Page | 1

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Year 8. Issue 27

SINCE 20.06.07 ISSUE NO- 391

BANK OF MAHARASHTRA OFFICERS’ ASSOCIATION (AFFILIATED TO AIBOA)

Mumbai Office: Jiva Devashi Niwas, Ranade Rd, Dadar, Mumbai 029.Pune Office: 1501, Lokmangal, Shivajinagar, Pune 005.

BY VASANT PONKSHE SECRETARY AIBOA CHAIRMAN BOMOA

BANKING NEWS08th to 14th December 2014

India can achieve 8-9% growth rate: Manmohan Singh

India can achieve a growth rate of 8-9 per cent provided there is a "national consensus" on methods to take advantage of globalised world, said former Prime Minister Manmohan Singh, whose tenure saw the economy registering three years of 9-plus growth rate. "I think that even though many other emerging economies are not doing too well, India has an opportunity to move towards a growth rate of 6-7 per cent and thereafter to 8 per cent," Singh said while delivering a lecture at Ficci. He said the country is poised to take advantage of globalisation and engage in trade to finance its imports through exports. "Today we cannot grow in isolation... India is well placed to take advantage of this situation provided we evolve a meaningful national consensus to move ahead," he said. Except for India, other emerging economies -- like Brazil, Russia and South Africa -- are not doing well, Singh said, adding the country is posed for a 8-9 per cent growth. "We are working towards a growth rate of 8-9 per cent. There are opportunities, there are risks. India is currently at least poised to create a milieu in which the growth story of India can be another worthwhile chapter in the evolving global economies," he said. Indian economy was growing at over 9 per cent for three years before it was impacted by the global financial crisis of 2008. The growth rate fell to sub-5 per cent in two consecutive fiscals -- 2012-13 and 2013-14. In the current fiscal, the government estimates the growth to be between 5.4-5.9 per cent. Singh said a meaningful solution to India's problems of poverty, ignorance and diseases can be found only in the framework of rapidly expanding economy. "There is a broad consensus that we need a growth rate of 8-9 per cent to create 10-12 million jobs every year if we have to conquer unemployment within our life-time," he said.

Rajan believes 'glide path' towards lower inflation fits India well

Reserve Bank of India (RBI) Governor Raghuram Rajan believes ‘an Urjit Patel glide path’ fits the country well for ensuring moderate growth even while the economy disinflates. “A ‘Volker’-like disinflation was never on the cards in India, but an Urjit Patel glide path fits us very well, ensuring moderate growth even while we disinflate. Going forward, we will discuss with the government an appropriate timeline within which the economy should move to the centre of the medium-term inflation band of 2-6%,” said Rajan at the Bharat Ram Memorial Lecture in New Delhi. A committee headed by RBI Deputy Governor Urjit Patel had earlier recommended a ‘glide path’ to disinflation. RBI will be looking to reduce headline retail inflation to 6% by March 2015. The core recommendation of the central bank panel was to ultimately bring the retail inflation rate down to 4% (plus or minus 2%). In its fifth bi-monthly monetary policy review earlier this month, RBI had kept the repo rate unchanged at 8%, while Rajan had highlighted that risks to the January 2016 target of 6% retail inflation appeared evenly balanced under the current policy stance. Rajan reiterated that the central bank’s focus on primarily keeping inflation low and stable would ensure the best conditions for growth. “In reacting to

Page | 2

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

developments, however, the central bank has to recognise that emerging markets are not as resilient as industrial economies. So, the path of disinflation cannot be as steep as in an industrial economy, because an emerging market is more fragile, and people’s buffers and safety nets are thinner,” said Rajan. November data for the Consumer Price Index (CPI)-based inflation are expected later on Friday; most expect it to ease below 5%. The inflation rate had risen to 5.52% the previous month. “Domestic demand-led growth is notoriously difficult to manage, and typically leads to excess. Therefore, we need to strengthen domestic macroeconomic institutions, so that we can foster sustainable and stable growth. At the same time, we cannot let foreign markets shrink further, and we have to take up the fight for an open global system,” Rajan said.

RBI Governor: Need more tax breaks to encourage domestic savings

India needs to provide more tax breaks to individuals so as to encourage savings, RBI Governor Raghuram Rajan has said. More tax benefits need to be given to encourage savings as the "real value of the financial benefits given (in recent years) has eroded," Rajan said in his Bharat Ram Memorial lecture here on Friday. Rajan's remarks are significant as it comes at a time when Finance Ministry has begun work for the upcoming budget in February next year. The erstwhile UPA regime --while being too business friendly--had not been liberal in providing tax breaks to encourage savings. Thanks to the runaway inflation in last two to three years of the UPA regime, savings rate in the country has sharply declined to about 31 per cent from level of 38 per cent some years back.

Insurance bill: Cabinet nod to 49% foreign equity cap

A much-awaited Bill to raise the composite foreign equity cap in the insurance sector from 26 per cent to 49 per cent is likely to sail through in Parliament this session, following the Cabinet on Wednesday approving amendments to the Bill after the government got support from the Congress in this regard. The amendments were recommended by a parliamentary select committee, without a dissent note from the main opposition party. The committee, chaired by Bharatiya Janata Party (BJP) Rajya Sabha member Chandan Mitra, also favoured the issuance of fresh equity for increasing stake, though it didn’t recommend making this mandatory. “The Cabinet approved the incorporation of amendments suggested by a parliamentary select panel in the Insurance Laws (Amendment) Bill, 2008,” sources said. They added the Rajya Sabha was likely to take up the Bill next week. The select committee opposed a cut in the minimum paid-up requirement for health insurers from the current Rs. 100 Cr. but suggested such a reduction for cooperatives in insurance segments. It also sought a specific definition of control and ownership in insurance companies be incorporated in the Bill, expected to provide a much-needed boost to the government’s reforms agenda. The National Democratic Alliance is short of a majority in the Rajya Sabha and requires opposition support for the Bill to be passed. With the backing of the Congress, it is expected the government won’t find it difficult to see the Bill through. The only dissent against the Bill was from the Left, which is ideologically opposed to foreign direct investment (FDI) in the sector, as well as from the Trinamool Congress, the Janata Dal (United) and the Samajwadi Party. Replying to a debate on supplementary demand for grants in Parliament, Finance Minister Arun Jaitley said, “We are ready to open the door in insurance sector; large investment is waiting to come.” Earlier, many were divided over whether the committee would recommend a 49 per cent cap on FDI alone or include foreign portfolio investors as well. “The committee recommends the composite cap of 49 per cent should be inclusive of all forms of foreign direct investment and foreign portfolio investments,” the panel suggested in a report, given to Parliament on Wednesday. Sanjay Tripathy, senior executive vice-president (marketing, product, digital and e-commerce), HDFC Life, said insurers would wait for the finer details of the Bill before taking any decision. He added smaller insurance players could see more investment from foreign partners, as these entities were in need of capital.

Tarun Chugh, managing director and chief executive, PNB MetLife, said, “At this stage, the sector needed long-term capital for growth and expansion, and this was possible only through FDI. Not only does FDI bring in capital and foreign exchange immediately into the economy, it also enables companies to invest further in managerial ability, technical knowledge, administrative organisation, and innovations in products and processes.” Through a press note earlier this year, the government had included foreign institutional investors (FIIs) in the 26 per cent foreign equity cap in the insurance

Page | 3

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

sector. The category of foreign portfolio investors includes FIIs. The norms regulating listing of insurance firms are stringent and foreign portfolio investors can come into the sector only if these firms go public. Deepak Mittal, chief executive of Edelweiss Tokio Life Insurance Company, said large players in the sector were interested to increase stake to 49 per cent, adding activity in the initial public offering segment would begin only after players decided whether they required FDI, foreign institutional investment or both. Rajesh Sud, chief executive and managing director, Max Life Insurance, said, “The select committee’s recommendations on the Insurance Amendment Bill, tabled in Rajya Sabha on Wednesday, is a welcome development and concludes a long-standing debate. It also indicates the Centre is acting quickly on important policy decisions. The recommendation on the increase in foreign capital to 49 per cent through foreign investors, including FDI and portfolio investors, will open capital coming into the country. Depending on each company’s stage of development and capital requirement, it will now have multiple options available. For some of the more established players, it opens up the possibilities of IPOs, as well as capital for acquisitions, which will allow consolidation in the sector.” A senior executive from the sector said, “Some large players are interested in an IPO. However, several factors such as FIPB (Foreign Investment Promotion Board) approval or automatic approval, apart from clarity in Indian management control, will be sought before taking a decision.”

Amid a debate on whether equity should be raised only through issuance of fresh shares, the committee said, “Incremental equity should ideally be used for expansion of capital base so as to actually strengthen the insurance sector.” As such, it didn’t make fresh equity mandatory for raising the cap, but said this was the ideal route. One of the arguments of the dissent notes — by P. Rajeeve (Communist Party of India-Marxist), Derek O’Brien (‘Trinamool Congress), Ram Gopal Yadav (Samajwadi Party) and K C Tyagi (Janata Dal United) — was Indian companies would dilute their stake in favour of foreign investment, which wouldn’t increase the capital base of these companies. “There is widespread apprehension that the proposed increase in FDI will allow Indian entities to liquidate a portion of their stake and earn profits that would be several multiples of their original investment, without any fresh capital flowing into the insurance sector,” O’Brien said. Earlier, there was speculation the committee might recommend a cut in the minimum paid-up capital requirement in the health insurance segment. However, it suggested retaining the requirement at Rs. 100 Cr. on a par with other insurance segments, saying any reduction “would encourage non-serious players to enter the field”. The panel, however, recommended slashing this requirement for cooperatives so that these entities could access a market segment that hasn’t been accessed by large insurance companies.

For retaining ‘control’ and ‘ownership’ in Indian companies, the panel favoured including their definitions in the Bill. “The term ‘control’ shall include the right to appoint majority of the directors or to control the management or policy decisions, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements,” it said.

SELECT PANEL RECOMMENDATIONS

Retain minimum paid-up capital requirements of health insurance companies at Rs. 100 Cr. 

Include definition of ownership and control in the Bill 

Govt should amend the General Insurance Business (Nationalisation) Act to allow public general insurers to raise money from markets 

Penalties on insurance companies to be linked to seriousness of offences committed by agents 

Irda should mull allowing multiple corporate agents in insurance

Cabinet nod to cut govt stake in PSBs to 52%

Page | 4

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Public sector banks (PSBs) will be able to raise up to Rs. 1.6 lakh-crore from markets as the Union Cabinet on Wednesday allowed the dilution of government equity in these lenders up to 52 per cent. This would enable these banks to partly meet Basel III requirements by March 31, 2019. The Cabinet Committee on Economic Affairs approved putting in place a new ethanol blending policy under which the price of ethanol would be fixed according to the distance of sugar factory from the depots of oil marketing companies. Under the ethanol blending programme, 5 per cent ethanol is doped with petrol. The much-awaited amendments to the Electricity Act were cleared, opening the gates for reforms in power transmission and distribution. The amendments are likely to come up in the ongoing session of Parliament. If the PSBs are permitted to bring down government holding to 52 per cent in a phased manner, they can raise up to Rs. 1,60,825 Cr. from the market, said an official statement, issued after the Cabinet meeting. This means that the government would require to give almost Rs. 79,000 Cr. (for common tier-I equity) during 2015-19, which will maintain its holding at 52 per cent. However, as the government is likely to receive an amount of Rs. 34,500 Cr. from PSBs as dividend, the net outgo will only be Rs. 44,395 Cr. On ethanol blending, CCEA approved a proposal to fix the delivered price of Ethanol would be fixed in the range of Rs. 48.50 per litre to Rs. 49.50 per litre, depending upon the distance of sugar mill from the depot/installation of the OMCs. Till 100 km distance ethanol would be priced at Rs. 48.50. Between 101 and 300 km, it would be Rs. 49 and for over 300 km, Rs. 49.50. The rates proposed would be delivered price at depot location and inclusive of all central and state taxes, transportation costs, etc which would be borne by the ethanol suppliers.

OTHER DECISIONS

Debt recovery tribunals: Debt recovery tribunals to be set up in Chandigarh, Bengaluru, Ernakulam, Dehradun, Siliguri and Hyderabad to expedite cases pertaining to bad loans

Lokpal and Lokayuktas Act: Cabinet approves amending the Lokpal and Lokayuktas Act, 2013; the Act will be amended to state 'Leader of Opposition' will also mean 'Leader of the Largest Party in Opposition of the Government' in the Lok Sabha

Solar plants in defence sector: Green signal given to install solar power plants in defence and paramilitary establishments

Solar parks: 25 solar parks of 500 Mw capacity each to be set up; financial support of Rs. 4,050 Cr. needed; Cabinet Committee on Economic Affairs also approves scheme for setting up 1,000-Mw grid connected solar power projects by PSUs and central government organisations

Capital to remain a challenge for PSU banks: Fitch

MUMBAI/SINGAPORE: The government's plans to reduce its stake in state-owned banks to 52% by 2019 will enable these banks to exercise greater flexibility in raising capital in the equity market - by allowing the dilution of government holdings for the purpose of raising core equity, said Fitch Ratings. There is no indication as yet that the government has planned this decision as part of a broader privatisation initiative in the banking sector, and Fitch believes that the government's stakes in state-owned banks is unlikely to go below 51% in the medium term. Fitch expects access to core equity to remain challenging, however, with state banks largely trading below book value. As such, state-owned banks will likely have to continue relying on Additional Tier 1 (AT1) hybrid instruments to strengthen capitalisation in the short term, despite the government's planned sell-downs. Thus far, state banks have been slow in issuing AT1 capital, with only two issues of Rs. 2500 Cr. each - Bank of India in August 2014 and IDBI bank in October 2014. Combined, these two issues constitute roughly 5% of the Fitch estimated total AT1 requirement through to 2016; affirming Fitch's view of the uncertainty regarding the ability of the domestic market on its own to fulfil the AT1 requirement of banks. Fitch estimates the banks to have large Basel III capital needs totalling $200 bn up to 2019, of which state-owned banks will account for around 85%. However, progress to strengthen capital has been slow, due to a low internal rate of capital accretion and limited access to core equity - owing to below-book valuations for many banks. Asset quality and earnings continue to remain stressed for most state

Page | 5

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

banks notwithstanding some signs of early recovery. However, progress to strengthen capital has been slow, due to a low internal rate of capital accretion and limited access to core equity - owing to below-book valuations for many banks. Asset quality and earnings continue to remain stressed for most state banks notwithstanding some signs of early recovery. Expectations of higher restructuring in 2HFY15 and muted credit growth could further mean that earnings (and valuations) recovery will be slow and protracted. As such, the plan to reduce government stakes may have to wait until there is a meaningful recovery in earnings and, therefore, equity valuations. State banks account for nearly 75% of total banking system assets but hold 90% of the system's stressed loans, with the stress on mid-sized state banks being particularly acute. By comparison, private banks are in a significantly stronger position than their state-owned peers in terms of capital and asset quality. A cyclical recovery in FY16 should help ease the level of stressed assets, which Fitch expects to peak by March 2015, although we maintain that private banks' superior credit profiles puts them in a better position to take advantage of a cyclical upturn. Nonetheless, a recovery should provide an environment for greater stability in bank Viability Ratings heading into the new fiscal year.

Govt cutting stake in banks will lead to sectoral reforms: SBI Chief

State Bank of India Chairman Arundhati Bhattacharya on Thursday said the Cabinet’s decision to pare stake in state-owned banks will lead to a fresh round of banking reforms, and force these financial institutions to be more competitive. Bhattacharya also said the government should allow public sector banks (PSBs) to look at different alternatives to raise funds to meet Basel-III norms, including issuing shares with differential voting rights. “The news that the government has allowed PSBs to bring down govt stake to 52 per cent kicks off the next round of reforms because for the first time there is a very clear signal that banks can pick up funds from the market,” Bhattacharya said at the concluding day of the Delhi Economics Conclave. “The big daddy back there is not going to be around to give them capital as and when they need and if they need to be competitive and want to grow, they definitely need to look at other places for more capital,” she said. Finance Minister Arun Jaitley had said in his Budget speech that to be in line with Basel-III norms there is a requirement to infuse Rs. 2.4 lakh-crore into the banking system as equity by 2018. “To meet this huge capital requirement, we need to raise additional resources to fulfil this obligation,” he had said. Bhattacharya said apart from paring stake, the Centre also has to create a clear roadmap on how much the banks need to do to meet the Basel-III norms. “The writing on the wall is very clear. There has to come a time where they have to think of differential voting rights and banks have the freedom to raise equity. It is time to lay out some kind of road map on how much the banks need to do and how much support they would get.”

Speaking on consolidating and merging of banks, Bhattacharya said: “It is extremely important for India to have three or four major banks. We should allow the banks to come together and talk among themselves.” She cautioned, however, that such mergers should not be forced by the government, and that the banks should have the freedom to choose their own partners. “Mergers must necessarily be amongst consenting people and people who can see strength in each other rather than somebody being a rescuer of the bad banks.” Bhattacharya said apart from long-term financing for infrastructure projects, banks should also make short-term investments in equity and bond markets. She also said that a lot of outdated securities and financial sector laws needed to be abolished or changed to reflect the current times.   She also spoke about improving the quality of banks’ boards  and strengthening whistle-blower policies.

Rate cut if inflation remains under control, says RBI Deputy Governor

The Reserve Bank of India (RBI) might look at a possible rate cut if factors leading to lower inflation continue to persist, its Deputy Governor, SS Mundra, said here on Wednesday. According to him, the latest monetary policy indicated that deflation at this point will be “quite encouraging” because of global factors such as low oil and commodity prices and softening of food prices. “So, that is why we indicated that if all of these remain same, then there will be room for softening of policy stance,” he told reporters on the sidelines of a seminar organised by the Confederation of Indian Industry (CII). The comments come ahead of consumer inflation data (for November) due on Friday (December 12). Inflation based on the consumer price index (CPI) fell to 5.52 per cent in October. The RBI held interest rates steady earlier this month, but said it could ease monetary policy early next year.

Page | 6

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Licences

According to Mundra, the central bank is likely to grant “payments bank” licences to applicants by March or April 2015. He did not, however, say how many licences the RBI was going to offer. Payments banks are expected to help expand financial inclusion footprints. The RBI had detailed the final guidelines for payments bank licences on November 27, and January 16 is the deadline for licence applications. Mundra said there is no cap on the number of licences that it will offer. On offering more universal banking licences, Mundra said the regulator was working towards a policy of granting such licences “on-tap” basis. So far, bank licences have been given during a particular time frame. Before April 2014, when Bandhan and IDFC were given in-principal approval, , the last banking licences were given to Kotak Mahindra Bank and Yes Bank in 2004.

Non-executive chairmen and separate managing directors for PSU banks from current financial year

NEW DELHI: Public sector banks are set to have non-executive chairmen and separate managing directors from the current financial year as the government tries to rework the structure on the lines of private banks to improve corporate governance standards. The decision comes as seven of the 10 candidates shortlisted by an appointment board have received a green light from the Central Vigilance Commission. Sources said those who have received vigilance clearance include P Srinivas and B. B. Joshi, executive directors at Bank of Baroda, Arun Srivastava and P. Koteeswaran of Bank of India, Animesh Chauhan of Central Bank of India, K. K. Sansi of Punjab & Sind Bank and Rakesh Sethi of Union Bank of India. Sources said the decision to split the post of chairman and managing director, which is peculiar to the nationalized banks, has already been taken and the finance ministry is undertaking the exercise to hunt for at least eight non-executive chairmen along with an equal number of MDs. While the decision was communicated a few days ago, the finance ministry is yet to go ahead with their appointments, possibly due to its decision to split the post of chairman and managing director. The top post in the state-owned banks was to be split from the next year but the decision has been advanced despite candidates being interviewed for post of CMDs. This year the government has to appoint eight bank chiefs including at some of the top public sector players such as Bank of Baroda, Punjab National Bank and Canara Bank. The move to have non-executive chairmen was first suggested by a committee headed by former Axis Bank chief PJ Nayak. Although the panel's other recommendations were ignored, the one to split the post has been accepted. It is not clear how the chairmen will be selected. Government sources said while appointing the new MDs, recommendations of a committee under expenditure secretary Ratan P. Watal will be factored in and those who have had long stints in Group A banks will considered assignments in PNB, BoB and Canara.

Don’t replace Gandhiji with other leaders on banknotes: RBI

A Reserve Bank of India panel has decided against the inclusion of any other national leader’s image on banknotes, saying that no other personality could better represent the ethos of India than Mahatma Gandhi.

Design panel

On the advice of the Government, the RBI had, in October 2010, constituted a Committee to design future currency notes, Finance Minister Arun Jaitley said in a written reply to the Lok Sabha. He said the Committee, inter alia, deliberated on the issue of changing the existing image of Mahatma Gandhi and inclusion of certain other personalities in the new design of banknotes. “After due consideration, the Committee decided that no other personality could better represent the ethos of India than Mahatma Gandhi,” Jaitley said. In reply to a question, Jaitley said during the last three years the RBI had received 21 complaints about the circulation of fake currency through automated teller machines (ATMs) installed by various public/private banks. “The RBI seeks a report upon receiving a complaint in this regard and takes such action as deemed fit based on the report, including issue of advisory to the concerned bank...,” he said.

Page | 7

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Genuine notes

The RBI has issued instructions to banks that banknotes in denominations of 100 and above should₹ be re-issued by banks over their counters or through ATMs only if these banknotes are duly checked for authenticity/genuineness and fitness by machines.

RBI Deputy Governor Khan proposes novel PPP model to drive financial inclusion agenda

India should adopt a “PPP” model for driving its financial inclusion agenda, RBI Deputy Governor HR Khan has said. Financial inclusion efforts should be tested against the “Plan, Pursue and Pause” framework to ensure better outcomes, Khan said at the “Inclusive Finance India Summit 2014” in the capital on Monday. There is a need to “plan” well, pursue what has been planned and ensure there is a “pause” to see if it is working well. Adoption of such a “PPP” approach could mean better results, Khan said.

Not public-private model

This PPP model is different from the commonly-known ‘public-private partnership’ that the Government is looking to encourage in various economic activities. Later, Tarun Chugh, Managing Director and Chief Executive Officer, PNB MetLife India Insurance, told Press that India's financial inclusion efforts are still at a “pilot” stage and more needs to be done to improve access to basic banking facilities, expanding mobile banking and increasing financial capability. Financial inclusion is just not about opening bank accounts but providing access to the breadth of financial products needed by all people, he said.

SBI chief proposes differential voting rights to meet Basel-III norms

With the government indicating that it won’t continue to fund public sector banks (PSBs), SBI chairperson Arundhati Bhattacharya today said they could look at issuing shares with differential voting rights to raise funds for meeting the Basel-III capital adequacy norms. “The writing on the wall is very clear...they (PSBs) have to think of differential voting rights. It is time to lay out some kind of roadmap on how much the banks need to do and how much support it would get,” she said, while talking to reporters on the sidelines of a conference. The government had yesterday allowed PSBs to raise up to Rs. 1.6 lakh Cr. from markets by diluting the government holding to 52 per cent in phases to meet Basel III norms.

Consolidation

Pitching for consolidation in the banking sector, Bhattacharya said that it was important to have three to four major banks. “It is extremely important for India to have 3-4 major banks. ... We should allow the banks to come together and talk among themselves. In the past also, we have seen government has forced some mergers...it is very important for the banks to determine who should be their correct partners,” she added. According to Bhattacharya, “it is better to merge good banks with good banks.”

Stake dilution

She further said the government has shown its intent to continue with reforms in the banking sector by deciding to bring down its stake to 52 per cent. “The news that the government has allowed PSBs to bring down government stake to 52 per cent kicks off the next round of reforms... because for the first time clear signal has been given (to PSBs) to source capital from the market. “The big daddy back there is not going to be around to give them capital as and when they need. If they need to be competitive and want to grow, then they definitely need to look at other places for more capital,” Bhattacharya added. Out of 27 PSBs, the Government of India controls 22 through majority holding. In the remaining five, state-run SBI holds majority stake.

Basel III norms

Page | 8

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

The Basel III norms, which will come into effect from March 31, 2019, were put in place following the 2007-08 financial crisis triggered by the fall of Lehman Brothers. The norms are aimed at improving risk management and governance, while raising the banking sector’s ability to absorb financial and economic stress. As per Basel-III norms, the minimum capital level for Tier-1 has to be 7 per cent.

CST compensation: Centre to release Rs. 11,000 cr in FY15 to states - Jaitley

Finance Minister Arun Jaitley said on Wednesday, a day before a crucial meeting with state finance ministers on the proposed Goods and Services Tax (GST), that the ministry would release Rs. 11,000 Cr. to states towards Central Sales Tax (CST) in FY15. "Despite a difficult and challenging (fiscal) situation, I propose to release about Rs. 11,000 Cr. a third (of the total CST compensation of Rs. 34,000 Cr. sought by states), this year as part-payment of CST compensation to the states. This will take care of the amounts from 2010-11 onwards. The balance of the amount, I will start paying from the next financial year onwards," Jaitley said, while replying to the debate on the Supplementary Demand for Grants for 2014-15. The Lok Sabha passed the supplementary demands for an additional expenditure of Rs. 12,500 Cr. However, the actual cash outgo would be Rs. 500 Cr. The government is working towards rolling out GST from April 1, 2016, and is in discussion with states to insulate their revenues from the impact of GST. GST will subsume indirect taxes such as excise duty and service tax at the central level and value-added tax (VAT) and local levies on the states' front. Although the Centre seems firm on its decision to subsume petroleum and entry taxes in GST, with a provision for first tranche of CST compensation, Jaitley is likely to assure the states on Thursday's meeting that the government will compensate them for three years' losses under GST as well, even though there is no provision for that in the Constitution. "A major impediment in the implementation of the GST has been the trust deficit between the states and the Centre. One of the major reasons for the trust deficit is non-payment of the CST compensation to the states, from the year 2010 onwards. In my meeting with the empowered committee of the state finance ministers in July 2014, I had committed that partial payment of outstanding CST compensation will be released this year. I stand by this commitment given by me," said Jaitley. Speaking on the Centre's growth forecasts, Jaitley said there were challenges but hoped it would be within the projected range of 5.4-5.9 per cent in 2014-15 and cross six per cent in the next financial year. He also said he was "determined to maintain" fiscal deficit at 4.1 per cent of the gross domestic product. "Don't underestimate the challenges I have… If we don't maintain that figure, the world and the global investors look at us, our ratings depend on that, and a lot depends on how the world views you," he said, adding that economic growth falling to below-five per cent levels in 2012-13 and 2013-14 had an impact on revenue collection, fiscal deficit, and government's expenditure on developmental works.

FINANCE MINISTER'S TAKE ON ISSUES

INTEREST RATES: We favour bringing down rates, authorities (RBI) are seized of the view 

MGNREGA: Myth that govt slashed MGNREGA allocation; Rs. 33,000 cr allocated last year and Rs. 34,000 Cr. this year, of which nearly Rs. 26,000 cr disbursed 

PATENTS ACT: Myth that govt changing patents Act 

LPG SUBSIDY: Poor entitled to subsidies, not rich. Leakages will be plugged 

DISINVESTMENT: Easy to oppose the idea but what do we do with loss-making units? 

PLANNING COMMISSION: Govt stands by cooperative federalism; all CMs, including the Congress ones, favoured dismantling the Plan panel 

INSURANCE: Large investments waiting to come in the sector

Page | 9

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

RBI to nudge foreign banks for subsidiarisation post review of PSL norms

The Reserve Bank of India (RBI) will nudge foreign banks in the country to opt for the subsidiarisation route after it reviews the priority sector lending (PSL) norms set for them. “Foreign banks expressed to us some concerns on the kind of obligations they would have if they move into the wholly-owned subsidiary (WOS) structure... We are in the process, at the request of the ministry, of reviewing the priority sector norms. When that process is finished after consultation with the government, we will be able to communicate those norms. Once we do that, we can nudge the foreign banks to move into the wholly-owned structure,” RBI governor Raghuram Rajan said post the central bank’s board meeting in Kolkata on Thursday. The central bank’s initial efforts to convince foreign lenders to create subsidiaries in India had failed. After taking feedback from bankers, RBI in November last year released a new framework for setting up WOS by foreign banks in India. It promised foreign lenders “near-national” treatment in branch expansion and permission to acquire local private banks if they choose to create subsidiaries here. Capital gains tax and tax duty have also been waived for conversion of foreign banks’ India branches into WOS. Many of them believe that they do not have the required expertise and risk management framework to meet stiff PSL targets. RBI had said the PSL requirement for WOS of foreign banks will be 40 per cent, just like their Indian rivals. Out of this, 18 per cent of loans have to be offered to the farm sector. While RBI has not made the WOS structure mandatory for existing foreign banks (which commenced banking business in India before August, 2010), it said foreign lenders that do not provide adequate disclosure in their home jurisdiction, have complex structures or are not widely held will have to set up subsidiaries in India. Also, foreign banks that entered India after August, 2010 will have to mandatorily convert their branches into WOS.

Rajan clarified new foreign banks that are entering India now will have to set up WOS. Also, RBI will continue to allow branch expansion of existing foreign banks. “Ultimately, we are worried about systemic risks stemming from large foreign banks in India. Many of those have been in India for many years. We have to be explicit about the costs and benefits. Otherwise, it will be a retrospective regulation...If they apply (for branch licence), it goes through normal process. We have not stopped giving branch licences,” he said. Separately, the governor said while current account deficit has widened it still remains at a comfortable level. “Current account deficit (at 2.1 per cent of gross domestic product) is still comfortable. The direction is something that we will be watching closely. There are risks to the current account. (But) at this point, while we are certainly vigilant, but I won't say we are apprehensive,” Rajan said. He added that the fall in global oil prices has provided a cushion to the current account and persuaded RBI to experiment with liberalising restrictions on gold imports. "It will be hard to maintain the kind of restrictions that we had for a long period. At some point we have to start taking off some of the restrictions. The oil prices are falling. It gives us some cushion on the current account. It is a good time to see what happens if we take off the restrictions (on gold imports)," Rajan said.

Bank of Maharashtra cuts minimum lending rate to 10.25%

State—run Bank of Maharashtra today announced a cut of 0.15 percentage point in its minimum lending rate or base rate to 10.25 per cent, a move which will make its housing and auto loans cheaper. “The bank has decided to revise the bank’s base rate from 10.40 per cent per annum to 10.25 per cent per annum with effect from December 15, 2014,” Bank of Maharashtra (BoM) said in a filing to the BSE. BoM is the first bank that has lowered lending rates after RBI Governor Raghuram Rajan made a case for lowering lending rates by banks earlier this month. “Some easing of monetary conditions has already taken place... However, these interest rate impulses have yet to be transmitted by banks into lower lending rates,” Rajan had said during the monetary policy review. Helped by softening prices of food items, retail or consumer price index (CPI) based inflation declined to 5.52 per cent in October. The wholesale price index (WPI) based inflation fell to 1.77 per cent during the month. Shares of Bank of Maharashtra were trading at Rs. 43.20 per piece on the BSE, up 1.29 per cent from previous close.

Soon, get one account for all financial assets soon, say RBI, Sebi,   Irda

Page | 10

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Financial regulators, including RBI, Sebi and IRDA, are working on creating a common account aggregation facility, which may allow people to get details of all their financial assets in one place. This may include bank accounts, stocks, bonds, insurance and mutual funds, among various financial assets, even if they are managed by institutions under jurisdiction of different regulators. A suggestion in this regard made by an Inter-Regulatory Technical Group (IRTG) was discussed here today by the Sub-Committee of Financial Stability and Development Council (FSDC), which met here today. The members of this sub-committee include chiefs of various regulators including RBI, Sebi, IRDA, PFRDA and FMC, as also representatives of the Finance Ministry. After the meeting, RBI Governor Raghuram Rajan said the FSDC Sub-Committee has decided to create a common platform for people to see their accounts across regulatory bodies. “We have discussed the possibility of creating a platform for people to see their accounts across regulatory bodies,” Rajan told reporters after the meeting. He said that that it was decided to create such a structure going forward. The regulators also discussed other issues of mutual interest, Rajan said. RBI Deputy Governor H R Khan said that deepening of the currency futures market and risks facing the financial system were also discussed.

Need to look into finer details, say companies about Insurance Bill

The finer details of the Insurance Laws (Amendment) Bill, 2008, will be studied closely before the companies take a decision on increasing stake of foreign partners or infusion of fresh capital. Clarity will be sought on what route the foreign investment would come through, apart from the exact meaning of Indian management control, which has not been explicitly defined. Sanjay Tripathy, senior executive vice-president, marketing, product, digital and e-commerce, HDFC Life, said insurers would wait for the finer details of the Bill before taking any decision. He added that smaller insurance players could see further investment from foreign partners, since they are in need of capital. The issue of Indian ownership and control as recommended by the Rajya Sabha Select Committee on the Bill has been defined in the Bill with “control”, including the “right to appoint the majority of directors or to control the management or policy decisions, including by virtue of their shareholding or management rights or shareholder agreements or voting agreements”. However, it is not clear whether voting rights of the foreign partner would be restricted or not and if foreigners can be appointed in the top management in insurance companies. This would include positions like chief executive, managing director and chief financial officer, apart from the appointed actuary. Deepak Mittal, managing director and chief executive officer, Edelweiss Tokio Life Insurance Company, said there is a strong interest from large players in the industry to increase stake to 49 per cent, though he added that IPO activity would begin only after players decide upon whether they require foreign direct investment, foreign institutional investors, or both. If fresh capital is brought in, insurers can get additional funds from their foreign joint venture partners as well as newer entities. Estimates said that the sector would gain an additional ~7500-8000 Cr. if FDI is raised. Fresh equity would mean immediate capital to expand the insurance business by offering additional products and services, along with branch expansion. Some areas of business, especially health and motor insurance are considered to be money guzzlers since a significant portion of revenues go in paying claims. Hence, fresh equity would help those companies who have not been very active in these spaces to increase investment in these fields.

While the insurance regulator had earlier envisaged that large insurers would list on the stock market, industry players are of the view that they would not do so immediately. “Some large players are interested in an IPO. However, several factors like FIPB approval or automatic approval, apart from clarity in Indian management control would be sought before taking a decision,” said a senior insurance executive. Many players have already agreed that FDI hike would lead to  a hike in foreign partner’s stake. Anoop Pabby, Managing Director and CEO, DHFL Pramerica Life Insurance said partnership agreement between DHFL and Prudential stipulates explicitly the situation where the FDI cap is lifted. “Prudential has a long-standing desire to bring up its share to the percentage allowed under the regulation and the agreement provides for this. We will follow our agreement between partners, subject to regulatory changes,” he said. He added that the approval on the much awaited insurance Bill which increases the cap on foreign investors from 26 per cent to 49 per cent is likely to bring another wave of growth in the insurance industry. “With the companies focusing on growth and expansion, the penetration of insurance will increase and the security of insurance could be availed by many more in India. It will also give the industry the much needed stability and the ability to focus on

Page | 11

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

investing more on technology to revamp the back-end operations for smoother and better customer service,” he said.

RBI set to allow FIIs, banks to trade in commodity market

The Reserve Bank of India (RBI) is set to give in-principle approval for foreign institutional investors (FIIs) and banks to participate in commodity markets, say sources in the know. “The matter is in the final stage of internal review and an in-principle approval is just a matter of time,” said a source. The development comes at a time when the country’s commodity exchanges (commexes) are suffering a heavy drop in turnover. According to a report by news agency Press Trust of India on Wednesday, the combined turnover of India’s commexes in April-November declined 48 per cent from the year-ago period to Rs. 39.88 lakh Cr. mainly due to poor trading volumes. According to Forward Markets Commission (FMC) data, these exchanges had generated a business of Rs. 76.78 lakh Cr. in April-November last year. In May, a five-member committee had said high-cost transactions in commodity futures caused a hindrance to the market. And, suggested this could be reduced if banks and FIIs were allowed to participate in the commodity market. The panel, headed by senior economic advisor in the finance ministry, D. S. Kolamkar, had on April 28 this year given a report on ‘Steps to fulfil the objectives of price discovery and risk management of the commodity derivatives market’. The committee had told the government in the report that high transaction costs in the futures market were an impediment to arbitrage. These, the panel had said, could be reduced by allowing banks and financial institutions, including FIIs, to participate in commodity futures trading. The panel had as members Institute of Company Secretaries of India (ICSI) Secretary M. S. Sahoo, finance ministry advisor C K G Nair, Indira Gandhi Institute of Development Research professor Susan Thomas and Forward Markets Commission economic advisor Usha Suresh. Policy and regulatory hurdles currently restrict banks and financial institutions from participating in the commodity market. Banks are also restricted under the Banking regulation Act. The committee suggested these needed to be removed, to widen participation. The existing system of limits on open interest and risk management provides adequate safeguards against the risk of allowing foreign participation in Indian markets, it said. The report also said commexes should explore the idea of extending trading hours that overlap with Asian and Australian markets, to improve their international competitiveness. At present, trading hours in India overlap with the European markets, but have little or no overlap with Australia and Asia, a large trading base that remains untapped. The committee also advised the government exempt arbitrageurs from restrictions on holding inventory. It strongly objected to abrupt suspension of trading in commodities and recommended the commodity markets regulator voluntarily adopt regulatory governance rules from the draft Indian Financial Code, to reduce legal and regulatory risks in the eyes of financial firms.

SBI launches first homegrown economic index

For the first time, a domestic bank will start giving a forward-looking economic index. The State Bank of India, the country’s largest lender, will use its loan book to give indicators on the domestic manufacturing activity from the New Year. The SBI Composite Index will have both monthly and yearly indices. The short-term report, to be released in the first week of every month, will forecast the state of the economy two months down the line. The annual index will make year-on-year forward predictions. Similar economic forecasts published by British lender HSBC, with global business survey compiler Markit, are the HSBC India Services Purchasing Managers’ Index (PMI), HSBC India Manufacturing PMI and the Markit India Business Outlook. Soumya Kanti Ghosh, Chief Economic Advisor at SBI’s economic research department, said SBI’s figures are not intended to rival HSBC’s numbers. However, during the eight years of back-testing (2007-2014), the SBI index accurately predicted economic direction 72 per cent of the time while the PMI had a 50 per cent strike rate. Arundhati Bhattacharya, Chairperson and Managing Director, SBI, said the index will take into account the credit demand and other indicators of economic activity like consumer spending, mining activity, interest rates, inflation, exchange rate and other thematic indices and service and manufacturing activities. “We are there across the country. Our loan portfolio is well distributed across all segments. That is one of our strengths. As we are a pan-India bank, we don’t have any segment or geographical bias,” she said. The SBI will also use public data on industrial production, international trade, commodity prices and current and futures prices in the stock markets to forecast possible expansion

Page | 12

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

or contraction of the economy. To represent the manufacturing sector, SBI will use the monthly Index of Industrial Production data rather than GDP figures, which are released ever quarter. The SBI index is built to be “conservative yet robust” in its forecast. On the other hand, the HSBC manufacturing index is based on data compiled from replies to questionnaires sent out to purchasing executives in around 500 manufacturing companies, covering factors such as new orders, purchases, output and delivery time. Like the HSBC indices, the SBI index is built on a scale of 0 to 100, with a number above 50 indicating growth over the corresponding pervious period and a number below 50 suggesting contraction.

‘Hard to spot genuine farm loan seekers’

Distinguishing between willful defaulters and genuine loan-seekers among small and marginal farmers is one of the challenges banks face in India, said experts, who wanted the Government to do more on this front. “While we have almost 1,800 feet (people) on the street, we have a lot of difficulty in identifying potential beneficiaries. Digitisation of standard appraisal records is also negligible,” said Sarat Yadav, Deputy General Manager (Rural and Inclusive Banking), ICICI Bank, at a panel discussion during the ‘Inclusive Finance India’ summit, organised by Metlife Foundation here on Monday. Here, banking sector representatives agreed that to bring in almost 80 million unbanked small and marginal farmers, there was need to find out how to identify genuine loan-seekers. Arindom Datta, Senior Director and Head of Rural and Development Banking, Rabo Bank India, said domestic lenders did not have a clear picture of agricultural value-chains.

Cautious

This, he argued, led to good farmers being left out since banks inevitably became cautious when farm loan defaults rose. He added that the system needed to be weaned off subsidies since it gave farmers an incentive to not repay loans. The bankers also said that the loan waiver scheme for debt up to

50,000 announced recently by Andhra Pradesh and Telangana could adversely impact rural banking,₹ with less farm credit availability and furthering of a subsidy culture.

New central fund

IIM-Bangalore Professor Trilochan Sastry, who is also associated with the Association for Democratic Reforms and Centre for Collective Development, advocated the creation of a separate central fund, like the one provided for Operation Flood in the 1970s, to make agricultural profitable. “Unless farming becomes profitable, rural banking won’t succeed. Small farmers today can’t get equity, so a separate social fund must be created. The Government needs to think agricultural in terms of a business model,” he added.

Collectivisation

Sastry said collectivisation of farmers could see the cost of services going down and linkages improved. He said banks did not want to lend to farmers due to a combination of low interest rates and abysmal repayment rates. “Cooperatives can help improve this problem; all the ones under us are profitable today. We were ruthless with willful defaulters but sympathetic with the genuine cases,” he said.

Lending rate cuts on the horizon: SBI Chief

The recent spate of downward revision in deposit rates by banks is an indication that lending rate cuts are on the horizon, according to State Bank of India chairperson Arundhati Bhattacharya. Over the last week ICICI Bank, HDFC Bank and SBI have cut their retail term deposit rates by 25-50 basis points on select maturity buckets. “Obviously the fact that we are adjusting rates on the deposit-taking side means that going forward all of us are seeing a lending rate cut. That is absolutely clear. “But exactly when it will happen is not really something that I can tell you right now,” she said. The SBI chief elaborated that banks are waiting for signs of credit pick up. “When we cut lending rates, income

Page | 13

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

comes down. We need some other ways of making up that income in order to keep paying the depositors their interest. That can always happen if the credit growth is quite robust and volumes pick up,” she explained. On whether a repo rate (interest rate at which banks borrow short-term funds from the central bank) cut could trigger a lending rate cut, the SBI chief pointed out that banks are flush with liquidity and they are hardly taking anything from the repo window. “Repo rate is a signal (for downward movement in interest rates). So, a 25 or a 50 basis points cut in repo rate doesn’t really make all that great a difference,” she said.

ICICI Bank raises $200 million overseas

The country’s largest private sector lender ICICI Bank on Monday said it will upsize the issuance of dollar-denominated senior unsecured notes by $200 million (about Rs. 1,200 Cr.) for five-and-half-year maturity. The upsized tap offering has the same terms and conditions as the existing notes, which will be consolidated with the bank's existing $500 million 3.50 per cent notes due 2020, 176 basis points over and above the US 5-year bond. Moody's Investors Service has maintained its Baa2 rating on the dollar-denominated senior unsecured notes. Standard and Poor’s also maintained its 'BBB-' long-term issue rating for the Dubai Branch's notes, following the announcement of a tap bond offering on its existing $500 million notes issued in September 2014. An ICICI Bank spokesperson declined to comment. “The bank received a coupon rate which was better than the previous 3.50 per cent,” a person in the know of the development said. The ICICI Bank's reopening was indicated to be at 3.35 per cent, about 167 basis points over the 5-year US Bonds The ‘BAA2’ senior unsecured debt rating is anchored on ICICI Bank's ‘BAA3’ baseline credit assessment (BCA) and the high likelihood of systemic support in the event of a crisis. The ‘BAA2’ rating is at the same level as the foreign currency debt ceiling for India. Moody’s said, “ICICI Bank's BCA is underpinned by the bank's solid franchise as India's largest private sector bank by assets, as well as its strong capitalisation, liquidity, and earnings profile. It also takes into consideration, among others, the bank's high borrower concentration in the form of its mandatory Government securities portfolio; its improving but still weak asset quality when compared to its global peers; and the challenging domestic operating environment. The notes will constitute direct, unconditional, unsecured, and unsubordinated obligations of ICICI Bank. They shall at all times rank at par among themselves and with all other unsecured obligations of the bank. The rating on the notes is subject to our review of the final issuance documentation, S&P said.

Tight spread

Reuters adds: According to a banker, the $200 million raised by ICICI in an opportunistic tap of its $500-million 3.5% March 2020s at 165bp over Treasuries was the tightest spread for an Indian bank deal since 2007. The issue broke the record of Axis Bank, which sold $500 million of 3.25% 2020 bonds last month priced at 170bp over Treasuries. While investors have turned a tad cautious over the country's high-yield sector due to complicated structures and more restrictive RBI guidelines for foreign borrowings, the appetite for quality investment-grade names out of the country remains robust, investors say. With a further boost from the strong November non-farm payroll growth in the US, the largest private-sector lender decided to do the opportunistic tap, which raised the total outstanding on the existing issue to $700 million. The tap offered a negligible new-issue premium as its existing 2020s were indicated at 163bp over Treasuries prior to the reopening. The tap came with a lower all-in yield of 3.356%, versus a yield 3.57% on the existing notes. The leads also referenced Axis Bank's 2020s, quoted at G-spread of 169bp. Yet, the ICICI tap priced through that on the back of strong demand from investors outside Asia. Axis Bank's stressed asset ratio as of September 30 stood at 4 per cent, compared with 6 per cent for ICICI. The distribution of the Reg S tap, with ICICI's Dubai branch as the issuer, defied the typical 70/30 split between investors from Asia and elsewhere for Asian deals. West Asian investors showed enormous appetite for ICICI, buying 39 per cent of the notes. European investors also bought an impressive 32 per cent, while Asia took the remainder. "The distribution speaks volumes about how well-known ICICI is among global investors," said a banker on the deal. "That's why the tap went for a Reg S-only format versus the 144A/Reg S format for the initial issue."

Meanwhile, the country's private-sector banks were likely to lead the improvement on asset quality in the near future, said Nomura. Against a narrowing fiscal deficit, declining inflation and rising GDP

Page | 14

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

growth in India, "we expect the asset quality cycle to bottom out over the next two to three quarters, led by private sector banks and large public sector banks," analysts at Nomura wrote in a research note on December 5. The analysts, however, expects the recovery to be gradual during 2015-2016 with Indian banking system's non-performing loans ratio and total stressed assets ratio to remain largely unchanged at around mid-4% and 10-11 per cent, respectively. The ICICI reopening was indicated a tad wider at bid-167 over Treasuries.

Court tells RBI to get tough with banks

The Supreme Court has asked the Reserve Bank of India (RBI) to demand responsible behaviour from banks while communicating with customers. Especially so, while making transactions in rural areas or when dealing with the poor, who may have little knowledge of what they are signing up for. Right to Information (RTI) activist S. Dheenadhayalan says the customer can now look forward to a level-playing field. A top RBI official is on record as saying that “a great threat arises from the asymmetry between information and power between FIs and poor consumers.” The official said, “This means that there is a real potential for negative outcomes arising out of institutional abuses or ill-informed client decisions.” An RBI Master Circular, issued on July 1 this year, asked banks to ensure entry of correct and legible particulars in the pass-books and statement of accounts.

Electronic clearing

In the case of electronic clearing and electronic fund transfer, banks do not provide details. This is in spite of the particulars provided by the receiving bank. In some cases, computerised entries use codes which just cannot be deciphered, the RBI said. It added that banks ensure that brief, intelligible particulars are entered in passbooks/statement of account. This was followed by a Supreme Court clarification recently on admissibility of computer records but subject to stringent conditions. Generally, the loan accounts bear a foot-note saying “any discrepancy in this statement has to be brought to the notice of the bank within a period of seven days.” But now a bank will be required to ensure that the statement of account is in conformity with section 65 (B) (2) of the Evidence Act, Dheenadhayalan said.

Same page

It will need to be in congruity with the ledger folio and with the contractual rights and obligations, followed by the disclaimer about discrepancies, if any. For instance, bank computers charge interest regularly on a loan account and then issue internal “systemic vouchers” for these entries every month. But these are not shared with customers who may not be tracking their accounts. The customers are charged a normal interest, which shows up in the loan accounts. But, as RTI documents show, they are unaware of the actual amount, which could vary from month to month.

RBI norms to extend 5/25 lending structure soon

KOLKATA: Reserve Bank of India said it would issue operational guidelines to extend the 5/25 lending rule for existing infrastructure projects this week to enable easy repayment and loan restructuring after every five years. A 5/25 structure allows banks to lend to a project for 25 years, with an option of rewriting the terms of the loan or transferring it to another bank or financial institution after five years "We will issue the guidelines in a day or two," RBI deputy governor SS Munda said in Kolkata Wednesday. Such restructuring of loans would enable loan repayment to be co-terminus with cash flows from the projects. It will also improve debt-servicing capacity and viability of the operational projects. Banks face major asset liability mismatches in long term project financing. The 5/25 rule encourages banks to extend long-term loans to infrastructure sector with flexible structuring to absorb potential adverse contingencies. On the liability side, banks are allowed to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as cash reserve ratio, statutory liquidity ratio and priority sector lending targets. Mundra also said that promoters need to bring in "real equity" instead of "perceived equity" to make a project viable. "Projects with thin equity is like walking on thin ice," he said at a CII event.

Page | 15

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

L&T Finance, Muthoot evince interest for banking licence

MUMBAI: Within a day of the RBI issuing the final guidelines for payments banks and small finance banks, L&T Finance and Muthoot Finance today evinced initial interest in applying for such banking licences. "We are examining that (for both payment and small finance bank) and will then take a decision whether to apply or not," L&T Finance's chairman YM Deosthalee said today. L&T Finance will be joining its peers like Muthoot Finance and Shriram Capital, who have also shown interest in applying for banking licence. "We are surely interested and our board members are studying the new directives of RBI and will undertake a decision on it soon," Muthoot Finance MD George Alexander Muthoot said today. After the release of the guidelines last evening, Shriram Capital's GS Sundararajan had also said the group will be interested in the small finance bank segment and evaluate the guidelines. Meanwhile, BSE CEO & MD Ashish Chauhan said, "Currently, we have no such plans. We are not pursuing any banking license as of now." There were media reports last week that the BSE and its larger rival NSE, which witness transactions of thousands of Cr. every session, are eyeing setting up of small banks. The introduction of the two new types of banks is the first step towards having a differentiated banking in the country. The small finance banks have been designed to serve the marginalised by small lending and accepting deposits, while the payments banks will be for garnering small savings and facilitating remittances.

PSU bankers paid very poorly, rues SBI chief

SBI chief Arundhati Bhattacharya today said that bankers are paid very poorly in India, especially at public sector banks. Bankers are paid poorly in India as compared to their counterparts elsewhere in the world, SBI chief Arundhati Bhattacharya. (PTI) Lamenting that bankers are paid very poorly in India, especially at public sector banks, SBI chief Arundhati Bhattacharya today said there is an urgent need to provide better remuneration to attract good talent. Bankers are paid poorly in India as compared to their counterparts elsewhere in the world, she said. “Let me start with income of banking professionals in India. Here, 70 per cent of the banks are in public sector and they are paid very poorly compared to market,” she said at Delhi Economic Conclave here. The SBI chief said there is urgent need to improve quality of board members by providing them suitable remuneration so that the overall efficiency improves. “We are very blessed in that. SBI has invariably had very good quality board. But that may not be true across (other banks’) board. One of the reasons is very low remuneration that is given to the board directors,” she said. “If you are trying to attract best in the field, they have to be remunerated accordingly. We must insist on people who are coming into the board having sufficient hands on experience in both planning and execution in their respective areas,” she said. So, this is something that government can easily implemented and should be done, she added.

The comments come about a week after PSU bank employee unions went to a four-day relay strike to press for early revision of wages. With regard to governance, she said P J Nayak Committee has very clearly laid out certain roadmap as to how governance can be taken forward. “I believe the government is looking at it. While they do look at it, I believe there are very some low-hanging fruits and those could be easily implemented within a short period of time,” she added. Talking about changing regulation in tune with the present system, Bhattacharya said India has over 60 Acts and multiple rules and regulations that govern the financial system at the moment. “Many of the laws are from 1950s and 1960s. The banking regulations themselves they were established before ATMs, credit cards, internet banking, investment advisory, private banking, mutual funds,… whole lot of other things,” she said.

“These acts have been amended from time to time to keep pace with changing reality but the legal foundations have remain more or less static and as the result the framework is very complex and inconsistent,” she said. “Occasionally, it is also open to regulatory arbitrage. So, we need to look at these things also holistically and move the laws to be in tandem with the times,” she added. With regard to improving governance, Bhattacharya also pitched for a good Whistle Blower policy with the objective to protect innocent and punish guilty. “In the area of governance, it’s very important especially in the public sector banks to nurture and have a good Whistle Blower policy to ensure that people who actually give right information are properly rewarded and those who actually misuse the system they are penalised,” she said. “We must free the public sector from the disgruntled and

Page | 16

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

weapons of anonymous and superfluous complaints that they use. These complaints very often contain allegations that are totally full of lies but a lot of resources get tied up in looking into these things,” she added. Good people who have taken strong decision should not be unnecessary paralysed on account of false allegations, she said.

India has potential to be reinsurance hub for SE Asia: IRDA

NEW DELHI: Given its talent pool, India has the potential to become reinsurance hub for South Asian market, IRDA Chairman TS Vijayan said today. "Today we have only one reinsurance company in India, GIC RE... They are doing very well... India has the possibility to become a hub of all the re-insurance activities in east and South East Asia," he said at industry body Ficci's Health Insurance Conference. "Reinsurance hub is possible because even in a city like Singapore large number of Indian people are doing the analytics job, accounts jobs, legal jobs," he said. Therefore, India has got enough eco-system to support them educate them, he said, adding that "we can create certain entity here, which is world leader in reinsurance". Besides, Vijayan also said the government could think of launching a 'Jan Bima Yojna' similar to Jan Dhan Yojana for banking sector to increase awareness and deepen insurance penetration. It is time for launching a 'Jan Bima Yojna' because if telecom sector can penetrate to remotest place in the country then why can't insurance industry, he said. Industry should think on this and learn from the success of the telecom industry, he added. The Narendra Modi-led government launched the 'Jan Dhan Yojana' in August this year with an aim to have at least one account per household in the country. Just like banking, the country is under-covered from an insurance point of view.

Let banks decide on consolidation: SBI chief

The Centre must leave it to the public sector banks (PSBs) to decide on the consolidation candidates, State Bank of India Chairperson Arundhati Bhattacharya has said. “It is important to start conversations among banks as to who should merge with whom,” she said at the Delhi Economics Conclave 2014 here on Thursday, adding that it is important for PSBs to decide for themselves on the right partner. The SBI chief also said India must work towards three-four large banks through consolidation. Bhattacharya’s remark is in line with the previous UPA regime’s stance of allowing banks to come up with their own proposals for consolidation. As on date, the Narendra Modi Government has no stated policy on bank consolidation. Indications are that the upcoming Budget will spell out the new dispensation’s policy stance and may even come up with some “big ticket” announcements on the merger front. Reacting to the Union Cabinet’s nod on Wednesday for whittling down the Centre’s holding in public sector banks to 52 per cent, the SBI chief said this will kick-off the next round of reforms. “Public sector banks are being given a clear signal that they have to source capital from the market,” she said, adding that to raise capital PSBs have to be seen as efficient. “The big daddy back there is not going to be around to give them (the PSBs) capital as and when they need. If they (the PSBs) need to be competitive and want to grow, they definitely need to look at other places for more capital,” she added. Bhattacharya also suggested that the Department of Financial Services come out with a framework for PSBs to issue shares with differential voting rights.

RuPay issuer retains insurance clause; government unhappy

MUMBAI: In a direct confrontation with the government, the issuer of RuPay cards - NPCI - has retained a clause on insurance the government is unhappy with, while inviting insurers to provide cover for active debit cards. As of now, general insurer HDFC Ergo provides Rs. 1 lakh personal accident cover to RuPay cardholders, which is up for review at the end of this fiscal year. The government is disappointed with one of the terms of the agreement between HDFC Ergo and NPCI that said the card holder can make a claim only if the card is swiped at least 45 days prior to an unfortunate event. The government feared that some citizens may not get full benefit of the cover because of this clause. Since NPCI had already signed the agreement with HDFC Ergo, the government roped in Life Insurance Corporation (LIC) to provide Rs. 30,000 life cover along with personal accident cover on the RuPay card. Incidentally, the new request for proposals floated by NPCI also says the card holder has to do at least one transaction 45 days before the date of the accident to be eligible for insurance. "The government is not comfortable with the condition of at least

Page | 17

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

one transaction in 45 days," AP Hota, MD and CEO of NPCI. "But if we waive it, the card holders may not have any compulsion to keep card active. Ultimately, we want to ensure that people do transactions," he said. RuPay Card gained prominence with the launch of Jan Dhan Yojana, a government initiative to provide banking service to the lower income group in unbanked areas. Every citizen who opens a bank account under this scheme is offered a free RuPay card with Rs. 1 lakh personal accident cover and Rs. 30,000 life insurance cover. As of now, NPCI has issued 6.5 Cr. cards and is expected to issue another 6 Cr. by the end of this fiscal. "Government wants us to drop the condition. If the government is willing to subsidise the premium, we are willing to waive the condition. But as things stand, we have not received any firm commitment from the government on this yet," said Hota. Currently, NPCI bears a premium cost. It pays a premium of little less than 50 paise per card. NPCI has Rs. 2 lakh personal accident called for cover for premium card and Rs. 1 lakh cover for non-premium cards.

RBI's net dollar purchases almost double in October

The Reserve Bank of India (RBI)’s net dollar purchases from the market almost doubled in October to $2.7 billion compared with $1.44 billion the previous month. The activities of the central bank in the foreign exchange market also went up in October. RBI bought $14.26 billion while it sold $11.55 billion. The intention has been to absorb the capital flows to build reserves. Latest data shows that RBI’s foreign exchange reserves rose by $1.43 billion for the week ending November 28 to $316.31 billion. RBI’s net forward purchases rose in October to $10.22 billion, from a net forward purchase of $8.4 billion in September. NRI deposits rose by $1.3 billion in October taking the kitty of outstanding deposits of overseas Indian to $110.01 billion. NRI deposits saw a flow of $7.58 billion during April-October 2014, down from $18.98 billion in April-October 2013. Meanwhile, the rupee breached the 62 mark again on Wednesday due to dollar demand from oil marketing companies. The rupee ended at 62.02 compared with previous close of 61.89 per dollar. During intra-day trades the rupee touched a low of 62.05.

New scheme takes banking to customers

Why do people go to moneylenders for loans, even though they have to pay exorbitant interest rates? Most of the time, it’s because they get a hassle-free loan. Ashok Reddy, Chairman of the Karnataka Vikas Grammena Bank, found this out for himself on a visit to rural areas. In many cases the loan was as small as 5,000, which was ignored by banks. Sensing an opportunity here, in January this year₹ the bank launched a scheme called Vikas Janashakti to serve customers at their doorsteps. Reddy, who was in Mangaluru recently, told Press that loan repayment under this scheme is linked to the daily deposit scheme (also known as pigmy deposit scheme in some banks). Under this, an agent of the bank collects small deposits from customers at their doorsteps every day. A rural youth may want to open a petty shop in his village or a small motor winding business. Generally, the requirement is less

50,000. But the lack of access to small loans either drives them to moneylenders or spells the end of₹ their entrepreneurialaims. This is where Vikas Janashakti can make a difference, he said. “Till now, we have reached more than 20,000 beneficiaries, and disbursed around 120 Cr. under the scheme,”₹ he said. The bank lends 5,000- 50,000 under the scheme. The interest rate charged by the bank is₹ ₹ around 14.5 per cent a year. While that may seem a trifle high, he pointed out that some of the microfinance institutions charge around 24-26 per cent a year. This model also ensures smooth repayment. As the loan is linked to the daily deposit scheme, the bank recovers the loan amount from the deposit scheme, every month, through a standing instruction. Those who find it difficult to pay a lump-sum amount at the end of the month are also benefited by this model. “In the days to come, Vikas Janashakti will be the flagship product of our bank,” Reddy said.

ING Vysya staff want Kotak’s assurance on job security

In a bid to ensure that their jobs are secured and wages protected, the staff of ING Vysya Bank want a tripartite agreement with the Kotak Mahindra Bank and their current employers. Last month Kotak Mahindra Bank announced the acquisition of the Bengaluru-headquartered ING Vysya Bank in a

15,000-crore ($2.4 billion) deal. “We are insisting that Kotak Mahindra Bank come up with₹ assurances in writing on the job safety aspect of all employees through a tripartite agreement,” said

Page | 18

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

SA Sridhar, General Secretary of the All India ING Vysya Bank Officers Association. ING Vysya has a staff strength of 10,590. “We want all the jobs and wages of all stakeholders to be protected,” Sridhar said. The association is planning to create awareness by educating the employees across India. At the recently held Central Committee Meeting of the All India ING Vysya Bank Officers Association, concerns were raised on the issue of job safety, Sridhar said. “They have to consider retaining all the employees. The merger should not be one sided,” he added. Announcing the acquisition last month, Kotak Mahindra had said after the merger all ING Vysya branches and employees will become Kotak branches and employees.

Bank credit up 11% annually: RBI data

Credit in the banking system continues to grow at a tepid pace despite the festival offers extended by lenders. Data from the Reserve Bank of India suggests that in the period between November 14-28, bank credit increased marginally by 0.5 per cent. However, in the past one year credit growth was up by 11 per cent to Rs. 62,84,396 Cr. Credit growth in the previous fortnight had slipped marginally. However, bankers believe that credit growth in the system has started picking up, gradually. “There is some demand coming for loan from new projects in commercial real estate and renewable energy segment. The year-on credit growth till November-end was about 10 per cent for the country’s largest lender,” said Arundhati Bhattacharya, chairman, State Bank of India. Even deposits increased marginally by 0.76 per cent in the same period. In the past one year, deposits swelled by 11.7 per cent to Rs. 83,17,049 Cr. from Rs. 74,45 544 Cr. in the same period a year ago.

Government not to implement Banking Transaction Tax

DELHI: The government is not considering implementing Banking Transaction Tax to replace all taxes in the country, Parliament was informed today. Banking Cash Transaction Tax (BCTT) was introduced in June 2005 to track unaccounted money and trace its source and destination, but was withdrawn in April 2009. "There is no proposal to implement Banking Transaction Tax to replace all taxes in the country," Minister of State for Finance Jayant Sinha said in a written reply to the Lok Sabha. Earlier this month, a high level official panel had proposed levying of banking transaction tax on withdrawal of cash beyond a specified limit in a day to check black money. The report of Tax Administration and Reform Commission (TARC), headed by Parthasarathi Shome, said there was no instrument at present that captures details of cash withdrawals from bank accounts. It said such information would help the I-T department widen its information base on the use of black money.

ICICI Bank, American Express launch transparent credit card

MUMBAI: Private sector lender ICICI Bank today launched India's first credit card with a transparent design. The card, part of ICICI Bank's 'Gemstone Collection', has been launched in association with American Express. The 'ICICI Bank Coral American Express Credit Card' will provide benefits on the lifestyle front, including an introductory extended credit period offer and bonus reward points on online transactions, ICICI Bank Executive Director Rajeev Sabharwal said here. "The card combines the strengths and capabilities of both organisations and offers an exciting new payment choice to customers," American Express President (South Asia) Sanjay Rishi said. Plastic credit cards are generally opaque in nature, having details like the card holders' name, photograph, signature and bar code, among others. This card has all these features, but without the opacity. Its features include an extended period for repaying of retail purchases for the first two bill cycles by paying the minimum amount due. Other offers include complimentary movie tickets, access to certain lounges at Mumbai and Delhi airports, minimum 15 per cent discount on bills at leading restaurants across the country and no surcharge on fuel transactions at HPCLBSE -1.41 % outlets, among others.

Life insurer LIC digitises all policy records

DELHI: The largest life insurer LIC has digitised all of its policy records and has put all policies issued by it in electronic form or dematerialised form. "Life Insurance Corporation (LIC) has been digitising all its policy records and as on date all of LIC policy records have been digitised," an official statement said. The Insurance Regulatory and Development Authority (Irda) in 2011 issued guidelines asking companies to keep policies in electronic form for efficiency, transparency and cost reduction in

Page | 19

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

maintaining insurance policy data. For the purpose of keeping data in digital form, five insurance repositories (IRs) have been granted permission to maintain such electronic policies. To protect interest of the policyholders in keeping data in electronic format, Irda has formulated strict norms for the repositories. "The guidelines provide for various means to protect the interests of the customers by having strict norms for licensing, fit and proper criteria for the CEOs of the repositories and a two stage licensing process," the statement said. Also, there are explicit norms for policyholders servicing, issuance of electronic policies, norms for opening and maintenance of electronic insurance accounts and operation of minors accounts. Further, it also has provisions for grievance redressal, rights of policyholders to opt out and obligation to insurers.

NEWS OF THE WEEK

5 reasons why falling oil prices is bad news for Indian oil giants

The Indian oil companies including ONGC, BPCL, Oil India, and RIL had gone on an energy asset buying spree overseas in the last few years with crude oil hovering at above $100 a barrel. But with Brent crude now falling 35% and at its 5-year low of $66 a barrel, the valuation of these assets have fallen sharply by as much as 25%, say analysts.  Here are few reasons why falling oil prices will haunt these companies in 2015: 

No takers:  With valuation of all energy assets falling across the world, many Indian companies including Reliance has put its shale gas assets on the block. RIL is, in fact, expecting $4.5 billion for its 45% in a shale gas JV with Pioneer Natural Resources of USA. The only problem is that there are no takers. If the deal indeed takes place, analysts say, the valuation will be far lower than the expectations. 

Uneconomical fields:  Last year, the government-owned ONGC and Oil India took over 10% stake in Mozambique gas field for $2.5 billion from Videocon. Since then, the valuation of the field is down by as much as 25% say analysts. This means, BPCL, Oil India and ONGC are sitting on an asset whose valuation will continue to fall from its dizzying high of $25 billion of last year.  

Falling Cash flow:  With the oil assets requiring massive dose of investments to keep the wells flowing, falling oil prices would mean lower cash flows. This will impact the cash flows of the companies. Imperial Energy, a company taken over by ONGC is worse off as the $2.1 billion acquisition of Russia-focused Imperial Energy’s oil reserves turned out to be way below projections made prior to the purchase. Falling oil prices will just make matters worse for the company. 

Foreign loans:  As most of these acquisitions abroad have been done via debt taken abroad, any fall in oil prices will make the takeovers more expensive.  The rupee is expected to fall against the US Dollar in 2015 to around Rs. 65 to a dollar. This means Indian companies will have to pay more if the loans are to be paid from the cash flows of local companies.  But if these companies have hedged their currency risk, then the risk is not that high.

Faster consolidation:  The last oil fall in the 90s led to a consolidation in the global oil and gas industry with the bigger fish gobbling up smaller ones. While small oil companies will need cash to expand and big ones will need money to prop up their reserves, the Indian companies can either buy out smaller companies at a lower valuation or wait for the tide to turn.  In either case, they will need cash to remain in the business. 

INTERVIEW OF THE WEEK

Vaya has sufficient capital for small bank licence: Vikram Akula

Vikram Akula, founder and former chairperson of SKS Microfinance, has decided to buy 26 per cent stake in financial inclusion start-up Vaya Finserv, where he has also assumed the role of chairman.

Page | 20

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Akula, in an interview with Somasroy Chakraborty, shares the reasons for his return to the segment after three years. Edited excerpts:

What prompted you to re-enter the financial inclusion space? :I had a non-compete agreement with SKS that prevented me from entering this space for three years. That agreement got over in November. Financial inclusion is something very close to my heart. I always wanted to come back to financial inclusion once the non-compete period ended.

What made you choose Vaya? :Three things stood out for me. Vaya has a great team, its managing director, Surya Kumar, was a colleague at SKS where he headed the technology division. The core team, of first 50 staff, is also from SKS. These are people with whom I have worked. I have seen their work and that gives me a lot of confidence. Second, Vaya’s mission to work in under-banked districts of India is in line with my own goal. Also, it uses next-generation technology platform, which is unique and will become the future of financial inclusion.

You have been appointed as the chairman. Will you play active role in day-to-day functioning? :No, I will be non-executive chairman. I will be like a mentor and my role will be more of strategic in nature. The team will be led by Surya Kumar.

Why did you acquire 26 per cent stake (in the start-up)? Can you offer some details on the pricing? : I wanted to have a meaningful stake in the company. I believe in this company and felt it should reflect in more than words. I am not in a position to comment on the pricing. All I can say is I will have 26 per cent stake. SKS Trusts owns 65 per cent stake. The remaining nine per cent is with employees and high net worth investors.

Will Vaya apply for a licence to set up small finance bank? : We are keen on creating a small finance bank. Vaya now works a business correspondent which facilitates savings and loans for self-help groups of women on behalf of banks. If we are fortunate to get a licence, we can offer the same services on our own. The only caveat is we are also interested in payments bank licence. As things stand, we are leaning more towards small finance bank.

Small finance banks will need to have minimum paid-up equity capital of Rs. 100 Cr. Will Vaya need to raise money to meet this criterion ?: Vaya currently has sufficient capital to meet the regulatory requirement. In fact, I don’t think there is a need for the company to raise capital in the medium-term.

Do you plan to increase your stake in VAYA? : I guess it is possible but there is no immediate plan.

Can you share some details on VAYA's future plans? : VAYA opened its first branch in July, and now has 23 branches with 183 employees across six districts of eastern Maharashtra and northern Karnataka. For financial inclusion it is necessary to have a critical mass. So, the company will expand its footprint to as many under-banked districts as possible over a period of time. Also, eventually our aspiration is to offer the full range of financial products and services including pension and insurance, not just savings and loan products.

NPA reporting in India is not watertight: Abhijit Banerjee

Abhijit Banerjee is Ford Foundation International Professor of Economics at the Massachusetts Institute of Technology, and one of the experts entrusted with updating the Millennium Development Goals by the United Nations. Banerjee, earlier a Guggenheim Fellow, an Alfred P Sloan Fellow and who won the Infosys Prize in 2009, was at the Delhi Economics Conclave to address a session on banking-sector reforms. He spoke to Arup Roychoudhury on the side lines. Edited excerpts:

The Cabinet has decided to pare stake in state-owned banks to 52 per cent. What impact would it have on the banks' functioning and their ability to raise capital?: I think the banks will have to work themselves to get capital from the market. The fact that they are not guaranteed a honeypot to drink will send a certain kind of signal to the market. Certain things will have to change. The banks don't live in the modern world. Beyond that, I don't know how much will change. As an example, most

Page | 21

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

banks don't give strong incentives to loan officers. Even private sector banks don't. I don't think that will change anytime soon.

Despite the high levels of non-performing assets (NPAs), there are many accounts that haven't gone bad but are at the threshold. How can the banking system quantify these and deal with the issue? : Other than provisioning for such a situation, in the Budget maybe, we can't do much. We should start provisioning for this; maybe we can set aside some mechanism for this. But the problem is that they are not NPA. You just can't have the regulators checking on every bad loan. That is just not possible. We need to force banks to be much more upfront about reporting NPAs. There are too many mechanisms for hiding NPAs.

Do you think the reporting of NPAs in India is less watertight compared to some other economies? :I think in India it is not very watertight.

What is your view of the first six months of the Narendra Modi government in terms of its policy measures? What remains to be done? : A lot needs to be done. To be fair, in six months, there is only so much you can do. I don't believe that it is useless to articulate sentiments, and the sentiment has been positive so far. But now the real work needs to be done. Everything, every little thing, needs to be changed one-by-one. That will take a long time and a lot of manpower.

INTERESTING TO KNOW THIS WEEK

Family agreement vs will: Which one holds?

The sibling dispute between the Shroff brothers - Shardul and Cyril - who together run the country's largest law firm, Amarchand & Mangaldas & Suresh A Shroff & Co, has put the spotlight on the legal status of a will vis-à-vis a "family settlement agreement". The two brothers are fighting over the ownership of the company, of which their late mother Bharti Shroff's will bequeaths 22 per cent to Shardul. However, a family agreement singed in 2001, entailed equal distribution of Bharti Shroff's interest in the firm between the brothers. Without going into the merit of the case which is sub-judice, Press explains the legal position that a will and a family settlement agreement enjoy, along with the limits and obligations that come with them.

Legally enforceable

A will and a family agreement are legally enforceable documents provided that the requirements under law for their execution are met. A will has been statutorily defined under Section 2 (h) of the Indian Succession Act, 1925, to mean the legal declaration of the intention of a testator, or the person making the will, on how he or she wants his or her property to be treated after his or her death. A person can only will away a property that he or she owns or has the power to dispose of at the time of death. "A will has to stand the test of law," says Anupam Srivastava of The Chambers of Law, a Delhi-based law firm. While a court generally does not get into the merits of a will, the document could get nullified if it is proved in a court of law to have been made under suspicious circumstances, adds Srivastava. In the absence of a will, the legal heirs are governed by the personal laws of the faith that the deceased professed.

A family agreement or arrangement has not been defined statutorily under Indian laws, points out Aakanksha Joshi, associate partner at law firm Economic Laws Practice. However, Joshi says that Halsbury's Laws of England defines it as an agreement among members of the same family, intended to be generally and reasonably for the benefit of the family, either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour. In other words, it is an arrangement - whether written or verbal - by which members of a family settle their inter se ("among themselves") rights in relation to a property to avoid disputes. As Jeevesh Nagrath, a lawyer in law firm Nagrath & Nagrath, says, "The purpose of a family agreement is to resolve a dispute or avert a future dispute, and to maintain peace and harmony in the family."

Page | 22

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Legal experts explain that a family agreement is a valid, legally-binding and enforceable contract, applicable to all the signatories of the agreement. "Since consideration for a promise is essential, hence an agreement, unlike a will, is found on some consideration," points out senior advocate Ashwini Kumar Mata. While a will relates to a bequest of an estate, a family agreement provides for an arrangement by which some rights are created or declared (or assigned/ extinguished) whether in present or in future, he adds.

Equal rights

On its own, neither a family agreement nor a will is superior or of greater legal character than the other, says Mata. However, legal experts point out that it is the cast and terms of the family agreement that will determine if there are any bequeathable assets or titles that can become the subject of a will. "Since both a family agreement and a will operate on different time planes, no occasion arises for conflict or preponderance of one over the other," says Mata. But legal opinion appears divided on this point. "Even if there is a family agreement, a portion to be transferred on a future date is not a valid contract for reasons of uncertainty, and at best should be seen as a desire, which one is entitled to change whenever one wants to," contends Srivastav. Indian courts seem to give greater legal sanctity to a family agreement. Courts have upheld family arrangements that also include those who are not members of a joint family, or those whose entitlement to inheriting a property is doubtful. "Courts lean in favour of upholding a family arrangement instead of disturbing the same on technical or trivial grounds even if they suffer from a legal lacunae or a formal defect," says Joshi of Economic Laws Practice. Experts point out that the courts have applied the rule of estoppel - a legal bar to alleging or denying a fact because of one's own previous actions or words to the contrary - to prevent the unsettling of a family agreement. "The Supreme Court has held that there are special equities attached to such agreements, and courts should always lean in favour of giving full effect to them," says Nagrath. In sharp contrast, there are strict requirements under law for the making of a will and for its subsequent execution.

Safeguards for a family agreement

According to Kavil Ramachandran, Thomas Schmidheiny Chair Professor of Family Business and Wealth Management, Indian School of Business, there are two dimensions to any family agreement. One, a legally binding shareholders agreement, and second, a set of policies, rules and restrictions that provide clarity on what is acceptable and what is not. The trouble is that most families have piecemeal awareness about a family agreement, shareholder agreement, family constitution or a will, says Ramachandran. To ensure the preponderance of a family agreement, the makers should specifically mention that it is superior to a will, says Ramachandran. His contention is that in the normal course, a legally signed family agreement should supersede a will, irrespective of whether the will was written prior to or after the family agreement. Legal experts also say that any family agreement must clearly state how the asset or title is to be divided and that each person to the settlement is absolutely entitled to the same. "If it is intended that the property is to be held jointly, the family arrangement should clearly specify this and mention that the property is held as joint property and whether it is intended for the heirs of any members to succeed to their share or not," says Joshi. Mata adds that it is important to appropriately structure a family agreement so as not to leave any disposable residuary bequeathable title or asset with the transferor that can become the subject matter of a will. At the end of the day, it is, of course, harmony among family members that is perhaps the best safeguard for the proper execution of a family agreement.

INTERNATIONAL NEWS THIS WEEK

UK proposes to get tough on senior managers of foreign banks

Senior managers at Indian bank branches and non-banking finance companies in the UK will need to brace themselves for tighter regulation that are likely to be brought in next year. The proposed regulatory regime, as outlined in a joint consultation paper by Bank of England’s Prudential Regulation Authority and the Financial Conduct Authority, is designed to make senior management of banks more responsible and accountable in the UK. According to the paper, if someone is in a senior management role, that person will be responsible for any regulatory violation, which occurs in their firm, unless the

Page | 23

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

person can demonstrate that they took steps to avoid the violation. The bank/ non-banking finance company must certify that its employees are not likely cause significant harm to the firm or its customers. Among the Indian banks that operate in the UK are Bank of Baroda, Bank of India, State Bank of India and Syndicate Bank. These banks largely cater to the large Indian diaspora. SBI has the largest operations in the UK, functioning since 1921. Four Indian banks operate as subsidiaries — Punjab National Bank, Union Bank of India, ICICI Bank and Axis Bank. The Indian non-banking finance companies operating in the UK include Exim Bank and IIFCL (UK).

Consultation stage

According to the Bank of England, there are about 150 branches of international banks operating in Britain, accounting for 31 per cent (£2.4 trillion) of the total assets of the banking system. Still in the consultation phase, the proposed regulation is required to be passed through legislation and the implementation date is yet to be decided. According to a senior Union Bank of India official, the proposed regulatory regime is quite controversial and individual banks are worried as to how the UK regulator is going to use it. If implemented, the regime could lead to criminal sanctions, and the fines and prohibitions will be at an individual level. Bank of England has restricted retail business for branches of all foreign banks as it is worried about the credit controls, credit risk management and viability of the business model of banks. In September this year, the PRA laid out norms that required banks from outside the European Economic Area to offer only minimal retail services. The authorities say they are comfortable with foreign banks in the UK to do more wholesale business but want want subsidiaries to do retail business as well.

China deflation risk deepens signalling room for easing

China's factory-gate deflation deepened and consumer prices climbed at the slowest pace since 2009, signalling room for further monetary easing. The producer-price index dropped 2.7 per cent in November from a year earlier, a record 33rd-straight decline and the biggest fall since mid-last year. Consumer prices rose 1.4 per cent, compared with the 1.6 per cent increase in October. Falling oil and metals prices have cut costs for China's factories, leading to lower export prices and adding to dis-inflation threats across the world. The rising risk of deflation drives up real borrowing costs, making it harder for China's indebted companies to service debts and increasing pressure on the central bank to follow up last month's surprise interest-rate cut with further monetary easing. "China has entered into a rapid dis-inflation process, and faces the risk of deflation," said Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd in Hong Kong. "As the PBOC has exhausted its newly invented and ineffective policy tools, we believe the next move will have to be a RRR cut in order to regain policy effectiveness and credibility." Factory-gate prices of coal products fell 11.6 per cent from a year earlier, oil and gas products slumped 13 per cent and ferrous metal products declined 16.6 per cent, according to a statement on the National Bureau of Statistics website. "The major driver of the recent decline in headline inflation readings is the slump of global oil and other major commodity prices," said Lu Ting, Bank of America Corp's head of Greater China economics in Hong Kong.

Oil slump

Oil's slide also helped push China's trade surplus to a record in November after an unexpected decline in imports. Lower oil prices could boost economic growth and help keep inflation slow enough to give scope for further easing after last month's surprise interest-rate cut. "The risk of deflation in China has risen significantly," China International Capital Corp. economists Liang Hong and Bian Quanshui wrote in a note. It will "lift the level of real interest rates, further curbing aggregate demand and in turn reinforcing deflation expectations." As such, the People's Bank of China needs to relax monetary policy, including cuts in interest rates and banks' RRR, they wrote. China is forecast to lower banks' required reserve ratio to 19.5 percent in the first quarter of 2015 and to 19 per cent in the second quarter, according to a survey by Bloomberg News.

Global risk

Page | 24

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

As lower commodity costs fuel the drop in factory prices, that's in turn pushing down China's export prices, feeding deflation risks globally. While most major central banks view inflation of about 2 per cent as the yardstick for price stability, more than one-fourth of 90 economies monitored by researcher Capital Economics Ltd are below 1 per cent, the most since 2009. Almost half of those are already in deflation. The moderation in China's consumer prices reflects tepid domestic demand. Non-food inflation was 1 percent from a year earlier, while food prices increased 2.3 per cent. "Without a question, deflation has become the main risk of prices," Xu Gao, chief economist at Everbright Securities Co in Beijing, wrote in a note. "The root cause of this is the weak real economy." The job market is showing signs of stress that may trigger a second wave of economic weakness next year driven by slowing consumption, wrote Standard Chartered Plc economists led by Shanghai-based Li Wei in a note.

Wages freeze?

"While the manufacturing sector has been losing jobs for three years, until recently growth in services jobs was enough to offset this," wrote the economists. "This has now changed. More worryingly, our recent discussions with companies suggest that many plan to freeze wages in 2015 as a result of the slowing economy and already-squeezed profit margins." China's top leaders started a meeting on Tuesday to map out economic plans for 2015. Economists expect the government to lower next year's economic growth target to 7 per cent from about 7.5 per cent this year as it adapts to the "new normal" of a slower expansion pace. "In the near future, the PBOC will likely remain at the forefront of the global central banks' battle against 'low-flation'," said Morgan Stanley analysts led by Helen Qiao in a note ahead of Wednesday's release. The analysts said they expect more flexibility in combining interest rate and reserve requirement cuts with targeted easing measures to maintain macro stability and address structural imbalances.

With new capital rule, Fed nudges big banks to shrink

The Federal Reserve, fearing complacency six years after the financial crisis, moved on Tuesday to preserve the efforts that have strengthened large banks. The Fed proposed a rule that would increase capital requirements for the nation's eight largest banks, including JPMorgan Chase and Goldman Sachs. By increasing the requirements, the Fed aims to make large banks more resilient to shocks. A bank with higher capital depends less on borrowed money, which may cease to be available in times of stress. The Fed's push to increase capital may also reduce the chances that a large bank's problems may weigh on the wider economy. Some economists have said that the size of some banks has made them "too big to fail."

PUSH FOR STABILITY

US Federal Reserve has proposed a rule that would increase capital requirements for the nation’s eight largest banks, including JPMorgan Chase and Goldman Sachs

The banks would have to raise a total of $21 bn in additional capital

Fed aims to make large banks more resilient to shocks

Janet L Yellen, the Fed’s chairwoman, said the proposed rule might persuade banks to shrink

Most of the affected banks have raised billions of dollars of new capital since the crisis, so they will most likely not find the proposed rule onerous to comply with

Janet L Yellen, the Fed's chairwoman, said on Tuesday that the proposed rule might persuade banks to shrink. The rule, she said in a statement, "would encourage such firms to reduce their systemic footprint and lessen the threat that their failure could pose to overall financial stability." Most of the affected banks have raised billions of dollars of new capital since the crisis, so they will most likely not find the proposed rule onerous to comply with. Fed officials estimated that nearly all of the eight banks would already meet the new requirements outlined on Tuesday. They added during a phone call with reporters that the eight banks would have to raise a total of $21 billion in additional capital but declined to provide specific figures for individual banks. JPMorgan, however, may account for most or all of that

Page | 25

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

sum. At a public Federal Reserve Board meeting on Tuesday, Stanley Fischer, the central bank's vice-chairman, made comments that implied that JPMorgan would be hardest hit by the regulation.

JPMorgan's capital, calculated under the method that the new rule requires, currently amounts to $163 billion, which is equivalent to 10.1 per cent of one measure of its assets. The Fed officials said that the highest requirement under the proposed rule would lead to a bank having capital equivalent to 11.5 per cent of its assets. Increasing JPMorgan's ratio to that level would in theory require adding just over $20 billion in capital. "The whole shortfall looks to be tied to JPMorgan," Jason Goldberg, a bank analyst at Barclays, said. "While we're still reviewing the Fed's proposal, we are well capitalised and intend to meet their requirements and time frames while continuing to deliver strong returns for our shareholders," Andrew Gray, a JPMorgan spokesman, said. Banks would have to be in full compliance with the rule by the beginning of 2019. Other banks subject to the new regulation would include State Street, Morgan Stanley, Bank of New York Mellon, Bank of America, Wells Fargo and Citigroup.

The Fed's proposal aims to create a more stringent version of an international rule formulated by the Basel Committee on Banking Supervision, a global bank regulation body. Under the current Basel rules, large banks are subject to a base requirement that says their capital must be equivalent to 7 per cent of their assets, measured according to their perceived riskiness. Like the Basel approach, the Fed's proposal adds "surcharges" to that 7 per cent requirement based on a bank's size and the nature of its activities. But the Fed's surcharges are bigger than Basel's. Noting that, industry representatives said the Fed's proposed rule could harm the competitiveness of American banks. "Holding US banks to a more stringent capital framework than our global competitors could be a misguided economic decision," Richard Foster, a vice president of the Financial Services Roundtable, said in a statement. Under the Fed's rule, a very large bank that operates in many countries and focuses on complex businesses that can be fragile during market routs would face the highest capital requirements. JPMorgan and Citigroup are examples of such banks. Conversely, the proposal would be much more lenient for a bank that is in relatively stable and simple businesses and operates primarily in the United States. Wells Fargo, which has only a small presence on Wall Street, would fit that description. Critics of large banks said the Fed may not have gone far enough. "This is an important step in the right direction," Senator Sherrod Brown, Democrat of Ohio, said in a statement. "But we must do more to ensure that banks have adequate capital to cover their losses." The big question is whether the rule will cause banks to shrink. A bank that has to have higher capital must get more of its funding - the money it uses for lending and trading - from shareholders. But if the financial return on the higher capital disappoints shareholders, the bank's shares could underperform. The bank's management might then decide to pare back its businesses - and even shrink - to bolster its returns.

"The penalty for being big and complex might be going up," said Mike Mayo, a bank analyst at the brokerage firm CLSA. In his estimation, shareholders of a large bank expect its annual earnings to be equivalent to at least 10 per cent of its capital. "If it is not in excess of that, there will be major questions about the business model," he said. Unlike the Basel rule, the Fed's proposal takes direct aim at Wall Street firms that borrow large sums for short periods in the debt markets. This type of borrowing evaporated in the 2008 financial crisis, depriving large banks of the money they needed to keep going and prompting the Fed to bail out the banks with emergency loans. According to the Fed's proposal, a bank that relies heavily on short-term market borrowing would have to hold more capital than one that gets most of its funding from deposits. "Reliance on short-term wholesale funding is among the more important determinants of the potential impact of the distress or failure of a systemically important financial firm on the broader financial system," Daniel K. Tarullo, the Fed governor who spearheaded the central bank's proposal, said in a statement.

Russian bank to provide up to $1 b credit to Essar Group

Russian bank VTB will provide up to $1 billion credit to Essar Group for its corporate and project needs. The agreement to this effect was signed by Essar co-founder Shashi Ruia and VTB Chairman Andrey Kostin in presence of Prime Minister Narendra Modi and Russian President Vladmir Putin here today. The MoU “envisages finance arrangement of $1 billion to Essar by VTB for general corporate

Page | 26

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

purpose,” an official statement said here. The deal is intended to finance the continued consolidation of certain assets in Essar Group’s investment portfolio and the strengthening of their capital structure. This financing follows the successful $1.2 billion transaction arranged in 1H 2014 by VTB Capital which acted as financial adviser and financier for the company in taking its key assets private, which were listed on the London Stock Exchange, VTB said in a statement.

NY banking regulator probing Barclays, Deutsche Bank FX algorithm

The New York banking regulator is investigating if Deutsche Bank and Barclays Plc used algorithms on their trading platforms to manipulate foreign exchange rates, a source with direct knowledge of the matter told Reuters. Benjamin Lawsky, the head of New York's Department of Financial Services (DFS), has ordered a monitor to be installed at Deutsche Bank and already has one in place at Barclays - a move that will allow him to collect greater evidence of alleged manipulation, said the source who did not want to be named. Deutsche Bank spokeswoman Renee Calabro declined to comment but cited an earlier statement on the probes. "Deutsche Bank has received requests for information from regulatory authorities that are investigating trading in the foreign exchange market. The Bank is cooperating with those investigations," Calabro said, quoting the earlier statement. Representatives at Barclays did not immediately respond to an email seeking comment outside regular business hours. A DFS spokesman declined to comment. Last month, regulators fined six major banks a total of $4.3 billion for failing to stop traders from trying to manipulate the foreign exchange market, following a yearlong global investigation. Deutsche Bank and Barclays were not among the six banks. Lawsky, who started his probe into possible manipulation of currency markets in February, chose not to coordinate a settlement with other regulators because he viewed those deals as too weak, a source told Reuters last month, an indication he's likely to go after the banks later and demand larger penalties. Reuters reported last month that the civil settlements struck between six global banks and US and UK authorities set the stage for negotiations over related ongoing probes that could bear much more severe consequences.

RBI THIS WEEK

RBI Central Board meets at Kolkata

The Central Board of Directors of the Reserve Bank of India met today at Kolkata. Dr. Raghuram Rajan, Governor, Reserve Bank of India chaired the meeting. Directors, Dr. Anil Kakodkar, Shri Kiran Karnik, Dr. Nachiket Mor, Shri Y.H. Malegam, Prof. Dipankar Gupta, Shri G. M. Rao, Ms. Ela Bhatt, Dr. Indira Rajaraman, Shri Y.C. Deveshwar, and Prof. Damodar Acharya attended the meeting. The meeting was also attended by the Government nominee director on the Central Board, Shri Rajiv Mehrishi, Secretary, Department of Economic Affairs. Deputy Governors Shri Harun R. Khan, Dr.Urjit Patel, Shri R. Gandhi and Shri S.S. Mundra were present. The Board reviewed the functioning of the Reserve Bank as well as the current economic situation and global and domestic challenges and policy responses. The Central Board meets at least once every quarter and the meeting in December every year is traditionally held in Kolkata. Apart from this, one meeting each is held in Chennai, Mumbai, and New Delhi which is typically held after the Union Budget and is addressed by the Finance Minister. The rest of the meetings are held in other state capitals by rotation. The main function of the Central Board of Directors of the Reserve Bank is to provide overall direction to the Reserve Bank’s affairs. On December 10, 2014, the Governor and Deputy Governors met the Chiefs of Eastern Sector banks and among others, took stock of the implementation of Pradhan Mantri Jan Dhan Yojana (PMDJY) and credit scenario in the state and discussed other region specific issues.

RBI to post on its Website Clarifications on Guidelines on Licensing of Small Finance Banks and Payments Banks

The Reserve Bank of India has been receiving queries from intending applicants seeking clarifications on the guidelines on licensing of small finance banks and payments banks. The guidelines were issued on November 27, 2014. Considering that the clarifications sought would be of wider interest and use for all intending applicants, the Reserve Bank has decided to post the clarifications on its website. The identity of those who raise queries would be kept confidential. The queries may be sent

Page | 27

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

by December 15, 2014 to Chief General Manager, Department of Banking Regulation, Reserve Bank of India, 13th Floor, Central Office Building, Fort, Mumbai–400 001 through mail or email.

Supervisory College for State Bank of India

The second Supervisory College for State Bank of India was held in Mumbai on December 08, 2014. Shri S.S. Mundra, Deputy Governor, Reserve Bank of India inaugurated the supervisory college. In his address, Shri Mundra briefly touched upon the set-up of Supervisory Colleges and then presented a bird’s eye view of the banking system in India and the tools for the supervision of commercial banks by RBI. He mentioned that though none of the Indian banks qualify as a global systemically important bank (G-SIB), some of the larger ones are systemically important for us and SBI being the largest Indian bank plays a critical role in our banking system. The Deputy Governor concluded by saying that today’s meeting is only an initiation. Interaction amongst the college members and the banking group should be on a continuous basis for evolving a much better supervisory environment.

Shri P.R. Ravi Mohan, Chief General Manager-in-Charge, Department of Banking Supervision, Reserve Bank of India highlighted the recent initiatives taken by the Reserve Bank on Risk Based Supervision (RBS), Automated Data Flow and Central Repository of Information on Large Credits (CRILC) while Shri Sudarshan Sen, Chief General Manager in-Charge of the Department of Banking Regulation updated the members on the latest regulatory changes. Smt Arundhati Bhattacharya, Chairperson, State Bank of India made a presentation to the College about the bank, including its international operations and responded to various queries from the host supervisors.

During the day-long event, the host and home supervisors deliberated on many issues of mutual concern and the host supervisors shared their views on the presence and operations of State Bank of India in their respective countries. Twenty three supervisors from fourteen overseas jurisdictions participated in the College for State Bank of India. Representatives from Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA) & Pension Fund Regulatory and Development Authority (PFRDA) also participated in the College.

The Reserve Bank of India has set up, as part of supervision of cross border operations of Indian banks abroad, Supervisory Colleges for banks which have good international presence. The main objectives of Supervisory College are to enhance information exchange and cooperation among supervisors, to improve understanding of the risk profile of the banking group and thereby facilitate more effective supervision of internationally active banks. The Reserve Bank had, in December 2012, set up the first Supervisory Colleges for State Bank of India and ICICI Bank Ltd. The Colleges for Bank of Baroda, Bank of India and Axis Bank Ltd were set up in February and September 2014, respectively. It is expected that the Colleges would enhance the mutual trust and co-operation among the supervisors.

Supervisory College for Punjab National Bank

The Reserve Bank of India set up the Supervisory College for Punjab National Bank on December 09, 2014 in Mumbai. Shri Chandan Sinha, Executive Director, Reserve Bank of India inaugurated the College. Shri Chandan Sinha in his address stated that the regulatory framework is getting synchronised across jurisdictions on the lines of the Basel framework and regulators are also learning from each-other about the best practices. He further emphasised that supervisory colleges provide a suitable platform for face-to-face interaction and sharing of valuable experiences across multiple supervisors. Shri Sinha also referred to mechanism of collaboration and information sharing with host regulators through mutually agreed Memorandum of Understanding (MoUs) that was progressing well.

During the day-long event, the host supervisors shared their views on the presence and operations of Punjab National Bank in their respective countries with the Reserve Bank. The top management of Punjab National Bank, led by Shri Gauri Shankar, Executive Director, made a presentation to the College about the bank in general and it’s international presence in particular and took questions from the host supervisors. Seven supervisors from three overseas jurisdictions participated in the meeting

Page | 28

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

of the Supervisory College for Punjab National Bank. Representatives from Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority (IRDA) were also present.

Foreign Direct Investment (FDI) in India – Review of FDI policy –Sector Specific conditions

Attention of Authorised Dealer Category – I (AD Category-I) banks is invited to Annex B of Schedule 1 to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000(the Principal Regulations) notified by the Reserve Bank vide Notification No. FEMA. 20/2000-RB dated 3rd May 2000, as amended from time to time whereby description of sectors/activities wherein the entry norms, sectoral cap and other conditions for sectors/activities in which FDI is permitted under Government route and Automatic route are specified. Attention of Authorised Dealer Category – I (AD Category-I) banks is also invited to Annex to A.P. (DIR Series) Circular No. 44 dated September 13, 2013.

2. The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India has been updating/notifying the FDI policy through issue of Consolidated FDI Policy Circular. Accordingly, Government has notified the latest FDI policy changes vide Consolidated FDI Policy Circular of 2014 dated April 17, 2014 and the same is available at Government website www.dipp.gov.in. In order to bring uniformity in the sectoral classification/conditionalities for FDI/foreign investment as notified under the Consolidated FDI Policy Circular with the FEMA Regulations, the position on Annex B of Schedule 1 to Notification No. FEMA. 20/2000-RB dated 3rd May 2000, as amended from time to time, has been suitably revised by amending the notification.

3. Reserve Bank has since amended the Principal Regulations through the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Tenth Amendment) Regulations, 2014 notified vide Notification No. FEMA. 312/2014-RB dated July 2, 2014, c.f. G.S.R. No. 798(E) dated November 13, 2014.

4. Authorised Dealer banks may bring the contents of this circular to the notice of their constituents and customers concerned.

5. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

Foreign Direct Investment (FDI) in India – Review of FDI policy –Sector Specific conditions- Defence

Attention of Authorised Dealer Category – I (AD Category-I) banks is invited to Regulation 14 and Annex B of Schedule 1 to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time. In terms of Schedule 1 to the Notification ibid, Foreign Direct Investment (FDI) up to 26 per cent is permitted under Government route in Defence industry subject to license under the Industries (Development & Regulation) Act, 1951. Proposals for FDI above 26 per cent would be subject to approval of Cabinet Committee on Security on case to case basis, wherever it is likely to result in access to modern and ‘state-of-art’ technology in the country.

2. The extant FDI policy for defence sector has since been reviewed. Department of Industrial Policy and Promotion (DIPP) has now provided a list of defence items as finalised by Department of Defence Production, Ministry of Defence and has clarified that items not in the list would not require industrial license for defence purposes. Dual use items, having military as well as civilian applications, other than those specially mentioned in the list, would also not require Industrial License from Defence angle. Department of Defence Production, Ministry of Defence, has finalised the ‘Security Manual for Licensed Defence Industry’.

Page | 29

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

3. Further, on a review, effective from August 26, 2014, foreign investment i.e. FDI, FIIs, RFPIs, NRIs, FVCIs and QFIs upto 49% under government route shall be permitted in defence sector subject to the conditions specified in the Press Note 7 (2014 Series) dated August 26, 2014. Portfolio investment (RFPI/FII/NRI/QFI) and FVCI investment will not exceed 24% of the total equity of the investee company. Portfolio investment will be under automatic route.

4. The listed investee company engaged in defence sector, in accordance with the guidance provided by the Press Note 7 (2014 Series) , shall immediately allocate limits for portfolio investment for RFPI (including QFI and FII), NRI (not exceeding 10%) and FVCI within the default portfolio investment limit of 24% being permitted now and approach Reserve Bank, Central Office, Foreign Investment Division, Mumbai so that allocated limits can be monitored by the Reserve Bank.

5. A copy each of Press Note No.3 , No.6, No. 7 (2014 Series) dated June 26, 2014, July 8, 2014 and August 26, 2014 respectively issued in this regard by DIPP, Ministry of Commerce & Industry, Government of India are enclosed.

6. Reserve Bank has since amended the Principal Regulations through the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Thirteenth Amendment) Regulations, 2014 notified vide Notification No. FEMA. 319/2014-RB dated September 5, 2014, c.f. G.S.R. No. 799(E) dated November 13, 2014.

7. Authorised Dealer banks may bring the contents of this circular to the notice of their constituents and customers concerned.

8. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

Foreign Direct Investment (FDI) in India – Review of FDI policy – Sector Specific conditions- Railway Infrastructure

Attention of Authorised Dealer Category – I (AD Category-I) banks is invited to Annex A and Annex B of Schedule 1 to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time. In terms of Annex A of Schedule 1 to the Notification ibid, Foreign Direct Investment (FDI) is prohibited in activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

2. The extant Foreign Direct Investment (FDI) policy for railways sector has since been reviewed. Department of Industrial Policy and Promotion (DIPP) has now permitted 100% FDI in railway Infrastructure sector under automatic route subject to conditions. Accordingly, it has been decided to permit FDI in the following activities of the Railway Transport sector:

“Construction, operation and maintenance of the following: (i) Suburban corridor projects through PPP, (ii) High speed train projects, (iii) Dedicated freight lines, (iv) Rolling stock including train sets, and locomotives/coaches manufacturing and maintenance facilities, (v) Railway Electrification, (vi) Signaling systems, (vii) Freight terminals, (viii) Passenger terminals, (ix) Infrastructure in industrial park pertaining to railway line/sidings including electrified railway lines and connectivities to main railway line and (x) Mass Rapid Transport Systems. Further, FDI beyond 49 of the equity of the investee company in sensitive areas from security point of view will be brought before the Cabinet Committee on Security (CCS) for consideration on a case to case basis.”

3. A copy of Press Note No. 8 (2014 Series) dated August 27, 2014 issued in this regard by DIPP, Ministry of Commerce & Industry, Government of India is enclosed.

Page | 30

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

4. Reserve Bank has since amended the Principal Regulations through the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Fourteenth Amendment) Regulations, 2014 notified vide Notification No. FEMA.320/2014-RB dated September 5, 2014, c.f. G.S.R. No. 800(E) dated November 13, 2014.

5. Authorised Dealer banks may bring the contents of this circular to the notice of their constituents and customers concerned.

6. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

Introduction of Digital Life Certificates for Pensioners

As per the present scheme for payment of government pension, pensioners are required to furnish a life certificate in November every year to the bank concerned for continued receipt of pension without interruption. Even though this requirement has been liberalised to enable pensioners to submit their life certificate at any branch of the pension disbursing bank, several pensioners find it difficult to submit the certificates in time for various reasons.

2. In order to alleviate the hardship caused to pensioners, the Government of India has since launched “Jeevan Pramaan”, a digital life certificate based on Aadhaar Biometric Authentication, aimed at further simplifying the process of submission of life certificate and facilitating accuracy and timeliness in disbursal of pensions. In order to facilitate implementation of Jeevan Pramaan, a web portal (jeevanpramaan.gov.in) was launched by the Hon’ble Prime Minister on November 10, 2014. Copy of a brochure on Jeevan Pramaan brought out by the Ministry of Communications and Information Technology of the Government of India, explaining the details of the scheme and its benefits, is enclosed for your information.

3. To facilitate introduction of Jeevan Pramaan, the Central Pension Accounting Office, Ministry of Finance, Government of India (CPAO) has amended the Scheme of Payment of Pensions to Central Government Civil Pensioners. A copy of the relative Office Memorandum dated November 14, 2014, issued by the CPAO, enclosing Correction Slip no. 22 dated November 10, 2014, and the process for getting digital life certificates by the pensioners, is attached. Copies of the memorandum has already been sent by CPAO to all banks and to the governments of all States and Union Territories. Similar amendments to their respective pension regulations have also been made by different Central Government Ministries (e.g., Ministry of Railways and Department of Posts). The Indian Banks Association has also issued a circular dated November 22, 2014, in this regard to their member banks.

4. Once fully implemented, agency bank branches will be able to obtain information about the digital life certificate of their pensioner customers by logging on to the website of Jeevan Pramaan and searching for the certificate or by downloading through their Core Banking Systems. Pensioners will also be able to forward to their bank branches the relative link to their digital life certificate by email/sms.

5. All agency banks disbursing government pension may take necessary action to implement and benefit from the scheme and issue necessary instructions to all their branches concerned and dealing staff. Banks may, in addition, work towards creating awareness about this facility among their pensioner customers through their branches, websites and other means. Banks may also suitably amend the FAQs on pension payments posted on their websites, and provide a link to the website of Jeevan Pramaan.

National Rural livelihoods Mission (NRLM) – Aajeevika - Interest Subvention Scheme

Please refer to our circular RPCD.GSSD.CO.BC.No.57/09.01.03/2013-14 dated November 19, 2013 on Interest Subvention Scheme under National Rural Livelihoods Mission (NRLM).

Page | 31

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

2. The revised guidelines for the year 2014-15 on Interest Subvention Scheme under NRLM, as received from the Ministry of Rural Development, Government of India, are annexed for implementation by banks.

Interest subvention scheme for Women SHGs - Year 2014-15

I. Interest subvention scheme on Credit to Women SHG during the year 2014-15 for all Commercial Banks (only Public Sector Banks, Private Sector Banks and Regional Rural Banks) and Co-operative banks in 150 districts

i. All women SHGs will be eligible for interest subvention on credit upto Rs. 3 lakhs at 7% per annum. SHG availing capital subsidy under SGSY in their existing credit outstanding will not be eligible for benefit under this scheme.

ii. The Commercial Banks and Cooperative Banks will lend to all the women SHGs at the rate of 7% in the 150 districts. Annexure I provide the names of the 150 districts.

iii. All Commercial Bank (excluding RRBs) will be subvented to the extent of difference between the Weighted Average Interest Charged (WAIC as specified by Department of Financial Services, Ministry of Finance for the year 2014-15 – Annexure II) and 7% subject to the maximum limit of 5.5% for the year 2014-15. This subvention will be available to all the Banks on the condition that they make SHG credit available at 7% p.a. in the 150 districts.

iv. RRBs and Cooperative Banks will be subvented to the extent of difference between the maximum lending rates (as specified by NABARD) and 7% subject to the maximum limit of 5.5% for the year 2014-15. This subvention will be available to all RRBs and Cooperative Banks on the condition that they make SHG credit available at 7% p.a. in the 150 districts. RRBs and Cooperative Banks will also get concessional refinance from NABARD. Detailed guidelines for RRBs and Cooperative Banks will be issued by NABARD.

v. Further, the SHGs will be provided with an additional 3% subvention on the prompt repayment of loans. For the purpose of Interest Subvention of additional 3% on prompt repayment, an SHG account will be considered prompt payee if it satisfies the following criterion as specified by Reserve Bank of India (RBI).

a. For Cash Credit Limit:

i. Outstanding balance shall not have remained in excess of the limit/drawing power continuously for more than 30 days.

ii. There should be regular credit and debits in the accounts. In any case there shall be at least one customer induced credit during a month.

iii. Customer induced credit should be sufficient to cover the interest debited during the month.

b. For the Term loans: A term loan account where all of the interest payments and/or instalments of principal were paid within 30 days of the due date during the tenure of the loan, would be considered as an account having prompt payment

The prompt payment guidelines would continue to be guided by RBI guidelines on the subject in the future.

All prompt payee SHG accounts as on the end of the reporting quarter will be eligible for the additional interest subvention of 3%. The banks should credit the amount of 3% interest subvention to the eligible SHG loan accounts and thereafter seek the reimbursement.

Page | 32

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

vi. The Interest Subvention scheme shall be implemented for all commercial banks (excluding RRBs) through a Nodal Bank selected by the Ministry of Rural Development. The Nodal Bank will operationalize the scheme through a web-based platform, as advised by MoRD. For the FY14-15, Canara Bank is nominated as the Nodal Bank by MoRD.

vii. For the RRBs and Cooperative Banks the scheme will be operationalized by NABARD similar to the short term crop loan scheme.

viii. All Commercial Banks (including the PSBs, Private Banks and RRBs) who are operating on the Core Banking Solutions (CBS) can avail the interest subvention under the scheme.

ix. In order to avail the Interest Subvention on credit extended to the SHGs @ 7%, regular subvention, all commercial banks (excluding RRBs) are required to upload the SHG loan account information on the Nodal Bank’s portal as per the required technical specification. Banks must submit the claims for 3% additional subvention on the same portal. All Commercial banks (excluding RRBs) are required to submit their claims, regular as well as additional claims to the Nodal bank on a quarterly basis as at June 30, 2014, September 30, 2014, December 31, 2014 and March 31, 2014 by last week of the subsequent month.

x. The claims submitted by bank should be accompanied by a Statutory Auditor’s certificate (in original) certifying the claims for subvention as true and correct. The claims of any Bank for the quarter ending March 2015 will be settled by MoRD only on receipt of the Statutory Audited certificate for the complete FY14-15 by the Bank.

xi. In order to avail the Interest Subvention on credit extended to the SHGs @ 7%, all RRBs and Cooperative Banks are required to submit their claims to respective NABARD - Regional Offices on a quarterly basis as at June 30, 2014, September 30, 2014, December 31, 2014 and March 31, 2014. The claims for the last quarter ending March 2015 should be accompanied with a Statutory Auditor’s certificate certifying the claims for the FY 14-15 as true and correct. The claims of any Bank for the quarter ending March 2015 will be settled by MoRD only on receipt of the Statutory Audited certificate for the complete FY14-15 by the Bank.

xii. RRBs and Cooperative Banks may submit their consolidated claims pertaining to the 3% additional subvention on disbursements made during the entire year 2014-15 to respective NABARD - Regional Offices latest by June 30, 2015, duly audited by Statutory Auditors certifying the correctness.

xiii. Any remaining claim pertaining to the disbursements made during the year 2014-15 and not included during the year, may be consolidated separately and marked as an 'Additional Claim' and submitted to Nodal Bank (for all Commercial banks except RRBs) and NABARD Regional Offices (for all RRBs and Cooperative Banks) latest by June 30, 2015, duly audited by Statutory Auditors certifying the correctness.

xiv. Any corrections in claims by PSBs and Pvt. Sector Banks shall be adjusted from later claims based on auditor’s certificate. The corrections must be made on the Nodal Bank’s portal accordingly.

xv. For process of submission of claims by RRBs and Cooperative Banks, detailed guidelines will be issued by NABARD.

II. Interest subvention scheme for Category II Districts (Other than 150 districts).

For category II districts, comprising of districts other than the above 150 districts, all women S.H.Gs under N.R.L.M will continue to be eligible for interest subvention to avail the loan facility at an interest rate of 7%. The funding for this subvention will be provided to the State Rural Livelihoods Missions (S.R.L.Ms). The State-wise distribution of the provision under this budget head would be determined each year. In the Category II districts, Banks will charge the SHGs as per their respective lending norms and the difference between the lending rates and 7% subjected to a maximum limit of 5.5% for

Page | 33

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

the year 14-15 will be subvented in the loan accounts of the SHGs by the SRLM. In pursuance of the above, the salient features and the operational guidelines in respect of the interest subvention for the category II districts, for the year 2014-15, are as follows:

(A) Role of the Banks:

All banks who are operating on the Core Banking Solution (CBS) are required to furnish the details of the Credit disbursement and Credit outstanding of the SHGs across all districts in the desired format as suggested by the MoRD, directly from the CBS platform, to the Ministry of Rural Development (through FTP) and to the SRLMs. The information should be provided on a monthly basis to facilitate the calculation and disbursement of the Interest Subvention amount to SHGs.

(B) Role of the State Governments:

i. All women SHGs, comprising of more than 70% BPL or rural poor members (rural poor as per the Participatory Identification Process) are regarded as SHGs under NRLM. Such SHGs, comprising of rural poor members from the intended NRLM target group will be eligible for interest subvention on credit up to Rs. 3 lakhs at the rate of 7% per annum on prompt repayment.

ii. This scheme will be implemented by the State Rural Livelihood Missions (SRLMs). SRLMs will provide interest subvention to the eligible SHGs who have accessed loan from Commercial and Cooperative Banks. The funding for this subvention will be met out of the Central Allocation: State Contribution in the ratio of 75:25.

iii. The SHGs will be subvented with the extent of difference between the lending Rate of the banks and 7% subjected to a maximum limit of 5.5% for the year 2014-15 by the SRLMs, directly on a monthly/quarterly basis. An e-transfer of the subvention amount will be made by the SRLM to the loan accounts of the SHGs who have repaid promptly.

iv. For the purpose of the Interest Subvention, an account will be considered as prompt payee if it satisfies the following criterion as specified by RBI:

a. For Cash Credit Limit:

1. Outstanding balance shall not have remained in excess of the limit/drawing power continuously for more than 30 days.

2. There should be regular credit and debits in the accounts. In any case there shall be at least one customer induced credit during a month.

3. Customer induced credit should be sufficient to cover the interest debited during the month.

b. For the Term loans: A term loan account where all of the interest payments and/or instalments of principal were paid within 30 days of the due date during the tenure of the loan, would be considered as an account having prompt payment.

The prompt payment guidelines would continue to be guided by RBI guidelines on the subject in the future.

v. Women SHGs who have availed capital subsidy under SGSY in their existing loans, will not be eligible for benefit of Interest Subvention for their subsisting loan under this scheme.

vi. SRLMs should submit Quarterly Utilization Certificate indicating subvention amounts transferred to the Loan accounts of the eligible SHGs.

III. The States with state specific interest subvention schemes are advised to harmonize their guidelines with the Central scheme.

Page | 34

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Overseas Investments by Alternative Investment Funds (AIF)

Attention of the Authorised Dealer (AD - Category I) banks is invited to Regulation 26 of Notification No. FEMA.120/RB-2004 dated July 7, 2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004] (the Notification), as amended from time to time and the provisions under A.P.(DIR Series) Circulars No. 49 and 50 dated April 30, 2007 and May 04, 2007 respectively.

2. On a review, it has been decided to permit an Indian Alternative Investment Fund (AIF), registered with Securities and Exchange Board of India (SEBI), to invest overseas in terms of the provisions issued under the A.P. (DIR Series) Circulars No. 49 and 50 dated April 30, 2007 and May 04, 2007 respectively.

3. Necessary amendments to the Notification ibid has been issued vide Notification No. FEMA.326/RB-2014 dated November 12, 2014 (copy enclosed) and effective from the date of publication in the Gazette i.e. November 21, 2014.

4. AD - Category I banks may bring the contents of this circular to the notice of their constituents and customers concerned.

5. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999 (42 of 1999) and are without prejudice to permissions/approvals, if any, required under any other law.

Inflation Indexed National Savings Securities- Cumulative, 2013 - Early repayment/redemption

Please refer to our circular DGBA.CDD.No.3688/13.01.999/2013-2014 dated December 19, 2013 regarding the issuance of Inflation Indexed National Savings Securities-Cumulative (IINSS-C), 2013. In terms of Para 15(ii) of the circular, an investor can seek early repayment/premature redemption,

i. after one year of holding if he/she is a senior citizen (over 65 years of age)ii. after 3 years of holding in all other cases,

subject to deduction of penalty at the rate of 50% of the last coupon payable. The early redemption is allowed only on coupon date.

2. In this regard, please find enclosed the process flow of early repayment/pre-mature redemption before the maturity date of the security on e-kuber Portal. The early repayment/pre-mature redemption report will be available in the ‘My Downloads’ option under the member bank user’s login.

3. The function will be available from December 23, 2014 on e-kuber portal. Kindly revert in case of any clarifications and mark a copy of your email.

Levy of Penal Charges on Non-maintenance of Minimum Balances in Savings Bank Accounts

Please refer to UBD circular UBD.PCB.Cir.No.15/12.05.001/2008-09 dated September 18, 2008 on ‘Display of information relating to interest rate and service charges’ and RPCD Circular RPCD.CO. RCB. BC. No. 36/07.51.010/2014-15 dated October 22, 2014 on ‘Customer Service in State /District Central Co-operative Banks’ advising Primary (Urban) Cooperative Banks and State and Central Co-operative Banks to display information relating to interest rates and service charges including minimum balance in savings bank account in a prescribed format in their premises as well as websites.

2. In this connection, a reference is invited to paragraph 30 of Part B of First Bi-monthly Monetary Policy Statement, 2014-15 announced on April 1, 2014, regarding 'Developmental and Regulatory Policies' proposing certain measures towards consumer protection. One of the proposals contained

Page | 35

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

therein was that banks should not take undue advantage of customer difficulty or inattention. Instead of levying penal charges for non-maintenance of minimum balance in ordinary savings bank accounts, banks should limit services available on such accounts to those available to Basic Savings Bank Deposit Accounts and restore the services when the balances improve to the minimum required level. A reference is also invited to the recommendations of Damodaran Committee on customer service in banks which, inter-alia, recommended that '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 / Email / letter. Further, the penal charges levied should be in proportion to the shortfall observed'.

3. Taking into consideration the recommendations of Damodaran Committee and in the interest of customers, it has been decided that while levying charges for non-maintenance of minimum balance in savings bank account, Primary (Urban) Cooperative Banks and State and Central Co-operative Banks shall adhere to the additional guidelines given in the Annex. The guidelines will come into effect from April 1, 2015.

4. These guidelines should be brought to the notice of all customers apart from being disclosed on the bank's website.

5. In the meantime, all banks are advised to take immediate steps to update customer information so as to facilitate sending alerts through electronic modes (SMSs / emails etc) for effective implementation of the guidelines.

Special Deposit Scheme 1975 – Payment of interest for the calendar year 2014

Please refer to our letter DGBA.CDD. No. 3622 /15.01.001 / 2013-14 December 18, 2013 on the captioned subject.

2. In this connection, we advise that interest for the calendar year 2014 may be promptly disbursed to the SDS account holders @ 8.7% per annum from January 01, 2014 to December 31, 2014 through electronic mode such as ECS/NECS/ NEFT/RTGS or by way of account payee cheques on January 01, 2015 itself, subject to instructions, as applicable, contained in paragraphs 3 and 4 of our circular CO.DT.No.15.01.001/H-3527/2003-04 dated December 30, 2003.

3. Please issue suitable instructions to all your Deposit Offices and acknowledge the receipt.

FINMIN THIS WEEK

RELEVANT PORTIONS OF THE SECOND REPORT OF THE SPECIAL INVESTIGATION TEAM (SIT) ON BLACK MONEY RELEASED; ON THE DIRECTIONS OF SIT, CBDT DIRECTS VARIOUS ASSESSING OFFICERS TO FINALIZE THE ASSESSMENTS FOR ALL ACTIONABLE CASES (427), WHOSE NAMES ARE APPEARING IN THE HSBC LIST RECEIVED BY THE DEPARTMENT

Placed below are the relevant portions of the Second Report of the Special Investigation Team (SIT) on Black Money which was recently submitted by the SIT to the Hon’ble Supreme Court:

I. In response to the directions issued by the SIT, CBDT has directed various Assessing Officers to finalize the assessments for all actionable cases (427), whose names are appearing in the HSBC list received by the Department. As per the information received from France, there are in all 628 persons/entities (except in 2 cases where the same names have appeared twice). Out of these 628 persons/entities, amounts/balances are shown against 339 persons and no amounts/ balances are shown against 289 persons/entities. In respect of the latter category also, further investigations and assessments are being taken to logical end. Out of the said 628 persons, 201 are either non–residents or non–traceable, leaving 427 persons’ cases as actionable cases.

Page | 36

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

The amount involved in these cases as per details available in the information received, is about Rs.4,479 Crs approximately ($ converted @ Rs.45). Out of these, Department has finalized assessment of 79 assessees (involving more than 300 assessments). An amount of Rs.2,926 Crs has been brought to tax towards the undisclosed balances in the accounts relating to these persons. For the said amount, these assessees have been levied tax and interest at the appropriate rates. Penalty proceedings under Section 271 (1)(c) of the Income Tax Act, 1961 (I.T. Act) have been initiated in 46 cases. Such penalties have been levied in 3 cases so far. With regard to the other assessees, proceedings are pending. Further, prosecutions have been initiated in 6 cases u/s. 276C (1) of the Income Tax (I.T.) Act for willful attempt to evade taxes and in 5 cases, proceedings have been initiated u/s. 276D of the I.T. Act on account of willfull failure to furnish information in response to the notices issued by the Income Tax Department.

Show Cause Notices for filing prosecution have been issued in 10 more cases and further action would be taken at the earliest. In other cases, necessary action is being expedited and substantial progress is expected in coming months. II. Apart from HSBC list, further actions taken by various agencies on the basis of directions given by SIT:-

1. Directorate of Revenue Intelligence:––

a) Details have been furnished in respect of 31 cases of iron ore export cases.

In 11 cases, the concerned parties have admitted the undervaluation and before issuance of show cause notices, paid Rs.116.73 Cr.s. Further action would be taken, in accordance with law. In 10 cases, show cause notices have been issued. Preparation of show cause notice is in progress after completion of investigation in other cases. b) In respect of other categories of trades, investigation is pending in 33 cases. In some cases, references have been made to Financial Intelligence Unit – India (FIU–IND), ED and CBDT. According to the agency, the total amount involved could be Rs. 14957.95 Cr.s.

2. Directorate of Enforcement:––

a) From the details furnished by Directorate of Enforcement in relation to mining cases, on the basis of previous illegal mining of iron ore reports relating to Orissa, Goa and Karnataka, action has been taken. In one case of Orissa, accused persons were taken into custody by the Enforcement Directorate and properties worth more than Rs. 400 Crs have already been identified and are under process of attachment. Regarding other cases, the efforts are on to get the data from the Director of Intelligence Bureau and State Government. b) In respect of Karnataka, 3 attachment orders have been passed attaching deposits in bank worth Rs.54.84 Crs, properties (Rs.37 Crs) and shares (Rs.904.13 Crs) and the orders have been confirmed by the adjudicating authority. c) Further efforts have been made to ascertain whether any other proceeds of crime exist so that they can be provisionally attached. In respect of Goa and Jharkhand, the preliminary scrutiny and investigation is in progress. d) It has been pointed out that because of stay order passed by the Hon’ble Kolkata High Court, the Directorate is facing difficulty in taking coercive action in Ponzi/chit fund scheme cases. e) In respect of certain other cases, prosecution complaints have been filed. In case of one group case in Jharkhand, provisional attachment orders attaching properties worth Rs. 452.43 Cr.s were passed and adjudicating authority has confirmed attachment of properties worth Rs. 263.73 Crs. f) 5 Letters Rogatories (LRs) have been issued by the PMLA Court. Replies to 4 LRs are pending while 1 LR has been returned and effort is being made to issue fresh LR. g) In another mining case in Karnataka, provisional attachment for Rs.884.13 Cr.s have been issued and confirmed by the adjudicating authority. Appeals are pending. h) In respect of another group cases of Andhra Pradesh, provisional attachment orders for Rs.1093.10 Cr.s have been

Page | 37

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

confirmed by the adjudicating authority. It is directed that necessary steps be taken immediately for realization of the amounts involved.

In respect of most of the above noted cases, the CBDT has reported about the actions taken by the assessing officers.

SUGGESTIONS AND RECOMMENDATIONS FOR TAKING ACTION TO CONTROL BLACK MONEY

1. Suggestion made by Financial Action Task Force (FATF) on TBML in its report, as quoted above, that Data Analysis & Research for Trade Transparency System adopted by USA requires to be adopted and accepted, as it would control over/under invoicing to some extent. There should be institutional mechanism through a dedicated set up which examines mismatch between export/import data with corresponding import/export data of other countries on at least a quarterly, if not a monthly basis.

2. It is established since years that over invoicing or under invoicing is known method for stashing black money outside the country. Main question is how to control this malady. If there is proper vigilance to a large extent by the Customs Department, mis–invoicing can be controlled because, now–a–days, price of various goods/machineries is known in the international markets. For this, data is also published and is available on computer at any point of time. Hence, it was suggested that in a Bill of Export/shipping Bills, an entry should be included, namely, what is the international market price of the goods/machineries which were sought to be exported. The said suggestion is under consideration and is likely to be implemented within short time.

3. Further, it is of utmost necessity to curb the creation of fake/bogus bills. One important step which can be taken to curb this menace is to make declaring of PAN number mandatory for all sales, where payment is in cash or through bank, above a value of Rs. One lakh. The purchaser would also be under obligation to ensure that the invoices he gets have the PAN number of the seller. Further, considering the fact that at present, purchase or sale of goods/services by cash is rampant, which undoubtedly utilizes/generates unaccounted money in the society. For this purpose, a suitable rule is required to be brought under I.T. Rule 114 B made under Section 139 A (5) of the IT Act. By such amendment, purchaser is required to disclose his identity either by PAN number or UID (Aadhar card) or any other centrally recognized documents of identity. Transactions relating to purchase and sale of goods, provision of services of any nature where the payment/consideration is Rs. One lakh or above, either by cash or cheque, may be covered under this rule.

4. It is suggested that for regulating the possession and transportation of cash, particularly putting a limitation on cash holdings for private use and including provisions for confiscation of cash held beyond prescribed limits, provision in the Act should be made. It is to be stated that a number of European countries bar any cash transaction above a particular limit. This can be done in India too. Again, while implementing the suggestions, to ensure that small transactions, which make a bulk of common man’s daily transactions, are not affected and for that, a threshold limit could be kept.

Further, for holding of cash/currency notes also, there should be a limit, by prescribing a reasonable threshold, may be Rs.10 lacs or Rs.15 lacs. This would control holding of unaccounted money to a large extent. This would also control transfer of unaccounted cash from one destination to other, which at present is rampant, may be by Angadias or by other means. 5. The aforesaid suggestion is also in conformity with the observations in the case of Rajendran Chingaravelu vs. UoI, in CA No.7914 of 2009; ORDER DATED November 24, 2009 (320 ITR 1)) by the Hon’ble Supreme Court. Therein, it had been observed that “The nation is facing terrorist threats. Transportation of large sums of money is associated with distribution of funds for terrorist activities, illegal pay offs, etc. There is also rampant circulation of unaccounted black money destroying the economy of the country.”

This is known to all concerned and, therefore, suggestion made above, be implemented.

Page | 38

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

6. Financial Action Task Force (FATF) on Money laundering recommends “tax crimes” to be made a predicate offence so that action can be taken under Prevention of Money Laundering Act, 2002. There are more than 25 countries in the world which have made “tax crimes” as a predicate offence. The Government needs to seriously examine the issue and take steps to make “tax crimes” as a predicate offence. To prevent any hardship to salaried or small tax payer, a high threshold of say, more than Rs.50 lakh of tax evasion could be considered as being a predicate offence.

7. Foreign Exchange Management Act, 1999 (FEMA) provides for confiscation of any property held abroad, if found to be held in violation of Section 4 of the Act. For various reasons, it is difficult to proceed against property held abroad. To strengthen the provisions, S. 13 and S. 37 need to be amended to provide for seizure and confiscation of property of equivalent value within the country, if it is held that property held abroad is in violation of Section 4 of FEMA.

8. FIU is uniquely positioned as the national center for receiving, analyzing and disseminating information related to suspected cases of money laundering. Its unique architecture connects it to the entire financial sector on one hand to law enforcement authorities and on the other through an electronic network that makes it possible for information to flow freely in a secure environment. Further, FIU is also connected to the other FIUs of the world through the Egmont Secure Web which makes it possible to access information in foreign jurisdictions. This unique architecture can be harnessed to exchange actionable intelligence on proceeds of crime. Some recommended measures are as follows:-

a. FIU should be given access to law enforcement information (i.e. information about perpetrators of crime) that can be shared with the reporting entities to locate proceeds of crime laundered in the financial system. This will be in line with the FATF standards which require that “FIU should have access to widest possible range of financial, administrative and law enforcement information.”

b. The latest amendments to the PML Rules (2013) have introduced a new report to be furnished to FIU every month i.e. Cross Border Wire Transfer Report in respect of all transactions of more than Rs. Five lakh whose origin or destination is in India. As FIU builds this database over a period of time, the information could be used, in conjunction with information available with other relevant agencies, to analyze suspected cases of cross border illicit financial flows, which have been identified by the OECD and other global bodies as a major area of concern, especially as they relate to significant transfer of funds from developing countries.

c. FIU’s international network (Egmont Group) should be fully harnessed to exchange information/intelligence on proceeds of crime transferred abroad. However, for this to be successful, utmost importance should be given to following protocol for international exchange of information so that it is done in a sustainable and credible manner.

d. The law enforcement authorities, through the FIU, invest in improving reporting entities capacity to identify and report suspicious transactions. Substantial proceeds of crime may be laundered in the domestic financial system but the reporting entities may be constrained by lack of access to information on perpetrators of crime. Facilitating access to such information, through FIU, and sharing red flag indicators for suspected proceeds of crime would lead to better quality, actionable intelligence/information from the reporting entities.

e. Post investigation, feedback should be shared jointly with FIU and reporting entities in order to develop better understanding of money laundering trends and typologies, which in turn will improve capacity to identify and report suspicious transactions. There should be a more dynamic interaction among between the stakeholders, i.e., reporting entities, FIU and the law enforcement authorities, which are part of the same value chain.

9. Malady of present enforcement system may be organic problem which leads to increase in corruption and that corruption money is always unaccounted. On occasions, officers fear to take appropriate action for various reasons. These can be controlled only by appropriate directions by the concerned Ministry that in a case where a person is involved in offence relating to taxation or money

Page | 39

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

laundering, evasion of duty and levies, then in such cases, higher officers should not intervene in midst of investigations.

10. It appears that for one or other reasons, Enforcement Directorate attaches the property of a defaulting assessee, then income tax department is not in position to recover the income tax dues, as it is contended that the property is attached by ED. This appears to be unreasonable. Income tax dues are also amount payable to the Central Government and this problem can be sorted out easily by mentioning in the attachment order passed by the E.D. that it would be open for the Income Tax Department to recover its dues in respect of the attached property. There can not be any conflict of interest between two Departments of Central Government. For this, even statutory rule can be made, if required.

11. It appears that, in number of cases, income tax dues or other duty recoveries are stayed without referring to the law laid down by the Hon’ble Court; namely Siliguri Municipality Vs. Amulandu Das, AIR 1984 SC 653, Somariyas Trading Co. Pvt. Ltd. Vs. S. Samuel AIR 1985 SC 61, Asstt. Collector Vs. Dunlop India Ltd., (1985) 19 ELT 22 and Benara Valves Ltd. Vs. Commissioner Central Excise, (2006) (204 ELT) 513. It is also noticed that in many cases, even at the show cause notice stage, stay orders are passed staying further proceedings which delay the entire process. Hence, it is submitted that the aforesaid ratio of the judgments may be reiterated.

12. At present, for entering into financial/business transactions, persons have option to quote their PAN or UID or Passport number or driving license or any other proof of identity. However, there is no mechanism/system at present to connect the data available with each of these independent proofs of ID. It is suggested that these data bases be interconnected. This would assist in identifying multiple transactions by one person with different IDs. A central KYC Registry should be established with all law enforcement agencies, Registrar of Companies and financial institutions having access to its database.

13. As suggested in first report, at least 5 Additional Chief Judicial Magistrates Courts in Mumbai are required to be established for deciding approx. 5000 pending IT prosecution cases. It appears that without direction by the Hon’ble Court, it would be difficult to establish 5 Courts as suggested. For the establishment of 5 courts, Central Government shall bear the entire cost.

Finally, we submit that appropriate directions may be issued to the Central Government for implementation of suggestions/recommendations made above so that substantive result could be achieved in curbing the menace of black money and stashing thereof in foreign tax havens.

MR. JUSTICE M. B. SHAH (RETD.) CHAIRMAN DR. JUSTICE ARIJIT PASAYAT (RETD.) VICE–CHAIRMAN

STRUCTURAL REFORMS NEEDED TO CREATE AT LEAST FIVE MILLION JOBS EVERY YEAR ALONG WITH HIGH GROWTH RATE OF 7-8%; GROWTH TO BE NON-INFLATIONARY, JOB ORIENTED, SUSTAINABLE AND ALL INCLUSIVE: JAYANT SINHA, MOS (FINANCE)

The Minister of State for Finance, Shri Jayant Sinha said that India has a huge unexploited potential for growth which can make it a US $5 trillion economy in the next ten years. Shri Sinha said that we need deep structural reforms to create at least five million jobs every year as well as to ensure 7-8% economic growth as job creation and growth go hand-in-hand. He said that India needs to develop alternative model of growth based on mix of policies including market driven entrepreneurship innovations, scope for larger private investment and free market economy in democratic polity among others. Shri Sinha was delivering the Inaugural Address after inaugurating the two day Delhi Economic Conclave 2014 here today. The theme of the two day Conclave is “Structural Reforms and Growth in India”. Shri Sinha said that the world economy is passing through a critical time and needs higher growth. . He said that we need growth which is sustainable, all inclusive, anti-inflationary and job-

Page | 40

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

oriented. He said that it is to be ensured that environmental and ecological carrying capacity is also increased along with higher growth.

Giving details about the kind of structural reforms required, the Minister of State for Finance Shri Sinha said that we believe in supply-side revolution with high productive capacity. He said that structural reforms must result into macro-economic stability, world class infrastructure, unlocking of entrepreneurship and innovations, and world class social security system. The Minister also focused on growth in agriculture especially in providing irrigation facilities and power to every field in the country so that agriculture productivity goes much higher. Stressing on the non-inflationary, inclusive and sustainable growth, Shri Sinha said that structural reforms shall keep taking place at gradual intervals as being done by the present Government so that as overall net result, these gradual reforms lead to transformation of India into an economy with a sustainable growth of 7-8% and inflation in the range of 4-6%.

Delivering the Key Note Address on this occasion, Mr. Tharman Shanmugaratnam, Deputy Prime Minister and Finance Minister, Singapore said that it is true that India‟s economy is having one amongst the largest unrealized potential yet there are huge obstacles in exploiting the same including legacy of incremental change and mind set for opposing the change as such among others. The Deputy Prime Minister said that India does not have time on its side and will have to race against competitive countries, intelligent machines among others. He said that demographic dividend may not be sufficient enough if it is not substantiated with skills and high quality education. He said that India has very highly talented people including scientists, IT experts, academicians, entrepreneurs, but there is a gap at the middle and lower level in comparison with other competitive countries like China. The Deputy Prime Minister focused on need for supply side transformation for increasing competitive capacity, social mobility, high quality export oriented manufacturing of goods, production to meet demands of both external and internal market. He said that it is important to focus on high technology and innovative progress so that high value added products are produced in order to generate and meet the demands of other parts of the world.

Shri Piyush Goyal, Minister of State (IC), Power, Coal and NRE, as the Lead Speaker in the First Plenary Session on „Infrastructure and Growth‟ said that there is need for change of mind set of policy makers, policy implementers, stakeholders including private entrepreneurs among others to achieve the goal of high and sustainable growth. He said that the present Government is focusing on bringing transparency and honesty in allocation of natural resources including coal blocks, iron ore and other minerals as well in time to come. The Minister specifically mentioned about e-auction of coal blocks which will bring more transparency, competitiveness and efficiency in the system.

The Power Minister Shri Goyal focused on the root cause analysis so that the problems and issues at principal base level are first addressed which will automatically take care of the individual ones. He assured that there will be no increase in power tariff post e-auction of coal mines and the focus would be outcome oriented. Shri Goyal said that the present Government has delivered in six months which could not be achieved by many previous Governments. He specifically mentioned about Deen Dayal Upadhayay Gram Jyoti Yojana for feeder separation to augment power supply to rural areas, which was announced by the Finance Minister in his Budget Speech on 10th July, 2014. Shri Goyal said that it was taken for Cabinet approval within four months. The Power Minister said that new Electricity Amendment Bill would also be introduced soon in the Parliament. He focused on innovative financing, monitoring and accountability. The Minister concluded that the present Government believes in good governance so that people at large get best possible services at most reasonable prices in an efficient and transparent manner. He said that there would be focus on monitoring and accountability. Among those present on the occasion included Shri Rajiv Mehrishi, Finance Secretary, Dr. Arvind Subramanian, Chief Economic Adviser, Ministry of Finance, Shri Shaktikanta Das, Revenue Secretary and Dr. Hasmukh Adhia, Secretary, Department of Financial Services along with officers of the Ministry of Finance, economists, foreign delegates and, private entrepreneurs among others.

INDIA SIGNS CREDIT AGREEMENT WITH INTERNATIONAL FUND FOR AGRICULTURAL DEVELOPMENT (IFAD) FOR US$ 50 MILLION FOR THE MEGHALAYA LIVELIHOOD AND ACCESS TO MARKETS PROJECTS (MEGHA-LAMP)

Page | 41

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

A financing agreement for a credit amount of US$ 50 million from International Fund for Agricultural Development (IFAD) was signed here today by Shri Tarun Bajaj, Joint Secretary, Department of Economic Affairs, Ministry of Finance on behalf of Government of India for the Meghalaya Livelihood and Access to Markets Projects (Megha-LAMP). Similarly a project agreement for implementation of the said Project has been signed by Shri R.M. Mishra, Principal Secretary, the Government of Meghalaya on behalf of the State Government. The Objective of the project is to adapt expanded and sustainable livelihood opportunities to the hill environment and to the effects of climate change. The project size is US $ 169.7 million, of which US $ 50.00 million will come in the form of IFAD credit. The remaining amount will be mobilized through State Government contributions, commercial Banks, complementary government programmes and participating households. It is expected to benefit more than 147,000 households, comprising of about 827,000 people. The Megha-LAMP Project will close in December 2022.

FINANCE MINISTER HOPEFUL THAT THERE WOULD BE INSURANCE MARKET EXPANSION ONCE THE INSURANCE AMENDMENT BILL IS PASSED BY THE PARLIAMENT; INSURANCE, BANKS, MUTUAL FUNDS AND SECURITIES ARE AMONG THE AREAS OF COOPERATION BETWEEN INDIA AND UK

The Union Finance Minister Shri Arun Jaitley said that he is hopeful that the Insurance Market expansion would take place once the Insurance Amendment Bill is passed by the Parliament. The Finance Minister Shri Jaitley expressed his sense of satisfaction over the recommendations made by the Parliamentary Select Committee with regard to the Insurance Amendment Bill referred to it. The Finance Minister Shri Jaitley was speaking when Mr. Jerry Gimstone, Chairman, Standard Life, UK and Shri Uday Kotak, Executive VC and MD , Kotak Mahindra Bank , both Co-Chair of India UK Financial Partnership called on the Finance Minister in his office here today. The Finance Minister further said that insurance, banks, mutual funds and securities are among the areas of cooperation between India and UK. Mr. Gimstone Chairman, Standard Life and co chair for the India UK Financial Partnership said that there is great potential for foreign investment in India in various sectors including infrastructure, insurance and pension sectors among others. He said that it is UK which is the largest investor in India. He said that UK corporate sector will play an important role in making the Prime Minister’s Make in India programme a reality and success.

Mr. Uday Kotak , co-chair appointed by the Government of India for the India UK Financial Partnership said that he is highly enthused by the Finance Minister 's initiative to form the India UK Financial Partnership. He said that we see tremendous opportunity in the areas of cross border finance and investments and learning from the UK experience in the financial sector. Earlier the India-UK Financial Partnership was launched by the Chancellor of the Exchequer and the Finance Minister of India to deepen financial services links between India and the UK and strengthen co-operation between London and Mumbai, two of the world’s leading financial centers. The industry leaders who will co-chair this Partnership are Mr. Uday Kotak, Executive Vice Chairman and Managing Director of Kotak Mahindra Bank and Sir Gerry Grimstone, Chairman of Standard Life and The City UK, which represents the UK-based financial and related professional services industry.

The Partnership will focus on the following work-streams. ·Development of corporate bond market, Mutual sharing of expertise on financial sector & market regulation · Enhancing financial training and qualification · Financial inclusion · Cross-border provision of financial and insurance services · Pensions · Internationalization of the Rupee · Infrastructure funding The partnership is about deepening the links between the two countries’ financial services industries. The financial services industry, underpins real economy and enables growth. Its objective is to identify specific and executable areas to deepen co-operation, provide mutual learnings and sharing of expertise across the industry from regulation to product development and training

Page | 42

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

WORLD BANK THIS WEEK

Staying the Course on Structural Reforms

China's effort to rebalance its economy - transitioning from investment-to consumption-based growth, reducing air pollution and improving social services - has inevitably led to a "new normal" of slowing growth. While it is tempting to focus on short-term growth targets, Chinese policymakers may want to consider the benefits of staying the course on structural reforms, which could help the country sustain robust economic growth in the long run. In recent years, China has carried out policies that have put the economy on a more sustainable footing at an impressive pace. The government, for example, has taken steps to rein in credit growth, enacted environmental legislation and reduced excess capacity in the economy. These measures have moderated economic growth, expected to come in at 7.4 percent this year and 7.2 percent in 2015, according to our (World Bank) most recent projections. These growth rates are still consistent with the growth target for the 12th Five-Year Plan (2011-15) period and would be the envy of any other country. But for China, the current growth performance represents a paradigm shift relative to the high growth of the last 30 years which has helped China lift more than 500 million people out of poverty. In an effort to sustain growth in the short-term at current levels, the government has taken actions aimed at boosting demand and short-term growth in sectors such as real estate. The central bank, for example, recently lowered interest rates on both deposits and loans, the first rate cut since the summer of 2012. The government also cut mortgage rates and relaxed lending standards. The key to Beijing's continued success, we believe, will be the government's ability to strike a balance between achieving short-term targets and promoting longer-term, sustainable growth. In the short term, for example, the government has the option of focusing on strengthening market discipline in the financial sector. It could implement policies to facilitate the reallocation of resources from less productive sectors, including State-owned enterprises, to those with high growth potential. This would mean that China can deleverage while maintaining growth by using credit better. For example, the government could gradually remove implicit State guarantees and let market forces decide whether companies succeed or not. Doing so could generate efficiency gains for the economy.

In the medium term, China's primary challenge is carrying out reforms that will transform the economy into a more efficient one. That depends on the success of structural reforms in land, labour and capital markets. Good progress is already being made but more needs to be done. For example, to integrate migrant workers more fully into urban life, the government has announced plans of gradual adjustments in the hukou (household registration) system, which would lead to more efficient use of labour. It has also introduced a comprehensive reform plan to improve China's public finances, which would remove the incentives for wasteful real estate development and inefficient urban sprawl. These transformational reforms, which call for a carefully coordinated approach, will move China in the right direction and lay the foundation for higher economic growth in the long run. But they will not reverse a trend of moderating growth over the next decade. The extent of moderating growth will therefore in large part be determined by the government's ability to implement the necessary policy actions. As the global economy continues to struggle, especially the economies of Japan and European Union, the world relies on China's growth engine more than ever - in 2013 it accounted for 30 percent of global growth (37 percent at purchasing power parity) compared with 22 percent of the United States (10 percent at PPP) and less than 1 percent for the EU (PPP). While the moderation of growth in China may somewhat soften global demand, it will enhance prospects of the world's second-largest economy transitioning to a more sustainable and efficient growth path.

IMF THIS WEEK

Statement by IMF Managing Director Christine Lagarde on IMF Quota and Governance ReformsPress Release No.14/568December 12, 2014

Ms. Christine Lagarde, Managing Director of the International Monetary Fund (IMF), made the following statement today: “The IMF’s membership has been calling on and was expecting the United

Page | 43

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

States to approve the IMF’s 2010 Quota and Governance Reforms by year end. Adoption of the reforms remains critical to strengthen the Fund’s credibility, legitimacy, and effectiveness, and to ensure it has sufficient permanent resources to meet its members’ needs. “I have now been informed by the U.S. Administration that the reforms are not included in the budget legislation currently before the U.S. Congress. I have expressed my disappointment to the U.S authorities and hope that they continue to work toward speedy ratification. “As requested by our membership, we will now proceed to discuss alternative options for advancing quota and governance reforms and ensuring that the Fund has adequate resources, starting with an Executive Board meeting in January 2015.”

BASLE THIS WEEK

Correlations across Asia-Pacific bond markets and the impact of capital flow measures

by Pornpinun Chantapacdepong and Ilhyock Shim

Working Papers No 472December 2014

Using a novel database on capital flow measures in Asia over 2004−2013, we investigate the impact of bond inflow measures on the cross-market correlations of weekly bond fund flows and of daily bond returns in 12 Asia-Pacific economies, after controlling for global, regional and local factors. We find that a bond inflow measure taken by a country tends to increase the correlation of bond flows into the country with those into other countries in the region. In particular, a country's policy actions to loosen (ie increase) bond inflows significantly increase bond flow correlations, but policy actions to tighten (ie decrease) bond inflows have no significant impact. We also find that bond inflow measures increase bond return correlations in the long run. These results can be explained by the signalling hypothesis, under which global investors expect that when a country takes a bond inflow measure other countries to take similar actions, so that they increase or decrease their investment in the region at the same time.

Revisions to the securitisation framework

December 2014

The Basel Committee on Banking Supervision's revisions to the securitisation framework aim to address a number of shortcomings in the Basel II securitisation framework and to strengthen the capital standards for securitisation exposures held in the banking book. This framework, which will come into effect in January 2018, forms part of the Committee's broader Basel III agenda to reform regulatory standards for banks in response to the global financial crisis and thus contributes to a more resilient banking sector. The crisis highlighted several weaknesses in the Basel II securitisation framework, including mechanistic reliance on external ratings, lack of risk sensitivity, cliff effects and insufficient capital for certain exposures. The Committee has revised the securitisation framework to address these issues.

The most significant revisions with respect to the Basel II securitisation framework relate to changes in (i) the hierarchy of approaches; (ii) the risk drivers used in each approach; and (iii) the amount of regulatory capital banks must hold for exposures to securitisations (i. e the framework's calibration).

The revised hierarchy of approaches reduces reliance on external ratings. It also simplifies and limits the number of approaches. At the top of this hierarchy is the Internal Ratings-Based Approach, which banks may use if their supervisors have approved their use of internal models. This is followed by the External Ratings-Based Approach - where credit ratings are permitted to be used in the jurisdiction - and the Standardised Approach. Additional risk drivers, notably an explicit adjustment to take account of the maturity of a securitisation's tranche, have been introduced in order to address weaknesses in the Basel II framework, which resulted in under-capitalisation of certain exposures. The final

Page | 44

391st Issue Banking News 08th to 14th December 2014 By Vasant Ponkshe, Secretary AIBOA Pune

requirements have incorporated feedback from two rounds of consultation (in December 2012 and December 2013) as well as two quantitative impact studies that helped inform the policy deliberations.

Criteria for identifying simple, transparent and comparable securitisations

December 2014

The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) released today a consultative document on Criteria for identifying simple, transparent and comparable securitisations. The purpose of these criteria is to identify - and to assist the financial industry's development of - simple, transparent and comparable securitisations structures, as well as to help parties involved in a securitisation transaction evaluate the risks of a particular securitisation as part of their due diligence on securitisations. Criteria promoting simplicity refer to the homogeneity of underlying assets with simple characteristics, and a transaction structure that is not overly complex. Criteria on transparency provide investors with sufficient information on the underlying assets, the structure of the transaction and the parties involved in the transaction, thereby promoting a more comprehensive and thorough understanding of the risks involved. The manner in which the information is available should not hinder transparency, but instead it should support investors in their assessment.

Criteria promoting comparability could assist investors in their understanding of such investments and enable more straightforward comparison across between securitisation products within an asset class. The proposed criteria have been mapped to key types of risk in the securitisation process: (i) generic criteria relating to the underlying asset pool (asset risk); (ii) transparency around the securitisation structure (structural risk); and (iii) governance of key parties to the securitisation process (fiduciary and servicer risk). The proposed approach is a modular one. The criteria published today may be supplemented or expanded (eg with criteria related to credit risk of the underlying securitised assets) based on specific needs and applications, such as investor mandates, regulatory applications or central bank collateral frameworks. The implementation of such criteria, including its potential impact on regulation, is not within the scope of this consultation. Comments on the proposals should be provided by Friday 13 February 2015, uploading them through the following BCBS link, or by e-mail to IOSCO's Consultation-2014-10@iosco.org. All comments will be published on the websites of the Bank for International Settlements and the International Organization of Securities Commissions unless a respondent specifically requests confidential treatment.

14/12/2014

COMPILED AND EDITED BY VASANT PONKSHE SECRETARY AIBOA CHAIRMAN BOMOA

9422319827