FOURTH QUARTER REVIEW
MONETARY POLICY STATEMENT: 2012-13
With an aim to boost the sagging Indian economy and revive investments, the Reserve Bank of India in its
fourth quarter review of the monetary policy on 19th March, 2013, has cut the Repo rate by 25 basis points to
7.50%, but at the same time cautioned that the headroom for further easing is quite limited. While the RBI
has appreciated Government’s stance on fiscal consolidation it has also put onus on the Govt. in reviving
investment sentiments in the country. The Reserve Bank has made it clear that a competitive interest rate is
necessary for this, but not sufficient. Sufficiency conditions in view of the Reserve Bank include:
 Bridging the supply constraints;
 Staying the course of fiscal consolidation (both in terms of quantity and quality); and
 Improve governance surrounding project implementation.
The review highlights the key macro-economic priorities namely to raise the growth rate, restrain inflation
pressures and mitigate the vulnerability of the external sector.
MONETARY MEASURES:
a)
REPO RATE: The policy Repo rate under the liquidity adjustment facility (LAF) has been reduced by 25
basis points from 7.75 per cent to 7.50% w.e.f. 19th March 2013.
b) REVERSE REPO RATE: The Reverse repo rate under the LAF, determined with a spread of 100 basis
points below the repo rate, gets calibrated to 6.50%.
c) MARGINAL STANDING FACILITY (MSF): The MSF rate, determined with a spread of 100 basis points
above the repo rate, stands at 8.50 per cent.
d) BANK RATE: The Bank Rate stands adjusted at 8.50 per cent.
e) CASH RESERVE RATIO: No change in CRR. It is 4.00 per cent of their net demand and time liabilities
(NDTL) effective the fortnight beginning February 9, 2013.
f) STATUTORY LIQUIDITY RATIO: No change in SLR. It is currently 23% of NDTL.
OVERVIEW:
Since the Reserve Bank’s Third Quarter Review of January 2013, global financial market conditions have improved,
but global economic activity has weakened. On the domestic front too, growth has decelerated significantly, even as
inflation remains at a level which is not conducive for sustained economic growth. Although there has been notable
softening of non-food manufactured products inflation, food inflation remains high, driving a wedge between wholesale
price and consumer price inflation, and is enha GLOBAL ECONOMY:
 US GDP estimates for Q4 of 2012 indicate a tentative upturn on the back of improvement in housing and
payroll employment. However, US macroeconomic prospects are clouded by the uncertainty surrounding
the temporary appropriations and the debt ceiling.
 In the Euro area, plagued by contingent risks of political uncertainty and adjustment fatigue, GDP shrank
for the third successive quarter in Q4.
 Output in Japan too contracted in Q4, and it is as yet unclear how effective the emerging package of
stimulus measures will be and how quickly they will turn around the economy.
 While some emerging and developing economies (EDEs), including China, are gradually returning to
faster growth, activity is slowing in others, followed by weak external demand and slack domestic
investment. International non-fuel commodity prices have softened in Q4, but fuel prices have remained
firm, despite the growth slowdown, leading to persisting inflationary pressures, particularly for net energy
importers.
DOMESTIC ECONOMY:
GROWTH:
India’s GDP growth in Q3 of 2012-13, at 4.5 per cent, was the weakest in the last 15 quarters. What is
worrisome is that the services sector growth, hitherto the mainstay of overall growth, has also decelerated to
its slowest pace in a decade. While overall industrial production growth turned positive in January, capital
goods production and mining activity continued to contract.
INFLATION:
The year-on-year headline WPI inflation edged up to 6.8 per cent in February 2013 from 6.6 per cent in
January, essentially reflecting the upward revisions effected to administered prices of petroleum products.
Retail inflation continued on the upward path that set in from October 2012, with the new combined (rural
and urban) CPI (Base: 2010=100) inflation at a high of 10.9 per cent in February 2013 on sustained price
pressures from food items, especially cereals and proteins. Consequently, the divergence between
wholesale and consumer price inflation continued to widen during the year.
MONETARY AND LIQUIDITY CONDITIONS:
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The reduction in the Cash Reserve Ratio (CRR) of banks by 25 basis points, effective from February 9 and
open market purchases of Rs.200 billion since February have enabled money market rates to remain
anchored to the policy repo rate. As per the review document, the Reserve Bank will continue to actively
manage liquidity through various instruments, including open market operations (OMO), so as to ensure
adequate flow of credit to productive sectors of the economy.
FISCAL SITUATION:
The Union Budget for 2013-14 has made a firm commitment to fiscal consolidation. According to the revised
budget estimates for 2012-13, the gross fiscal deficit (GFD)-GDP ratio, at 5.2 per cent, was contained
around its budgeted level, mainly by scaling down plan and capital expenditures. The GFD-GDP ratio is
programmed to decline to 4.8 per cent in 2013-14 and further down to 3.0 per cent by 2016-17, in line with
the revised road map for fiscal consolidation.
EXTERNAL SECTOR:
With merchandise exports recording positive growth for the second successive month in February and nonoil imports contracting, the trade deficit narrowed significantly. For April-February 2012-13, however, the
trade deficit was higher than its level a year ago with adverse implications for the current account deficit
(CAD), already at a record high. Although capital inflows, mainly in the form of portfolio investment and debt
flows, provided adequate financing, the growing vulnerability of the external sector to abrupt shifts in
sentiment remains a key concern.
OUTLOOK:
The Central Statistics Office (CSO) has projected GDP growth for 2012-13 of 5.0 per cent, lower than the
Reserve Bank’s baseline projection of 5.5 per cent set out in the earlier review, reflecting slower than
expected growth in both industry and services. Key to reinvigorating growth is accelerating investment. As
per the review document, the government has a critical role to play in this regard by remaining committed to
fiscal consolidation, easing the supply bottlenecks and improving governance surrounding project
implementation
POLICY GUIDELINES
PPF SCHEME, 1968 & SCS SCHEME, 2004
The Government of India has advised the rate of interest on various small savings schemes for the financial year 2013-14.
Accordingly, the rates of interest on PPF, 1968 and SCSS, 2004 for the financial year 2013-14, effective from April 01, 2013, on the
basis of the interest compounding / payment built-in the schemes, will be as under:
Scheme
Rate of Interest w.e.f.
1.4.2012
Rate of Interest
w.e.f. 1.4.2013
5 year SCSS, 2004
9.3% p.a
9.2% p.a
PPF, 1968
8.8% p.a
8.7% p.a
WRITE-OFF OF UNREALISED EXPORT BILLS
With a view to further simplifying and liberalising the procedure and for providing greater flexibility to all exporters as well as
authorised dealer banks, the Reserve Bank has reviewed its instructions regarding write-off of unrealised export bills. RBI has now
decided to effect the following liberalisation in the limits of “write-offs” of unrealised export bills:
Write-off Limit
Per Cent
Self “write-off” by an exporter
(other than status holder exporter)
5*
Self “write-off” by status holder exporter
10*
‘Write-off” by authorised dealer bank
10*
*of the total export proceeds realised during the previous calendar year
The above limits will be related to total export proceeds realised during the previous calendar year and will be cumulatively available
in a year.
The above “write-off” will be subject to the following conditions:
a) The relevant amount has remained outstanding for more than one year;
b) Satisfactory documentary evidence is furnished in support of the exporter having made all efforts to realise the dues;
c) The case falls under any of the under noted categories:
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
The overseas buyer has been declared insolvent and a certificate from the official liquidator indicating that there is no possibility of
recovery of export proceeds has been produced.
The overseas buyer is not traceable over a reasonably long period of time.
The goods exported have been auctioned or destroyed by the port/customs/health authorities in the importing country.
The unrealised amount represents the balance due in a case settled through the intervention of the Indian Embassy, foreign
chamber of commerce or similar organisation.
 The unrealised amount represents the undrawn balance of an export bill (not exceeding 10 per cent of the invoice value)
remaining outstanding and turned out to be unrealisable despite all efforts made by the exporter.
 The cost of resorting to legal action would be disproportionate to the unrealised amount of the export bill or where the exporter
even after winning the court case against the overseas buyer could not execute the court decree due to reasons beyond his
control.
 Bills were drawn for the difference between the letter of credit value and actual export value or between the provisional and the
actual freight charges but the amount has remained unrealised consequent on dishonour of the bills by the overseas buyer
and there are no prospects of realisation.
d) The exporter has surrendered proportionate export incentives (for cases not covered under the extant guidelines), if any, availed
of in respect of the relative shipments. AD category - I banks should obtain documents evidencing surrender of export incentives
availed of before permitting the relevant bills to be written off;
e) In case of self write-off, the exporter should submit to the concerned AD bank, a chartered accountant’s certificate, indicating the
export realisation in the preceding calendar year and also the amount of write-off already availed of during the year, if any, the
relevant GR/SDF numbers to be written off, bill number, invoice value, commodity exported and country of export. The chartered
accountant's certificate should also indicate that the export benefits, if any, availed of by the exporter have been surrendered.
The following would, however, not qualify for the “write off” facility:
 Exports made to countries with externalisation problem i.e., where the overseas buyer has deposited the value of export in
local currency but the amount has not been allowed to be repatriated by the central banking authorities of the country.
 GR/SDF forms which are under investigation by agencies like, Enforcement Directorate, Directorate of Revenue Intelligence,
Central Bureau of Investigation, etc., as also the outstanding bills which are subject matter of civil / criminal suit.
AD banks advised to put in place a system under which their internal inspectors or auditors (including external auditors appointed by
authorised dealers) should carry out random sample check/percentage check of “write-off” outstanding export bills.
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FACILITY FOR EXCHANGE OF NOTES AND COINS
RBI has enlarged the scope of the guidelines on facility for Exchange of Notes and Coins as under:
The facility of exchange of cut/mutilated banknotes, in addition to soiled notes and issue of good quality clean banknotes/coins,
should be made available at all bank branches (including those of co-operative banks and RRBs). In case a branch, for any reason,
is not able to immediately adjudicate the cut/mutilated notes across the counter, it may accept and send such notes to the currency
chest to which it is linked, for adjudication and in any case ensure that the tenderer receives the exchange value as per the RBI
Note (Refund) Rules, 2009, within a reasonable time, say a fortnight. This above facility should be provided to all members of public
without discrimination on all working days.
PERFORMANCE AUDIT OF AGRICULTURAL DEBT WAIVER AND DEBT RELIEF
SCHEME, 2008
Keeping in view the serious nature of observations made by the Comptroller and Auditor General, Government of India has desired
that:
a) The beneficiaries' lists need complete verification with priority being given to areas where indebtedness was high.
b) Administrative / accounting lapses on the part of the officials, internal auditors and statutory auditors who were responsible for
verification, certification, or for passing the claims be identified and accountability fixed for the lapses. Action needs to be
initiated and full responsibility be fixed at the earliest with no exceptions.
c) Cases of extending of benefits to ineligible beneficiaries must be dealt with on top priority and full recoveries as per law must be
made to ensure no loss to the exchequer. It will be the personal responsibility of the institutional heads to ensure that such
recoveries are effected in full.
d) All cases of tampering of records or alteration, etc. must be identified and scrutinized by higher authority. A decision on each
such case in the form of speaking orders must be taken. Stringent action under relevant sections of law against those
responsible must be initiated. This would be monitored by the CVOs of the concerned institutions regularly.
e) Debt Waiver / Debt Relief certificates must be issued in all eligible cases immediately and full records of such issuance may be
kept ready for inspection.
f) A list of eligible beneficiaries who were not extended benefits also be drawn up and may be examined qualitatively to establish
the reasons for such denials. Action may be initiated in all cases where malafides or carelessness appears likely.
RBI has designed a format for monthly reporting to be sent latest by 7th of every month.
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EXTERNAL COMMERCIAL BORROWINGS (ECB)
As per the extant guidelines, corporates that are under investigation by any law enforcing agencies like the Directorate of
Enforcement (DoE), etc. are not allowed to access ECB under the Automatic route. Any request by such corporates for ECB is
examined by the Reserve Bank under the approval route. On a review, RBI has decided to permit all entities to avail of ECBs under
the automatic route as per the current norms, notwithstanding the pending investigations / adjudications / appeals by the law
enforcing agencies, without prejudice to the outcome of such investigations / adjudications / appeals. Accordingly, in case of all
applications where the borrowing entity has indicated about the pending investigations / adjudications / appeals, Authorised Dealers
while approving the proposal shall intimate the concerned agencies by endorsing the copy of the approval letter. The same
procedure will be followed by the Reserve Bank of India also while approving such proposals.
The modifications to the ECB guidelines will come into force with immediate effect. All other aspects of the ECB policy, under the
Automatic route such as amount of ECB, eligible borrower, recognised lender, end-use, all-in-cost ceiling, average maturity period,
prepayment, refinancing of existing ECB and reporting arrangements remain unchanged.
FRAUDS - CLASSIFICATION AND REPORTING
As per the extant guidelines, cases of attempted fraud, where likely loss would have been Rs.25 lakhs or more had the fraud taken
place, should be reported by the bank to the Fraud Monitoring Cell, DSB, RBI, within two weeks of the bank coming to know that the
attempt to defraud the bank failed or was foiled.
On review and as a part of rationalisation of process and procedures, RBI has decided that the practice of reporting attempted fraud,
where likely loss would have been Rs. 25 lakhs or more to Fraud Monitoring Cell, DSB, RBI may be discontinued. However, the
bank should continue to place the individual cases of attempted fraud involving Rs.25 lakhs or more above before the Audit
Committee of its Board. The report containing attempted frauds which is to be placed before the Audit Committee of the Board
should cover the following:
 The modus of operandi of attempted fraud.
 How the attempt did not materialize into a fraud or how the attempt failed/ or was foiled.
 The measures taken by the bank to strengthen the existing systems and controls.
 New systems and controls put in place in the area where fraud was attempted.
 In addition yearly consolidated review of such cases detected during the year containing information such as area of operations
where such attempts were made, effectiveness of new process and procedures put in place during the year, trend of such
cases during the last three years, need for the further change in process and procedures, if any, etc as on March 31 every year
starting from the year ending March 31, 2013 within three months from the end of the relative year.
Quarterly Review of Frauds:
Information relating to frauds for the quarters ending June, September and December may be placed before the Audit Committee
of the Board of Directors during the month following the quarter, to which it pertains, irrespective of whether or not these are
required to be placed before the Board/ Management Committee in terms of the Calendar of Reviews prescribed by the RBI. A
separate review for the quarter ending March is not required in view of the Annual Review for the year ending March prescribed
below.
Annual Review of Frauds: Banks should conduct an annual review of the frauds and place a note before the Board of Directors for
information. The review for the year ended March may be placed before the Board before the end of next quarter i.e. for the quarter
ended June 30th.
CORE BANKING SOLUTIONS (CBS) BY UCBS
The usage of Information Technology (IT) is critical for the survival and growth of banking institutions as IT usage not only helps
banks to reduce their cost of operations, but also enables them to offer products and services at competitive rates to their
customers. IT has become not just an enabler but a differentiator for banks in a competitive environment. Further, for effective
regulatory and supervisory compliance the banks need to use IT in their operations. Considering the importance of the matter, the
Reserve Bank had included ‘Review of Mechanisation and Computerization’ as one of the reviews to be placed annually before the
Board of Directors of UCBs.
Core Banking Solutions (CBS) essentially helps in integration of the range of services that can be offered by all the bank's branches
from centralized data centers. It also helps the banks, apart from providing better customer service, in generating MIS reports for the
top management and in submission of various reports to the regulators and the Government. The Government of India has also
observed that UCBs without CBS do not integrate well with the banking system and hence there is the need to quickly adopt this
model. CBS is a necessity in today’s banking scenario. RBI has advised UCBs in their own interest, as also in the interest of their
customers, to adopt CBS as soon as possible. A large number of software are available today, including cloud based solutions, and
UCBs may adopt the model that meets their bank’s requirement.
Information available with RBI indicates that very few UCBs have adopted CBS. Hence all UCBs are advised to implement CBS, in
all their branches before December 31, 2013. The concerned Regional Office of the Reserve Bank to be kept informed of the
progress made in implementing CBS. Failure to implement CBS within the timeframe, could result in denial of various facilities
(expansion of branches or area of operation etc.) to UCBs.
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ADVANCES TO INFRASTRUCTURE SECTOR
As per the extant guidelines on ‘Prudential Norms on Unsecured Advances’ rights, licenses, authorization, etc., charged to the
banks as collateral in respect of projects (including infrastructure projects) should not be reckoned as tangible security. However, it
was observed that infrastructure projects, especially road / highway projects, are special in nature where asset created by bank
finance cannot be pledged / mortgaged to the bank but certain rights to receive annuities / toll collection from the assets can be
hypothecated to the lenders. In view of the above, banks were allowed in April 2010, to treat annuities under Build-Operate-Transfer
(BOT) model in respect of road / highway projects and toll collection rights, where there are provisions to compensate the project
sponsor if a certain level of traffic is not achieved, as tangible securities. This is subject to the condition that banks’ right to receive
annuities and toll collection rights is legally enforceable and irrevocable.
RBI has observed that it has been brought to their notice that most of the projects in India are user-charge based for which the
Planning Commission has published Model Concession Agreements (MCAs). These have been adopted by various Ministries and
State Governments for their respective public-private partnership (PPP) projects and they provide adequate comfort to the lenders
regarding security of their debt. In view of the above features, RBI has decided that in case of PPP projects, the debts due to the
lenders may be considered as secured to the extent assured by the project authority in terms of the Concession Agreement, subject
to the following conditions:
a) User charges/toll/tariff payments are kept in an escrow account where senior lenders have priority over withdrawals by the
concessionaire;
b) There is sufficient risk mitigation, such as pre-determined increase in user charges or increase in concession period, in case
project revenues are lower than anticipated;
c) The lenders have a right of substitution in case of concessionaire default;
d) The lenders have a right to trigger termination in case of default in debt service; and
e) Upon termination, the Project Authority has an obligation of (i) compulsory buy-out and (ii) repayment of debt due in a predetermined manner.
In all such cases, banks must satisfy themselves about the legal enforceability of the provisions of the tripartite agreement and
factor in their past experience with such contracts.
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MIGRATING TO CTS 2010 STANDARDS
On a review of the progress made by banks so far in migration to CTS-2010 standard cheques and in
consultation with a few banks and Indian Banks Association, RBI has decided to put in place the following
arrangements for clearing of residual non-CTS-2010 standard cheques beyond the cutoff date of March 31,
2013.
a) All cheques issued by banks (including DDs / POs issued by banks) shall necessarily conform to CTS2010 standard.
b) Banks shall not charge their savings bank account customers for issuance of CTS-2010 standard
cheques when they are issued for the first time. However, banks may continue to follow their existing
policy regarding cheque book issuance for additional issuance of cheques, in adherence to their
accepted Fair Practices Code.
c) All residual non-CTS-2010 cheques with customers will continue to be valid and accepted in all clearing
houses (including the Cheque Truncation System centers) for another four months up to July 31, 2013,
subject to a review in June 2013.
d) Cheque issuing banks shall make all efforts to withdraw the non-CTS-2010 Standard cheques in
circulation before the extended timeline of July 31, 2013 by creating awareness among customers
through SMS alerts, letters, display boards in branches / ATMs, log-on message in internet banking,
notification on the web-site etc.
e) No fresh Post Dated Cheques (PDC) / Equated Monthly Installment (EMI) cheques (either in old format
or new CTS-2010 format) shall be accepted by lending banks in locations where facility of ECS / RECS
(Debit) is available.
LAF & MSF
Currently, the margin requirements under the Liquidity Adjustment Facility (LAF) and Marginal Standing
Facility (MSF) in respect of Central Government dated securities / Treasury Bills and State Development
Loans (SDLs) stand at 5 per cent and 10 per cent respectively.
RBI on a review has decided to revise the margin requirements under LAF and MSF operations.
Accordingly, the margin requirements in respect of Central Government dated securities/ Treasury Bills and
State Development Loans (SDLs) will be 4 per cent and 6 per cent respectively. Thus, the amount of
securities offered on acceptance of a bid/ application for Rs.100 crore will be Rs 104 crore (face value) of
Central Government dated security/ Treasury Bills or Rs. 106 crore (face value) of SDLs as the case may
be.
The revised margin requirements would come into force with effect from April 2, 2013. All other terms and
conditions of the current LAF and MSF schemes will remain unchanged.
WESTPAC BANKING CORPORATION
RBI has advised that the name of “Westpac Banking Corporation" has been included in the Second
Schedule to the Reserve Bank of India Act, 1934.
BASEL III - CAPITAL REGULATIONS IN INDIA
In view of the shift in the start date of Basel III implementation, all instructions applicable as on January 1,
2013, except those relating to Credit Valuation Adjustment (CVA) risk capital charge for OTC derivatives,
would become effective from April 1, 2013 with banks disclosing Basel III capital ratios from the quarter
ending June 30, 2013. As the introduction of mandatory forex forward guaranteed settlement through a
central counterparty has been deferred pending resolution of certain issues such as exposure norms, etc.,
the CVA risk capital charges would become effective as on January 1, 2014. The other transitional
arrangements would remain unchanged and Basel III will be fully implemented as on March 31, 2018.
NRO A/CS OF BANGLADESH NATIONALITY
RBI has decided to permit Authorised banks to open NRO account of individuals of Bangladesh nationality
without the approval of RBI subject to the following conditions:
a) The bank concerned should satisfy itself that the individual is holding valid visa and valid residential
permit issued by Foreigner Registration Office (FRO) / Foreigner Regional Registration Office (FRRO)
concerned;
b) The Authorised bank should put in place a system of quarterly reporting whereby each branch of the
Authorised bank shall maintain a record of the bank accounts opened by individual/s of Bangladesh
nationality and details of such account shall be forwarded to their Head Office. The Head Office of the
bank shall furnish details of such accounts on quarterly basis to the Ministry of Home Affairs.
c) The report shall contain details of Name of the Individual, Date of arrival in India, Passport No. and Place,
Country of issue, Residential permit reference and date and place of issue, Name of the FRO / FRRO
concerned and the Complete address and contact number of the branch where the bank account is being
maintained.
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d) Opening of accounts by entities of Bangladesh ownership shall continue to require approval of Reserve
Bank, as hitherto.
PRIORITY SECTOR LENDING
RBI has observed that some banks have included contingent liabilities / off-balance sheet items as part of
priority sector target achievement. In this connection, RBI has clarified that this is not in conformity with
priority sector lending guidelines. Therefore, banks are advised to declassify such accounts with
retrospective effect, where a contingent liability / off-balance sheet item is treated as a part of priority sector
target achievement. RBI has clarified that all types of loans, investments or any other item which are treated
as eligible for classifications under PS target / sub-target achievement should also form part of Adjusted Net
Bank Credit.
RISK MANAGEMENT AND INTER-BANK DEALINGS
EXTANT GUIDELINES: As per the extant guidelines, the overnight open exchange position and the
aggregate gap limits are required to be approved by Reserve Bank.
REVISED GUIDELINES: In view of the various developments in the forex markets a group comprising
officials of RBI, representatives of select banks and the Foreign Exchange Dealers Association of India
(FEDAI) went into the various issues involved in the guidelines relating to the Foreign Exchange Exposure
Limits of Authorised Dealers. Based on the recommendations of the group, RBI has decided to revise the
existing guidelines on calculation of the Foreign Exchange Exposure Limits of the Authorised Dealers.
Further, for the present, RBI has decided to withdraw the restrictions placed on open positions limit of the
ADs involving Rupee as one of the currencies, (on both overnight and intra-day open positions). Until further
review, the following instructions shall however continue to be effective:
 The positions in the exchanges (both Futures and Options) cannot be netted / offset by undertaking
positions in the OTC market and vice-versa. The positions initiated in the exchanges shall be liquidated /
closed in exchanges only.
 The position limit for the trading member AD Category-I bank in the exchanges for trading Currency
Futures and Options shall be US$ 100 million or 15 per cent of the Outstanding open interest, whichever
is lower.
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