News from the Reserve Bank of India RBI circulars can be accessed through the link:

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1 News from the Reserve Bank of India RBI circulars can be accessed through the link: RETAIL LIABILITIES Issue of Term Deposit Receipt Query Banks during the course of acting as Professional Clearing Members of Stock Exchanges / Clearing Corporations, issue own FDR with zero % interest as security in favour of the Clearing Corporations. Whether such a practice is as per the extant guidelines on acceptance of deposits? Response A Fixed Deposit Receipt (FDR) is acknowledgement for a deposit received by a bank for a fixed term which is withdrawable only after the expiry of the said fixed period. A bank issues FDR indicating therein full details, such as, date of issue, period of deposit, due date, applicable rate of interest, etc. As such, issue of FDR without a corresponding fixed deposit account in the books of the bank is not in order and will amount to violation of the extant guidelines on acceptance of deposits. The rate of interest payable on such deposits would be subject to the extant guidelines on 'Interest Rates on Rupee Deposits held in Domestic, Ordinary Non-Resident (NRO) and Non- Resident (External) (NRE) Accounts'. Mailbox clarification dated April 3, 2013 Clean Note Policy RBI has reiterated that banks should do away with stapling of any note packet and instead secure note packets with paper bands. Banks should sort notes into re-issuables and non-issuables, and issue only clean notes to public and banks should stop writing of any kind on watermark window of bank notes. DCM.(NPD).No.5133/ / dated May 10, 2013 Acknowledgement by Banks at the Time of Submission of Form 15-G/15-H With a view to protect interest of the depositors and for rendering better customer service, RBI has now advised banks to give an acknowledgment at the time of receipt of form 15-G/15-H. This will help in building a system of accountability and customers will not be put to inconvenience due to any omission on part of the banks. DBOD.No.Leg.BC.100/ / dated May 31, 2013 RETAIL ASSETS Priority Sector Lending - Targets and Classification - Categorization of eligible Activities under Priority Sector for Manufacturing Enterprises under MSMED Act, 2006 Delay in Re-presentation of Technical Return Cheques and Levy of Charges for such Returns RBI has advised that cheque return charges shall be levied only in cases where the customer is at fault and is responsible for such returns. Cheques that need to be re-presented without any recourse to the payee, shall be made in the immediate next presentation clearing not later than 24 hours (excluding holidays) with due notification to the customers of such representation through SMS alert, etc. Banks have been advised to reframe their cheque collection policies to include the above. DPSS.CO.CHD.No.2030/ / dated May 7, 2013 Query Whether Micro and Small Enterprises (MSEs) engaged in the manufacture or production of goods to any industry as notified by the Ministry of MSME under Micro and Small Enterprises as per MSMED Act, 2006 from time to time are also included under direct finance to MSEs under priority sector, in addition to those specified in the First Schedule of the Industries (Development and Regulation) Act, 1951? Response Micro and Small Enterprises engaged in the manufacture or production of goods to any industry specified in the First Schedule of the Industries (Development and Regulation) Act, 1951 and the activities notified by the 2

2 Government, from time to time, for MSEs engaged in manufacture or production of goods under MSMED Act, 2006 are eligible for classification under priority sector as direct finance to MSEs. Mailbox clarification dated April 18, 2013 Priority Sector Lending-Targets and Classification - Revision of Limits As per the Monetary Policy Statement for the year , following limits under priority sector stand revised upward with effect from April 01, A. Agriculture The limit of loans to farmers against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months stands increased from 25 lakh to 50 lakh both under direct and indirect agriculture. The limit of loans to dealers / sellers of fertilizers, pesticides, seeds, cattle feed, poultry feed, agricultural implements and other inputs has been raised to 5 crore per borrower from 1 crore. B. Micro and Small Enterprises (MSEs) The limit of bank loans to MSEs engaged in providing or rendering of services has been increased from 2 crore to 5 crore per borrower / unit, provided they satisfy the investment criteria for equipment as defined under MSMED Act, RPCD.CO.Plan.BC.72/ / dated May 3, 2013 Priority Sector Lending-Targets and Classification-Bank Loans to MFIs for On-lending-Amendment in Income Generation Criteria Bank credit to MFIs for onlending will now be eligible for categorization as priority sector advance if aggregate amount of loan, extended for income generating activity, is not less than 70% of the total loans given by MFIs. RPCD.CO.Plan.BC.80/ / dated June 27, 2013 trading in currencies, securities and commodities. It has come to the notice of RBI that such structures having equity participation of Indian parties have also started offering financial products linked to Indian Rupee. RBI has clarified that any overseas entity having equity participation directly / indirectly shall not offer such products without the specific approval of the RBI given that currently Indian Rupee is not fully convertible and such products could have implications for the exchange rate management of the country. Any incidence of such product facilitation would be treated as a contravention of the extant FEMA regulations and would consequently attract action under the relevant provisions of FEMA, A. P. (DIR Series) Circular No.100 dated April 25, 2013 External Commercial Borrowings (ECB) for the Low Cost Affordable Housing Projects The policy regarding ECB for the low cost affordable housing projects has been reviewed and the following modifications have been made: Developers / builders should have a minimum of three year's experience in undertaking residential projects and a good track record in terms of quality and delivery. The condition of minimum paid-up capital of not less than INR 50 crore, as per the latest audited balance sheet, for Housing Finance Companies (HFCs) stands withdrawn. However, the condition of the minimum Net Owned Funds (NoF) of Rs.300 crore for the past three financial years remains unchanged. The aggregate limit for ECB under the low cost affordable housing scheme is extended for the financial years and with a ceiling of USD 1 billion in each of the two years. The ECB availed of by developers and builders shall be swapped into Rupees for the entire maturity on fully hedged basis. A.P.(DIR Series) Circular No.113 dated June 24, 2013 TRADE CPC Overseas Direct Investments - Clarification It has been observed that eligible Indian parties are using overseas direct investments (ODI) automatic route to set up certain structures facilitating TREASURY Import of Gold by Nominated Banks / Agencies Previously banks / agencies were permitted to import gold on loan basis, supplier'scredit / buyers credit basis, consignment basis as also on unfixed 3

3 price basis.however to moderate the demand for gold for domestic use, RBI has decided to restrict the import of gold on consignment basis by banks, only to meet the genuine needs of exporters of gold jewellery. This facility should not be allowed for the contracts which are on past performance basis. DBOD.No.BP.BC.102/ / dated June 18, 2013 A. P. (DIR Series) Circular No.103 dated May 13, 2013 Import of Gold by Nominated Banks / Agencies Monetary Policy Statement SLR Holdings under Held to Maturity Category RBI has decided to permitbanks to exceed the limit of 25% of total investments under HTM category provided the excess comprises only of SLR securities, and the total SLR securities held in the HTM category is not more than 24.50% by end June 2013, 24.00% by end September 2013, 23.50% by end December 2013, and 23.00% by end March 2014 of their DTL as on the last Friday of the second preceding fortnight. Banks may shift investments to / from HTM with the approval of the Board of Directors once a year and such shifting will normally be allowed at the beginning of the accounting year. In order to enable banks to shift their SLR securities from the HTM category to AFS / HFT once in each quarter, it has been decided to allow such shifting at the beginning of each quarter during DBOD.No.BP.BC.92/ / dated May 15, 2013 Prudential Norms for Off-balance Sheet Exposures of Banks - Deferment of Option Premium Banks are currently permitted to defer, at their discretion, the premium on plain vanilla options sold by them to users subject to certain conditions. It has now been decided to extend this facility to cost reduction forex option structures in which the liability of the users never exceeds the net premium payable to the bank under any scenario. This facility would be subject to the following conditions: Banks should carry out necessary due diligence with regard to the ability of users to adhere to the premium payment schedule, in accordance with their Board approved policy in this regard, before extending this facility to the users. Payment of premium for option structure with maturity of more than 1- year may be deferred, provided the premium payment period does not extend beyond the maturity date of the contract. The premium should be received uniformly over the maturity of the contract and the periodicity of such payment should be at least once in a quarter. Banks are required to ensure that credit in any form or name is not enabled for import of any form of gold. Import of gold on loan basis may, however, continue to be allowed since the scheme envisages that the nominated banks / nominated agencies can import gold on loan basis for on-lending only to the exporters of jewellery in sync with the non-applicability of the above restrictions to exporters of gold jewellery. A. P. (DIR Series) Circular No.122 dated June 27, 2013 TREASURY / CUSTODY Risk Management and Inter Bank Dealings Banks are required to verify on a periodical basis the forward cover outstanding is supported by underlying exposures. In this context, it is clarified that in case an FII intends to hedge the exposure of one of its subaccount holders, it will be required to produce a clear mandate from the sub-account holder in respect of the latter's intention to enter into the derivative transaction. Further, banks shall have to verify the mandate as well as the eligibility of the contract vis-a-vis the market value of the securities held in the concerned sub-account. A.P. (DIR Series) Circular No.121 dated June 26, 2013 FINCON / WHOLESALE BANKING / RETAIL ASSETS Review of Prudential Guidelines on Restructuring of Advances by Banks and Financial Institutions RBI has now decided to increase the provision to 5% in respect of new restructured standard accounts (flow) with effect from June 1, 2013 and in a phased manner for the stock of restructured standard accounts as on March 31, In partial modification, it is clarified that para 3.3 of the circular should read as under: As an immediate measure, the RBI increased the provision on restructured standard accounts to 2.75 % from 2.00 % vide circular 4

4 DBOD.No.BP.BC.63/ / dated November 26, It has now been decided to increase the provision to 5 % in respect of new restructured standard accounts (flow) with effect from June 1, 2013 and in a phased manner for the stock of restructured standard accounts as on May 31, 2013 as under : 3.50 % - with effect from March 31, 2014 (spread over the four quarters of ) 4.25 % - with effect from March 31, 2015 (spread over the four quarters of ) 5.00 % - with effect from March 31, 2016 (spread over the four quarters of ) Mailbox Clarification dated June 6, 2013 Liquidity facilities for securitisation transactions Acceptances (including endorsements with the character of acceptance) Deferred payment guarantees (b) Performance guarantees are essentially transaction-related contingencies that involve an irrevocable undertaking to pay a third party in the event the counterparty fails to fulfil or perform a contractual non-financial obligation. An indicative list of performance guarantees, attracting a CCF of 50 % is as under: Bid bonds Performance bonds and export performance guarantees Guarantees in lieu of security deposits / earnest money deposits FINCON New Capital Adequacy Framework - Non-market related Off Balance Sheet Items Bank Guarantees As incorrect application of credit conversion factor (CCFs) may have a (EMD) for participating in tenders Retention money guarantees Warranties, indemnities and standby letters of credit related to particular transaction DBOD.No.BP.BC / dated April 2, 2013 direct bearing on the capital adequacy, banks have been advised to keep in view the following principles for application of CCFs: (a) Financial guarantees are direct credit substitutes wherein a bank irrevocably undertakes to guarantee the repayment of a contractual financial obligation. An indicative list of financial guarantees, attracting a CCF of 100 % is as under: Guarantees for credit facilities Guarantees in lieu of repayment of financial securities Guarantees in lieu of margin requirements of exchanges Guarantees for mobilisation advance, advance money before the commencement of a project and for money to be received in various stages of project implementation Guarantees towards revenue dues, taxes, duties, levies etc. in favour of Tax / Customs / Port / Excise Authorities and for disputed liabilities for litigation pending at courts Credit Enhancements Inclusion of Accrued Interest in the Net Demand and Time Liabilities (NDTL) for Maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) by Scheduled Commercial Banks (SCBs) Issue Some banks are reporting the position of interest accruals as of last month end, thereby showing an incorrect position of the Net Demand and Time Liabilities (NDTL) of the bank for the particular fortnight. Clarification It is clarified that while reporting CRR / SLR, banks should calculate accrued interest on deposits on each reporting fortnight (as per the interest calculation methods applicable to various types of accounts) so that their liability in this regard is fairly reflected in the total NDTL of the same fortnightly return. Mailbox Clarification dated April 25,

5 LEGAL / WHOLESALE BANKING / RETAIL ASSETS Legal Audit of Title Documents in Respect of Large Value Loan Accounts RBI has advised banks to subject title deeds and other documents in respect of all credit exposures of 5 crore and above to periodic legal audit and reverification of title deeds with relevant authorities as part of regular audit exercise till the loan stands fully repaid. Bank may furnish a review note to its Board / Audit Committee of the Board at quarterly intervals on an ongoing basis giving information in respect of such legal audits which should cover aspects like number of loan accounts due for legal audit for the quarter, how many accounts covered, list of deficiencies observed by the auditors, steps taken to rectify the deficiencies, number of accounts in which the rectification could not take place, course of action to safeguard the interest of bank in such cases, action taken on issues pending from earlier quarters. DBS.FrMC.BC.No.7/ / dated June 7, 2013 TRADE CPC / CUSTODY Foreign Direct Investment -Reporting of issue / transfer of Shares to / by a FVCI RBI has observed that SEBI registered FVCIs making investments in an Indian Company under FDI Scheme, also report the same transaction under Schedule 6 of the Notification ibid, resulting in double reporting of the transaction. Hence, RBI has clarified that wherever a SEBI registered FVCI acquires shares of an Indian company under FDI Scheme, such investments have to be reported in form FC-GPR/FC-TRS only, as applicable. Where the investment is under Schedule 6 of the Notification ibid, no FC-GPR/FC-TRS reporting is required. Such transactions would be reported by the custodian bank in the monthly reporting format as prescribed by RBI from time to time. A SEBI registered FVCI while making investment in an Indian company may determine upfront whether the said investment is under FDI or FVCI scheme and report accordingly. For the guidance of FVCI investors, a suitable remark in para 3(4) and 5(a)(4) of form FC-GPR and para 4(4) and para 5(4) of form FC-TRS, has been incorporated, which would read as follows: 'The investment/s made by SEBI registered FVCI is/are under FDI Scheme, in terms of Schedule 1 to Notification No. FEMA 20 dated May 3, 2000.' A.P. (DIR Series) Circular No.110 dated June 12, 2013 CUSTODY Foreign Investment in India by SEBI Registered Long Term Investors in Government Dated Securities RBI has decided in consultation with Government of India to enhance the limit for foreign investment in Government dated securities with USD 5 billion to USD 30 billion with immediate effect. The enhanced limit of USD 5 billion will be available only for investments in Government dated securities by long term investors registered with SEBI - Sovereign Wealth Funds (SWFs), Multilateral Agencies, Pension / Insurance / Endowment Funds, Foreign Central Banks. The operational guidelines in this regard will be issued by SEBI. A.P. (DIR Series) Circular No.111dated June 12,