Review of Prudential Guidelines on Restructuring of Advances by Banks and
Financial Institutions – Draft Guidelines
Please refer to paragraphs 90 to 92 (extract enclosed) of the Second Quarter Review of Monetary Policy 2012-13 announced on October 30, 2012, wherein it was indicated that the draft guidelines on ‘Review of Prudential Guidelines on Restructuring of Advances by Banks and Financial Institutions’ in the light of the recommendations of the Working Group (WG) to Review the existing Prudential Guidelines on Restructuring of Advances (Chairman: Shri B. Mahapatra) will be issued by end-January 2013.
2. Accordingly, certain provisions of the existing guidelines contained in our circular DBOD.BP.BC.No.37/21.04.132/2008-09 dated August 27, 2008 and subsequent circulars issued on the subject have been revised and draft guidelines enumerating the existing instructions, recommendation(s) of the WG in that regard, and the proposed revised instruction(s) are given in theAnnex.
3. Comments on the draft guidelines may please be emailed or sent to the Chief General Manager-in-Charge, Department of Banking Operations and Development, Reserve Bank of India, Central Office, Mumbai 400 001 on or before February 28, 2013.
The Chairman and Managing Directors/
Chief Executives Officers of
All Scheduled Commercial Banks
(Excluding Local Area Banks and Regional Rural Banks)
Draft Guidelines on
Composition of Capital Disclosure Requirements
Please refer to the paragraph 87 (extract enclosed) of the Second Quarter Review of Monetary Policy Statement 2012-13 announced on October 30, 2012. It was indicated that the draft guidelines on composition of capital disclosure requirements, based on the proposals of the Basel Committee on Banking Supervision (BCBS), will be issued by end-December 2012.
2. In this context, a reference is also invited to the circular DBOD.No.BP.BC.98/21.06.201/2011-12 dated May 2, 2012 on implementation of Basel III capital regulations. The guidelines, inter alia, listed out certain disclosure requirements to improve transparency of regulatory capital and to enhance market discipline. Further, it also indicated that the Reserve Bank will issue appropriate Pillar 3 disclosure norms once the Basel Committee on Banking Supervision (BCBS) has finalised the same. The Basel Committee has since issued its rules text on ‘composition of capital disclosure requirements’.
India remains an attractive investment destination even as taxation uncertainties pose a challenge, according to global consultancy Deloitte.
A survey of investors, spread across various segments, conducted by Deloitte also found that investors were looking for more clarity on certain tax issues.
“…while India continues to be an attractive investment destination, the dynamic Indian tax framework create some apprehensions in the investors’ perception about the approach on the tax issues related to transactions in India,” it said.
Deloitte said the Indian tax landscape has been in limelight globally due to the landmark ruling of Supreme Court in Vodafone case followed by the retrospective amendments along with the proposed General Anti-Avoidance Rules (GAAR).
The Reserve Bank should give preference to the non-corporate sector for new bank licences, Prime Minister’s Economic Advisory Council ChairmanC Rangarajan said.
“It is possible for the Reserve Bank to start with initially non-corporate business and find out whether there are suitable applicants and thereafter proceed to look at the other applicants,” he said in an interview.
The RBI is in the process of finalising the guidelines for giving new bank licences after Parliament approved Banking Laws (Amendment) Bill last month.
The central bank, Rangarajan said, “should look at various types of financial institutions that are available currently and decide”.
“…. many of the strong private sector banks today have been at one time or other in the financial system. They can look at it first and look at the other later on,” he said.
The market regulator Sebi on Wednesday said it has appointed a committee under ex-Cabinet secretary K M Chandrashekhar to frame a single set of guidelines for all types of foreign investors.
The committee will suggest ways to simplify the investment process for all overseas entities like foreign institutional investors, foreign venture capital investors (FVCIs), qualified financial/institutional investors (QFIs), and NRIs, among others, and also to strengthen surveillance over them.
“Why should we have various routes for foreign investment? Why should we have sub-accounts, ODIs, FIIs and QFIs and NRIs and all that? In consultation with government, we have decided to combine these various routes which are present today into one single route.
Management of Intra-Group Transactions and Exposures – Draft Guidelines
As a prudential measure aimed at avoiding concentration of credit risk, the Reserve Bank of India has prescribed regulatory limits on banks’ exposure to individual and Group borrowers which are laid down in the Master Circular on Exposure Norms. The instructions in this guideline are exclusively meant for banks’ transactions and exposures to the entities belonging to the bank’s own Group (Group entities). The draft guidelines contain both quantitative limits for the financial Intra-Group Transactions and Exposures (ITEs)1 and prudential measures for the non-financial ITEs2 to ensure that the banks engage in the ITEs in safe and sound manner in order to contain the concentration and contagion risk arising out of ITEs. These measures are aimed at ensuring that banks, at all times, maintain arms length relationship in their dealings with the Group entities, meet minimum requirements with respect to Group risk management and group-wide oversight, and adhere to prudential limits on intra-group exposures.
2. The draft guidelines on Management of Intra-Group Transactions and Exposures for safe conduct of ITEs and management of risk concentrations have been prepared in the light of experience gained in monitoring of identified financial conglomerates during last few years. The same are furnished in Annex.
The Reserve Bank of India today released on its website, the “Draft Circular for Deployment of White Label Automated Teller Machines (WLAs)“. The Reserve Bank has sought views/comments on the draft circular from banks, authorised ATM network operators, non-bank entities and members of public.
The key features of the draft circular are:
- Non-bank entities proposing to set up WLAs would have to make an application to the reserve Bank for seeking authorisation under the Payment and Settlement Systems (PSS) Act, 2007. Such entities should have a minimum net worth of Rs. 100 crore at the time of making the application and on a continuing basis after issue of the requisite authorisation. Other guidelines for applying to the Reserve Bank for authorisation under the PSS Act are available at
- Roles and responsibilities of the stakeholders as indicated at Annex ‘B’ (WLA Operator, Sponsor Bank, ATM Network Operators) are identified in the draft circular keeping in view various aspects, that is, cash management, ATM network membership and customer grievance redressal.
The general criteria for the non-bank entities that would be authorised under the PSS Act to own and operate WLAs are indicated at Annex- A
While implementation of Basel III norms will help in improving the capital base of the banks in the country, the credit growth of some lenders may suffer, said S & P in its report released on Friday.
The stringent norms by the Reserve Bank of India to implement BASEL III standards will bridge the gap between India and its Asian peers for the risk-adjusted capital criterion. But, it will also pose a challenge of constant capital infusion.
“The draft guidelines may negatively affect the credit growth of a few banks,” said the report. But overall, the guidelines — if implemented — will benefit Indian banks’ stand-alone credit profiles, it added.
S & P is of the view that the Indian banks will be able to implement the Basel III guidelines within the time frame despite the stringent guidelines given by the banking regulator. The RBI’s guidelines are more stringent than what the Basel Committee on Banking Supervision (BCBS) has proposed. In addition, the RBI expects banks to meet these requirements in a relatively shorter time frame, S & P said.
Indian banks would require additional Rs 8 lakh crore to meet the minimum capital adequacy under Basel III norms, ratings agency Crisil has said. The amount is over and above their earnings in the transition period between 2013 and 2019.
According to the Basel III guidelines released in 2010, banks across the globe would need a minimum capital adequacy ratio of 10.5 per cent, which includes seven per cent of core equity, 1.5 per cent of non-equity Tier-I capital and two per cent of Tier-II capital. The countercyclical buffer of up to 2.5 per cent would increase the total capital requirement to 13 per cent.
“Indian banks are well capitalised and would be able to meet the leverage and liquidity requirements under Basel III,” said Pawan Agarwal, director (corporate and government ratings), Crisil. According to evaluation by the ratings agency, the overall capital adequacy ratio of Indian banks, on an average, was 14.1 per cent as on March 31. The Reserve Bank of India is expected to issue draft guidelines by December.
Assuming the government maintains 51 per cent stake and bank credit grows around 20 per cent every year, around Rs 6 lakh crore would be required, which includes Tier-I capital of Rs 3.5 lakh crore in public sector banks.
The challenge, however, is to replace existing hybrid instruments worth Rs 1.25 lakh crore, a part of Tier-I capital, with those permitted under Basel-III norms. The new standards would allow hybrid instruments such as Tier-I perpetual bonds and upper Tier-II bonds with a ‘write off’ clause that enables automatic conversion into equity, when required. “Lack of adequate appetite may lead to higher premium for new instruments,” said Agarwal.
Crisil said while new measures would strengthen Indian banks, their profitability is likely to be hit, given the higher core equity capital and liquidity requirements. The ratings agency estimates the return on equity would decline by around two-three per cent for banks with low core capital. While rating banks, there would be an increased focus on their capability to raise the required capital.
Bloomberg has just disclosed a statement from the German Budgetary Committee which is critical to the future shape of the EFSF:
- GERMAN CDU/CSU PARLIAMENTARY SPOKESMAN SCHARLACK SPEAKS ON EFSF
- GERMAN BUDGET COMMITTEE SETS CONDITIONS FOR EFSF LEVERAGING
- GERMAN BUDGET COMMITTE GUIDELINES VOTE EXCLUDES LEVERAGING
- BUDGET COMMITTEE SAYS EFSF REPOS MUSTN’T RAISE GUARANTEES
- GERMAN BUDGET COMMITTEE SAYS EFSF LEVERAGING MUST EXCLUDE ECB
- GERMAN BUDGET COMMITTEE BACKS EFSF DRAFT GUIDELINES
So far so good… But this…
- BUDGET COMMITTEE SAYS EFSF GUARANTEES MUSTN’T EXCEED EU211 BLN
…Is not good. If this is the core guarantees that can be levered up to 5x assuming a 20% first loss guarantee, it means barely $1 trillion can be insured. This is nowhere near enough to backstop the just noted €1.7 trillion in future debt rolls, not to mention the €X billion in bank recaps. It also means that a French downgrade, with S&P noted earlier is contingent on the country not falling into recession, an event which even Goldman has said previously is assured, would put the full weight of the European rescue squarely on the shoulders of Germany.