some commentators are saying thousands of jobs will be lost. For every one of the doomsayers, there is another
who is predicting that there will be a growth in allied jobs.
The fact is, customers will expect to be dealing with someone who can show a level of professionalism and
demonstrate they’re behaving in an ethical manner. For all those who put their faith in an app or chat bot just as
many will want the re-assurance of dealing with another human on the other side of the counter, phone, or computer
screen.
Another argument for the professionalism will make the fans of the bottom line happy. And while FINSIA’s survey
showing the lack of trust illustrates the need for professionalism, the growing demand for big business to show social
responsibility is already having an impact on profitability. It’s clearly good for business.
Pauline Vamos, who was at the helm of the Association of Superannuation Funds of Australia between 2007 and 2016,
says: “Businesses with good ethics out -performed the ASX. The link between conduct and share price is there to
see.”
Organisations that are seen to be behaving badly, she adds, see their reputation damaged which can cost much more
than making acting ethically mandatory.
She said: “Once your reputation is damaged, the cost of building it back up is huge. There’s more spent on that
than changing an organisation’s behaviour in the first place.”
While millions of dollars in fines levied against the banks has been seen by some as a ‘cost of doing business', Ms.
Vamos insists that the cost of repositioning the brand and distraction of management time had a greater impact.
As Giles Cuthbert, Managing Director of the UK Chartered Banker Institute, said during a session in Australia,
work done on measuring the success of professionalism showed how staff were given credit for their
recognition in doing the right thing.
He said: “One bank recognises when individual bankers send a customer off to another bank to get the correct
product, rather than just selling the product there in front of them. We have seen quite shift in how banks measure
performance.”
“What’s interesting is that this is happening at a time when we have seen banks return to profitability in the
UK.”
“It’s possibly because of the trust that is inspiring that we are seeing banks return to profit.”
So, if professionalism and ethical behaviour is the way towards profitability, it makes sense to push that strategy.
But, again, how do we go about that? Kylie Blundell says ethics can be taught, illustrating the fact when she reveals
experiences of how individuals making snap decisions under situations imitating day-to-day banking dilemmas showed
less than favourable results.
“When it comes to education - whether it be academic or professional qualifications - it is important they all
include ethics,” she says.
“The key point is learners need to understand the ‘why’, not just the process.”
“We also need to empower employees by education - not just so, they have the technical skills to perform their
role but provide them not just with the knowledge to help them recognise ethical dilemmas, but a range of tools or
frameworks to assist their ethical decision making.”
Integrity workshops delivered by FINSIA looking at techniques to promote ethical behaviour - to see if outcomes
were Honest, Open, Transparent and Fair - showed results indicating ethical education was a must.
“Transparency is interesting,” she adds.
“The workshops describe a common workplace scenario that presents some sort of ethical dilemma and provides a
number of next steps.”
“We ask participants to vote anonymously on what option they would choose.”
“What’s interesting is, if we ask people to discuss with other participants their options and the reasons for this
choice before they vote, the option selected most frequently tends to be the more ethically appropriate option.”
“If we ask participants to vote anonymously without discussing it with the other participants, or if we ask them to
vote quickly without time to contemplate, the option selected most frequently tends to be less ethically
appropriate.”
“It highlights the importance of creating workplaces and workplace practices that are open and transparent and
encourage employees to discuss their concerns with others to improve ethical decision making.”
Even though FINSIA thinks that professionalism is the way towards repairing the trust deficit, there is an
expectation that the Royal Commission will want to push for at least some greater regulatory controls. But, as
Blundell says, the professionalisation approach will actually set higher standards.
“We are working towards driving an aspiration for ethical conduct at a level higher than regulatory
compliance,” she says. “We need to move away from ‘the race to the bottom’ to meet minimum
requirements.” “We often see this with new starters where the drive to meet minimum competency requirements as
quickly as possible is at odds with professionalism.”
“We are also working on raising skill levels to improve customer outcomes and support the tradition of prudent
stewardship of customers’ money plus attracting and retaining the right talent to work in banking through the
provision of a professional pathway.” That she says is the way FINSIA can restore pride in the banking sector.
6.Customer Service in Banks: For Sustainable Business Growth

We see our customers as invited guests to a party and we are the hosts. It’s our job every day to make every
important aspect of the customer experience a little bit better. - Jeff Bezos
Introduction
Every organisation needs to practice excellence in customer service, because the organisation’s existence depends
on the customer. If there is no customer, the organisation will not exist and the organisation is meant for the
customers.
When there is a competition in business, customer has more choices. Hence efficient service is essential not only
to attract new customers, but also to retain existing ones.
In the present well connected world, thanks to technology development that the customers are well informed
and well aware about the products. Without excellent service the customers cannot be satisfied.
These hold good for the banks also. Banks are service organisations. The service being intangible in nature, quality
of service is more important than the physical product. Hence in present scenario of competitive banking,
excellence in customer service is the most important tool for sustained business growth for banks.
Initiatives of RBI in ensuring customer service in banks
The vast network of branches spread over the entire country with millions of customers, a complex variety of
products and services offered, the varied institutional framework- all these add to the enormity and complexity
of banking operations in India giving rise to complaints for deficiencies in services. This is evidenced by a series
of studies conducted by various committees such as the Talwar Committee, Goiporia Committee, Tarapore
Committee, Damodaran Committee, etc, to bring in improvement in performance and procedure involved in the
dispensation of hassle free customer service.
RBI’s efforts resulted in the following policies on customer service, approved by the Banks’ Boards:
• Comprehensive deposit Policy
• Cheque collection Policy
• Customer compensation Policy
• Customer grievance redressal Policy
• Banking Ombudsman
• The Banking Ombudsman scheme enables an expeditious and inexpensive forum to bank customers for
resolution of complaints relating to certain services rendered by banks. The scheme is introduced with
effect from 1995.
• Customers’ charter
• In the light of charter of customer rights, a draft model Customer Rights policy was framed by RBI in the
year 2015 and it was co-ordinated by Indian Banks' Association (IBA) to frame the Customer Rights Policy
by each bank’s board, in line with the Model customer’s charter. Customer protection is also an integral
aspect of financial inclusion. The Customer Rights Policy is based on domestic experience and global best
practices
With the efforts of RBI the Customer Service and Grievance mechanism consists of the following:
RBI brought the major breakthrough in customer service by introducing the following:
Customer Rights Policy encompasses the following five basic rights:
Right to Fair Treatment, Right to Transparency and Honest Dealing, Right to Suitability, Right to Privacy, Right
to Customer Grievance and Compensation.
Internal Ombudsman
For early resolution of customer complaints, in May 2015 RBI mandated all the public sector banks and select
private sector and foreign banks to appoint Internal Ombudsman (Chief Customer Service Officers).
The Internal Ombudsman is entrusted with the responsibility of examining those grievances which were either
rejected by the bank’s internal grievance redressal system or where only a partial relief was granted. All banks
have appointed Internal Ombudsman.
Banking Codes and Standards Board of India (BCSBI)
The Tarapore Committee observed that there was an institutional gap for measuring the performance of banks
against a benchmark reflecting the best practices (Code and Standards). Therefore, the committee recommended
setting up of BCSBI. In February 2006, BCSBI was set up to ensure that the common person as a consumer of
financial services from the banking Industry is in no way at a disadvantageous position and really gets what he
/ she has been promised.
BCSBI has in collaboration with the IBA, evolved two codes - Code of Bank’s Commitment to Customers and
the Code of Bank’s Commitment to Micro and Small Enterprises - which set minimum standards of banking
practices for member banks to follow when they are dealing with individual customers and micro and small
enterprises.
These codes are subject to periodical review and revision. The central objective of these codes is promoting good
banking practices, setting minimum standards, increasing transparency, achieving higher operating standards and
above all, promoting a cordial banker-customer relationship which would foster confidence of the common man
in the banking system.
• Code of Bank’s Commitment to Customers formed in 2006 was reviewed in 2009& 2014.
• Code of Bank’s Commitment to Micro and Small Enterprises formed in 2008 was reviewed in 2012 and
2015.
BCSBI is not a forum for redressal of individual grievances. It, however, examines each complaint to identify any
systemic issue that may exist and takes up the matter with the respective bank to ensure that systems and
procedures are suitably amended so that such complaints do not recur.
BCSBI also provides free of cost credit counselling to the borrowers of member banks in the retail segment eg
personal loan, credit card and MSE sector whose credit exposure does not exceed INR 50 lacs.
Based on the survey carried out by BCSBI, member banks are awarded suitable ‘BCSBI Code Compliance Rating’
with the technical assistance of rating agency CRISIL. In this rating, parameters according to their character
are grouped into five broad groups with respective weightage, as Information Dissemination (25), Transparency
(30), Customer Centricity (20), Grievance redressal (15) and Customer feedback (10).
The Survey conducted in the year 2015, compared to the year 2014 for overall parameters (overall rating) are
depicted in Table 1.
The survey shows migration of banks from above average to High in the year 2015.
Effort of the banks in customer service and grievance redressal
• Banks have also framed the following appreciable polices to ensure customer service:
Customer Rights Policy , Fair Lending Practices Code, Model Code Collection of Dues, Cheque Collection Policy,
Bank’s Commitment to Customer, Compensation Policy, Bank’s Commitment to MSME, Banking Ombudsman
Scheme, Internal Ombusman System 2012, Whistle Blower Policy, Grievance Redressal Policy, Policy on Bank
Deposits, Corporate Governance Report
Principles of customer service in banks
• The principles followed by the banks in framing the policies and in day to day banking activities are:
• Customers must be treated fairly at all times.
• Complaints raised by customers must be dealt with courteously.
• Customers to be fully informed of avenues to escalate their complaints / grievances within the organisation
and their right to alternative remedy, if they are not fully satisfied with the response of the bank to their
complaints.
• The banks to treat all complaints efficiently and fairly, as they can damage the bank’s reputation and
business if handled otherwise.
• The bank’s employees must work in good faith and without prejudice to the interest of the customer.
Table 1.
Challenges
The vast network of branches spread over the entire country covering wide range of geographic locations, house
different types of employees being serving the customers on behalf of the bank. In this situation bank’s
commitment to provide standardised service as per the committed code, in all the branches by each and every
bank’s staff is not an easy task. This is to be faced by the banks by imparting the knowledge on the adopted
BCSBI codes, need for the commitment through following the same and the reputational risk involved in the
entire process. The well designed training programmes will make this possible.
Since complex and variety of products and services being offered by the bank, the customers cannot find the
difference between the service and person providing the service. The need for the bank staff to handle
difficult situations with smile and to deliver the service in such a way to satisfy the customers’ needs are
required. Here customer service and soft skills of the bank’s staff plays important role. This also can be solved
through well designed human resource and soft skill training programmes to the bank’s staff.
As the online transactions have increased, so have the rise in complaints related to electronic banking
transactions. Recently complaints related to cyber frauds have witnessed manifold increase. These challenges to
be faced by developing robust mechanism to prevent fraud incidents, raising customer awareness on safe use of
digital payment systems, redressal of these complaints and limiting the liability of the customers on fraudulent
digital transactions, to retain customers’ confidence in these delivery channels.
In case of digital transactions due to the involvement of number of players to effect a particular transaction,
there is a possibility of failure of transactions often. As the banks are outsourcing certain activities, the process
becomes complex and refund or reversal of transactions in case of failure also becomes difficult and time taking.
This often puts the customer in difficulties. This to be resolved by a well designed procedure with the vendors
and proper follow up on ongoing basis.
RBI has observed the increase in large number of cases of mis-selling of third party products, specifically
insurance products to the customers by the banks by bundling them with loans. The banks by placing a system of
periodic inspection of the sale of third party products by involving internal inspection / audit teams, can plug the
loopholes.
Recent incidents have shown that the idle accounts were used to receive and transfer large sum, as money mule
transactions. This can be prevented by developing a robust system to monitor the transactions being undertaken
in these types of accounts. The technology aided alert and exception transaction reporting mechanism will
rescue the banks to solve these issues.
Conclusion
The competition in banking keeps on increasing day by day. The millennial or Gen-Y customers form the major
part of the customers of banks. Gen-Y customers are active and in the way of shifting to other banks on getting
better customer service. In the present era of digital channels, interoperable products launched by National
Payment Corporation of India (NPCI), Central KYC Registry and the migration towards account number
portability in banks will make the dissatisfied customer silently walk away without causing any inconvenience to
her and loss of business to the bank Technology tools can be explored to collect the complaints of the customer
from various sources and through various modes like, branch, controlling offices, internet, mobile apps, call
centres, SMS, etc, to make the complaints or service request or enquiry as simple process. It can be channelised
to reach the concerned unit to resolve the issue at the earliest time with suitable escalation matrix. The data
available through this mode can be used to analyse, find out the complaint areas, suitable modifications in the
products taking these inputs. Effective implementation and monitoring of this tool is important for better results.
Use of social media provides direct reach of the customer to the management of the bank with transparency. It
helps to solve the issues of the customers and engage the customer for cross selling and to build loyalty. The
data analytics based on the customer transaction data and external data can also be explored to reach the
customer with better service.
Recent licenses issued to new banks, small banks, payment banks, emerging challenges from Fin-Tech companies,
strengthening and deepening of bond markets to cater the corporate clients and disastrous effect of NPA make the
bank’s business and profitability a difficult task. In this situation the customer service is the differentiator to the
banks, without involving much additional cost.
RBI Deputy Governor has said that ‘Customer service is a business need of banks and not social service’. Hence
there is a need to build structure and processes that aim at providing quality and efficient services to the
customers to survive in the business of banking.
7. Financial Benchmark Administrators (Reserve Bank) Directions, 2019

RBI issued the ‘Financial Benchmarks Administrators (Reserve Bank) Directions, 2019’ which came into force
with effect from June 26, 2019. These apply to Financial Benchmark Administrators (FBAs) administering
‘Significant Benchmarks’ in the markets for financial instruments regulated by RBI.
Authorization of FBA: On RBI notifying a benchmark as a ‘significant benchmark’, the person administering
that benchmark shall make, within a period of three months, an application for authorization to continue
administering that benchmark. No FBA shall administer a ‘significant benchmark’ without obtaining
authorization of RBI.
Eligibility criteria for FBAs: It can be a company incorporated in India and having minimum net worth of Rs.1
crore at all times. Authorized FBAs shall adhere to the following directions for administering ‘significant
benchmarks’: a. Overall Responsibility of FBAs b.
Significant Benchmarks: Formulation, Determination and Review c. Organizational and Process Controls (Role
of Oversight Committee) d. Internal Control e. Outsourcing of ‘significant benchmark’ related work f.
Complaint Management g. Data Preservation
Benchmark Publication: FBAs shall make public the ‘significant benchmarks’, either on the day of its release
or with a lag not exceeding 15 days from the release.
Reporting: FBAs shall submit to RBI such data and reports within such timelines and in such formats as advised
from time to time.
2. For purposes other than hedging. (e) Any floating interest rate or price or index used in IRDs in the OTC
market shall be a benchmark published by an FBA or approved by The Fixed Income Money Market and
Derivatives Association of India (FIMMDA) for this purpose. FIMMDA shall ensure that the floating rate approved
by them is determined transparently, objectively and in arm’s length transactions. (f) IRD transactions shall be
settled bilaterally or through RBI approved clearing arrangement. Transactions by non-residents for purposes
other than hedging interest rate risk (a) Non-residents, other than individuals, may undertake Overnight
Indexed Swaps (OIS) transactions for purposes other than hedging interest rate risk subject to certain
conditions. OIS transactions by non-residents for purposes other than hedging interest rate risk shall be subject
to an overall limit, as specified below:
I. The Price Value of a Basis Point (PVBP) of all outstanding OIS positions undertaken by all non-residents shall
not exceed the amount of INR 3.50 billion (PVBP cap).
II. Non-residents shall not undertake any further OIS transactions for purposes other than hedging after the
PVBP cap is reached.
III. The PVBP of all outstanding OIS positions, for the purposes other than hedging, for any non-resident
(including related entities) shall not exceed 10% of the PVBP cap.
IV. Clearing Corporation of India Ltd. (CCIL) shall publish the methodology for calculation of the PVBP and
monitor as well as publish utilization of the PVBP limit on a daily basis. (b) Foreign Portfolio Investors (FPIs),
collectively, may also transact in interest rate futures (IRF) up to a limit of net long position of INR 50 billion.
Remittance/Payments by non-residents All payments related to IRD transactions may be routed through a
Rupee account of the non-resident or, through a vostro account maintained with an Authorised Dealer bank in
India. KYC for the non-resident Market-maker shall ensure that non-resident clients are from an FATF
compliant country and that non-resident clients comply with the KYC requirements. Regulatory reporting (1)
Market-makers in OTC transactions shall report all transactions, including client trades, within 30 minutes.
***ALL THE VERY BEST***

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BANKING IS EASY

Date: 18.03.2020 Sanjay Kumar Trivedy

He can be contacted only through whatsapp no. : 9987519725

B INDIAN BANKING 29-55

C LATEST RBI GUIDELINES (2019-2020) 56-90

D LOANS & ADVANCES 91-110

E DIGITAL BANKING 111-124

F NPA & RECOVERY MANAGEMENT 125-143

1 Resolution of Stressed Assets – Prudential Framework 125

G BASEL & RISK MANAGEMENT 144-151

H FOREX & TREASURY 152-158

I GENERAL BANKING 159-175

2. UNION BUDGET: 2020-21

HIGHLIGHTS OF BUDGET 2020

3. SIXTH BI-MONTHLY MONETARY POLICY (06.02.2020)

4. Seven Ages of India’s Monetary Policy

5. $ 5 Trillion Economy: Aspiration to Action

1.The PMC Bank Crisis -Where Do We Go From Here?

2. RBI’s Recent Repo Rate Cuts And Their Transmission by Banks

3. Golden Jubilee of Banks’ Nationalisation- A Walk Through

4. Banking Landscape in the 21st Century

5. Indian Banking at Crossroads: Some Reflections

6. Indian Banking Sector: Current Status and the Way Forward

7. Amalgamation of PSBs : Tasks Ahead

C. RBI POLICY GUIDELINES (2019-20)

SIXTH BI-MONTHLY MONETARY POLICY (06.02.2020)

3.FINANCIAL INCLUSION & Govt. Sponsored Schemes

BASEL, RISK MANAGEMENT & PRUDENTIAL NORMS

NPA AND RECOVERY MANAGEMENT

FOREIGN EXCHANGE AND INTERNATIONAL TRADE

SUPERVISORY ACTION FRAMEWORK FOR PRIMARY UCB’s:

CASH WITHDRAWAL USING POS TERMINALS

CRILC – (UCBS) (Central Repository of Information on Large Credits)

CURRENCY DERIVATIVE TRANSACTIONS

D. LOANS & ADVANCES

2. Strengthening MSMEs - Policy Innovations

3.Rural and Agriculture Finance: Critical Input to Achieve Inclusive and

Internal Working Group set up by RBI

4.Microfinance as the next wave of Financial Inclusion

5. PARTIAL GUARANTEE SCHEME FOR NBFCs

3. Artificial Intelligence (AI)

4. BLOCK CHAIN TECHNOLOGY & BANKING

5.ROLE OF TECHNOLOGY IN BANKING IN THE NEXT DECADE

1. RESOLUTION OF STRESSED ASSETS – PRUDENTIAL FRAMEWORK.

SMA-0 1-30 days

SMA-1 31-60 days

3.The Need for Innovations in NPA Recovery

4. Prompt Corrective Action (PCA) Framework & Memorandum of Understanding (MOU)

G. BASEL & RISK MANAGEMENT

2. Risk Management in Banking in the next decade

2. FEDAI Rules 2019

3. NEW ECB FRAMEWORK

4. SPECIAL NON-RESIDENT RUPEE ACCOUNT (SNRR)

5. FOREX EXCHANGE RISK MANAGEMENT

The Indian Scenario

2. Concurrent Audit System - Revised RBI directions

3. Financial Stability Report (Dec. 2019)

4. RBI Vision 2022 (Utkarsh 2022)

6.Customer Service in Banks: For Sustainable Business Growth

ALL THE VERY BEST