RBI issued guidelines for Enhancing Security of Card Transactions- 15/01/2020

RBI/2019-20/142
DPSS.CO.PD No.1343/02.14.003/2019-20

January 15, 2020

The Chairman / Managing Director / Chief Executive Officer
All Scheduled Commercial Banks (SCBs) including Regional Rural Banks (RRBs) /
Urban Co-operative Banks (UCBs) / State Co-operative Banks (StCBs) /
District Central Co-operative Banks (DCCBs) / Payments Banks (PBs) /
Small Finance Banks (SFBs) / Local Area Banks (LABs) /
Authorised Card Payment Networks / Non-Bank PPI issuers

Madam / Dear Sir,

Enhancing Security of Card Transactions

Over the years, the volume and value of transactions made through cards have increased manifold. To improve user convenience and increase the security of card transactions, it has been decided as under:

a) At the time of issue / re-issue, all cards (physical and virtual) shall be enabled for use only at contact-based points of usage [viz. ATMs and Point of Sale (PoS) devices] within India. Issuers shall provide cardholders a facility for enabling card not present (domestic and international) transactions, card present (international) transactions and contactless transactions, as per the process outlined in para 1 (c).

Continue Reading

Guidelines for ‘on tap’ Licensing of Small Finance Banks in the Private Sector

Licensing of Small Finance Banks in the Private Sector

Guidelines for ‘on tap’ Licensing of Small Finance Banks in the Private Sector

I. Introduction

The Reserve Bank had issued the Guidelines for Licensing of “Small Finance Banks” in the Private Sector on November 27, 2014. The process of licensing culminated in granting in-principle approval to ten applicants and they have since established the banks. It was notified in these Guidelines that after gaining experience in dealing with these banks, the Reserve Bank will consider ‘on tap’ licensing of these banks. After a review of the performance of the existing small finance banks and to encourage competition, it was announced in the Second Bi-monthly Monetary Policy Statement, 2019-20 dated June 06, 2019 that the Reserve Bank would put out draft guidelines for ‘on tap’ licensing of such banks. Accordingly, the draft guidelines were published on the RBI website on September 13, 2019 inviting comments from the stakeholders and members of the public. The final Guidelines, taking into consideration the responses received, are given below.

II. Guidelines

1. Registration, licensing and regulations

The small finance bank shall be registered as a public limited company under the Companies Act, 2013. It will be licensed under Section 22 of the Banking Regulation Act, 1949 and governed by the provisions of the Banking Regulation Act, 1949; Reserve Bank of India Act, 1934; Foreign Exchange Management Act, 1999; Payment and Settlement Systems Act, 2007; Credit Information Companies (Regulation) Act, 2005; Deposit Insurance and Credit Guarantee Corporation Act, 1961; other relevant Statutes and the Directives, Prudential Regulations and other Guidelines/ Instructions issued by Reserve Bank of India (RBI) and other regulators from time to time. The small finance banks will be given scheduled bank status once they commence their operations.

2. Objectives

The objectives of setting up of small finance banks will be for furthering financial inclusion by (i) provision of savings vehicles primarily to unserved and underserved sections of the population, and (ii) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations.

3. Eligible promoters

(a) Eligibility Criteria:

Resident individuals/professionals (Indian citizens), singly or jointly, each having at least 10 years of experience in banking and finance at a senior level; and Companies and Societies in the private sector, that are owned and controlled by residents (as defined in FEMA Regulations, as amended from time to time), and having successful track record of running their businesses for at least a period of five years, will be eligible as promoters to set up small finance banks. Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) in the private sector, that are controlled by residents (as defined in FEMA Regulations, as amended from time to time), and having successful track record of running their businesses for at least a period of five years, can also opt for conversion into small finance banks after complying with all legal and regulatory requirements of various authorities and if they conform to these guidelines. Further, existing Payments Banks (PBs) which are controlled by residents and have completed five years of operations are also eligible for conversion into small finance banks after complying with all legal and regulatory requirements of various authorities and if they conform to these guidelines. However, joint ventures by different promoter groups for the purpose of setting up small finance banks would not be permitted. As local focus and the ability to serve smaller customers will be the key criteria in licensing such banks, this may be a more appropriate vehicle for local players or players who are focused on lending to unserved / underserved sections of the society. Accordingly, proposals from Government owned / public sector entities and large industrial house / business groups, including from NBFCs and PBs promoted by them, autonomous boards / bodies set up under enactment of a state legislature, state financial corporations, subsidiaries of development financial institutions, will not be entertained. For the purpose of these guidelines, a group with assets of ₹ 5,000 crore or more with the non-financial business of the group accounting for 40 per cent or more in terms of total assets / gross income, will be treated as a large industrial house / business groups. (In taking a view on whether the companies, either as promoters or investors, belong to a large industrial house or to a company connected to a large industrial house, the decision of the RBI will be final). Further, proposals from Alternative Investment Funds (AIFs) will also not be entertained.

Primary (Urban) Co-operative Banks (UCBs), which are desirous of voluntarily transiting into small finance bank, may refer to Scheme on voluntary transition of Urban Co-operative Bank into a Small Finance Bank (Circular reference no. DCBR.CO.LS.PCB. Cir.No.5/07.01.000/2018-19 dated September 27, 2018). UCBs applying for transiting to small finance bank or obtaining in-principle approval for such transition (under the above referred scheme), will be required to ensure compliance with these ‘on tap’ licensing guidelines from the date of commencement of business as small finance bank except the guideline on minimum capital. The minimum net worth of such small finance banks shall be ₹ 100 crore from the date of commencement of business. However they will have to increase their minimum net worth to ₹ 200 crore within five years from the date of commencement of business.

(b) ‘Fit and Proper’ criteria

Promoters / Promoter Groups1 should be ‘fit and proper’ in order to be eligible to promote small finance banks. RBI would assess the ‘fit and proper’ status of the applicants on the basis of their past record of sound credentials and integrity; financial soundness and successful track record of professional experience or of running their businesses, etc. for at least a period of five years.

(c) Corporate Structure:

The promoters / promoter group may choose to set up the small finance bank either as a standalone entity or under a holding company, which shall act as the promoting entity of the bank. However, if there is an intermediate company between the small finance bank and its promoting entity, it should be a Non-Operative Financial Holding Company (NOFHC). If the promoters desire to set up the small finance bank under a holding company structure, without an NOFHC, the holding company / the promoting entity shall be registered as an NBFC – CIC with the Reserve Bank. In case the small finance bank is set up under an NOFHC, the NOFHC would be required to conform to all requirements relating to NOFHC stipulated under paragraph 2 (C) II of the Guidelines for ‘on tap’ Licensing of Universal Banks in the Private Sector dated August 1, 2016. The general principle for reorganisation of the activities in the group is that all activities permitted to a bank under Section 6 (a) to (o) of Banking Regulation Act, 1949 shall be carried out from the bank. However, if the Promoters desire to continue existing specialized activities from a separate entity proposed to be held under the NOFHC, prior approval from RBI would be required and it should be ensured that similar activities are not conducted through the bank. Further, the activities not permitted to the bank would also not be permitted to the group i.e. entities under the NOFHC would not be permitted to engage in activities that the bank is not permitted to engage in. However, small finance banks will not be allowed to set up any subsidiaries.

4. Scope of activities

The small finance bank, in furtherance of the objectives for which it is set up, shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.

It can also undertake other non-risk sharing simple financial services activities, not requiring any commitment of own fund, such as distribution of mutual fund units, insurance products, pension products, etc. with the prior approval of the RBI and after complying with the requirements of the sectoral regulator for such products. After three years from the date of commencement of operations of the bank, requirement for prior approval from the Reserve Bank will no longer apply and the bank will be governed by the extant norms as applicable to scheduled commercial banks.

The small finance bank can also become a Category II Authorised Dealer in foreign exchange business for its clients’ requirements.

Small finance banks will have general permission to open banking outlets from the date of commencement of business as per RBI circular on “Rationalisation of Branch Authorisation Policy- Revision of Guidelines” dated May 18, 2017, as amended from time to time subject to the condition that the requirement of opening at least 25 per cent of its banking outlets in unbanked rural centers (population upto 9,999 as per the latest census). Where the small finance bank has been formed by conversion of an existing NBFC – MFI, the transition of existing branches to banking outlets will be governed by the provisions of paragraph 7 of the RBI circular on “Rationalisation of Branch Authorisation Policy- Revision of Guidelines” dated May 18, 2017, as amended from time to time.

There will not be any restriction in the area of operations of small finance banks; however, preference will be given to those applicants who, in the initial phase, set up the bank in a cluster of under-banked States / districts, such as in the North-East, East and Central regions of the country. These applicants will not have any hindrance to expand to other regions in due course. It is expected that the small finance bank should primarily be responsive to local needs. After the initial stabilization period of five years, and after a review, RBI may liberalize the scope of activities of the small finance banks.

The other financial and non-financial services activities of the promoters, if any, should be kept distinctly ring-fenced and not comingled with the banking business.

The small finance bank will be required to use the words “Small Finance Bank” in its name in order to differentiate it from other banks.

5. Capital requirement

The minimum paid-up voting equity capital for small finance banks shall be ₹ 200 crore, except for such small finance banks which are:

a. transited from UCBs for which the capital requirement will be as prescribed in paragraph 3 (a) above.

b. converted from NBFC/MFI/LAB/PB for which the capital requirement will be as prescribed in paragraph 10 below.

In view of the inherent risk of a small finance bank, it shall be required to maintain a minimum capital adequacy ratio of 15 per cent of its risk weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed by RBI from time to time. Tier I capital should be at least 7.5 per cent of RWAs. Tier II capital should be limited to a maximum of 100 per cent of total Tier I capital. Basel II norms will be generally applicable to the small finance banks, unless stipulated otherwise.

6. Promoters’ contribution

The promoters shall hold a minimum of 40 per cent of the paid-up voting equity capital of the bank at all times during the first five years from the date of commencement of business of the bank. If the initial shareholding by promoters in the bank is in excess of 40 per cent of paid-up voting equity capital, it should be brought down to 40 per cent within a period of five years. Whether a promoter ceases to be a promoter or could exit from the bank, after completing the lock-in period of five years, would depend on the RBI’s regulatory and supervisory comfort / discomfort and SEBI regulations in this regard. Further, the promoters’ stake should be brought down to a maximum of 30 per cent of the paid-up voting equity capital of the bank within a period of 10 years, and to a maximum of 15 per cent within 15 years from the date of commencement of business of the bank.

Further, in the case of such small finance banks which are transited from UCBs the promoters shall hold a minimum of 26 per cent of paid-up voting equity capital at all times during the first five years from commencement of business of the bank. Promoters’ holding may be brought down to 15 per cent over a period of 15 years from the date of reaching net worth of ₹ 200 crore by such UCBs.

Proposals having diversified shareholding, subject to the initial minimum shareholding of promoters, and a time frame for listing of the bank will be preferred. However, listing will be mandatory within three years after the small finance bank reaches the net worth of ₹ 500 crore for the first time. Small finance banks having net worth of below ₹ 500 crore could also get their shares listed voluntarily, subject to fulfillment of the requirements of the capital markets regulator. Any proposed material change2 in the shareholding pattern in the promoter entity at the time of application and during the period between the application and grant of license should be brought to the prior notice of RBI. Thereafter, such a change would require prior approval of RBI.

7. Foreign shareholding

The foreign shareholding in the small finance bank would be as per the extant Foreign Direct Investment (FDI) policy for private sector banks, subject to paragraph 6 above.

8. Voting rights and transfer / acquisition of shares

As per Section 12 (2) of the Banking Regulation Act, 1949, read with RBI notification dated July 21, 2016, published in the Gazette of India dated September 17, 2016, any shareholder’s voting rights in private sector banks are currently capped at 26 per cent of the total voting rights of all the shareholders of the banking company. Further, as per Section 12 (B) of the Act ibid, any acquisition of 5 per cent or more of paid-up share capital in a private sector bank or voting rights therein will require prior approval of RBI. These provisions will apply to the small finance banks also. However, shareholding limits of promoters / promoter group will be guided by paragraph 6 of these guidelines.

9. Prudential norms

The newly set up small finance banks should ensure that they put in place a robust risk management framework. The small finance bank will be subject to all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). No forbearance would be provided for complying with the statutory provisions.

In view of the objectives for which small finance banks are set up, the bank will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by RBI. While 40 per cent of its ANBC should be allocated to different sub-sectors under PSL as per the extant PSL prescriptions, the bank can allocate the balance 35 per cent to any one or more sub-sectors under the PSL where it has competitive advantage. The first audited balance sheet as on March 31st, post commencement of operations of the small finance bank, would form the basis for the first PSL target for the bank (for the subsequent financial year). During the ‘intervening period’ i.e. the period between date of commencement of business and the date of first audited balance sheet (i.e. March 31st), the small finance banks are not allowed to sell Priority Sector Lending Certificates.

The maximum loan size and investment limit exposure to a single and group obligor would be restricted to 10 per cent and 15 per cent of its capital funds, respectively. Further, in order to ensure that the bank extends loans primarily to small borrowers, at least 50 per cent of its loan portfolio should constitute loans and advances of up to ₹ 25 lakh on an ongoing basis. For assessing compliance with this requirement, the entire loan portfolio of the bank, as on the date of commencement of operations, would be considered and not just the fresh loans disbursed after the commencement of operations. Further, the criteria of upper limit of ₹ 25 lakh shall be borrower wise.

After the initial stabilization period of five years, and after a review, RBI may relax the above exposure limits.

In addition to the restrictions placed on banks’ loans and advances to its directors and the companies in which its directors are interested under Section 20 of the Banking Regulation Act, 1949, the small finance bank is precluded from having any exposure to its promoters, major shareholders (who have shareholding of 10 per cent or more of paid-up voting equity shares in the bank), the relatives [as defined in Section 2 (77) of the Companies Act, 2013 and Rules made there under] of the promoters as also the entities in which they have significant influence or control (as defined under Accounting Standards Ind AS 28 and Ind AS 110).

10. Additional conditions for NBFCs/MFIs/LABs/PBs converting into a bank

An existing NBFC/MFI/LAB/PB, if it meets the conditions under these guidelines, could apply to convert itself into a small finance bank, after complying with all legal and approval requirements from various authorities. In such a case, the entity shall have a minimum net worth of ₹ 200 crore or it shall infuse additional paid-up voting equity capital to achieve net worth of ₹ 200 crore within eighteen months from the date of in-principle approval or as on the date of commencement of operations, whichever is earlier. It may be noted that on conversion into a small finance bank, the NBFC / MFI / PB will cease to exist and all its business which a bank can undertake should fold into the bank and the activities which a bank cannot statutorily undertake be divested / disposed of. Further, the branches of the NBFC / MFI / PB should either be converted into bank branches within a period of three years from the date of commencement of operations or be merged / closed. The small finance bank and the NBFC / MFI cannot co-exist.

Banks are precluded from creating floating charge on their assets. For such NBFCs / MFIs, which succeed in obtaining licenses to convert into small finance banks, if they have created floating charges on their assets for secured borrowings which stand in their balance sheets on the day of conversion into a small finance bank, RBI will permit grandfathering of such borrowings till their maturity. An additional risk weight of 25 per cent will be imposed on the assets on which charge / lien has been created by the converting entity, in favour of the existing lenders / debenture holders, until such time these liabilities are extinguished in order to protect the interest of the depositors.

If the existing NBFCs/MFIs/LABs have diluted the promoters’ shareholding to below 40 per cent, but above 26 per cent, due to regulatory requirements or otherwise, RBI may not insist on the promoters’ minimum initial contribution as indicated in paragraph 6 of the guidelines. In such cases, the promoters’ have to ensure that their holding does not fall below 26% of paid-up voting equity capital during the first five years from commencement of business of the bank, even if fresh equity is infused.

11. Business plan

The applicants for small finance bank licenses will be required to furnish their business plans along with project reports with their applications. The business plan will have to address how the bank proposes to achieve the objectives behind setting up of small finance banks and in the case of an NBFC / MFI applicant, how the existing business of NBFC / MFI will fold into the bank or divested / disposed of. The business plan submitted by the applicant should be realistic and viable. In case of deviation from the stated business plan after issue of license, RBI may consider restricting the bank’s expansion, effecting change in management and imposing other penal / regulatory measures as may be necessary.

12. Corporate governance

  1. The Board of the small finance bank should have a majority of independent Directors3.
  2. The bank should comply with the corporate governance guidelines including ‘fit and proper’ criteria for Directors as issued by RBI from time to time.

13. Other conditions

  1. A promoter will not be granted licenses for both universal bank and small finance bank even if the proposal is to set them up under the NOFHC structure.
  2. If a promoter of a payments bank desires to set up a small finance bank, both the banks should be under NOFHC structure.
  3. Individuals (including relatives) and entities other than the promoters will not be permitted to have shareholding in excess of 10 per cent of the paid-up voting equity capital of the bank. In case of existing NBFCs/MFIs/LABs converting into small finance bank, where there is shareholding in excess of 10 per cent of the paid-up voting equity capital by entities other than the promoters (including private equity funds), RBI may consider providing time up to 3 years from the date of the ‘in principle’ approval for the shareholding to be brought down to a maximum of 10 per cent.
  4. The small finance bank cannot be a Business Correspondent (BC) for another bank. However, it can have its own BC network.
  5. The operations of the bank should be technology driven from the beginning, conforming to generally accepted standards and norms; while new approaches (such as for data storage, security and real time data updation) are encouraged, a detailed technology plan for the same should be furnished to RBI.
  6. The bank should have a high powered Customer Grievances Cell to handle customer complaints. The small finance banks will come under the purview of RBI’s Banking Ombudsman Scheme, 2006, as amended from time to time.
  7. The compliance of terms and conditions laid down by RBI is an essential condition of grant of license. Any non-compliance will attract penal measures or regulatory actions including cancellation of license of the bank.

14. Transition path

The small finance bank may choose to continue as a differentiated bank. If it aspires to transit into a universal bank, such transition will not be automatic, but would be subject to it applying to RBI for such conversion and fulfilling minimum paid-up voting equity capital / net worth requirement as applicable to universal banks; its satisfactory track record of performance as a small finance bank for a minimum period of five years and the outcome of RBI’s due diligence exercise. On transition into a universal bank, it will be subjected to all the norms including NOFHC structure as applicable under the Guidelines for ‘on tap’ Licensing of Universal Banks in the Private Sector dated August 1, 2016.

15. Procedure for application

In terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949, applications shall be submitted in the prescribed form (Form III). In addition, the applicants should furnish the business plan as per paragraph 11 and other requisite information as per the Annex II. Applications for setting up of small finance banks in the private sector, along with other details as mentioned above, contained in an envelope superscripted “Application for Small Finance Bank” should be addressed to:

The Chief General Manager,
Department of Regulation,
Reserve Bank of India,
Central Office, 13th Floor,
Central Office Building,
Shahid Bhagat Singh Road,
Mumbai – 400001

The licensing window will be open on-tap. As such, applications in the prescribed form along with requisite information could be submitted to RBI at any point of time, as desired by the applicant.

16. Procedure for RBI decisions

  1. At the first stage, the applications will be screened by RBI to assess the eligibility of the applicants, vis-à-vis the criteria laid down in these guidelines. RBI may apply additional criteria to determine the suitability of applications, in addition to the ‘fit and proper’ criteria prescribed at paragraph 3 above. Thereafter, the applications will be referred to a Standing External Advisory Committee (SEAC) to be set up by RBI.
  2. The SEAC will comprise of eminent persons with experience in banking, financial sector and other relevant areas. The tenure of the SEAC will be for three years.
  3. The SEAC will set up its own procedures for screening the applications. The SEAC will meet periodically, as and when required. The Committee will reserve the right to call for more information as well as have discussions with any applicant/s and seek clarification on any issue as may be required by it. The Committee will submit its recommendations to RBI for consideration.
  4. The Internal Screening Committee (ISC), consisting of the Governor and the Deputy Governors will examine all the applications. The ISC will also deliberate on the rationale of the recommendations made by the SEAC and then submit its recommendations to the Committee of the Central Board (CCB) of RBI for the final decision to issue ‘in-principle approval’.
  5. The validity of the ‘in-principle approval’ issued by RBI will be 18 months from the date of granting ‘in-principle approval’ and would thereafter lapse automatically. Therefore, the -applicant will have to obtain the license within a period of 18 months of granting the ‘in-principle approval’.
  6. After issue of the ‘in-principle approval’ for setting up of a small finance bank, if any adverse features are noticed regarding the Promoters or the companies / entities with which the Promoters are associated and the group in which they have interest, the RBI may impose additional conditions and if warranted, may withdraw the ‘in-principle approval’.
  7. The names of applicants that are found suitable for grant of in-principle approval will also be placed on the RBI website.
  8. An applicant who has not been found suitable for issue of license will be advised of the Reserve Bank’s decision. Such applicants will not be eligible to make an application for a banking license for a period of three years from the date of that decision.
  9. Applicants aggrieved by the decision of the Committee of the Central Board can prefer an appeal against the decision to the Central Board of Directors, within one month from the date of receipt of communication from RBI relating to the application not being considered as at paragraph 16 (h) above.

Annex I

Definitions

I. Promoter

Promoter means, the person who together with his relatives [as defined in Section 2 (77) of the Companies Act, 2013 and Rules made there under], by virtue of his ownership of voting equity shares, is in effective control of the bank / NOFHC, and includes, wherever applicable, all entities which form part of the Promoter Group.

II. Promoting entity

Promoting entity means the entity that promotes the bank.

III. Promoter Group

“Promoter Group” includes:

(i) the promoter;

(ii) relatives of the promoter [as defined in Section 2 (77) of the Companies Act, 2013 and Rules made there under]; and

(iii) in case promoter is a body corporate:

(A) a subsidiary or holding company of such body corporate;

(B) any body corporate in which the promoter holds ten per cent or more of the equity share capital or which holds ten per cent or more of the equity share capital of the promoter;

(C) any body corporate in which a group of individuals or companies or combinations thereof which hold twenty per cent or more of the equity share capital in that body corporate also holds twenty per cent or more of the equity share capital of the promoter;

(D) Joint venture/Associate (as defined in terms of InD AS 28) with the promoter;

(E) Related party (as defined in terms of InD AS 24) of the promoter; and

(iv) in case the promoter is an individual:

(A) any body corporate in which ten per cent or more of the equity share capital is held by the promoter or a relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of his immediate relative is a member;

(B) any body corporate in which a body corporate as provided in (A) above holds ten per cent or more, of the equity share capital;

(C) any Hindu Undivided Family or firm in which the aggregate shareholding of the promoter and his immediate relatives is equal to or more than ten per cent of the total; and

(v) all persons who are declared as promoters in the Articles of Association of the bank/ group companies.

(vi) all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus4 under the heading “shareholding of the promoter group”;

(vii) Entities sharing a common brand name with entities discussed in A, B, C, D, E, where the promoter is a body corporate and A, B, C where the promoter is an individual;

Provided that a financial institution, scheduled commercial bank, foreign institutional investor or mutual fund shall not be deemed to be promoter group merely by virtue of the act that ten per cent or more of the equity share capital of the promoter is held by such institution unless such investment is strategic in nature.


Annex II

Additional Information to be furnished by promoters along with relevant supporting documents

I. Existing Structure

1. Information on the individual promoter :

  1. Self-declaration by the individual promoters as per Appendix I.
  2. Detailed profiles on the background and experience of the individual promoters, his/their expertise, track record of business.

2. Information on the individuals and entities in the promoter group :

  1. Names and details of other entities in the promoter group as per Appendix II (if not covered in Appendix I).
  2. Shareholding pattern of all the entities in the promoter group.
  3. A pictorial organogram indicating the corporate structure of all the entities in the group indicating the shareholding and total assets of the entities.
  4. Annual reports of the past five years of all the group entities.

3. Information on the entity converting/promoting the bank :

  1. Declaration by the promoting / converting entity as per Appendix III.
  2. Shareholding pattern of the promoting / converting entity.
  3. Memorandum and Articles of Association and financial statements of the promoter entity for the past five years (including a tabulation of important financial indicators for the said years), board composition and representation of the Directors over a period of ten years, income tax returns for last three years, C.A certificate indicating source of funds for promoting / converting entity.

II. Proposed Structure

  1. The applicants should furnish detailed information about the persons/entities, who would subscribe to 5 per cent or more of the paid-up voting equity capital (shareholding pattern) of the proposed bank, including foreign equity participation, in the proposed bank and the sources of capital of the proposed investors.
  2. The proposed promoter shareholding and plan for dilution of promoter shareholding in compliance with the guidelines.
  3. Proposed management of the bank, if finalised.

III. Project Report

A project report covering business potential and viability of the proposed bank, the proposed area of operation, the business plan5, any other financial services proposed to be offered, plan for compliance with prudential norms on CRR/SLR6, composition of loan portfolio, priority sector, etc. as per the guidelines, and any other information that is considered relevant. The project report should give as much concrete details as feasible, based on adequate ground level information and avoid unrealistic or unduly ambitious projections. The business plan should address how the bank proposes to achieve financial inclusion7 and in the case of an NBFC / MFI applicant, how the existing business of NBFC / MFI will fold into the bank or divested / disposed of.

IV. Any other information

The promoters may furnish any other relevant information and documents supporting the applications. Further, the RBI may call for any other additional information, as may be required, in due course.


1 The definitions of ‘promoter’ and ‘promoter group’ are provided in Annex I.

2 Material Change means any change of 10% or above of shareholding.

3 Independent Directors: As defined in Companies Act, 2013

4 As per SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018

5 Business plan should, inter alia, include (but not limited to), the underlying assumptions, the existing infrastructure/ network/ branches, and the proposed product lines, target clientele, target locations, usage of technology, risk management, plans relating to human resources, branch network, alternative points of presence, opening of branches in unbanked rural areas, priority sector compliance, financial projections for five years, etc.

6 In case of NBFC applicants, information on existing CRR / SLR requirement, projected CRR / SLR requirement and plan for compliance with statutory norms on CRR / SLR may be given.

7 Financial Inclusion Plan should include (but not limited to), details of joint venture or partnership for offering financial inclusion products, promoting financial literacy, achieving the objective of small finance banks, etc.

 

RBI-Statement on Developmental and Regulatory Policies: 05/12/2019

Date: Dec 05, 2019

Statement on Developmental and Regulatory Policies

This Statement sets out various developmental and regulatory policy measures for strengthening regulation and supervision; broadening and deepening of financial markets; and improving payment and settlement systems.

I. Regulation and Supervision

1. Primary (Urban) Co-operative Banks – Exposure Limits and Priority Sector Lending

With a view to reducing concentration risk in the exposures of primary (urban) co-operative banks (UCBs) and to further strengthen the role of UCBs in promoting financial inclusion, it is proposed to amend certain regulatory guidelines relating to UCBs. The guidelines would primarily relate to exposure norms for single and group/interconnected borrowers, promotion of financial inclusion, priority sector lending, etc. These measures are expected to strengthen the resilience and sustainability of UCBs and protect the interest of depositors. An appropriate timeframe will be provided for compliance with the revised norms. A draft circular proposing the above changes for eliciting stakeholder comments will be issued shortly.

2. Primary (Urban) Co-operative Banks – Reporting to Central Repository of Information on Large Credits (CRILC)

The Reserve Bank has created a Central Repository of Information on Large Credits (CRILC) of scheduled commercial banks, all India financial institutions and certain non-banking financial companies with multiple objectives, which, among others, include strengthening offsite supervision and early recognition of financial distress. With a view to building a similar database of large credits extended by primary (urban) co-operative banks (UCBs), it has been decided to bring UCBs with assets of ₹500 crores and above under the CRILC reporting framework. Detailed instructions in this regard will be issued by December 31, 2019.

3. Comprehensive Cyber Security Framework for Primary (Urban) Cooperative Banks (UCBs) – A Graded Approach

The Reserve Bank had prescribed a set of baseline cybersecurity controls for primary (Urban) cooperative banks (UCBs) in October 2018. On further examination, it has been decided to prescribe a comprehensive cybersecurity framework for the UCBs, as a graded approach, based on their digital depth and interconnectedness with the payment systems landscape, digital products offered by them and assessment of cybersecurity risk. The framework would mandate implementation of progressively stronger security measures based on the nature, variety and scale of digital product offerings of banks. Such measures would, among others, include implementation of bank-specific email domain; periodic security assessment of public-facing websites/applications; strengthening the cybersecurity incident reporting mechanism; strengthening of governance framework; and setting up of Security Operations Center (SOC). This would bolster cybersecurity preparedness and ensure that the UCBs offering a range of payment services and higher Information Technology penetration are brought at par with commercial banks in addressing cybersecurity threats.

Detailed guidelines in this regard will be issued by December 31, 2019.

4. Development of Secondary Market for Corporate Loans – setting up of Self-Regulatory Body

As recommended by the Task Force on Development of Secondary Market for Corporate Loans, the Reserve Bank will facilitate the setting up of a self-regulatory body (SRB) as a first step towards the development of the secondary market for corporate loans. The SRB will be responsible, inter-alia, for standardising documents, covenants and practices related to secondary market transactions in corporate loans and promoting the growth of the secondary market in line with regulatory objectives.

5. On Tap Licensing of Small Finance Banks

In the Second Bi-monthly Monetary Policy Statement, 2019-20 of June 06, 2019, it was announced that the Draft Guidelines for ‘On tap’ Licensing of Small Finance Banks will be issued by the end of August 2019. Accordingly, the Draft Guidelines were placed on the RBI’s website on September 13, 2019 inviting comments from the stakeholders and members of the public. After examining the responses received, the ‘On tap’ Licensing Guidelines for Small Finance Banks have now been finalised and are being issued today.

6. International Financial Service Centre Banking Unit (IBU)

With a view to facilitating ease of operations for IBUs and having regard to the Liquidity Coverage Ratio being maintained by them, it has been decided to allow IBUs to:

open foreign currency current accounts of their corporate borrowers subject to the provisions of FEMA 1999 and regulations issued thereunder, wherever applicable; and

accept fixed deposits in foreign currency of tenor less than one year from non-bank entities and consequently remove the current restriction on premature withdrawal of deposits.

However, the current prohibition on acceptance of retail deposits including from high net worth individuals (HNIs) will continue. Necessary instructions are being issued shortly.

7. Review of NBFC-P2P Directions- Aggregate Lender Limit and escrow accounts

The Reserve Bank had issued directions for Non-Banking Financial Company-Peer to Peer Lending platform (NBFC-P2P) on October 4, 2017. At present, the aggregate limits for both borrowers and lenders across all P2P platforms stand at ₹10 lakh, whereas exposure of a single lender to a single borrower is capped at ₹50,000 across all NBFC-P2P platforms. A review of the functioning of the lending platforms and lending limit was carried out and it has been decided that in order to give the next push to the lending platforms, the aggregate exposure of a lender to all borrowers at any point of time, across all P2P platforms, shall be subject to a cap of ₹50 lakh. Further, it is also proposed to do away with the current requirement of escrow accounts to be operated by bank promoted trustee for transfer of funds having to be necessarily opened with the concerned bank. This will help provide more flexibility in operations. Necessary instructions in this regard will be issued shortly.

8. Baseline Cyber Security Controls for ATM Switch application service providers of RBI regulated entities

A number of commercial banks, urban cooperative banks and other regulated entities are dependent upon third party application service providers for shared services for ATM Switch applications. Since these service providers also have exposure to the payment system landscape and are, therefore, exposed to the associated cyber threats, it has been decided that certain baseline cyber security controls shall be mandated by the regulated entities in their contractual agreements with these service providers. The guidelines would require implementation of several measures to strengthen the process of deployment and changes in application softwares in the ecosystem; continuous surveillance; implementation of controls on storage, processing and transmission of sensitive data; building capacity for forensic examination; and making the incident response mechanism more robust. Detailed guidelines in this regard will be issued by December 31, 2019.

II. Financial Markets

9. Hedging of foreign exchange risk by residents and non-residents – Issue of final guidelines

An announcement regarding the review of foreign exchange hedging facilities was made in February 2019, followed by issue of draft regulations for public comments on February 15, 2019. The Task Force on Offshore Rupee markets (Chairperson: Smt. Usha Thorat) also suggested some changes based on its review. The draft regulations have been modified based on the feedback and the recommendations of the Task Force. The important changes are as follows: –

Users may undertake over the counter (OTC) currency derivative transactions up to USD 10 million, without the need to evidence underlying exposure.

Banks shall be provided with the discretion, in exceptional circumstances, to pass on net gains on hedge transactions booked on anticipated exposures.

Strengthening of the safeguards to ensure, that complex derivatives are sold only to users that are capable of managing the risks.

The final directions will be issued after notification of the changes to Foreign Exchange Management Act (FEMA) Regulations.

III. Payment and Settlement System

10. New Pre-Paid Payment Instruments (PPI)

Prepaid Payment Instruments (PPIs) have been playing an important role in promoting digital payments. To further facilitate its usage, it is proposed to introduce a new type of PPI which can be used only for purchase of goods and services up to a limit of ₹10,000. The loading/reloading of such PPI will be only from a bank account and used for making only digital payments such as bill payments, merchant payments, etc. Such PPIs can be issued on the basis of essential minimum details sourced from the customer. Instructions in this regard will be issued by December 31, 2019.

(Yogesh Dayal)
Chief General Manager


Press Release: 2019-2020/1351

RBI announces the Framework on Currency Swap Arrangement for SAARC countries for the period 2019 to 2022

Date : Nov 26, 2019
Framework on Currency Swap Arrangement for SAARC countries for the period 2019 to 2022

To further financial stability and economic cooperation within the SAARC region, the Reserve Bank of India, with the concurrence of the Government of India, has decided to put in place a revised Framework on Currency Swap Arrangement for SAARC countries 2019-2022. The Framework is valid from November 14, 2019 to November 13, 2022. Based on the terms and conditions of the Framework, the RBI would enter into bilateral swap agreements with SAARC central banks, who want to avail swap facility. It may be recalled that the SAARC Currency Swap Facility came into operation on November 15, 2012 with an intention to provide a backstop line of funding for short term foreign exchange liquidity requirements or balance of payment crises till longer-term arrangements are made.

Under the Framework for 2019-22, RBI will continue to offer swap arrangement within the overall corpus of US $ Two billion. The drawals can be made in US Dollar, Euro or Indian Rupee. The Framework provides certain concessions for swap drawals in Indian Rupee.

The Currency Swap Facility will be available to all SAARC member countries, subject to their signing the bilateral swap agreements.

(Yogesh Dayal)
Chief General Manager

Press Release: 2019-2020/1272

RBI Central Board accepts Bimal Jalan Committee recommendations and approves surplus transfer to the Government-26/08/2019

1. The Central Board of the Reserve Bank of India (RBI) today decided to transfer a sum of ₹1,76,051 crore to the Government of India (Government) comprising of ₹1,23,414 crore of surplus for the year 2018-19 and ₹52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the meeting of the Central Board today.

2. It may be recalled that the RBI, in consultation with the Government of India, had constituted an Expert Committee to Review the Extant Economic Capital Framework of the Reserve Bank of India (Chairman: Dr. Bimal Jalan). The Committee has since submitted its report to the Governor of the RBI. The Committee’s recommendations were based on the consideration of the role of central banks’ financial resilience, cross-country practices, statutory provisions and the impact of the RBI’s public policy mandate and operating environment on its balance sheet and the risks involved.

3. The Committee’s recommendations were guided by the fact that the RBI forms the primary bulwark for monetary, financial and external stability. Hence, the resilience of the RBI needs to be commensurate with its public policy objectives and must be maintained above the level of peer central banks as would be expected of a central bank of one of the fastest growing large economies of the world.

4. Major recommendations of the Committee with regard to risk provisioning and surplus distribution

(i) RBI’s economic capital: The Committee reviewed the status, need and justification of the various reserves, risk provisions and risk buffers maintained by the RBI and recommended their continuance. A clearer distinction between the two components of economic capital (realized equity and revaluation balances) was also recommended by the Committee as realized equity could be used for meeting all risks/ losses as they were primarily built up from retained earnings, while revaluation balances could be reckoned only as risk buffers against market risks as they represented unrealized valuation gains and hence were not distributable. Further, there was only a one-way fungibility between them which implies that while a shortfall, if any, in revaluation balances vis-à-vis market risk provisioning requirements could be met through increased risk provisioning from net income, the reverse, i.e., the use of surplus in revaluation balances over market risk provisioning requirements for covering shortfall in provisions for other risks is not permitted. The Committee recommended revising the presentation of the liabilities side of the RBI balance sheet to reflect this distinction.

(ii) Risk provisioning for market risk: The Committee has recommended the adoption of Expected Shortfall (ES) methodology under stressed conditions (in place of the extant Stressed-Value at Risk) for measuring the RBI’s market risk on which there was growing consensus among central banks as well as commercial banks over the recent years. While central banks are seen to be adopting ES at 99 per cent confidence level (CL), the Committee has recommended the adoption of a target of ES 99.5 per cent CL keeping in view the macroeconomic stability requirements. In view of the cyclical volatility of the RBI’s revaluation balances, a downward risk tolerance limit (RTL) of 97.5 per cent CL has also been articulated. Both levels were stress-tested for their adequacy by the Committee.

(iii) Size of Realized Equity: The Committee recognized that the RBI’s provisioning for monetary, financial and external stability risks is the country’s savings for a ‘rainy day’ (a monetary/ financial stability crisis) which has been consciously maintained with the RBI in view of its role as the Monetary Authority and the Lender of Last Resort. Realized equity is also required to cover credit risk and operational risk. This risk provisioning made primarily from retained earnings is cumulatively referred to as the Contingent Risk Buffer (CRB) and has been recommended to be maintained within a range of 6.5 per cent to 5.5 per cent of the RBI’s balance sheet, comprising 5.5 to 4.5 per cent for monetary and financial stability risks and 1.0 per cent for credit and operational risks. Further, any shortfall in revaluation balances vis-à-vis the market risk RTL would add to the requirement for realized equity. The Committee also recommended the development of methodologies for assessing the concentration risk of the forex portfolio as well as jointly assessing the RBI’s market-credit risk.

(iv) Surplus Distribution Policy: The Committee has recommended a surplus distribution policy which targets the level of realized equity to be maintained by the RBI, within the overall level of its economic capital vis-à-vis the earlier policy which targeted total economic capital level alone. Only if realized equity is above its requirement, will the entire net income be transferable to the Government. If it is below the lower bound of requirement, risk provisioning will be made to the extent necessary and only the residual net income (if any) transferred to the Government. Within the range of CRB, i.e., 6.5 to 5.5 percent of the balance sheet, the Central Board will decide on the level of risk provisioning.

5. Application of the Committee’s recommendations

The Central Board accepted all the recommendations of the Committee and finalized the RBI’s accounts for 2018-19 using the revised framework to determine risk provisioning and surplus transfer. The implications of this decision are given below:

(i) Realized Equity: Given that the available realized equity stood at 6.8 per cent of balance sheet, while the requirement recommended by the Committee was 6.5 per cent to 5.5 per cent of balance sheet, there was excess of risk provisioning to the extent of ₹11,608 crore at the upper bound of CRB and ₹52,637 crore at the lower bound of CRB. The Central Board decided to maintain the realized equity level at 5.5 per cent of balance sheet and the resultant excess risk provisions of ₹ 52,637 crore were written back.

(ii) Economic capital levels: While the revised framework technically would allow the RBI’s economic capital levels as on June 30, 2019 to lie within the range of 24.5 per cent to 20.0 per cent of balance sheet (depending on the level of realized equity maintained and availability of revaluation balances), the economic capital as on June 30, 2019 stood at 23.3 per cent of balance sheet. As financial resilience was within the desired range, the entire net income of ₹1,23,414 crore for the year 2018-19, of which an amount of ₹28,000 crore has already been paid as interim dividend, will be transferred to the Government of India. This is in addition to the ₹52,637 crore of excess risk provisions which has been written back and consequently will be transferred to the Government.

6. As on June 30, 2019, the RBI stands as a central bank with one of the highest levels of financial resilience globally.

7. The Board also reviewed the current economic situation, global and domestic challenges and various areas of operations of the Reserve Bank. The Board, further, approved the Annual Report of the Reserve Bank for the year 2018-19.

8. Shri Shaktikanta Das, Governor chaired the 578th meeting of the Central Board. Deputy Governors Shri N.S. Vishwanathan and Shri Mahesh Kumar Jain of the Reserve Bank of India, and other Directors of the Central Board of the Reserve Bank – Dr. Prasanna Kumar Mohanty, Shri Dilip S. Shanghvi, Shri Natarajan Chandrasekaran, Shri Bharat Doshi, Shri Sudhir Mankad, Shri Manish Sabharwal, Shri Swaminathan Gurumurthy, Ms. Revathy Iyer and Prof. Sachin Chaturvedi attended the meeting. The Government Directors Shri Rajiv Kumar, Finance Secretary and Secretary, Department of Financial Services and Shri Atanu Chakraborty, Secretary, Department of Economic Affairs, were also present.

Yogesh Dayal
Chief General Manager

Press Release: 2019-2020/531


 

RBI constitutes Expert Committee on Economic Capital Framework

Date : Dec 26, 2018

As decided by the Central Board of Reserve Bank of India (RBI) in its meeting held on November 19, 2018, the RBI, in consultation with the Government of India, has today constituted an Expert Committee to review the extant Economic Capital Framework of the RBI. The composition of the Committee is as under:

1) Dr. Bimal Jalan
Former Governor, Reserve Bank of India
Chairman
2) Dr. Rakesh Mohan
Former Deputy Governor, Reserve Bank of India and
former Secretary, Department of Economic Affairs,
Ministry of Finance, Government of India
Vice Chairman
3) Shri Bharat Doshi
Director, Central Board, Reserve Bank of India
Member
4) Shri Sudhir Mankad
Director, Central Board, Reserve Bank of India
Member
5) Shri Subhash Chandra Garg
Secretary, Department of Economic Affairs,
Ministry of Finance, Government of India
Member
6) Shri N.S. Vishwanathan
Deputy Governor, Reserve Bank of India
Member

2. The terms of reference of the Committee are given below:

2.1 Keeping in consideration (i) statutory mandate under section 47 of the RBI Act that the profits of the RBI shall be transferred to the Government, after making provisions ‘which are usually provided by the bankers’, and (ii) public policy mandate of the RBI, including financial stability considerations, the Expert Committee would:

review status, need and justification of various provisions, reserves and buffers presently provided for by the RBI; and

review global best practices followed by the central banks in making assessment and provisions for risks which central bank balance sheets are subject to;

2.2 To suggest an adequate level of risk provisioning that the RBI needs to maintain;

2.3 To determine whether the RBI is holding provisions, reserves and buffers in surplus / deficit of the required level of such provisions, reserves and buffers;

2.4 To propose a suitable profits distribution policy taking into account all the likely situations of the RBI, including the situations of holding more provisions than required and the RBI holding less provisions than required;

2.5 Any other related matter including treatment of surplus reserves, created out of realised gains, if determined to be held.

3. The Expert Committee will submit its report within a period of 90 days from the date of its first meeting.

Jose J. Kattoor
Chief General Manager

Press Release: 2018-2019/1468