Bank Finance for the Purchase of Gold and Advances against Gold

India Infoline News Service | Mumbai |

The Monetary Policy Statement of April 2012 announced the constitution of a Working Group (Convenor: Shri K.U.B. Rao) to study issues relating to gold imports and gold loans by Non-Banking Financial Companies (NBFCs) in India.

In terms of extant guidelines, no advances should be granted by banks against gold bullion to dealers/traders in gold if, in their assessment, such advances are likely to be utilised for purposes of financing gold purchase at auctions and/or speculative holding of stocks and bullion.

In this context, the significant rise in imports of gold in recent years is a cause for concern as direct bank financing for purchase of gold in any form viz., bullion/primary gold/jewellery/gold coin could lead to fuelling of demand for gold for speculative purposes. The Monetary Policy Statement of April 2012 announced the constitution of a Working Group (Convenor: Shri K.U.B. Rao) to study issues relating to gold imports and gold loans by Non-Banking Financial Companies (NBFCs) in India. The Working Group submitted its draft report in August 2012. Pending a decision on its recommendations, it is proposed to advise banks that:
other than working capital finance, banks are not permitted to finance purchase of gold in any form.
Detailed guidelines in this regard are being issued separately.
Branch Authorisation Policy Opening Administrative/Controlling Offices in Tier 1 Centres
Currently, domestic scheduled commercial banks (excluding RRBs) are permitted to open branches, including Regional Offices and Zonal Offices in Tier 2 to Tier 6 centres (with population up to 99,999 as per Census 2001) and in rural, semi-urban and urban centres in the North-Eastern States and Sikkim without the requirement of taking permission from the Reserve Bank in each case, subject to reporting. With a view to further increasing operational flexibility of banks, it is proposed:
to permit domestic scheduled commercial banks (other than RRBs) to open offices performing purely administrative and controlling functions (Regional Offices and Zonal Offices) in Tier 1 centres, subject to reporting.

Detailed guidelines in this regard are being issued separately.
Issue of Co-branded Rupee Denominated Pre-paid/Debit Cards

In order to obviate the need for banks to approach the Reserve Bank for every co-branding arrangement, it is proposed:
to accord general permission to banks for issue of co-branded debit and rupee denominated pre-paid instruments, subject to certain conditions.
107. Detailed guidelines in this regard are being issued separately.

Working Group on Pricing of Credit
As proposed in the SQR of October 2011, a Working Group on pricing of credit was constituted (Chairman: Shri Anand Sinha) to look into the principles governing proper, transparent and non-discriminatory pricing of credit. The report of the Working Group is expected by end-December 2012.
Supervisory Policies, Procedures and Processes

The High Level Steering Committee (HLSC) (Chairman: Dr. K. C. Chakrabarty) set up by the Reserve Bank to review the existing supervisory policies, procedures and processes for commercial banks in India submitted its report on June 11, 2012. The HLSC has recommended a shift in the supervisory approach from a transaction-testing based CAMELS framework to a risk based approach for early identification of risks and for enabling appropriate supervisory intervention in a timely manner. A phased approach for transition to risk based supervision (RBS) is being adopted. While 50 per cent of banks are to be covered under RBS from the next supervisory cycle beginning April 2013, the remaining banks would be covered subsequently. In line with the Committee’s recommendations, banks have been advised to assess their risk management architecture, culture, practices and related processes against the essential requirements identified as prerequisites for introduction of RBS. Banks should also assess and upgrade their human resources capacity for handling risk management systems, processes and MIS to facilitate the switch over to RBS.

Definition of Infrastructure Lending
Banks’ lending to the infrastructure sector has grown significantly. As a multiplicity of definitions among various regulators gives rise to confusion and difficulties, the Government of India has notified a master list of infrastructure sectors/sub-sectors in March 2012. Accordingly, it is proposed:
to harmonise the definition of infrastructure for the purpose of banks’ lending with the master list notified by the Government of India.

Detailed guidelines in this regard are being issued separately.
Intra-Group Transactions and Exposures
112. On August 14, 2012 the Reserve Bank issued draft guidelines on management of Intra-Group Transactions and Exposures (ITEs) applicable to scheduled commercial banks. The draft guidelines contain both quantitative limits for the financial ITEs and prudential measures for non-financial ITEs to ensure that banks engage in ITEs in a safe and sound manner in order to contain concentration and contagion risk arising therefrom. These measures require banks to maintain arms-length relationships in their dealings with group entities, meet minimum requirements with respect to group risk management and group-wide oversight and adhere to prudential limits on ITEs. Comments/feedback on the draft guidelines have been sought. It is proposed:
to issue final guidelines on management of ITEs by end-January 2013.

Internal Working Group on Rationalisation of Calendar of Reviews
 Commercial banks are required to periodically place reviews on different areas of banks’ operations before their Board of Directors/Management Committee/Audit Committee of the Board. These reviews are put up as per the calendar prescribed by the Reserve Bank. This calendar is reviewed by the Reserve Bank from time to time to keep it relevant to the latest developments. Accordingly, a Working Group on Rationalisation of Calendar of Reviews (Chairman: Shri Deepak Singhal) has been constituted to examine and review the contents of current prescriptions in this regard. The Group is required to submit its report by end-December 2012.
VI. Institutional Developments

Non-Banking Financial Companies
Overseas Investment by Core Investment Companies
114. Following the announcement in the Monetary Policy Statement of April 2012, draft guidelines for overseas investment by Core Investment Companies were placed on the Reserve Bank’s website in May 2012. Comments received from the public are under examination and it is proposed:
to issue the final guidelines by end-November 2012.
Regulatory Framework for NBFCs
115. The report of the Working Group on NBFCs (Chairperson: Smt. Usha Thorat) was placed on the Reserve Bank’s website in August 2011. Based on the feedback received and further discussions held with various representatives of the sector, it has been decided:
to place draft guidelines for NBFCs on the website for comments by end-November 2012.
Registration of NBFC-Factors
Following the notification by the Central Government of the Factoring Regulation Act, 2011, the Reserve Bank has put in place a detailed regulatory framework for NBFC-Factors on July 23, 2012. NBFC-Factors shall have a minimum Net Owned Fund of `50 million for registration; factoring activity should constitute at least 75 percent of total assets; and income derived from factoring business should not be less than 75 percent of gross income. NBFC-Factors intending to deal in forex through export/import factoring will need an authorisation under FEMA, 1999 from the Reserve Bank.
Automated Data Flow from Banks
As stated in the Monetary Policy Statement of April 2012, banks are required to implement suitable solutions to generate all their returns to be submitted to the Reserve Bank from their source systems without any manual intervention. The process is expected to be completed by end March 2013. The Reserve Bank is closely monitoring the progress of implementation. It is reiterated that banks put in place the appropriate systems to meet the objective stated within the stipulated timeline.
Payment Systems in India: Vision 2012-15

The roadmap for effecting further improvements in the payments system in the country over the next three years was laid out in the document entitled “Payment Systems in India: Vision 2012-15”, released on October 1, 2012 after extensive public consultations. The Vision statement articulates the key goals to be achieved. The overall policy stance is oriented towards promoting a less cash society and, in doing so, aims to reach out beyond the currently served target groups, thereby facilitating greater financial inclusion in the country. As a first step, the Merchant Discount Rate (MDR) was reduced for debit cards to encourage all categories and types of merchants to deploy the card acceptance infrastructure and also facilitate acceptance of small value transactions.

Disincentivising Issuance and Usage of Cheques
Given the still high use of cheques, any strategy to discourage the use of cheques by individuals as well as institutional users has to have a multi-pronged approach encompassing cost and time considerations, incentives for use of electronic modes of transactions and disincentives for the use of paper-based instruments. Accordingly, it has been decided to prepare a Discussion Paper on the subject by end-December 2012 and place it in the public domain for comments.

Electronic Payments: National Electronic Funds Transfer (NEFT)
The NEFT system, introduced in 2005, is now a retail electronic payment product of system-wide importance. Banks were recently advised to proactively assist customers in correctly filling in the required details (such as Indian financial system code (IFSC) of destination bank branch) in the NEFT application form to ensure hassle- and error-free remittances. As an additional measure aimed at improving the efficiency of the system and enhancing customer service, it has been decided to introduce with effect from November 19, 2012 an additional batch at 8.00 am in the NEFT system. This is intended to meet the growing demand and increasing volume of NEFT transactions, and to decongest the build-up of transactions in the first batch on all days including Saturdays.

Alternate Payments: Committee for Implementation of GIRO Based Payment System
 Implementation of an electronic GIRO system in India, viz., a payment instruction from one bank account to another bank account which is initiated by the payer and not the payee, has been identified as one of the key tasks in Payment Systems in India: Vision 2012-15. Accordingly, it is proposed to set up a Committee (Chairman: Shri G. Padmanabhan) to finalise the modalities of GIRO payments - both electronic-and cheque-based.

Uniform Routing Code and Account Number Structure

In India, different payment systems use different codes for identifying the bank/branches for routing transactions. A Technical Committee (Chairman: Shri Vijay Chugh) comprising various stakeholders has been constituted to examine the feasibility of a uniform routing code and uniform account number across banks. The Committee will submit its report by end-December 2012.
Using Aadhaar for Authentication for Securing Card Present Transactions
One of the recommendations of the Working Group formed for securing card present transactions (Chairperson: Ms. Gowri Mukherjee) was that banks could consider the Aadhaar biometric authentication along with the MagStripe as an additional factor of authentication for card present transactions at ATMs and POS terminals. In order to take this process forward, a pilot project using Aadhaar as an additional factor of authentication for card present transactions has been scheduled to be held in Delhi from November 15, 2012. Based on the outcome of the pilot project, further steps would be taken by the Reserve Bank.

Cheque Truncation System (CTS)
Cheque Truncation System (CTS) is an important efficiency enhancement initiative undertaken by the Reserve Bank in paper clearing, as cheques are still an important mode of payment in the country. The pan-India roll-out of CTS is envisaged to be completed by end-December 2013. This is as per the roadmap drawn-up by the National Payments Corporation of India (NPCI), which has been entrusted with the task.
Currency Management
Distribution Channels of Bank Notes and Coins
Pursuant to the announcements made in the Annual Monetary Policy Statement of April 2012, the CMDs of banks were sensitised to their role in currency management. They have been advised to identify four-five branches at each of the centres where the Reserve Bank’s Issue offices are located. These branches would provide exchange facilities for soiled/mutilated notes as also issue coins to the general public through their dedicated counters/coin vending machines. These identified branches have to be advised to the Reserve Bank by end-October 2012. In addition, banks may also take necessary steps to streamline their systems to provide smooth and unhindered exchange facilities at other currency chests and branches across the country.

Detection and Reporting Mechanism of Counterfeit Banknotes
In May 2012, banks were advised to re-align their cash management to ensure that cash receipts in denominations of `100 and above are not put into re-circulation without being machine-processed for authenticity. Banks have the option of either providing machines to their branches or ensuring that branches which do not have the machines are supplied only machine-processed notes for distribution among the public.
 It is observed, however, that reporting of detection of counterfeit notes has not improved on the expected lines. It needs to be emphasised that although 90 per cent of the currency chests are with the public sector banks, they account for reporting a mere 10 per cent of counterfeit notes, while private sector banks with less than 10 per cent of currency chests are reporting 90 per cent of such cases. A review on the status of implementation of the Reserve Bank’s instructions issued in May 2012 will be made in the first week of November 2012. It is reiterated that wherever counterfeit notes are detected but not impounded and reported, it will be construed as wilful involvement of the bank concerned in circulating counterfeit notes and may attract penal measures.

High Level Committee on Demand for Coins
The High Level Committee constituted by the Government of India (Chairman: Dr. K. C. Chakrabarty) to examine the growing demand for coins submitted its report on August 14, 2012. Some of the major recommendations include the need for the Reserve Bank to focus exclusively on management and planning of the currency system, while the responsibility for distribution of coins and notes among individuals and institutions should be entirely with banks, subject to compliance with Sections 38 and 39 of Reserve Bank of India Act, 1935. The Committee has also recommended that if the last mile connectivity for distributing coins/small notes has to be achieved, there is a need to introduce alternative avenues for distribution of small notes and coins on behalf of banks. Banks may, therefore, be encouraged to explore the possibility of introducing the franchisee model.

Furthermore, each bank may be allotted certain areas (districts/States) on the lines of the Lead Bank Scheme/Service Area Approach for priority sector lending for ensuring that the area is supplied with coins and clean notes in coordination with other currency chests and small coin depots in that area. Additional storage points or underground silos can be created in the space available in mints which can be used as counter- cyclical buffers - they will store/absorb coins during surplus years and release them during shortages.



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