Presentation on Relevant Important Circulars as applicable to UCBs as issued by. Mumbai on 28 th May 2011

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1 Presentation on Relevant Important Circulars as applicable to UCBs as issued by Reserve Bank of India Mumbai on 28 th May 2011

2 Types of Institutions whom separate Circulars are issued by RBI NBFCs Financial Institutions (FIs, such as EximBank, NABARD, NHB, IFCI, IIBI, SIDBI, SFCs etc.) Scheduled Commercial Banks (Nationalised Banks, RRBs & Local Area Banks) Urban Co-op. banks (UCBs)(Issued by UBD, RBI) Foreign Banks State Co-op. Banks / District Central Co-op. Banks AD Category Banks

3 APPLICABLE ACTS, GUIDELINES ETC. FOR UCBs THE MULTI STATE CO-OP. SOCIETIES ACT, 2002 (MSCS Act) GUIDELINES / CIRCULARS ISSUED BY RBI RESERVE BANK OF INDIA ACT, 1934 (RBI Act) BANKING REGULATION ACT, 1949 (BR Act) ACCOUNTING STANDARDS / GUIDELINES ISSUED BY ICAI Maharashtra Co-op. Societies Act (MCS Act)

4 Features of Circulars issued by RBI Separate applicability of Circulars, unless issued by RBI, for specific category of Bank Master Circulars -Consolidated & updated every year on 1 st July Applicability of RBI Guidelines is in addition to Guidelines issued by ICAI etc. (In certain areas / issues, RBI Guidelines are silent)

5 TYPES OF URBAN CO-OP. BANKS (UCBs) SCHEDULED BANKS (REF.: SCH. 2 OF RBI ACT, 1934) GOVERNED BY MCS ACT, 1960 OR RESP. STATE ACT (IF AREA OF OPERATION IS STATE) GOVERNED BY MSCS ACT, 2002 (IF AREA OF OPERATION IS IN MORE THAN 1 STATE) NON-SCHEDULED BANKS GOVERNED BY MCS ACT, 1960 OR RESP. STATE ACT (IF AREA OF OPERATION IS STATE) GOVERNED BY MSCS ACT, 2002 (IF AREA OF OPERATION IS MORE THAN 1 STATE)

6 TYPES OF URBAN CO-OP. BANKS (UCBs) FROM RBI PERSPECTIVE2.1.4 annex 4 TIER I UCBs (Unit Bank, having deposit base of less than 100 cr.or Banks having Branches in more than 1 District, but deposit base in any single District is more than 95% of Total Deposits) TIER II UCBs(Bank which is not a TIER I Bank)

7 Master Circulars issued by RBI NOT COVERED FOR DISCUSSIONS 1. Frauds - Reporting to RBI 2. Management of Advances 3. Income recognition, Asset classification & Provisioning etc. 4. Detection and Impounding of Counterfeit Notes 5. Customer Services BEARING ON FINANCIAL STATEMENTS / NOTES TO ACCOUNTS 6. Investments 7. Guarantees, Co-Acceptances & Letters of Credit 8. Know Your Customer (KYC) Norms / Anti-Money Laundering (AML) Standards / Combating of Financing of Terrorism (CFT) / Obligation under PMLA, Inspections & Audit systems

8 Master Circulars issued by RBI 10. Cash Reserve Ratio (CRR) & Statutory Reserve Ratio (SLR) 11. Maintenance of Deposit Accounts 12. Interest Rates on Rupee Deposits 13. Priority Sector Lending 14. Capital Adequacy 15. Housing Finance 16. Exposure Norms and Statutory / Other Restrictions 17. Board of Directors

9 Master Circular Investments INVESTMENT POLICY ROLE OF AUDITOR UCBs should lay down, with the approval of their Board of Directors, the broad Investment Policy with objectives to be achieved. Investment Policy should be reviewed each year. Investment Policy should include Guidelines on quantity (ceiling) & quality of each type of security Indicate authority to put through investment deals Reporting systems to be adopted Clearly spell out internal control mechanism, accounting standards, audit, review & reporting system to be evolved.

10 Master Circular Investments Restrictions Holding Shares in Other Co-op. Banks (certain exemptions given. But, Total Investments shall not exceed 2% of its owned funds & shall not exceed 5% of subscribed capital of Investee Institution) (Sec. 19 of BR Act, 1949) No capital contribution in Institution, which is out of area of operation. (except formed for Mutual protection)

11 Master Circular Investments Restrictions Should not undertake purchase / sale transactions with broking firms or other intermediaries on principal to principal basis Permitted to participate in designated Interest Rate Future (IRF) recognized SEBI Limit of 5% of total transactions (purchases & sales) can be entered by Banks during yr. with each approved broker Secondary market transactions in Govt. Securities be settled on T+1 basis(except Repo)

12 Master Circular Investments Restrictions Maintain investments in Govt. Securities in SGL A/cs. with RBI or CSGL A/c. with PDs, Scheduled Commercial Banks, State Co-op. Banks, Depositories & SHCIL. Banks should not capitalise broken period interest paid to seller as part of purchase cost, but treat it as an item of expenditure under P&L A/c. Banks should not be in an oversold position

13 Master Circular Investments STATUTORY (SLR) INVESTMENTS Maintain liquid assets, which should not be less than 25% its Net Demand & Time Liabilities (NDTL) in India (in addition to the minimum Cash Reserve Requirement). (Sec. 24 of BR Act, 1949). Liquid assets = Cash, gold or unencumbered approved securities Approved securities (defined u/s. 5(a) (i) & (ii) of The BR Act, 1949 From March 31, 2011 onwards all Non-scheduled UCBs shall maintain SLR in Government and other approved securities up to 25% of their NDTL.

14 Master Circular Investments Restrictions on Deposits Total deposits placed with other Banks for all purposes, shall not exceed 20% of its total depositsas on March 31 of pr. year. Same should not exceed 5% for single Bank. The total UCB deposits accepted by Scheduled UCB should not exceed 10% of its total deposits as on 31st March of previous financial year.

15 Master Circular Investments Securities be classified in 3 categories, viz; Held to Maturity Available for Sale Held for Trading, Non-SLR Investments limited to 10% of Bank s total depositsas on March 31 of previous yr. Investment in unlisted securitiesshould be subject to minimum rating & should not exceed 10% of total Non-SLR Investments

16 Master Circular Investments Fresh investments in shares of All India Financial Institutions (AIFIs) not allowed. Existing shares be phased out & till such time they are held, will be reckoned as Non-SLR Investments. All fresh investments under Non-SLR category be classified under HFT / AFS categories only & marked to market. Should build up IFR of minimum of 5% of HFT & AFS Investments. UCBs are free to build up higher IFR up to 10%.

17 Definition Profit on Sale Master Circular Investments HTM AFS HFT Acquired with intention to hold up to maturity 1 st to P&L A/c. Then to IFR Acquired with intention to trade. (Not sold in 90 days, be shifted to AFS. While shifting, it is to be marked to market) P&L A/c. Securities that do not fall in HTM & AFS P&L A/c. Loss(on P&L A/c. P&L A/c. P&L A/c. sale) Amortization / Marked to Market Amortized Marked to Market every 31 st march Marked to Market every quarter end Provision Securities under AFS & HFT be valued scrip-wise & depreciation / appreciation be aggregated for each classification separately for AFS & HFT. Net depreciation, be provided for. Net appreciation, be ignored. Net depreciation to be provided for in any 1 classification, should not be reduced on a/c. of net appreciation in other classification.

18 Restrictions Master Circular Investments HTM AFS HFT should not exceed 25% of Bank's total investments Silent Silent Exemptions Shifting to & from HTM Shifting from AFS to HFT or HFT to AFS Permitted to exceed 25%limit, if excess comprises only SLR securities & Total SLR securities held in HTM category is not more than 25% of NDTL as on last Friday of 2 nd preceding fortnight. Once in year. Normally at beginning of year. (Marked to market, while shifting) Allowed Allowed

19 Master Circular Investments Investments be classified in the following categories (For disclosure in Balance sheet) (i) Government securities (ii) Other approved securities (iii) Shares (iv) Bonds of PSU (v) Others Govt. Securities were accounted either on Trade Date or Settlement Date. RBI vide Circular dated , with view to bring uniformity, directed that Banks should follow Settlement Date accounting for recording purchase & sale transactions in Govt. Securities. These instructions are applicable with immediate effect.

20 Master Circular Investments Prudential norms on Investment in Zero Coupon Bonds RBI vide Circular dated directed that UCBs should not invest in Long Term Zero Coupon Bonds (ZCBs) issued by Corporates& NBFCs, unless issuer builds up Sinking Fund for all accrued interest & keeps it invested in liquid investments / securities (Government bonds).

21 Master Circular Guarantees, Co-Acceptances & Letters of Credit Guarantees Banks may provide only Financial Guarantees and not Performance Guarantees. Scheduled Banks may issue Performance Guaranteeson behalf of their constituents subject to exercising due caution in the matter. Guarantees should not be issued for period exceeding ten years.

22 Master Circular Guarantees, Co-Acceptances & Letters of Credit Guarantees Total volume of Guarantees outstanding at any time not to exceed 10% of total owned resources (Paid up capital, Reserves & Deposits). Unsecured Guarantees be limited to 25% of owned funds (Paid up capital + Reserves) or 25% of total guarantees, whichever is less.

23 Master Circular Guarantees, Co-Acceptances & Letters of Credit Letter of credits Large LCs are issued under two authorised signatures, where 1 of signatures should be from Head Office / Controlling Office.

24 Master Circular KYC / AML / CFT / Obligation under PMLA, 2002 Guidelines issued by RBI are under Section 35A of BR Act, 1949 KYC Policy : Banks should frame KYC Policies incorporating following 4 elements: a) Customer Acceptance Policy b) Customer Identification Procedures c) Monitoring of Transactions and d) Risk Management.

25 Master Circular KYC / AML / CFT / Obligation under PMLA, 2002 Banks should maintain records for at least 10 years from the date of transactions between the bank and the client. (PMLA Act, 2002) Exemptions for KYC Banks may notify customer when the balance reaches Rs. 40,000 or total credit in a year reaches Rs. 80,000, that appropriate documents for conducting KYC must be submitted otherwise operations in the account will be stopped.

26 Master Circular KYC / AML / CFT / Obligation under PMLA, 2002 AML / CFT / Obligation under PMLA, 2002 Cash Transactions Reports (CTR) -Seriesof cash transactions in month, exceeding Rs. 10 lakh. Suspicious Transactions Reports (STR) Counterfeit Currency Reports (CCR)

27 Master Circular Inspections & Audit Types of audits systems Internal audits (Periodicityshould be at least once in every 12 months, which should be really of surprise character.) Supplementary short inspections (Internal inspection be supplemented by surprise short inspections at irregular intervals)

28 Master Circular Inspections & Audit Revenue audit systems Credit Portfolio audit(system of exclusive scrutiny of credit portfolio with focus on larger advances & group exposures at regular intervals be introduced.) Investments portfolio audit(subjectedto audit by Internal Auditors & in their absence, by CAs out of panel maintained by the Registrar of Coop. Societies). Reports be placed, once a quarter.

29 Master Circular Inspections & Audit systems Concurrent Audit(Branches with Deposits over Rs. 50 cr. are required to introduce Concurrent Audit.) CAs / Audit Firms associated with Bank for Internal / Concurrent Audits should not undertake Statutory Audit assignment for same period. Audit for Electronic Data Processing Systems (EDP Audit Cell be constituted as part of Inspection & Audit Dept. to carry out EDP Audit)

30 Master Circular Inspections & Audit Audit Committee systems Audit Committee of Board of Directors may consist of Chairman & three / four Directors, one or more of such Directors being CAs or persons having experience in management, finance, accountancy & audit system, etc. Detailed scope given

31 Important announcement by RBI vide Circular dated In partial modification of the instructions contained therein, it is advised that the system audit may be conducted bya Certified Information Systems Auditor (CISA) and registered with Information Systems Audit and Control Association (ISACA) or by a holder of a Diploma in Information System Audit (DISA) qualification of the Institute of Chartered Accountants of India (ICAI).

32 Master Circular Board of Directors Constitution MCS Act Dos & Don ts Loans to Directors: UCBs are prohibited to make, provide or renew either secured or unsecured loans & advances or extend any other financial accommodation to their Directors, or their relatives & Firms / Concerns / Companies in which they are interested. (Exemptions : staff Directors, CEOs, Directors of Salary Earners Coops., Loans Ag. FDs / LIC Policies) Periodicity of reviews of various aspects given in detail

33 Master Circular CRR & SLR CRR Sec. 42 (1) RBI Act, 1934 governs Scheduled UCBs & Sec. 18 of BR Act govern Non Scheduled Banks. SLR Provisions of Sec. 24 of BR Act govern maintenance of SLR for all UCBs.

34 Master Circular CRR & SLR CRR & SLR Maintain Daily register stating Day-to-day position of liquidity of Bank (Sec. 18 & 24 of BR Act, 1949) CRR is 6% of Bank'stotal Net Demand & Time Liabilities Scheduled UCBs can maintain on average daily balance, a minimum of 70% of prescribed CRR balance based on their Net Demand & Time Liabilities (NDTL), as on last Friday of second preceding fortnight.

35 Master Circular CRR & SLR CRR for Non-scheduled banks In terms of Sec. 18 of BR Act, 1949, is required to maintain on daily basis CRR of amount not less than 3% of its NDTL as obtained on last Friday of the second preceding fortnight.

36 Master Circular CRR & SLR How to work out NDTL All Demand Deposits Add All Time Deposits Add Net Liabilities to Banking System Ignore Net Assets to Banking System Add Inter Branch Accounts Add Accrued interest on Deposits Add All other liabilities & provisions Ignore Share Capital & Reserves

37 Master Circular Maintenance of Deposit Accounts The banks are required to obtain PAN / GIR number of a depositor opening an account with an initial deposit of Rs.50,000/-and above. Instructions for Safe Deposit Locker Accounts Operational & Nomination instructions Instructions for Joint Accounts, Unclaimed deposits etc.

38 Master Circular Interest Rates on Rupee Deposits Interest payable on Current Accounts UCBs may, at their discretion, pay interest at a rate not exceeding half per cent per annum on current accounts. Interest payable on Savings Accounts 4% pa payable half yearly or quarterly. (RBI, vide Circular dated , increased interest rate on Domestic & Ordinary Non-Resident Savings Deposits & Savings Deposits under Non-Resident (External) A/cs. by 0.50% from 3.50% to 4.00% pa, with immediate effect. Daily product basis

39 Master Circular Interest Rates on Rupee Deposits Interest payable on Term Deposits Freedom given to Banks Should offer uniform rates on Deposits below Rs. 15 lakh for same maturity. For Deposits of Rs 15 lakh& above Banks may discriminate For staff, Bank may at its discretion allow additional interest at rate not exceeding 1% pa over & above rate of interest. Banks may offer higher rate of interest on Term Deposits of any size, to senior citizens. Banks are free to determine their own penal interest rates for premature withdrawal of Term Deposits.

40 Master Circular Interest Rates on Rupee Deposits Interest on savings bank accounts should be credited on regular basis whether the account is operative or not. If a Fixed Deposit Receipt matures and proceeds are unpaid, the amount left unclaimed with the bank will attractsavings bank rate of interest.

41 Master Circular Priority Sector Lending 40 per cent of Adjusted Bank Credit (ABC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. Adjusted Bank Credit (ABC) = Total Loans & Advance plus investments in Non-SLR Bonds (Investments made by Banks in Non-SLR Bonds held in HTM category will not be taken into account for calculation of ABC. However, fresh investments by Banks in Non-SLR Bonds will be taken into account for the purpose. Increased limit of Housing Loans under Priority Sector Advances from Rs. 20 lakhto Rs. 25 lakh. Change will be applicable to housing loans sanctioned on or after April 1, (RBI Circular, dated )

42 Master Circular Capital Adequacy Vide Sec. 11 of BR Act, no Co-op. Bank shall commence or carry on banking business unless aggregate value of its paid up Capital & Reserves is not less than Rs. 1 lakh. Vide Sec. 22 (3) (d) of BR Act, RBI can prescribe minimum entry point capital (entry point norms) from time to time, for setting-up of a new UCB.

43 Master Circular Capital Adequacy Share linking to Borrowings RBI has prescribed following share linking norms: 5% for unsecured borrowings 2.50% for secured borrowings (Vide Circular dated , RBI exempted UCBs, which maintain CRAR of 12% or above on continuous basis, from extant mandatory share linking norms) For secured borrowings by SSIs, out of 2.50% of borrowings, 1% can be collected initially & balance 1.50% can be collected in next 2 years. CAR has been 9% For UCBs holding AD 1(ForexLicence), it is minimum 12%.

44 Master Circular Capital Adequacy Components of Tier I Capital Paid-up Sh. Capital & Non refundable Contributions (Admission fees) Perpetual Non-Cumulative Preference Shares (PNCPS). Capital Reserve / Surplus from sale of Assets & Free Reserves (Exclude Reserves created out of Revaluation of Fixed Assets / created to meet liabilities from Tier I Capital. Free Reserves to exclude Reserves / Provisions created to meet anticipated losses, losses on account of fraud etc., Depreciation in Investments & Other Assets & Other liabilities. Example, "Building Fund" is Free Reserves, BDDR be excluded.) Innovative Perpetual Debt Instruments Surplus in P&L A/c.(Balance after appropriation towards Dividend payable, Education Fund, Other funds, Asset loss, etc.)

45 Master Circular Capital Adequacy Components of Tier II Capital 45% of Revaluation Reserves (balance 55% to be ignored) General Provisions and Loss Reserves(Such provisions of general nature, which are not attributed to identified potential loss or a diminution in value of an asset or a known liability. Such as General provision for Std. Assets, excess provision on sale of NPAs etc. could be considered for inclusion under this category. Such provisions which are considered for inclusion in Tier II capital will be admitted up to 1.25% of total weighted risk assets.) Additional general provisions (floating provisions) for bad debts i.e., provisions not earmarked for any specific loan impairments (NPAs) may be used either for netting off of gross NPAs or for inclusion in Tier II capital but cannot be used on both counts.

46 Master Circular Capital Adequacy Components of Tier II Capital Investment Fluctuation Reserve Hybrid Debt Capital Instruments (Like Tier II Preference Shares, Perpetual Cumulative Preference Shares (PCPS), Redeemable Non Cumulative Preference Shares (RNCPS) & Redeemable Cumulative Preference Shares (RCPS)) Long Term (Subordinated) Deposits (Issued for minimum period of not less than 5 years) (To be issued subject to compliance with Bye-laws / Provisions of Co-operative Societies Act under which they are registered and with the approval of the concerned Registrar of Co-operative Societies / Central Registrar of Cooperative Societies concerned) Subordinated Debt Instruments will be limited to 50% of Tier I capital. Tier II capital can not exceed Tier I capital.

47 Master Circular Housing Finance The banks may grant housing loans up to a maximum of Rs. 25 lakhper beneficiary of a dwelling unit. However, Tier II UCBs ( all other UCBs which are not Tier I UCBs (Banks having Deposits below Rs. 100 cr.) may extend individual housing loans up to a maximum of Rs. 50 lakhper beneficiaryof a dwelling unitsubject to extant prudential exposure limits.

48 Master Circular Housing Finance Exposures which may not be classified as CRE Loans extended against Security of future rent receivables (Lease Rent Discounting) Lease rental agreement between the lessor& lessee has a lock in period which is not shorter than the tenor of loan There is no clause which allows a downward revision in Rentals during the period covered by the loan

49 Master Circular Exposure Norms & Statutory / Other Restrictions Exposure to individual borrower should not exceed 15% of capital funds Exposureto group of borrowers should not exceed 40% of capital funds (Definition of a group is left to perception of Banks. Guiding principles is commonality of management & effective control) Exposure shall include both credit exposure (Loans and Advances) & investment exposure (non SLR) "Capital Funds" for the purpose of exposure norm would comprise both Tier I and Tier II Capital as defined in our Master Circular on Capital Adequacy.

50 Master Circular Exposure Norms & Statutory / Other Restrictions UCBs may utilise up to 15% of their total deposit resources (as on March 31 of previous financial year) to provide housing, real estate and Commercial Real Estate loans. Scheduled UCBs should not place deposits with other scheduled/non-scheduled UCBs.

51 Master Circular Exposure Norms & Statutory / Other Restrictions Non-scheduled PCBs are permitted to place deposits with strong scheduled PCBs complying with the following norms Bank complies with the prescribed level of CRAR. Net NPAs of Bank are less than 7%. Bank has not defaulted in the maintenance of CRR/SLR for the last two years Bank has declared net profits for the last three consecutive years Bank complies with prudential norms on income recognition, asset classification & provisioning, exposure ceilings & loans & advances to directors Deposits placed by non-scheduled UCB with Scheduled UCB should not exceed 5% of Depositing Bank s total deposits as on March 31 of previous year.

52 RBI Circular dated Limit on Unsecured Adv. Criteria UCBs having CRAR equal to or more than 9 % UCBs having CRAR less than 9 % UCBs with DTL up to Rs. 10 Cr. UCBs with DTL above Rs. 10 Cr. & up to Rs. 50 Cr. UCBs with DTL above Rs. 50 Cr. & up to Rs. 100 Cr. UCBs with DTL above Rs. 100 Cr. Rs. 1 lakh Rs. 2 lakh Rs. 3 lakh Rs. 5 lakh Rs. 25,000 Rs. 50,000 Rs. 1 lakh Rs. 2 lakh

53 Master Circular Exposure Norms & Statutory / Other Restrictions UCBs can not give loans (fund & non fund based) Against security of its own shares(sec. 20(1)(a)-BR Act) Against FDs of other Banks Bridge Loans / Interim Finance (Including against Capital / Debentures issues and / or in form of loans of bridging nature, pending raising of long term funds) Stockbrokers (against shares & debentures / bonds, or other securities, such as FDs, LIC policies etc.) Commodity brokers NBFCs (except, engaged in hire- purchase / leasing)

54 Master Circular Exposure Norms & Statutory / Other Restrictions Total unsecured advances (with surety & without surety ) granted by UCBs to its members should not exceed 15% of its Demand & Time Liabilities (DTL) Advances against units of mutual funds can be extended only to individuals as in the case of advances against the security of shares, debentures and bonds

55 Master Circular Exposure Norms & Statutory / Other Restrictions Exposure of UCBs to Housing, Real Estate & CRE would be limited to 10% of their total assets. This could be exceeded by an additional 5% of total assets for purpose of grant of housing loans to individuals for purchase or construction of dwelling units costing up to Rs. 10 lakh. (RBI Circular, dated ) Exposure of State Co-op. Banks (StCBs) & Central Co-op. Banks (CCBs) to Housing Finance would be limited to 5% of their total assets, as against 10% of their total loans and advances. Total assets may be reckoned based on Audited Balance Sheet as on March 31 of preceding financial year. (RBI Circular, dated )

56 Other important Circulars issued by RBI BR Act - Area of operation Prior RBI & ROC approval is must, Change in Bye-laws - Opening Branches, Closing Branches, Upgradation of Extension Counter to Branch Prior RBI approval is must - ATMs (On site & Off site) can be opened (subject to conditions) - Without approval of RBI - Shifting Branches -Prior RBI approval is must (except shifting in same Municipal Ward / locality)

57 Other important Circulars issued by RBI Asset Liability Management (ALM) System in Tier I & Tier II UCBs (Other than Scheduled) Formation ALCO Committee Negative gap in 1-14 days & days should not exceed 20%. For other UCBs, Negative gaps / Mismatches in Next day, 2-7 days, 8-14 days & days should not exceed 5%, 10%, 15% & 20%, respectively.

58 MARKING SYSTEM UNDER CAMELSCRATING SYSTEM CAPITAL ADEQUACY - 12% ASSET QUALITY - 20% MANAGEMENT - 12% EARNING APPRAISAL - 16% LIQUIDITY APPRAISAL - 12% SYSTEMS & CONTROLS - 08% CO-OPERATION - 20%

59 PLEASE ASK QUESTIONS BEFORE I SAY

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