Report of the Committee to re-examine the existing classification and suggest revised guidelines with regard to Priority Sector Lending Classification and related issues, 2012 (M.V Nair)
- The Committee reiterated the need for commercial banks to play significantly enlarged role for deepening financial services in rural and urban markets.
- Retain Priority sector lending (PSL) target at 40% of Adjusted Net Bank Credit (ANBC) (or Credit Equivalent of Off-Balance sheet exposure or CEOBE, whichever is higher) for domestic banks. The Priority sectors to be agriculture, MSE, microcredit, education, housing, off-grid energy solutions for households and exports (for foreign banks only).
- The Committee recommends removing the distinction between Direct and Indirect Agriculture while retaining the 18% target for agriculture sector, as there is a need for these to be seen as a single set of activities comprising production, storage and distribution.
- Sub-targets can be introduced for the following, and require banks to achieve minimum increase of 15% per year in the number of accounts:
- A sub-target of 9% of ANBC (or CEOBE, whichever is higher) for small and marginal farmers, to be achieved latest by 2015-16 – this is based on the Committee’s conclusion that small and marginal farmers forming 80% of total farmer households face exclusion from formal financial channels.
- A sub-target of 7% of ANBC (or CEOBE whichever is higher) for micro enterprises, to be achieved by 2013-14 – this is based on the Committee’s conclusion that only 5% out of the 26 million MSE units are covered by formal financial institutions.
- Caps are suggested for the following:
- Within the existing target of 10% of ANBC for Weaker sections, not more than 6% of ANBC to be lent to eligible small and marginal farmers and eligible village and cottage industries and artisans.
- The Committee favours placing a cap of upto 5% of ANBC (or CEOBE whichever is higher) for bank finance to non-bank intermediaries for purposes of on-lending to small and marginal farmers and microenterprises.
- These is a need to revise overall limits for PSL every 3 years based on price index, cost of inputs, relevance in value chain and so on. Committee suggested revised limits for specific items within the priority sector list, for instance,
- Increase PSL limits for education loans to Rs.15 lakh (from Rs.10 lakh) and Rs.25 lakh (from Rs.20 lakh) for studying in India and abroad respectively
- Increase PSL limits for investment in plant and machinery for food and agro-based processing units to Rs. 20 crore from Rs.10 crore
- Increase PSL limits for loans extended to artisans, village and cottage industries under weaker sections, to Rs.1 lakh from Rs. 50000
- The differential treatment for foreign banks is to be removed by placing a 40% PSL target for them, with sub-targets of 15% for exports, 15% for MSE sector within which to place a 7% sub-target for microenterprises.
- The Differential rate of interest (DRI) scheme is to be discontinued as other better schemes targeting the same beneficiaries are already present; the Interest subvention scheme can be extended to eligible borrowers of private sector banks.
- Priority sector status can be given to loans taken for off-grid solar and renewable energy solutions for households, as well as to loans for women, and housing loans to Economically Weaker sections (EWS) and Low Income Groups (LIG).
- The Committee recommends introducing non-tradable Priority Sector Lending Certificates (PSLCs) on a pilot basis for commercial banks, foreign banks and RRBs.
- The Committee suggests creating a Credit Guarantee Fund to deal with cases of distressed small and marginal farmers, to protect lending institutions against perceived risks.
- Interest rates of all priority sector advances is to be linked to base rate and the penalty paid on deposits placed with NABARD/SIDBI/NHB by banks defaulting on meeting their PSL targets is to be benchmarked to the reverse repo rate.
- All branch managers must be provided discretionary powers with respect to sanctioning loans for small and marginal farmers, microenterprises and weaker sections without reference to any higher authority, in order to facilitate speedy credit disbursal.
- Turnaround times are to be put in place for disposal of loan applications – not more than a fortnight for loans upto Rs.50000, and not more than 4 weeks for loans more than Rs.50000 (provided the application forms and check lists are complete).
- Banks are to put in place a redressal mechanism for complaints received.
- The Committee recommends conducting impact evaluation studies for diverse priority sector segments and the use of the study results to change the course of RBI’s PSL policy.
Some of the Recommendations of Nair Committee that have been implemented by RBI are given below:
- Loans sanctioned by banks directly to individuals for setting up off-grid solar and other off-grid renewable energy solutions for households have been given PSL status.
- Loans to individual women beneficiaries upto 50,000 per borrower have been included under Weaker Sections category.
- Acknowledgement of Loan Applications: Banks should provide acknowledgement for loan applications received under priority sector loans. Bank Boards should prescribe a time limit within which the bank communicates its decision in writing to the applicants.
Report of the Working group on the Issues and Concerns in the NBFC Sector, 2011 (Usha Thorat)
- The Committee recommends exemption from RBI registration for all NBFCs with asset sizes below Rs.1000 cr that do not access public funds (public funds are raised either directly or indirectly through public deposits, commercial papers, debentures, inter-corporate deposits, guarantees and bank finance or any other debt instrument, but exclude funds raised by issue of share capital and/ or instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue from registration with RBI). However, an annual certificate of their Statutory Auditors certifying the NOF, total asset size and whether they have accessed any public funds in the financial year should be submitted to RBI. In the same lines, existing NBFC-NDs with asset size less than Rs.50 cr can deregister from RBI.
- RBI to insist on an asset size of minimum Rs.50 cr and NOF of Rs.2 cr for registration with RBI.
- Prior RBI approval is also to be placed for NBFCs’ changes in shareholding in excess of 25% of the paid up capital, as well as for mergers and acquisitions governed by SEBI regulations for Substantial Acquisitions of Shares and Takeover.
- The Committee recommends a change in the definition of principal business of NBFCs from 50% to 75% as minimum threshold of financial assets and income. Financial activities as given in the Act must exclude insurance business, management of chits, kuries and collection of monies for awarding prizes and gifts.
- The Committee proposes a single category of loan/investment company (while retaining asset financing companies as a separate category) instead of the existing classification of having separate loan companies and investment companies.
- The limit on acceptance of deposits by rated AFCs is to be reduced from 4 times of NOF to 2.5 times of NOF.
- Tier I capital requirement is to be set at 12% for all NBFCs (including captive NBFCs that focus on financing parent company’s products), and the risk weights for NBFCs that are not sponsored by banks or that are not part of a group that contains a bank, is to be set at 150% for capital market exposures and 125% for Commercial Real Estate exposures. The risk weights on exposure to capital market and real estate, for NBFCs in a bank group shall be the same as specified for banks.
- A liquidity coverage requirement is to be introduced such that cash and bank deposits maturing in 30 days, government securities, and investments in money market instruments maturing within 30 days, fully cover gaps between outflows and inflows for the 30 day bucket.
- Asset classification and provisioning norms for NBFCs to be made at par with banks. ie., from 180 days to 90 days as is the case with banks.
- The Committee recommends bringing NBFCs under the purview of SARFAESI Act 2002.
- The regulatory gaps are to be bridged, that treat NBFCs engaged in margin financing differently from stockbroking firms and investment/merchant banks (such as with NBFCs that have brokers and merchant bankers in their group are to be looked at under the conglomerate approach).
- All Government-owned entities that qualify as NBFCs based on the principal business criterion must also be made to comply with NBFC regulations and be brought under RBI oversight.
- • The Committee endorses RBI’s stand of not permitting any more fresh registration of NBFC-Ds, so as to remove differential regulatory treatment of banks and NBFC-D. All NBFCs-D to obtain mandatory credit ratings.
- RBI, through amendments to the Banking Regulation Act must be given as much power as it has over banks, in relation to the management of NBFCs. All NBFCs with asset size of R.1000 cr or more, whether listed or not must be made to comply with Clause 49 of SEBI Listing Agreements, along with the associated disclosure requirements, as well to have Remuneration Committee to decide Senior Management compensation.
- All registered NBFCs must disclose their registration with all regulators and exchanges, as well as credit ratings assigned by rating agencies, and penalties placed by regulators if any. All NBFCs with asset size Rs.100 cr or more must also disclose their provision coverage ratio, liquidity ratio, asset-liability profile, movement of NPAs, off-balance sheet exposures, financing of parent company products, as well as securitisations and assignments.
- The Committee recommends a revised CAMELS plus supervisory approach for NBFCs with asset size of Rs.1000 cr and above, and is to include assessment of risks due to concentration, funding, asset liability mismatches, liquidity, counterparty credit, complex structured off-balance sheet exposures, securitisation and credit transfer, leverage, cross-border transactions, and so on.
RBI’s response to Usha Thorat Committee Recommendations
RBI has placed draft guidelines based on the Usha Thorat Committee recommendations, in December 2012. There have not come into effect yet. Some of the important details are:
- Increase provisioning norms for NBFCs from 180/360 days to 120 days, and after a year to 90 days, at par with that of banks.
- Increase provisioning norms for standard assets of NBFCs from 0.25% to 0.40%.
- Raise Tier l capital be raised to 12% for all captive NBFCs (90% and above of total assets (net of intangibles) are on financing parent company’s products/services), and for NBFCs that are into lending to / investment in sensitive sectors namely, capital market, commodities and real estate, to the extent of 75% or more of their total assets net of intangible assets. Other NBFCs including IFCs to maintain Tier l capital at 10%.
- Increase the risk weights for NBFCs that are not sponsored by banks or that are not part of a group that contains a bank, to 150% for capital market exposures and 125% for Commercial Real Estate exposures. The risk weights on exposure to capital market and real estate, for NBFCs in a bank group shall be the same as specified for banks.
- Any short term gap in net cash inflows and outflows in NBFCs’ ALM in the 1-30 day bucket is to be met by maintaining high quality liquid assets in cash, bank deposits available within 30 days, money market instruments maturing within 30 days, investment in actively traded debt securities (valued at 90% of the quoted price) and carrying a rating not lower than AA or equivalent [this is in line with the Liquidity Coverage Ratio requirement stipulated for banks by Basel III which may come into effect from 2015].
- Increased corporate governance and disclosure norms for NBFCs
Report of the RBI Sub-Committee to study Issues and concerns in the MFI sector, 2011 (Y.H Malegam)
- The Sub-Committee has recommended creation of a separate category of NBFCs operating in the microfinance sector to be designated as NBFC-MFIs. Such an NBFC-MFI should be ‘a company which provides financial services pre-dominantly to low-income borrowers, with loans of small amounts, for short-terms, on unsecured basis, mainly for income-generating activities, with repayment schedules which are more frequent than those normally stipulated by commercial banks’ and which further satisfies the regulations specified in that behalf. All NBFC-MFIs should have a minimum net worth of Rs.15 cr, a capital adequacy of 15%, and all NOF in the form of Tier I capital. Some additional qualifications for NBFC to be classified as NBFC-MFI are:
- The NBFC-MFI will hold not less than 90% of its total assets (other than cash and bank balances and money market instruments) in the form of qualifying assets.
- Qualifying assets are those that satisfy the following criteria:
- The loan is given to a borrower who is a member of a household whose annual income does not exceed Rs. 50,000
- The loan does not exceed Rs. 25,000 and the total outstanding indebtedness of the borrower including this loan also does not exceed Rs.25,000
- The tenure of the loan is not less than 12 months where the loan amount does not exceed Rs.15,000 and 24 months in other cases with a right to the borrower of prepayment without penalty in all cases
- The loan is without collateral
- The aggregate amount of loans given for income generation purposes is not less than 75% of the total loans given by the MFIs
- The loan is repayable by weekly, fortnightly or monthly instalments at the choice of the borrower
- There should be a margin cap of 10% placed on MFIs with an outstanding loan portfolio at the beginning of the year larger than Rs. 100 cr, and a cap of 12% for those MFIs with upto Rs.100 cr. There should also be a cap of 24% on individual loans.
- In the interest of transparency, an MFI can levy only three charges, namely, processing fee not more than 1% of the gross loan amount, interest charge and insurance premium (only actual cost, without any administrative charges). No security deposits are to be collected.
- A Loan card is to be given to every borrower, displaying in local language and understood by the borrower, the effective rate of interest, terms and conditions, borrower details to identify the borrower, acknowledgement by MFI of repayment instalments made.
- The Sub-committee has made a number of recommendations to mitigate the problems of multiple-lending, over borrowing, ghost borrowers and coercive methods of recovery, such as:
- A borrower has to be a member of only one SHG or JLG
- Not more than two MFIs can lend to the same borrower
- There should be a minimum moratorium period between the disbursement of loan and the commencement of recovery
- Recovery must be done only with the groups at a designated place, and not in the home or workplace of the borrower
- RBI to put in place a Code of Conduct (along the lines of the Fair Practices Guidelines of RBI for NBFCs) which all MFIs must follow, besides having in place proper recruitment, training and supervision of field staff to prevent coercive recovery practices
- MFIs must establish a Grievance Redressal Procedure
- All MFIs are to become members of a credit bureau. In the meantime, the primary responsibility for obtaining information from potential borrowers regarding existing borrowings should lie with the MFI.
- Provisioning for loans should not be maintained for individual loans but the MFI should be required to maintain at all times an aggregate provision for loan losses which shall be the higher of: (i) 1% of the outstanding loan portfolio or (ii) 50% of the aggregate loan instalments which are overdue for more than 90 days and less than 180 days and 100% of the aggregate loan instalments which are overdue for 180 days or more.
- The Sub-Committee has recommended that bank lending to NBFCs which qualify as NBFC-MFIs will be entitled to priority sector lending status.
- For monitoring compliance with regulations, the Sub-Committee has proposed a four-pillar approach with the responsibility being shared by the MFI, the industry associations, through compliance with the Code of conduct, banks by their surveillance of MFIs through their branches, and the RBI through on-site and off-site supervision, by itself and by the use of external agencies. The RBI is to be given powers to remove the CEO/ Director of an MFI in the event of persistent non-compliance with regulations.
- While reviewing the proposed Micro Finance (Development and Regulation) Bill 2010, the Sub- Committee has recommended that entities governed by the proposed Act should not be allowed to do business of providing thrift services. It has also suggested that NBFC-MFIs should be exempted from the State Money Lending Acts and also that if the recommendations of the Sub-Committee are accepted, the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act will no longer be needed.
RBI’s response to Malegam Committee Recommendations by creating a new category of NBFCs termed NBFC-MFIs. Some of the important regulations in this regard are given below:
Accepting many of the recommendations of the Malegam Committee, RBI created a new category of NBFCs, namely NBFC-MFIs in December 2011 , which are to satisfy the following criteria:
- Minimum NOF of Rs. 5 cr, and of Rs.2 cr for NBFC-MFIs in the North-East.
- Tier I and Tier II Capital to be not less than 15% of aggregate risk-weighted assets
- Not less than 85% of its net assets are in the nature of “qualifying assets”, [modified as on August 03, 2012: Only the assets originated on or after January 1, 2012 will have to comply with the Qualifying Assets criteria. As a special dispensation, the existing assets as on January 1, 2012 will be reckoned towards meeting both the Qualifying Assets criteria as well as the Total Net Assets criteria. These assets will be allowed to run off on maturity and cannot be renewed]. These are:
- Loan disbursed to a borrower with a rural household annual income not exceeding Rs.60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000
- Loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles
- Total indebtedness of the borrower does not exceed Rs. 50,000
- Tenure of the loan not to be less than 24 months for loan amount in excess of Rs.15,000 with prepayment without penalty
- Loan to be extended without collateral
- Aggregate amount of loans, given for income generation, is not less than 75% of the total loans given by the MFIs [modified as on August 03, 2012: Aggregate amount of loans given for income generation should constitute at least 70% of the total loans of the MFI so that the remaining 30% can be for other purposes such as housing repairs, education, medical and other emergencies]
- Loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower
- An NBFC which does not qualify as an NBFC-MFI shall not extend loans to micro finance sector, which in aggregate exceed 10% of its total assets.
- The CRAR for NBFC-MFIs which have more than 25% loan portfolio in the state of Andhra Pradesh will be at 12% for the year 2011-2012 only. Thereafter they have to maintain CRAR at 15%.
- The aggregate loan provision to be maintained by NBFC-MFIs at any point of time shall not be less than the higher of a) 1% of the outstanding loan portfolio or b) 50% of the aggregate loan instalments which are overdue for more than 90 days and less than 180 days and 100% of the aggregate loan instalments which are overdue for 180 days or more.
- All NBFC-MFIs shall maintain an aggregate margin cap of not more than 12%. The interest cost will be calculated on average fortnightly balances of outstanding borrowings and interest income is to be calculated on average fortnightly balances of outstanding loan portfolio of qualifying assets. [modified on August 03, 2012: The margin cap for all NBFCs irrespective of their size would be 12% till March 31, 2014. However, with effect from 1st April, 2014 margin caps as defined by Malegam Committee may not exceed 10% for large MFIs (loans portfolios exceeding Rs.100 crore) and 12% for the others.]
- Interest on individual loans will not exceed 26% per annum and calculated on a reducing balance basis. [deleted on August 03,2012 and the following inserted: NBFC-MFIs will ensure that the average interest rate on loans during a financial year does not exceed the average borrowing cost during that financial year plus the margin, within the prescribed cap. Moreover, while the rate of interest on individual loans may exceed 26%, the maximum variance permitted for individual loans between the minimum and maximum interest rate cannot exceed 4%]
- Processing charges shall not be more than 1% of gross loan amount. Processing charges need not be included in the margin cap or the interest cap.
- NBFC-MFIs shall recover only the actual cost of insurance for group, or livestock, life, health for borrower and spouse. Administrative charges where recovered, shall be as per IRDA guidelines.
Fair Practices in Lending
I. Transparency in Interest Rates
- There shall be only three components in the pricing of the loan viz., the interest charge, the processing charge and the insurance premium (which includes the administrative charges in respect thereof).
- There will be no penalty charged on delayed payment.
- NBFC-MFIs shall not collect any Security Deposit/ Margin from the borrower.
- There should be a standard form of loan agreement.
- Every NBFC-MFI should provide to the borrower a loan card reflecting
- The effective rate of interest charged
- All other terms and conditions attached to the loan
- Information which adequately identifies the borrower and
- Acknowledgements by the NBFC-MFI of all repayments including installments received and the final discharge.
- All entries in the Loan Card should be in the vernacular language.
- The effective rate of interest charged by the NBFC-MFI should be prominently displayed in all its offices and in the literature issued by it and on its website.
II. Multiple-lending, Over-borrowing and Ghost-borrowers
- NBFC-MFIs can lend to individual borrowers who are not member of JLG/ SHG or to borrowers that are members of JLG/SHG.
- A borrower cannot be a member of more than one SHG/JLG.
- Not more than two NBFC-MFIs should lend to the same borrower.
- There must be a minimum period of moratorium between the grant of the loan and the due date of the repayment of the first installment. The moratorium shall not be less than the frequency of repayment. For eg: in the case of weekly repayment, the moratorium shall not be less than one week.
- Recovery of loan given in violation of the regulations should be deferred till all prior existing loans are fully repaid.
- All sanctioning and disbursement of loans should be done only at a central location and more than one individual should be involved in this function. In addition, there should be close supervision of the disbursement function.
III. Non- Coercive Methods of Recovery
- NBFC-MFIs shall ensure that a Code of Conduct and systems are in place for recruitment, training and supervision of field staff. The Code of Conduct should also incorporate the Guidelines on Fair Practices Code issued for NBFCs by RBI.
- Recovery should normally be made only at a central designated place. Field staff shall be allowed to make recovery at the place of residence or work of the borrower only if borrower fails to appear at central designated place on 2 or more successive occasions.
- [Added on August 03, 2012: every NBFC-MFI has to be a member of at least one Credit Information Company (CIC) established under the CIC Regulation Act 2005, provide timely and accurate data to the CICs and use the data available with them to ensure compliance with the conditions regarding membership of SHG/ JLG, level of indebtedness and sources of borrowing. While the quality and coverage of data with CICs will take some time to become robust, the NBFC-MFIs may rely on self-certification from the borrowers and their own local enquiries on these aspects as well as the annual household income.
- All NBFC-MFIs will have to become member of at least one Self-Regulatory Organization (SRO) which is recognized by the Reserve Bank and will also have to comply with the Code of Conduct prescribed by the SRO.
- NBFC-MFIs may approach their Boards for fixing internal exposure limits to avoid any undesirable concentration in specific geographical locations.]
Report of the Committee on Customer Service in Banks, 2010 (Damodaran)
1. Unbundling of products: Product proliferation and an emphasis on incremental growth in fee-based income have prompted many banks to develop and market a bundle of products as one package, not necessarily in a homogenous way. The pricing of products and services in a bundling approach may not necessarily serve the best interest of the customers who need only basic banking services. The customers had expressed a desire to pay only for the product they use, would prefer plain vanilla products and are distinctly unhappy paying for an entire bundle.
2. Minimum Account Balance: Banks should inform the customer immediately on the balance in the account breaching minimum balance and the applicable penal charges for not maintaining the balance by SMS/e-mail/letter.
3. Basic Savings Account: Bank should offer a basic bank account with certain privileges like certain number of transactions (say three per month), cheque facility, ATM Card, etc., without any prescription of minimum balance.
4. Know Your Customer Norms -
- KYC for additional accounts opened in the same bank should have relaxed conditions and there should not be a repeated exercise.
- Indian Bank’s Association (IBA) may consider setting up a trusted third party KYC Data bank which can be relied upon for KYC purposes and perhaps hosted under the UID number of the customer.
- Unique Identification No. (UID) as KYC for Opening No Frills Account – With introduction of Unique Identification (UID), it is recommended that for opening of No Frills Accounts, UID may suffice as KYC. Till the full implementation of UID project, self-attested photograph and address proof should be treated as sufficient KYC to open no frills account.
5. Linking Terms and Conditions of Various Products to Core Banking Solutions (CBS): All products like PPF or any future products introduced for specific segments, say senior citizens, which are provided on an agency basis by banks should have all their terms and conditions properly integrated into the CBS.
6. Prepaid Instruments – Availability of prepaid instruments of higher value would find favour with frequent travellers/ tourists. The banks should be permitted to issue such all-purpose prepaid cards’ with a maximum withdrawal limit of 50,000/- per day.
7. Reporting to Credit Information Bureau – Banks should be doubly careful while reporting a borrower as defaulter to Credit Information Bureau. Banks should ensure that any representation from the customer in this matter is processed expeditiously. Rules of the Credit Information Bureau should clearly differentiate settlements done at a huge loss to the bank from the routine settlements, where customers dispute on fees, commissions etc. and accordingly create suitable flag in the Credit Report.
8. Loan Statement – Banks must ensure that loan statements are issued to the borrowers periodically giving details of loan disbursed, demands and repayments effected along with interest and details of charges.
9. Most Important Terms and Conditions (MITC) – The banks must develop MITCs for all the important products and services focusing on the 5 – 10 items that are of critical importance to the consumers. All MITCs should be in Arial font and size 12, which would be easily readable to the customers
10. Customers in Rural and Semi urban Areas-
- Banks should ensure proper currency exchange facilities and also the quality of notes in circulation in rural areas.
- Branches should be made functioning at a time convenient to the customers (agricultural laborers, workers, artisans, etc.) i.e., morning hours and late evening hours.
11. Self Help Groups -
- SHG members should not be forced to take insurance products.
- Multiplicity of loans to the same borrowers through MFIs should be avoided as the same results in poor recovery by SHGs.
- Banks can provide loans to SHGs in tranches. However, the same should take into account the business requirements of the SHG rather than depending solely on the repayment made by the SHGs.
- SHG representatives should also be given presence in the SLBC forum.
12. Tribal Areas / North-East
- The business correspondent / facilitator model should be completely used for improving the banking facilities in the tribal areas.
- Financial education material in pictorial form and audio presentations in local dialect should be used in Tribal areas
- Prominent citizens belonging to important Tribes of the region could also be considered for appointment as BC.
- RBI may take up the issue of poor VSAT based connectivity in the region with Government of India for BSNL to do the needful at the earliest.
- The KYC norms and related tax issues may be viewed from the region -specific requirements and may be on a relaxed basis for a period of five years or till such time that the average population per branch reaches the national average.
13. The awareness about the Banking Codes and Standards Board of India (BCSBI )Codes even after five years since the incorporation of BCSBI has not penetrated to the desired level and banks need to make every effort in that direction. A full and proper implementation of the Codes is an important and urgent requirement to fulfil the commitment made to the bank customers. The Banks should train and familiarize all the staff in following and implementing the Codes.
14. Customer Education-
- Special efforts are required to educate the customers in the use of technology in banking. Banks should make use of Print media, Television, All India Radio for this purpose. Short training programmes at the branch level can also be arranged for the customers.
- Banks should establish a proper Customer Grievance / Assistance Centre which works in an integrated manner across channels like – branches, call centres, IVR, internet and mobile. The personnel in the Call centres who receive the grievances should be empowered to make decisions.
- All banks should implement a relevant Customer Relationship Management system to capture and track customer issues and complaints.
- Banks in North Eastern region may explore a possibility of ensuring backup of alternate sources of energy for supply of power for ATM machines so as to ensure continuous service to the customers
- The layout of the branch premises and the people manning it play an important role in motivating a customer with positive thoughts. The needs of the senior citizens and the physically challenged persons must also be an important input in deciding on the branch locale and its access.
- There must be specific and proper queue management system at branches where there is heavy crowd, with basic facilities of seating arrangements, drinking water etc.
- The ‘May I Help You’ counters at branches should be invariably manned
- The deposit insurance cover should be raised to 5,00,000/- so as to encourage individuals to keep all their deposits in a bank.
16. Mobile banking – All grievances of mobile banking should be addressed by the banks only, without referring the customer to the service providers. The agreements of the banks with the telecom service providers should incorporate suitable provisions to address mobile banking grievances. Banks should encourage formation of user communities to get feedback on the banks and also to enhance the efficiency of their products, and design new products.
17. Banks have to necessarily ensure that all internet banking is made failsafe by putting in place robust and dynamic fraud detection and prevention systems. Banks in their systems should have facility of customer behaviour/purchase pattern analysis and any attempt from an unknown address / suspicious outlier debit transaction should be first blocked and then informed over SMS to the customer. In the case of fraud, instead of the bank putting the onus on the customer to prove that he has not done the transaction or caused it to happen, the onus should be on the bank to prove that the customer has done the transaction.
18. To avoid identity issues, all credit and debit cards (including Chip cards) should be Photo Cards with the scanned signatures laminated on the Card.
19. If an ATM card has been misused by another person, on receipt of SMS about use of the Card, the customer should be able to immediately send return SMS to block the Card (if he observes misuse) with a single word like ‘BLOCK’ to prevent further withdrawals
20. Banks should in a phased manner switch over to the use of Chip based card (EMV) instead of the current magnetic strip based ones, in order to prevent skimming and damage / erosion of data due to wear and tear and misuse
21. Biometric ATM Cards – Illiterate customers and senior citizens generally find it difficult to remember ATM PIN. Banks may issue Biometric ATM cards to senior citizens and illiterate customers who are not at ease while using ordinary ATM cards.
22. For debit / credit card transactions at the Point of Sale (PoS), instead of signature based authorisation, PIN based authorisation should be made mandatory without any looping. There should be a phased withdrawal of non-pin based PoS machines.
23. Self-Personalisation of Cards – Call centres as well as the online systems through net banking should enable a customer to:
- Fix individual transaction limits for debit/credit card use.
- Debar or fix limits for purchase of electronic or jewellery items
- Manipulate the limits for add on cards
- Activate/deactivate use of card internationally.
- Limit the use of card to any particular state or a defined area
24. Free SMS / e-mail alerts should be sent for every transaction such as date of maturity of deposit, ECS credit received, credit of pension, credit / receipt of money through RTGS etc.
25. Business Process Reengineering– Banks should ensure that the CBS addresses the following major issues which were not integrated into CBS at its inception. For instance, automatic updation of age records and then conferring senior citizen benefits wherever applicable once a customer becomes a senior citizen.
26. Online Grievance Redressal System – Bank should provide for online registration of grievance in its website.
27. Customer Service during Internal Audit – The bank / branch inspection should review also the systemic ways of complaint resolution rather than looking at the mere number of cases resolved. The time frame for redressal of different types of grievances in terms of the intensity and nature should be displayed on the notice board of every branch.
28. Banking Ombudsman Scheme (BOS)- There is a need for the banks in developing their Internal Grievance Redressal Mechanism to ensure only the minimum number of cases gets escalated to the Banking Ombudsman and the Scheme is strictly utilised only as an appellate mechanism. This can be made possible by having an official within the bank in the form of an internal Ombudsman which is in vogue in some countries like Canada and France.
29. Several States do not have a Banking Ombudsman (BO) office. The bank customers in Jammu and Kashmir and the North-Eastern States have stated that it was not possible to interact with the far away BO offices in New Delhi and Guwahati respectively.
30. Role of Bank Boards in Customer Service- Board of Directors should play a proactive role in implementing all the customer service guidelines and instructions. Root cause analysis of the top five types of complaints of a quarter should be placed before the Customer Service Committee of the Board held in the subsequent quarter. A brief note on the discussions held on the same should be placed before the Board in its subsequent meeting. The actionable points that emanate out of such deliberations should be closed only after placing of the compliance status in the subsequent meetings of the Customer Service Committee / Board (as the case may be)
31. The Board should ensure that the following policies are in place:
- A comprehensive policy for Customer Acceptance, Customer Care and Customer Severance.
- The policies should clearly lay out approach to Customer Care taking into account the geographic spread of branches, segments of customers, needs of special sections like senior citizens, widows, physically challenged persons etc.
- Customer Centricity – The bank’s approach to develop ‘Client First Attitude’ by its employees needs to be documented and the same may include aspects such as positive attitudinal change, behavior and practices
- Banks may consider reward, recognition and motivation programme for front-line Officers who have shown exemplary character in ensuring quality customer service.
- Customer service and grievance redressal should be included as a mandatory parameter in the Performance Appraisal Report of all employees.
Report of the Committee on Banking Sector Reforms, 1998 (Narasimham)
1. An asset can be classified as doubtful if it is in the substandard category for 18 months in the first instance and eventually for 12 months and loss if it has been so identified but not written off.
2. The Committee has noted that Non-Performing Assets (NPAs) figures do not include advances covered by Government guarantees which have turned sticky and which in the absence of such guarantees would have been classified as NPAs. The Committee is of the view that for the purposes of evaluating the quality of asset portfolio such advances should be treated as NPAs.
3. Banks and financial institutions should avoid the practice of “ever greening” by making fresh advances to their troubled constituents only with a view to settling interest dues and avoiding classification of the loans in question as NPAs.
4. The Committee believes that the objective should be to reduce the average level of net NPAs for all banks to below 5% by the year 2000 and to 3% by 2002. For those banks with an international presence the minimum objective should be to reduce gross NPAs to 5% and 3% by the year 2000 and 2002, respectively, and net NPAs to 3% and 0% by these dates.
5. For banks with a high NPA portfolio, the Committee suggests consideration of two alternative approaches:
- In the first approach, all loan assets in the doubtful and loss categories – which in any case represent bulk of the hard core NPAs in most banks, should be identified and their realisable value determined. These assets could be transferred to an Asset Reconstruction Company (ARC) which would issue to the banks NPA Swap Bonds representing the realisable value of the assets transferred.
- An alternative approach could be to enable the banks in difficulty to issue bonds which could form part of Tier II capital. This will help the banks to bolster capital adequacy which has been eroded because of the provisioning requirements for NPAs. As the banks in difficulty may find it difficult to attract subscribers to bonds, the government will need to guarantee these instruments which would then make them eligible for SLR investments.
6. Priority Sector Lending: The Committee has noted the reasons why the Government could not accept the recommendation for reducing the scope of directed credit under priority sector from 40% to 10%. The Committee recommends that the interest subsidy element in credit for the priority sector should be totally eliminated and even interest rates on loans under Rs.2 lakh should be deregulated. The Committee believes that it is the timely and adequate availability of credit rather than its cost which is material for the intended beneficiaries.
7. Recruitment: The Committee notes that public sector banks and financial institutions have yet to introduce a system of recruiting skilled manpower from the open market. The Committee believes that this delay has had an impact on the competency levels of public sector banks. The Committee on the Financial System (CFS), 1991 had recommended that there was no need for continuing with the Banking Service Recruitment Boards insofar as recruitment of officers was concerned. This Committee, upon examination of the issue, reaffirms that recommendation.
8. Structural Issues: In India also banks and Development Finance Institutions (DFIs) are moving closer to each other in the scope of their activities. The Committee is of the view that with such convergence of activities between banks and DFIs, the DFIs should, over a period of time, convert themselves to banks. There would then be only two forms of intermediaries, viz. banking companies and non-banking finance companies. If a DFI does not acquire a banking licence within a stipulated time it would be categorised as a non-banking finance company.
9. The Committee is of the view that foreign banks may be allowed to set up subsidiaries or joint ventures in India. Such subsidiaries or joint ventures should be treated on par with other private banks
10. Though cooperation is a state subject, since Urban Cooperative Banks (UCBs) are primarily credit institutions meant to be run on commercial lines, the Committee recommends that this duality in control should be eliminated. It should be primarily the task of the Board for Financial Supervision to set up regulatory standards for Urban Cooperative banks and ensure compliance with these standards through the instrumentality of supervision.
11. Rural and Small Industrial Credit: The Committee recommends that a distinction be made between NPAs arising out of client specific and institution specific reasons and general (agro-climatic and environmental issues) factors. While there should be no concession in treatment of NPAs arising from client specific reasons, any decision to declare a particular crop or product or a particular region to be distress hit should be taken purely on techno-economic consideration by a technical body like NABARD.
12. As a measure of improving the efficiency and imparting a measure of flexibility the committee recommends consideration of the debt securitisation concept within the priority sector. This could enable banks, which are not able to reach the priority sector target to purchase the debt from the institutions, which are able to lend beyond their mandated percentage.
13. Banking policy should facilitate the evolution and growth of micro credit institutions including LABs which focus on agriculture, tiny and small scale industries promoted by NGOs for meeting the banking needs of the poor. Third-tier banks should be promoted and strengthened to be autonomous, vibrant, effective and competitive in their operations
14. The Committee recommends that an integrated system of regulation and supervision be put in place to regulate and supervise the activities of banks, financial institutions and non-banking finance companies (NBFCs). The functions of regulation and supervision are organically linked and we propose that this agency be renamed as the Board for Financial Regulation and Supervision (BFRS) to make this combination of functions explicit.
15. The Board for Financial Regulation and Supervision (BFRS) should be given statutory powers and be reconstituted in such a way as to be composed of professionals. At present, the professional inputs are largely available in an advisory board which acts as a distinct entity supporting the BFS. Statutory amendment which would give the necessary powers to the BFRS should develop its own autonomous professional character. The Committee, taking note of the formation of BFS, recommends that the process of separating it from the Reserve Bank qua central bank should begin and the Board should be invested with requisite autonomy and armed with necessary powers. However, with a view to retain an organic linkage with RBI, the Governor, RBI should be head of the BFRS.
16. No further recapitalisation of banks: So far, a sum of Rs.20, 000 crore has been expended for recapitalisation and to the extent to which recapitalisation has enabled banks to write off losses, this is the cost which the Exchequer has had to bear for the bad debts of the banks. Recapitalisation is a costly and, in the long run, not a sustainable option. Recapitalisation involves budgetary commitments and could lead to a large measure of monetisation. The Committee urges that no further recapitalisation of banks be undertaken from the Government budget.
17. At present, the laws stipulate that not less than 51% of the share capital of public sector banks should be vested with the Government and similarly not less than 55% of the share capital of the State Bank of India should be held by the Reserve Bank of India. The current requirement of minimum Government of India/Reserve Bank of India shareholding is likely to become a constraint for raising additional capital from the market by some of the better placed banks unless Government also decides to provide necessary budgetary resources to proportionately subscribe to the additional equity, including the necessary premium on the share price, so as to retain its minimum stipulated shareholding. The Committee believes that these minimum stipulations should be reviewed. It suggests that the minimum shareholding by Government/RBI in the equity of nationalised banks and SBI should be brought down to 33%.
18. The Reserve Bank as a regulator of the monetary system should not be also the owner of a bank in view of the potential for possible conflict of interest. It would be necessary for the Government/RBI to divest their stake in these nationalised banks and in the State Bank of India.
19. The Committee strongly urges that there should be no recourse to any scheme of debt waiver in view of its serious and deleterious impact on the culture of credit.
Report of the Committee on Financial Sector Reforms, 2008 (Raghuram Rajan)
1. India’s economy has become more open and it is impossible to control capital flows in either direction, except for the very short term. Given this, the real exchange rate, which is the key factor determining India’s competitiveness, is influenced by factors such as productivity growth and demand supply imbalances that are not changed by central bank intervention against the dollar. The RBI should formally have a single objective, to stay close to a low inflation number, or within a range, in the medium term, and move steadily to a single instrument, the short-term interest rate (repo and reverse repo) to achieve it.
2. Steadily open up investment in the rupee corporate and government bond markets to foreign investors after a clear monetary policy framework is in place. India should accept the possible costs of subsequent currency appreciation as a legitimate down payment on the more robust markets and financing we will enjoy in the future. We should also relieve pressure from inflows by becoming more liberal on outflows, especially in forms that can be controlled if foreign currency becomes scarce. For instance, we should encourage greater outward investment by provident funds and insurance companies when inflows are high.
Broadening Access to Finance
3. Allow more entry to private well-governed deposit-taking small finance banks offsetting their higher risk from being geographically focused by requiring higher capital adequacy norms, a strict prohibition on related party transactions, and lower allowable concentration norms. The small finance bank proposed emulates the Local Area Bank initiative by the RBI that was prematurely terminated, though the details of the Committee’s proposal differs somewhat. The intent is to bring local knowledge to bear on the products that are needed locally, and to have the locus of decision making close to the banker who is in touch with the client.
This would suggest rethinking the entire cooperative bank structure, and moving more to the model practiced elsewhere in the world, where members have their funds at stake and exercise control, debtors do not have disproportionate power, and government refinance gives way to refinancing by the market. The Committee would suggest implementation of a strong prompt corrective action regime so that unviable cooperatives are closed, and would recommend that well-run cooperatives with a good track record explore conversion to a small bank license, with members becoming shareholders.
4. The second organizational structure the Committee proposes makes it easier for large financial institutions to ‘bridge the last mile’. Large institutions have the ability to offer commodity products like savings accounts at low cost, provided the cost of delivery and customer acquisition is reduced. They should be able to use existing networks like cell-phone kiosks or kirana shops as business correspondents to deliver products. Liberalize the banking correspondent regulation so that a wide range of local agents can serve to extend financial services. Use technology both to reduce costs and to limit fraud and misrepresentation.
5. Offer priority sector loan certificates (PSLC) to all entities that lend to eligible categories in the priority sector. Allow banks that undershoot their priority sector obligations to buy the PSLC and submit it towards fulfilment of their target. Any registered lender (including microfinance institutions, cooperative banks, banking correspondents, etc.) who has made loans to eligible categories would get ‘Priority Sector Lending Certificates’ (PSLC) for the amount of these loans. The Committee recommends liberalizing interest rates while increasing safeguards that prevent exploitation.
6. Liberalize the interest rate that institutions can charge, ensuring credit reaches the poor, but require
- full transparency on the actual effective annualized interest cost of a loan to the borrower,
- periodic public disclosure of maximum and average interest rates charged by the lender to the priority sector,
- only loans that stay within a margin of local estimated costs of lending to the poor be eligible for PSLCs.
The Committee believes that through a combination of transparency, incentives, and eventually competition, liberalized interest rates to the poor can be kept within reasonable limits, and liberalization would enhance, and improve the sources of, credit to the poor. The Committee suggests that the government pay more directly for the social obligations it wants banks to undertake (for example, by reducing priority sector obligations and, over time, paying directly for PSLCs)
Levelling the Playing Field
7. The greatest source of uneven privileges in the banking system stems from ownership. The public sector banks, accounting for 70 per cent of the system, enjoy benefits but also suffer constraints, with the latter increasingly dominating. There is little evidence that the ownership of banks makes any difference to whether they undertake social obligations, once these are mandated or paid for. So on net, what matters is how an ownership structure will affect the efficiency with which financial services are delivered. The majority of this Committee does not see a compelling reason for continuing government ownership. There are other activities where government attention and resources are more important. A parallel approach is to undertake reforms that would remove constraints on the public sector banks, even while retaining government ownership. Intermediate steps such as reducing the government’s ownership below 50 per cent while retaining its control (as suggested by the Narasimham Committee). Unfortunately, ideology has overtaken reasoned debate in this issue. The pragmatic approach, which should appeal to practical people of all hues, is to experiment, as China does so successfully, and to use the resulting experience to guide policy. One aspect of the pragmatic approach would be to sell a few small underperforming public sector banks, possibly through a strategic sale (with some protections in place for employees), so as to gain experience with the selling process, and to see whether the outcomes are good enough to pursue the process more widely.
8. Create stronger boards for large public sector banks, with more power to outside shareholders (including possibly a private sector strategic investor), devolving the power to appoint and compensate top executives to the board.
9. After starting the process of strengthening boards, delink the banks from additional government oversight, including by the Central Vigilance Commission and Parliament, with the justification that with government-controlled boards governing the banks, a second layer of oversight is not needed. Further ways to justify reduced government oversight is to create bank holding companies where the government only has a direct stake in the holding company. Another is to bring the direct government stake below 50 per cent, perhaps through divestment to other public sector entities or provident funds, so that the government (broadly defined) has control, but the government (narrowly defined) cannot be considered the owner.
10. Be more liberal in allowing takeovers and mergers, including by domestically incorporated subsidiaries of foreign banks. The commitment to allow foreign banks subsidiaries to participate in takeovers will substantially increase the pressure on domestic banks.
11. A second way to foster growth and competition, but also to strengthen banks, is to de-license the process of branching immediately. The RBI can retain the right to impose restrictions on the growth of certain banks for prudential reasons, but this should be the exception rather than the norm. One objective of branch licensing is to force banks into under-banked areas in exchange for permission to enter lucrative urban areas. This is again an obligation that will have to be revisited as competition increases in urban areas, but it can be explicitly achieved today by instituting a service norm—for every x savings accounts that are opened in high income neighbourhoods, y low-frill accounts have to be opened in low income neighbourhoods. The service provision obligation could become traded (much as the priority sector norms earlier), with small banks or cooperatives acquiring certificates for the excess number of accounts they provide and selling them to deficient banks. The government may provide added incentives by buying certificates, and should take over this obligation from banks over time.
12. Allow holding company structures, with a parent holding company owning regulated subsidiaries. The holding company should be supervised by the Financial Sector Oversight Agency, with each regulated subsidiary supervised by the appropriate regulator.
Creating More Efficient and Liquid Markets
13. The Committee believes that there are substantial efficiencies to be had by consolidating the regulation of trading under one roof (SEBI)—this will allow scope economies to be realized, improve liquidity, and increase competition. Moreover, all markets are interconnected, so fragmenting regulation weakens our ability to regulate.
14. Encourage the introduction of markets that are currently missing such as exchange traded interest rate and exchange rate derivatives.
15. Stop creating investor uncertainty by banning markets. If market manipulation is the worry, take direct action against those suspected of manipulation. As an example, products such as currency futures and commodity options are banned. A market that is banned can obviously not attain liquidity or efficiency. Equally problematic, a missing market can hamper the efficiency of other markets also. For instance, the absence of interest rate futures can hurt the Treasury market. The recent practice of closing down commodity markets when the price reaches high levels is unfortunate to say the least.
16. Create the concept of one consolidated membership of an exchange for qualified investors (instead of the current need to obtain memberships for each product traded). Consolidated membership should confer the right to trade all the exchange’s products on a unified trading screen with consolidated margining.
17. Encourage the setting up of ‘professional’ markets and exchanges with a higher order size that are restricted to sophisticated investors, where more sophisticated products can be traded. Some exchanges, clearing corporations, and depositories are close to being world class as is the clearing, settlement, and depository infrastructure. New entry by professional exchanges catering to institutional/sophisticated customers could help, as could greater competition between elements of the infrastructure.
18. Create a more innovation friendly environment, speeding up the process by which products are approved by focusing primarily on concerns of systemic risk, fraud, contract enforcement, transparency and inappropriate sales practices.
19. Allow greater participation of foreign investors in domestic markets as in Proposal 2. Increase participation of domestic investors by reducing the extent to which regulators restrict an institutional investor’s choice of investments. Move gradually instead to a ‘prudent man’ principle where the institutional investor is allowed to exercise judgement based on what a prudent man might deem to be appropriate investments.
Creating a growth Friendly Regulatory Environment
Problems with existing financial regulatory and supervisory structure:
- First, the pace of innovation is very slow. Products that are proposed to be introduced in India (though well-established elsewhere in the world) take several years to get regulatory approval.
- Second, excessive regulatory micromanagement leads to a counter-productive interaction between the regulator and the regulated.
- Third, some areas of the financial sector have multiple regulators, while others that could pose systemic risks have none. Both situations, of unclear responsibility, and of no responsibility, are dangerous.
- Fourth, regulators tend to focus on their narrow area to the exclusion of other sectors, leading to balkanization even between areas of the financial sector that naturally belong together. Financial institutions are not able to realize economies of scope in these areas, leading to inefficiency and slower growth.
- Finally, regulatory incentive structures lead to excessive caution, which can be augmented by the paucity of skills among the regulator’s operational staff relative those of the regulated. Such caution could actually exacerbate risks.
20. Rewrite financial sector regulation, with only clear objectives and regulatory principles outlined.
21. Parliament, through the Finance Ministry, and based on expert opinion as well as the principles enshrined in legislation, should set a specific remit for each regulator every five years. Every year, each regulator should report to a standing committee (possibly the Standing Committee on Finance), explaining in its annual report the progress it has made on meeting the remit. The interactions should be made public.
22. Regulatory actions should be subject to appeal to the Financial Sector Appellate Tribunal, which will be set up along the lines of, and subsume, the Securities Appellate Tribunal.
23. Supervision of all deposit taking institutions must come under the RBI. Situations where responsibility is shared, such as with the State Registrar of Cooperative Societies, should gradually cease. Drawing a lesson from the current crisis in industrial countries, the Committee recommends that joint responsibility for monetary policy and banking supervision continue to be with the RBI, and that the RBI play an important role in the joint supervision of conglomerates and systemically important NBFCs.
24. The Ministry of Corporate Affairs (MCA) should review accounts of unlisted companies, while SEBI should review accounts of listed companies.
25. A Financial Sector Oversight Agency (FSOA) should be set up by statute. The FSOA’s focus will be both macro-prudential as well as supervisory; the FSOA will develop periodic assessments of macroeconomic risks, risk concentrations, as well as risk exposures in the economy; it will monitor the functioning of large, systemically important, financial conglomerates; anticipating potential risks, it will initiate balanced supervisory action by the concerned regulators to address those risks; it will address and defuse inter-regulatory conflicts. The FSOA should be comprised of chiefs of the regulatory bodies (with a chair, typically the senior-most regulator, appointed from amongst them by the government), and should also include the Finance Secretary as a permanent invitee. The FSOA should have a permanent secretariat comprised of staff including those on deputation from the various regulators.
26. The Committee recommends setting up a Working Group on Financial Sector Reforms with the Finance Minister as the Chairman. The main focus of this working group would be to shepherd financial sector reforms.
27. The Committee also notes the consumer faces an integrated portfolio of services. It is increasingly important for the consumer to have a ‘one stop’ source of redress for complaints, a financial ombudsman. Set up an Office of the Financial Ombudsman (OFO), incorporating all such offices in existing regulators, to serve as an interface between the household and industry.
28. The Committee recommends strengthening the capacity of the Deposit Insurance and Credit Guarantee Corporation (DICGC) to both monitor risk and resolve a failing bank, instilling a more explicit system of prompt corrective action and making deposit insurance premia more risk-based.
Creating a Robust Infrastructure for Credit
29. Expedite the process of creating a unique national ID number with biometric identification. More sources of information, such as payments of rent or of utilities/cell-phone bills, need to be tapped to build individual records of payment, which can then open doors to credit and expand access.
30. The Committee recommends movement from a system where information is shared primarily amongst institutional credit providers on the basis of reciprocity to a system of subscription, where information is collected from more sources and a subscriber gets access to data subject to verification of need to know and authorization to use of the subscriber by the credit bureau.
31. On-going efforts to improve land registration and titling—including full cadastral mapping of land, reconciling various registries, forcing compulsory registration of all land transactions, computerizing land records, and providing easy remote access to land records—should be expedited, with the Centre playing a role in facilitating pilots and sharing experience of best practices.
32. Restrictions on tenancy should be re-examined so that tenancy can be formalized in contracts, which can then serve as the basis for borrowing.
33. The powers of SARFAESI that are currently conferred only on banks, public financial institutions, and housing finance companies should be extended to all institutional lenders.
34. Encourage the entry of more well-capitalized ARCs, including ones with foreign backing. If India is to have a flourishing corporate debt market, corporate public debt, which is largely unsecured, needs to have value when a company becomes distressed.
35. The Committee outlines a number of desirable attributes of a bankruptcy code in the Indian context, many of which are aligned with the recommendations of the Irani Committee.