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WHAT IS NEW IN BANKING

Monetary Policy 04.05.2022

Resolution of the MPC

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting on May 4, 2022 decided to:

• Increase the policy repo rate under the liquidity adjustment facility (LAF) by 40 basis points to 4.40 per cent with immediate effect. Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 4.65 per cent.

Maintenance of Cash Reserve Ratio

As announced in the Governor’s statement dated May 4, 2022, it has been decided to increase the cash reserve ratio (CRR) of all banks by 50 basis points from 4.00 per cent to 4.50 per cent of their Net Demand and Time Liabilities (NDTL), effective from the reporting fortnight beginning May 21, 2022.

Change in Bank Rate

As announced in the Monetary Policy Statement 2022-23 dated May 4, 2022, the Bank Rate has been revised upwards by 40 basis points from 4.25 per cent to 4.65 per cent with immediate effect.

Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances – Clarifications by RBI (15.02.2022)

 In view of several queries received seeking certain clarifications, it is advised as under:

1. The definition of ‘out of order’, as clarified in the Circular, shall be applicable to all loan products being offered as an overdraft facility, including those not meant for business purposes and/or which entail interest repayments as the only credits. 

2. The ‘previous 90 days period’ for determination of ‘out of order’ status of a CC/OD account shall be inclusive of the day for which the day-end process is being run.

3. In case of borrowers having more than one credit facility from a lending institution, loan accounts shall be upgraded from NPA to standard asset category only upon repayment of entire arrears of interest and principal pertaining to all the credit facilities.

4. The circular does not make any changes to the requirements related to reporting of information to CRILC, which will continue to be governed in terms of extant instructions for respective entities.

Clarification regarding definition of ‘out of order’ (12.11.2021)

6. Cash credit/Overdraft (CC/OD) account is classified as NPA if it is ‘out of order’. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, the extant instructions, inter alia, stipulate that the account should be treated as ‘out of order’ if there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period. In order to avoid any ambiguity regarding determination of ‘out of order’ status of CC/OD accounts on a continuous basis, it is clarified that an account shall be treated as ‘out of order’ if:

1. the outstanding balance in the CC/OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days, or
2. the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but there are no credits continuously for 90 days, or the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited during the previous 90 days period.

7. Accordingly, treatment of CC/OD accounts as ‘out of order’ on or after the date of this circular shall be based on the above instructions.

Integrated Ombudsman scheme, 2021

Integrated Ombudsman scheme, 2021 (the scheme) has been launched by RBI on November 12, 2021. The scheme integrates the existing three Ombudsman schemes of the Reserve Bank, namely, i) the Banking Ombudsman scheme, 2006; ii) the Ombudsman scheme for Non-Banking Financial Companies, 2018; and iii) the Ombudsman scheme for Digital Transactions, 2019. (For details kindly read the related article on this website)

Resolution of the Monetary Policy Committee (MPC) on December 8, 2021

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (December 8, 2021) decided to:

• keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 per cent.

The reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent.

• The MPC also decided to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.

These 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.

Resolution of the Monetary Policy Committee (MPC) on October 8, 2021

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting held on October 8, 2021 decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 per cent. Accordingly, the reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent.

The MPC also decided to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward. These 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.

Enhancement of collateral free loans to Self Help Groups (SHGs) under DAY-NRLM from ₹10 lakh to ₹20 Lakh (09.08.2021)

For loans to SHGs up to ₹10.00 lakh, no collateral and no margin will be charged. No lien should be marked against savings bank account of SHGs and no deposits should be insisted upon while sanctioning loans.

For loans to SHGs above ₹10 lakh and up to ₹20 lakh, no collateral should be charged and no lien should be marked against savings bank account of SHGs. However, the entire loan (irrespective of the loan outstanding, even if it subsequently goes below ₹10 lakh) would be eligible for coverage under Credit Guarantee Fund for Micro Units (CGFMU).

Regulatory Restrictions on Loans and Advances (July 23, 2021)

The Reserve Bank on July 23, 2021 revised the regulatory restrictions on loans and advances to directors and relatives directors of scheduled commercial banks, small finance banks and local area banks and their relatives as follows:

i) The threshold of Rs.25,00,000 for personal loans granted to any director of other banks stands revised Rs.5,00,000,00.

ii) Unless sanctioned by the Board of Directors/Management Committee, banks should not grant loans and advances aggregating Rupees five crore and above to

(a) Any relative other than spouse and minor / dependent children of their own Chairmen/Managing Directors or other Directors;

(b) Any relative other than spouse and minor / dependent children of the Chairman/Managing Director or other directors of other banks;

(c) Any firm in which any of the relatives other than spouse and minor / dependent children as mentioned in (a) & (b) above is interested as a partner or guarantor; and

(d) Any company in which any of the relatives other than spouse and minor / dependent children as mentioned in (a) & (b) above is interested as a major shareholder or as a director or as a guarantor or is in control.

A relative of a director shall also be deemed to be interested in a company, being the subsidiary or holding company, if he/she is a major shareholder or is in control of the respective holding or subsidiary company. 

Interest on Overdue Domestic Deposits (July 2, 2021)

The Reserve Bank on July 2, 2021 advised that the rate of interest payable on matured and unpaid proceeds of term deposit shall be the same rate applicable to savings account or the contracted rate of interest on the matured TD, whichever is lower. Accordingly, the relevant sections in the Master Directions on Interest Rate of Deposits dated March 3, 2016 and Cooperative Banks – Interest Rate on Deposits dated May 12, 2016 have been amended. 

Resolution of the MPC (June 04, 2021)

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting held on June 04, 2021 decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 per cent. Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent.

The MPC also decided to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward. These 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. To read more, please click here.

27.04.2021 -Guidelines for Appointment of SCAs/SAs (April 27, 2021)

The Reserve Bank on April 27, 2021 issued the following guidelines under Section 30(1A) of the Banking Regulation Act, 1949, Section 10(1) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980 and Section 41(1) of SBI Act, 1955; and under provisions of Chapter IIIB of RBI Act, 1934 for NBFCs:

Applicability - The guidelines will be applicable to the Commercial Banks (excluding RRBs), UCBs and NBFCs including HFCs (hereinafter referred to as the Entities) for Financial Year 2021-22 and onwards in respect of appointment/reappointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of the Entities.

Prior Approval of the Reserve Bank - Commercial Banks (excluding RRBs) and UCBs will be required to take prior approval of the Reserve Bank (Department of Supervision) for appointment/reappointment of SCAs/SAs, on an annual basis. While NBFCs do not have to take prior approval of the Reserve Bank for appointment of SCAs/SAs, all NBFCs need to inform the Reserve Bank within one month of such appointment.

Number of SCAs/SAs and Branch Coverage - For Entities with asset size of ₹15,000 crore and above as at the end of previous year, the statutory audit should be conducted under joint audit of a minimum of two audit firms [Partnership firms/Limited Liability Partnerships (LLPs)]. All other Entities should appoint a minimum of one audit firm (Partnership firm/LLPs) for conducting statutory audit.

Eligibility Criteria of Auditors - Each Entity is required to appoint audit firm(s) as its SCA(s)/SA(s) fulfilling the eligibility norms as prescribed in Annex I of the guidelines.

Independence of Auditors – For Commercial Banks (excluding RRBs) and NBFCs, the Audit Committee of the Board (ACB)/ Local Management Committee (LMC) shall monitor and assess the independence of the auditors and conflict of interest position in terms of relevant regulatory provisions, standards and best practices. For UCBs/remaining NBFCs, the Board of Directors shall monitor and assess the independence of the auditors.

Professional Standards of SCAs/SAs - The SCAs/SAs shall be strictly guided by the relevant professional standards in discharge of their audit responsibilities with highest diligence.

Tenure and Rotation – In order to protect the independence of the auditors/audit firms, Entities will have to appoint the SCAs/SAs for a continuous period of three years, subject to the firms satisfying the eligibility norms each year.

Audit Fees and Expenses - The audit fees for SCAs/SAs of all the Entities shall be decided in terms of the relevant statutory/regulatory provisions.

Statutory Audit Policy and Appointment Procedure - Each Entity shall formulate a Board/LMC approved policy to be hosted on its official website/public domain and formulate necessary procedure thereunder to be followed for appointment of SCAs/SAs.

08.04.2021: Enhancement of limit of maximum balance per customer at end of the day from ₹1 lakh to ₹2 lakh – Payments Banks (PBs)

PBs were restricted to hold a maximum balance of ₹1 lakh per individual customer at the end of the day. It has been decided to enhance the limit of maximum balance at the end of the day from ₹1 lakh to ₹2 lakh per individual customer of PBs with immediate effect.

23.03.2021: No justification for charging compound interest or penal interest during the period of loan moratorium which was allowed by the Reserve Bank of India from March 1 to August 31 last year on account of the COVID19 pandemic. : SC

The Supreme Court has observed that there is no justification for charging compound interest or penal interest during the period of loan moratorium which was allowed by the Reserve Bank of India from March 1 to August 31 last year on account of the COVID19 pandemic. The Court observed that compound interest is chargeable on wilful or deliberate default by the borrower to pay the due installments. So, when the installments have been deferred based on the moratorium declared by the RBI, the non-payment of installments cannot be termed as willful. Therefore, there is no justification in charging compound interest.  The Court observed that there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium from any of the borrowers and whatever the amount is recovered by way of interest on interest/compound interest/penalty interest for the period during the moratorium, the same shall be refunded and to be adjusted/given credit in the next instalment of the loan amount. Interim relief granted earlier not to declare the accounts of respective borrowers as NPA stands vacated. Small Scale Industrial Manufactures Association (Regd.) Versus Union of India and others WRIT PETITION (C) NO. 476 OF 2020. Date of Judgment: 23.03.2021.

16.03.2021- Penalty imposed upton SBI: The Reserve Bank of India (RBI) has, by an order dated March 15, 2021, imposed a monetary penalty of ₹2 Crore (Rupees Two Crore only) on State Bank of India (the bank) for contravention of provisions of section 10 (1) (b) (ii) of the Banking Regulation Act, 1949 (the Act) and specific directions of RBI issued to the bank on payment of remuneration to employees in the form of commission.

15.03.2021 RBI: Extension of Image-based Cheque Truncation System (CTS) across all bank branches in the country

it has been decided by RBI to extend CTS across all bank branches in the country. To facilitate this, banks shall have to ensure that all their branches participate in image-based CTS under respective grids by September 30, 2021. They are free to adopt a model of their choice, like deploying suitable infrastructure in every branch or following a hub & spoke model, etc. and concerned banks shall coordinate with the respective Regional Offices of RBI to operationalise this.

IDBI Bank Limited taken out of PCA framework (10.03.2021)

IDBI Bank Limited taken out of the Prompt Corrective Action (PCA) framework, subject to certain conditions and continuous monitoring - RBI on 10.03.2021.

Inclusion of “Fino Payments Bank Limited” in the Second Schedule of the Reserve Bank of India Act, 1934

“Fino Payments Bank Limited” has been included in the Second Schedule to the Reserve Bank of India Act, 1934 vide Notification published on February 13 - February 19, 2021.

Restoration of Cash Reserve Ratio (CRR) (05.02.2021)

As per Satement of Development and Regulatory Policies issued on 05.02.2021, the cash reserve ratio (CRR) of all banks was reduced by 100 basis points to 3.00 per cent of their Net Demand and Time liabilities (NDTL) effective from the reporting fortnight beginning March 28, 2020. The dispensation was available for a period of one year ending March 26, 2021.

It has been decided to gradually restore the CRR in two phases in a non-disruptive manner. Accordingly, banks are required to maintain the CRR at 3.50 per cent of their NDTL effective from the reporting fortnight beginning March 27, 2021 and 4.00 per cent of their NDTL effective from fortnight beginning May 22, 2021.

Further, Scheduled Commercial Banks will be allowed to deduct the amount equivalent to credit disbursed to ‘New MSME borrowers’ from their Net Demand and Time Liabilities (NDTL) for calculation of the Cash Reserve Ratio (CRR). For the purpose of this exemption, ‘New MSME borrowers’ shall be defined as those MSME borrowers who have not availed any credit facilities from the banking system as on January 1, 2021. This exemption will be available only up to ₹25 lakh per borrower disbursed up to the fortnight ending October 1, 2021, for a period of one year from the date of origination of the loan or the tenure of the loan, whichever is earlier.

RBI imposes penalty on Banks (January 13, 2021)

The Reserve Bank of India (RBI) has imposed, by an order dated January 13, 2021, a monetary penalty of ₹1 lakh on The Mandvi Mercantile Co-operative Bank Ltd., Mandvi, Dist. Kutch (Gujarat) (the bank)  and a monetary penalty of ₹0.50 lakh on Alavi Co-operative Bank Ltd., Vadodara (Gujarat) (the bank) for contravention of RBI directions on ‘Loans and Advances to Directors, Relatives and Firms/Concerns in which they are Interested’ and ‘Placement of Deposits with Other Banks by Primary (Urban) Co-operative Banks (UCBs)’. 

The Reserve Bank of India (RBI) has, by an order dated January 12, 2021, imposed a monetary penalty of ₹2 crore (Rupees Two Crore only) on Deutsche Bank AG (the bank) for non-compliance with certain provisions of directions issued by RBI contained in the “Reserve Bank of India (Interest Rate on Deposits) Directions, 2016”. 

Reserve Bank of India (RBI) has, vide order dated January 08, 2021 cancelled the licence of Vasantdada Nagari Sahakari Bank Ltd., Osmanabad, Maharashtra to carry on banking business, with effect from the close of business on January 11, 2021. 

The Reserve Bank of India, in exercise of powers conferred on it under Section 45-IA (6) of the Reserve Bank of India Act, 1934, has cancelled the Certificate of Registration of the following companies. 1. Abhinav Hire Purchase Limited 2. Jupiter Management Services Private Limited 3. N. E. Leasing and Finance Private Limited 

Risk based Internal Audit (RBIA) Framework – Strengthening Governance arrangements (RBI notification dated 07.01.2021)

To bring uniformity in approach followed by the banks, as also to align the expectations on Internal Audit Function with the best practices, banks are advised as under:

1. Authority, Stature and Independence - The internal audit function must have sufficient authority, stature, independence and resources within the bank, thereby enabling internal auditors to carry out their assignments with objectivity. Accordingly, the Head of Internal Audit (HIA) shall be a senior executive of the bank who shall have the ability to exercise independent judgement. The HIA as well as the internal audit function shall have the authority to communicate with any staff member and have access to all records or files that are necessary to carry out the entrusted responsibilities. 

2. Competence - Requisite professional competence, knowledge and experience of each internal auditor is essential for the effectiveness of the bank's internal audit function. The desired areas of knowledge and experience may include banking operations, accounting, information technology, data analytics and forensic investigation, among others. Banks should ensure that internal audit function has the requisite skills to audit all areas of the bank.

3. Staff Rotation - Except for the entities where the internal audit function is a specialised function and managed by career internal auditors, the Board should prescribe a minimum period of service for staff in the Internal Audit function. The Board may also examine the feasibility of prescribing at least one stint of service in the internal audit function for those staff possessing specialized knowledge useful for the audit function, but who are posted in other departments, so as to have adequate skills for the staff in the Internal Audit function.

4. Tenor for appointment of Head of Internal Audit - Except for the entities where the internal audit function is a specialised function and managed by career internal auditors, the HIA shall be appointed for a reasonably long period, preferably for a minimum of three years. 

5. Reporting Line - The HIA shall directly report to either the Audit Committee of the Board (ACB) / MD & CEO or Whole Time Director (WTD). Should the Board of Directors decide to allow the MD & CEO or a WTD to be the ‘reporting authority’ of the HIA, then the ‘reviewing authority’ shall be with the ACB and the ‘accepting authority’ shall be with the Board in matters of performance appraisal of the HIA. Further, in such cases, the ACB shall meet the HIA at least once in a quarter, without the presence of the senior management, including the MD & CEO/WTD. The HIA shall not have any reporting relationship with the business verticals of the bank and shall not be given any business targets. In foreign banks operating in India as branches, the HIA shall report to the internal audit function in the controlling office / head office.

6. Remuneration - The independence and objectivity of the internal audit function could be undermined if the remuneration of internal audit staff is linked to the financial performance of the business lines for which they exercise audit responsibilities. Thus, the remuneration policies should be structured in a way that it avoids creating conflict of interest and compromising audit’s independence and objectivity.

 Card Transactions -The Reserve Bank decided to increase the contactless card per transactions limit from ₹2,000/- to ₹5,000/- on December 04, 2020.