PwC’s Banking Insights...2 PwC PwC’s Banking InsightsPwC’s Banking Insights Table of contents Topic Page no. Preface 3 Impact assessment of regulatory changes in April 2017 4

PwC’s Banking InsightsMay–June 2017

2 PwC PwC’s Banking Insights

PwC’s Banking Insights

Table of contents

Topic Page no.

Preface 3

Impact assessment of regulatory changes in April 2017 4

Risk Management Systems – Role of the Chief Risk Officer (CRO) 4

Revised Prompt Corrective Action (PCA) Framework for Banks 7

Additional Provisions for Standard Advances at Higher Than the Prescribed Rates 12

Prudential Guidelines – Banks’ investment in units of REITs and InvITs 15

Guidelines on compliance with Accounting Standard (AS) 11 by banks - Clarification10 18

Impact assessment of regulatory changes in May 2017 21

Rationalisation of Branch Authorisation Policy – Revision of guidelines 21

Timelines for Stressed Assets Resolution 24

Partial Credit Enhancement to Corporate Bonds 27

Other notifications in April and May 2017 30

Contacts 34



Preface Impact assessment of regulatory changes in April 2017

In April 2017, the Reserve Bank of India (RBI) published the Prompt Corrective Action (PCA) framework for banks in order to address the Non-Performing Asset (NPA) menace that has been plaguing the banking sector and India’s economy as a whole. In order to tackle the problem, both the central government and RBI have been introducing various measures. Moreover, the government released a presidential NPA ordinance in May 2017 to amend the Banking Regulations Act, 1949, and gave more power to the RBI for forming appropriate rules and frameworks for NPA resolution. Recent yearly financial results have also shown that the worst may be behind us as gross NPA (GNPA) and NPA levels are gradually decreasing. However, some public sector banks continue to have very high levels of NPAs, and RBI has placed restrictions on branch expansion and lending operations.

Further, in the last quarter, the rupee has appreciated significantly and reached an 18-month high against the US dollar. Moreover, there has been a massive inflow of funds into the capital markets sector as foreign institutional investors (FIIs) have bought Indian indices given the stable government and encouraging policy environment.

Other favourable factors are the impending roll-out of GST and the forecast of another year of normal monsoon that will increase consumption rates in the rural economy.

With the implementation of GST in July, the government will focus on supporting the regime. To drive investment in the economy, the government has announced different GST rates and measures. Further, we may see some consolidation in the banking space, especially among small public sector undertaking (PSU) banks, as large NPAs may be merged with bigger banks.

ContactsOther notifications in April and May 2017


Circular reference: RBI/2016-17/294DBR.BP.BC.No.65/21.04.103/2016-17 Dated 27 April 2017

Applicability: All Scheduled Commercial Banks And

Small Finance Banks (Excluding Local Area Banks and Regional Rural Banks)

Background and objective:In the light of piling stressed assets on banking institutions, the government is planning to promulgate an ordinance for RBI to take action against loan defaulters. In this direction, RBI has issued a circular defining the role of the CRO. The objective behind issuing the circular is to have a system of separating the credit risk management function from the credit sanction process and bring uniformity in the approach followed by banks, as also to align the risk management system with the best practices.

Risk Management Systems – Role of the Chief Risk Officer (CRO)1

1Risk Management Systems – Role of the Chief Risk Officer (CRO). Retrieved from https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10948

Preface Impact assessment of regulatory changes in April 2017 ContactsOther notifications in April and May 2017



Extract from the regulation:

i. Banks shall lay down a Board approved policy clearly defining the role and responsibilities of the CRO.

ii. CRO shall be a senior official in the banks’ hierarchy and shall have the necessary and adequate professional qualification / experience in the areas of risk management.

iii. The CRO shall have direct reporting lines to the MD & CEO / Risk Management Committee (RMC) of the Board. In case the CRO reports to the MD & CEO, the RMC shall meet the CRO on a one-to-one basis, without the presence of the MD & CEO, at least once a quarter.

iv. The CRO shall not have any reporting relationship with the business verticals of the bank and shall not be given any business targets.

v. In case the CRO is associated with the credit sanction process, it shall be clearly enunciated whether the CRO’s role would be that of an adviser or a decision maker. The policy shall include the necessary safeguards to ensure the independence of the CRO.

vi. In banks that follow committee approach in credit sanction process for high value proposals, if the CRO is one of the decision makers in the credit sanction process, he shall have voting power and all members who are part of the credit sanction process, shall individually and severally be liable for all the aspects, including risk perspective related to the credit proposal. If the CRO is not a part of the credit sanction process, his role will be limited to that of an adviser.

vii. In banks which do not follow committee approach for sanction of high value credits, the CRO can only be an adviser in the sanction process and shall not have any sanctioning power.

viii. The CRO in his role as an adviser shall be an invitee to the credit sanction/approval committee without any voting rights in the proceedings of the committee.

ix. There shall not be any ‘dual hatting’, the CRO shall not be given the responsibility of chief executive officer, chief operating officer, chief financial officer, chief of the internal audit function or any other function.

x. Appointment of the CRO shall be for a fixed tenure with the approval of the Board of Directors of the banks. The CRO may be transferred/removed from his post before completion of the tenure only with the approval of the Board and such premature transfer/removal shall be reported to the Department of Banking Supervision, Reserve Bank of India, Mumbai. In case of listed banks, any change in incumbency of CRO shall be reported to the stock exchanges.

Preface ContactsImpact assessment of regulatory changes in April 2017 Other notifications in April and May 2017



Impact assessment:

• This circular has a wide-ranging impact on the banking sector. It also aims to reduce influenced business decisions, aggressive funding resorted to by banks and accounts from turning into NPAs.

• The roles and responsibilities, reporting line, independence, dual hatting and tenure for the position of the CRO need to be evaluated in light of the circular.

• A policy should be formulated to bridge the gaps between the current policy and the circular, and should be presented to the board for approval.

• The guidelines of this circular need to be taken into consideration by banks’ compliance teams, as any change in the role of the CRO needs to be reported to RBI and stock exchanges (if applicable) on a timely basis.

• The committee charter, governing the RMC needs to be updated based on the reporting line of the CRO and the frequency of the meetings between the RMC and CRO.

• Banks’ credit appraisals and sanctioning policies need to be accessed based on the approach used for sanctioning high-value credit through a credit committee or without a credit committee.

• If banks have credit committees that approve high-value proposals, the credit committee charters need to be updated on the basis of the role of the CRO, i.e. adviser or decision maker. This may have an implication on the credit sanction approving matrix.




Circular reference: RBI/2016-17/276 DBS.CO.PPD. BC.No.8/11.01.005/2016-17Dated 13 April 2017

Applicability: All Scheduled Commercial Banks (Excluding Rural Regional Banks)

Background and objective:The problem of NPAs in the Indian banking system is one of the foremost and the most formidable.

As part of the PCA framework, RBI has specified certain regulatory trigger points in terms of three parameters, i.e. capital to risk weighted assets ratio (CRAR), (NPAs and return on assets (RoA), for initiation of certain structured and discretionary actions in respect of banks hitting such trigger points. The PCA framework is applicable only to commercial banks and not extended to co-operative banks, non-banking financial companies (NBFCs) and financial marker infrastructures (FMIs).

The first notification was released on 21 December 2002. However, a revised framework was released on 13 April 2017.

Purpose of the regulationPCA is triggered when banks breach certain regulatory requirements like CRAR, net NPA and RoA. To ensure that banks don’t go bust, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled.

Revised Prompt Corrective Action (PCA) Framework for Banks2

2Revised Prompt Corrective Action (PCA) Framework for Banks. Retrieved from https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10921




Salient features of revised PCA Frameworks for Banks

i. Capital (Breach of either CRAR or CET 1 ratio to trigger PCA Indicator: CRAR- Minimum regulatory prescription for capital to risk assets ratio + applicable capital conservation buffer (CCB) Current minimum RBI prescription of 10.25% (9% minimum total capital plus 1.25%* of CCB as on March 31, 2017) and / or Regulatory pre-specified trigger of Common Equity Tier 1 (CET 1min) + applicable capital conservation buffer (CCB) current minimum RBI prescription of 6.75% (5.5% plus 1.25%* of CCB as on March 31, 2017) Risk Threshold 1: Upto 250 bps below Indicator (<10.25% but >=7.75%) upto 162.50 bps below Indicator (<6.75% but >= 5.125%).Risk Threshold 2: More than 250 bps but not exceeding 400 bps below Indicator (<7.75% but >=6.25%) and more than 162.50 bps below but not exceeding 312.50 bps below Indicator (<5.125% but >=3.625%).Risk Threshold 3: In excess of 312.50 bps below Indicator (<3.625%).

ii. Asset Quality Indicator: Net Non-performing advances (NNPA) ratio Risk Threshold 1: >=6.0% but <9.0% Risk Threshold 2: >=9.0% but < 12.0% Risk Threshold 3: >=12.0%

iii. Profitability Indicator: RoA Risk Threshold 1: Negative RoA for two consecutive years Risk Threshold 2: Negative RoA for three consecutive years Risk Threshold 3: Negative RoA for four consecutive years

iv. Leverage Indicator: Tier 1 leverage ratio Risk Threshold 1: <=4.0% but > = 3.5% (Leverage is over 25 times the Tier 1 capital) Risk Threshold 2: < 3.5% (leverage is over 28.6 times the Tier 1 capital)

v. Mandatory actions Risk Threshold 1: i. Restriction on dividend distribution/remittance of profits ii. Promoters/owners/parent in the case of foreign banks to bring in capital Risk Threshold 2: i. In addition to mandatory actions of Threshold 1, Restriction on branch expansion; domestic and/or overseas ii. Higher provisions as part of the coverage regime Risk Threshold 3: i. In addition to mandatory actions of Threshold 1, Restriction on branch expansion; domestic and/or overseas ii. Restriction on management compensation and directors’ fees, as applicable

vi. Discretionary actions Common menu:

i. Special Supervisory Interactionsii Strategy relatediii. Governance related

iv. Capital relatedv. Credit risk relatedvi. Market risk relatedvii. HR related

viii. Profitability relatedix. Operations relatedx. Any other




Detailed discretionary actions are mentioned below:

Special supervisory interactionsi. Special Supervisory Monitoring Meetings (SSMMs) at quarterly

or other identified frequencyii. Special inspections/targeted scrutiny of the bankiii. Special audit of the bank

Strategy related actions RBI to advise the bank’s Board to:i. Activate the Recovery Plan that has been duly approved by

the supervisorii. Undertake a detailed review of business model in terms of sustainability

of the business model, profitability of business lines and activities, medium and long term viability, balance sheet projections, etc.

iii. Review short term strategy focusing on addressing immediate concernsiv. Review medium term business plans, identify achievable targets and set

concrete milestones for progress and achievementv. Review all business lines to identify scope for enhancement/ contractionvi. Undertake business process reengineering as appropriatevii. Undertake restructuring of operations as appropriate

Governance related actionsi. RBI to actively engage with the bank’s Board on various aspects as

considered appropriateii. RBI to recommend to owners (Government/ promoters/ parent of

foreign bank branch) to bring in new management/ Board

iii. RBI to remove managerial persons under Section 36AA of the BR Act 1949 as applicable

iv. RBI to supersede the Board under Section 36ACA of the BR Act 1949/ recommend supersession of the Board as applicable

v. RBI to require bank to invoke claw back and malus clauses and other actions as available in regulatory guidelines, and impose other restrictions or conditions permissible under the BR Act, 1949

vi. Impose restrictions on directors’ or management compensation, as applicable.

Capital related actionsi. Detailed Board level review of capital planningii. Submission of plans and proposals for raising additional capitaliii. Requiring the bank to bolster reserves through retained profitsiv. Restriction on investment in subsidiaries/associatesv. Restriction in expansion of high risk-weighted assets to conserve capitalvi. Reduction in exposure to high risk sectors to conserve capitalvii. Restrictions on increasing stake in subsidiaries and other

group companies




Detailed discretionary actions are mentioned below:

Credit risk related actionsi. Preparation of time bound plan and commitment for reduction of

stock of NPAsii. Preparation of and commitment to plan for containing generation

of fresh NPAsiii. Strengthening of loan review mechanismiv. Restrictions on/ reduction in credit expansion for borrowers below

certain rating gradesv. Reduction in risk assetsvi. Restrictions on/ reduction in credit expansion to unrated borrowersvii. Reduction in unsecured exposuresviii. Reduction in loan concentrations; in identified sectors,

industries or borrowersix. Sale of assetsx. Action plan for recovery of assets through identification of areas

(geography wise, industry segment wise, borrower wise, etc.) and setting up of dedicated Recovery Task Forces, Adalats, etc.

Market risk related actionsi. Restrictions on/reduction in borrowings from the inter-bank marketii. Restrictions on accessing/ renewing wholesale deposits/ costly deposits/

certificates of depositsiii. Restrictions on derivative activities, derivatives that permit

collateral substitution

iv. Restriction on excess maintenance of collateral held that could contractually be called any time by the counterparty

HR related actionsi. Restriction on staff expansionii. Review of specialized training needs of existing staff

Profitabilityrelatedactionsi. Restrictions on capital expenditure, other than for technological

upgradation within Board approved limits

Operations related actionsi. Restrictions on branch expansion plans; domestic or overseasii. Reduction in business at overseas branches/ subsidiaries/ in other entitiesiii. Restrictions on entering into new lines of businessiv. Reduction in leverage through reduction in non-fund based businessv. Reduction in risky assetsvi. Restrictions on non-credit asset creationvii. Restriction in undertaking businesses as specified




Impact assessment:

• The breach of Risk Threshold 3 of CET 1 by a bank would identify a bank as a likely candidate for resolution through tools like amalgamation, reconstruction and winding up.

• In the case of a default on the part of a bank in meeting the obligations to its depositors, possible resolution processes may be resorted to without reference to the PCA matrix.




Circular reference: RBI/2016-17/282 DBR.No.BP.BC.64/21.04.048/2016-17 Dated 18 April 2017

Applicability: All Scheduled Commercial Bank (Excluding Regional Rural Banks)

Background and objective:RBI focuses on the telecom sector as it has a significant impact on the financial stability of banks having high exposure to telecom companies. The telecom sector has been identified as one of the major contributors to banks’ stressed assets and NPAs. Thus, banks exercise a close vigilance on loans and provisions in the telecom sector.

This approach will assist banks in provisioning and estimating their losses at an earlier stage based on the credit loss assessment compared to the NPA calculation currently used where the NPAs are identified at a later stage.

Additional Provisions for Standard Advances at Higher Than the Prescribed Rates3

3Additional Provisions for Standard Advances At Higher Than The Prescribed Rates. Retrieved from https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10931





It is advised that the provisioning rates prescribed in the abovementioned circular are the regulatory minimum and banks are encouraged to make provisions at higher rates in respect of advances to stressed sectors of the economy. With a view to ensure that banks have adequate provisions for loans and advances at all times, it is advised as under:

i. Banks shall put in place a Board–approved policy for making provisions for standard assets at rates higher than the regulatory minimum, based on evaluation of risk and stress in various sectors.

ii. The policy shall require a review, at least on a quarterly basis, of the performance of various sectors of the economy to which the bank has an exposure to evaluate the present and emerging risks and stress therein. The review may include quantitative and qualitative aspects like debt-equity ratio, interest coverage ratio, profit margins, ratings upgrade to downgrade ratio, sectoral non-performing assets/stressed assets, industry performance and outlook, legal/ regulatory issues faced by the sector, etc. The reviews may also include sector specific parameters.

iii. More immediately, as the telecom sector is reporting stressed financial conditions, and presently interest coverage ratio for the sector is less than one, Board of Directors of the banks may review the telecom sector latest by June 30, 2017, and consider making provisions for standard assets in this sector at higher rates so that necessary resilience is built in the balance sheets should the stress reflect on the quality of exposure to the sector at a future date. Besides, banks should also subject the exposure to the sector to closer monitoring.




Impact assessment:

• Banks will institute a study to evaluate present and emerging risks and inherent stress in sectors in which they have substantial exposure.

• The business team and board of directors (BoDs) will have to reassess the portfolio and review the current provisioning rates, asset quality, and performance and classifications of assets.

• Further, the provisioning of standard assets will be based on these sectoral reviews; hence, judicial decisions need to be taken to determine higher provisioning rates sector wise and design monitoring mechanisms for high-risk sectors, i.e. telecom.

• The revised board-approved provisioning policy will form the basis for further provisioning. Also, changes in the system for passing JVs will be amended by the respective authoriser.

• Banks should also assess the Provision Coverage Ratio (PCR) with reference to the gross NPA position and take actions as required.




Circular reference: RBI/2016-17/280 DBR.No.FSD.BC.62/24.01.040/2016-17 Dated 17 April 2017

Applicability: All Scheduled Commercial Banks (Excluding Regional Rural Banks)

Background and objective:A REIT is an investment vehicle that owns and operates real estate related assets that allow investors income produced through real estate ownership without actually having to buy any such assets.

InvITs, on the other hand, are trusts that manage income-generating infrastructure assets, typically offering investors regular yield and a liquid method of investing in infrastructure projects.

Consistent with the government’s efforts to support infrastructure development in India, SEBI has framed REIT and InvIT rules to help developers free up capital/debt and reduce costs by forming trusts and listing real estate assets by raising money from the public.

Banks may consider investing in these assets as they provide them with opportunities to invest in different asset classes with reduced risks and relatively stable but slightly lower returns.

Prudential Guidelines – Banks’ investment in units of REITs and InvITs4

4Prudential Guidelines – Banks’ investment in units of REITs and InvITs. Retrieved from https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10929





It has been decided to allow banks to participate in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) within the overall ceiling of 20 per cent of their net worth permitted for direct investments in shares, convertible bonds/ debentures, units of equity-oriented mutual funds and exposures to Venture Capital Funds (VCFs) [both registered and unregistered], subject to the following conditions:

i. Banks should put in place a Board approved policy on exposures to REITs/ InvITs which lays down an internal limit on such investments within the overall exposure limits in respect of the real estate sector and infrastructure sector.

ii. Banks shall not invest more than 10 per cent of the unit capital of an REIT/ InvIT.

iii. Banks should ensure adherence to the prudential guidelines issued by RBI from time to time on Equity investments by Banks, Classification and Valuation of Investment Portfolio, Basel III Capital requirements for Commercial Real Estate Exposures and Large Exposure Framework, as applicable.




Impact assessment:

• The investment policies of banks are to be suitably modified to include REITs/InvITs as eligible instruments for investment, for which necessary approvals from the board are to be sought.

• Treasury systems are to be modified to allow ordering, settlement and monitoring of the new products.

• Investment exposure limits in the risk management policy are to be modified to meet the prudential guidelines issued by RBI.

• Treasury MIS reports are to be modified to include investments made in such units for monitoring and reporting purposes.

Detailed guidelines are expected to be issued in May 2017 to operationalise the circular.




Circular reference: RBI/2016-17/281 DBR.BP.BC.No.61/21.04.018/2016-17 Dated 18 April 2017

Applicability: All Scheduled Commercial Banks (Excluding Regional Rural Banks)

Background and objective:As per RBI’s circular dated 15 March 2005, banks have been asked to follow AS 11 issued by Institute of Chartered Accountants of India (ICAI) for foreign operations. According to the standard, the exchange difference arising from non-integral operations needs to be accumulated in a foreign currency translation reserve (FCTR). Amounts from these reserves can be transferred to statements of profit and loss on full or partial disposal of such operations.

Extract from AS 11:‘An enterprise may dispose of its interest in a non-integral foreign operation through sale, liquidation, repayment of share capital, or abandonment of all, or part of, that operation. The payment of a dividend forms part of a disposal only when it constitutes a return of the investment. In the case of a partial disposal, only the proportionate share of the related accumulated exchange differences is included in the gain or loss.’

Guidelines on compliance with Accounting Standard (AS) 11 [The Effects of Changes in Foreign Exchange Rates] by banks - Clarification5

5Guidelines on compliance with Accounting Standard (AS) 11 [The Effects of Changes in Foreign Exchange Rates] by banks – Clarification. Retrieved from https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10930

RBI observed that banks have been recognising gains in their statements of profit and loss from FCTRs on repatriation of accumulated profits/retained earnings from overseas branches. Along with ICAI, RBI has drawn attention to the fact that such repatriation does not constitute a disposal and hence, banks should not recognise a proportionate amount of exchange gains or losses held in the FCTR in the statements of profit and loss.





It has been observed that banks have been recognizing gains in profit & loss account from Foreign Currency Translation Reserve (FCTR) on repatriation of accumulated profits / retained earnings from overseas branch(es) by treating the same as partial disposal under AS 11.

The matter has been examined taking into consideration, inter alia, the views of the Institute of Chartered Accountants of India. It is clarified that the repatriation of accumulated profits shall not be considered as disposal or partial disposal of interest in non-integral foreign operations as per AS 11, The Effects of Changes in Foreign Exchange Rates. Accordingly, banks shall not recognize in the profit and loss account the proportionate exchange gains or losses held in the foreign currency translation reserve on repatriation of profits from overseas operations.




Impact assessment:

• Banks need to amend their accounting policy considering RBI’s clarification.

• Financial reporting teams need to be informed about guidelines, and new treatments of such repartition of profits will need to be finalised.

• Adequate disclosures are to be made in financial statements explaining the changes in accounting policies and the effect of such changes on the net profits of banks.

• Banks are to obtain a clarification from their statutory auditors as to the treatment of such recognised gains in previous years.

• Profits of banks which have previously been recognised as exchange gains on repatriation of funds by their overseas branches will be affected.




Circular reference: RBI/2016-17/306 DBR.No.BAPD.BC.69/22.01.001/2016-17 Dated 18 May 2017

Applicability: All Scheduled Commercial Banks (Excluding RRBs), Small Finance Banks, Payment Banks and Local Area Banks

Background and objective:In a bid to take banking services to the remote locations of the country, to facilitate financial inclusion and provide flexibility on the choice of delivery channel, the RBI has proposed to redefine branches and permissible methods of outreach, keeping in mind the various attributes of the banks and the types of services that are sought to be provided by banks.

Currently, banks provide services through a variety of business outlets: branches, extension counters, satellite offices, mobile branches, ultra-small branches, etc. To facilitate adequate outreach of banking outlets in unbanked areas and, at the same time, provide autonomy to transfer banks to decide their business strategy, the RBI in its Bi-Monthly Monetary Policy Statement 2016-17 published on 5 April 2016 has highlighted various steps/measures needed to be taken under the current banking scenario and the amendments to be made to the banking framework in the country.

Rationalisation of Branch Authorisation Policy – Revision of guidelines6

6Rationalisation of Branch Authorisation Policy - Revision of Guidelines. Retrieved from https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=10972&Mode=0

Financial Inclusion being the overarching objective of the revised framework and the operational flexibility being given to banks, the Board has been given overall responsibility to ensure that all the guidelines are complied with.

Preface Impact assessment of regulatory changes in May 2017 ContactsOther notifications in April and May 2017



Synopsis:

Major changes under revised guidelines on the authorisation of banking outlets:

• The definition of what constitutes a bank branch has been changed. As against the earlier definition of considering all the outlets, including extension counters and ATMs as a ‘branch’, the new provisions have changed the nomenclature to calling it as a ‘banking outlet’.

• Under the revised policy, an unbanked rural centre (URC) is defined as a rural (Tier 5 and 6) centre that does not have a CBS-enabled ‘banking outlet’ of a Scheduled Commercial Bank, a payment bank, a SFB or a Regional Rural Bank nor a branch of a Local Area Bank or Licensed Co-operative Bank for carrying out customer based banking transactions.

• The restrictions on opening banking outlets in Tier 1 to Tier 6 centres without taking RBI’s permission in each case has been removed and a mandate to open at least 25% of these outlets in URCs has been introduced. Detailed computation and compliance requirements for achieving 25% of the total number of banking outlets has been explained in the guidelines.

• The opening of a ‘Banking Outlet/part-time Banking Outlet’ in any Tier 3 to Tier 6 centre of North-Eastern States and Sikkim as well as in any Tier 3 to 6 centres of LWE affected districts, notified by the Government of India, will be considered as equivalent to opening a ‘Banking Outlet’/ ‘part-time Banking Outlet’, as the case may be, in an URC.

• The time given to a bank for opening an outlet in a URC is one year. If a bank fails to adhere to the requirement of opening 25% banking outlets in a year, appropriate penal measures, including restrictions on opening of Tier 1 branches, may be imposed. Banking outlets opened in unbanked rural centres in excess of the requirement will be allowed to carry forward the benefit of the ‘Banking Outlets’ for a period of next 2 years.

• State Level Banker Committees (SLBCs) are being constituted to compile and publish the list of URCs. Banks shall inform and coordinate with the SLBC Convenor bank to earmark the centre identified by them for opening a banking outlet.

• No Customer Interface will be allowed. Banks which currently have specific permission to allow limited customer interface at CPCs will have to align with the above instructions within one year from the date of this circular.




Synopsis:

• Banks may shift, merge or close all branches except rural branches and sole semi-urban branches at their discretion. However, it would require approval of the District Consultative Committee (DCC)/District Level Review Committee (DLRC).

• Small Finance Banks, Payment Banks as well as Local Area Banks (LABs) and Domestic Scheduled Commercial Banks from whom general permission has been withdrawn shall obtain prior approval of Department of Banking Regulation (DBR), Central Office, RBI for opening all their branches.

• With the expansion in definition of a branch, RBI has allowed all extension counters, satellite offices, part-shifted branches, ultra-small branches and specialized branches, to be treated as ‘banking outlets’ or ‘part-time banking outlets’. However, ATMs, E-lobbies, bunch note acceptor machines, cash deposit machines, e- kiosks and mobile branches will fall outside the purview of ‘banking outlets’. This is a shift from the earlier definition of a ‘branch’ which also included off-site ATMs.

The guideline comes as a breather for payment banks and small finance banks who are planning to take banking to rural India mostly through small physical business correspondent touchpoints. It also gives the scope to banks to open part-time banking outlets in left-wing, extremism-affected states and states in the North East to be counted as full-fledged banking outlets.

In an attempt to ensure that banking outlets and their services do not become a superficial compliance requirement towards financial inclusion, the RBI has made the banks’ management board responsible for overseeing their deployment and their proper functioning. The role of the BoD has been increased to provide a direct oversight over operations, to ensure compliance with these guidelines and to monitor the quality of services provided at such banking outlets by setting internal targets and instituting necessary review procedures. The progress is to be reviewed at least on a quarterly basis.




Circular reference: RBI/2016-17/299 DBR.No.BP.BC.67/21.04.048/2016-17 Dated 5 May 2017

Applicability: All Scheduled Commercial Bank (Excluding Local Area Banks and Regional Rural Banks)

Background and objective:The circular amends the existing ‘Framework for Revitalizing Distressed Assets in the Economy – Guidelines on JLF and CAP’ dated 26 February 2014 (JLF Framework) and mandates members of a joint lenders forum (JLF) to follow strict timelines in implementing a corrective action plan (CAP) or suffer penal consequences for non-compliance. This circular empowers the RBI to directly intervene and direct banks to finalise the insolvency proceedings and achieve successful resolution of the stressed asset situations.

The JLF framework was formulated by the RBI with the objective of identifying stressed assets at an early stage and arrive at a feasible solution for timely restructuring of stressed accounts or dispensing with unviable accounts before such accounts are declared as NPAs.

• Further, the circular makes it easy for JLF members to act on the CAP in a considerably short span of time, which decreases the degradation of value of the assets.

Timelines for Stressed Assets Resolution7

7Timelines for Stressed Assets Resolution. Retrieved from https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10957&Mode=0

• This framework guides bilateral or consortium lenders to act as per the JLF’s CAP, which was turning out to be an issue earlier as some of the representatives were construed as being soft on delinquent borrowers.

• The delay in the action of the CAP, decided by the JLF, was due to other reasons, one of which was long vacancies in the senior leadership team.

• The RBI wanted to strengthen traditionally weaker lenders by providing a framework or rights to implement and enforce bankruptcy laws. This would help to strengthen the practices carried out by scrupulous borrowers.

However, these measures did not entirely serve the purpose as there was a delay due to non-agreement between the members of the JLF, leading to failures in implementing and initiating prompt CAPs in the case of stressed assets.





• The Framework aims at early identification of stressed assets and timely implementation of a corrective action plan (CAP) to preserve the economic value of stressed assets. In order to ensure that the CAP is finalized and formulated in an expeditious manner, the Framework specifies various timelines within which lenders have to decide and implement the CAP. The Framework also contains disincentives, in the form of asset classification and accelerated provisioning where lenders fail to adhere to the provisions of the Framework. Despite this, delays have been observed in finalizing and implementation of the CAP, leading to delays in resolution of stressed assets in the banking system.

• It is hereby clarified that the CAP can also include resolution by way of Flexible Structuring of Project Loans, Change in Ownership under Strategic Debt Restructuring, Scheme for Sustainable Structuring of Stressed Assets (S4A), etc.

• In this context, it is reiterated that lenders must scrupulously adhere to the timelines prescribed in the Framework for finalizing and implementing the CAP. To facilitate timely decision making, it has been decided that, henceforth, the decisions agreed upon by a minimum of 60 percent of creditors by value and 50 percent of creditors by number in the JLF would be considered as the basis for deciding the CAP, and will be binding on all lenders, subject to the exit (by substitution) option available in the Framework. Lenders shall ensure that their representatives in the JLF are equipped with appropriate mandates, and that decisions taken at the JLF are implemented by the lenders within the timelines.

• It shall be noted that:

i. The stand of the participating banks while voting on the final proposal before the JLF shall be unambiguous and unconditional;

ii. Any bank which does not support the majority decision on the CAP may exit subject to substitution within the stipulated time line, failing which it shall abide the decision of the JLF;

iii. The bank shall implement the JLF decision without any additional conditionalities;

iv. The Boards shall empower their executives to implement the JLF decision without requiring further approval from the Board.

• Any non-adherence to these instructions and timelines specified under the Framework shall attract monetary penalties on the concerned banks under the provisions of the Banking Regulation Act 1949.

• This circular is issued in exercise of the powers conferred by Sections 21, 35A and 35AB of the Banking Regulation Act, 1949.




Impact assessment:

• The majority consent on CAPs discussed in the JLF has been significantly reduced from 75% to 60% of the total creditors by value and from 60% to 50% of the total number of creditors from erstwhile 60%. The notification also brings in flexible options for banks to revive stressed assets. These updates will allow lenders to speed up the process of recovery and restructuring.

• Reduction in majority threshold also makes participation in JLF meetings crucial to table CAPs favourable to banks. Internal meetings to draw CAPs for stressed accounts may be conducted with stakeholders and JLF representatives of banks as the regulator requires all mandates to be in place prior to JLF meetings.

• The regulators’ firm intent to make banks abide with CAPs for speedier resolution is evident as the boards now have to pre-authorise the adoption of CAPs as agreed in the JLF.

• The framework does not bind all banks to comply with agreed CAPs, with no scope for changes in conditions. Banks may have to implement frequent monitoring measures to review achievement/non-achievement of milestones as the regulator stipulates a heavy penalty if timelines agreed to in CAPs are missed.




Circular reference: RBI/2016-17/43 DBR.BP.BC.No.5/21.04.142/2016-17 Dated 18 May 2017

Applicability: All Scheduled Commercial Banks (excluding RRBs)

Background and objective:RBI, in its review of the Monetary Policy, 2013–14, proposed to issue guidelines for providing credit to corporates by way of providing credit facilities and liquidity facilities and not by way of guarantee. The purpose of this guideline was to reduce dependency of corporates on banks for finance, along with bringing depth and liquidity to the bond market. Due to the inherent risks in the initial stages of project implementation, ratings of corporate bonds are affected and they do not attract investors. Partial credit facilities by banks with up to 20% of bond issue size enhance the credit rating of such corporate bonds so that long-term investors can buy into those papers comfortably.

Considering the credit and liquidity risk faced by banks on partial credit enhancement (PCE) financing, the RBI has come up with a mandate to obtain ratings for bonds from a minimum of two external rating agencies.

Partial Credit Enhancement to Corporate Bonds8

8Partial Credit Enhancement (PCE) to Corporate Bonds. Retrieved from https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10571&Mode=0





On a review of the capital requirement for PCE, it has been decided that:

• To be eligible for PCE from banks, corporate bonds shall be rated by a minimum of two external credit rating agencies at all times;

• The rating reports, both initial and subsequent, shall disclose both standalone credit rating (i.e. rating without taking into account the effect of PCE) as well as the enhanced credit rating (taking into account the effect of PCE).

• For the purpose of capital computation in the books of the PCE provider, the lower of the two standalone credit ratings and the corresponding enhanced credit rating of the same rating agency shall be reckoned.

• Where the reassessed standalone credit rating at any time during the life of the bond shows improvement over the corresponding rating at the time of bond issuance, the capital requirement may be recalculated on the basis of the reassessed standalone credit rating and the reassessed enhanced credit rating, without reference to the constraints of capital floor and difference in notches.

Preface Other notifications in April and May 2017Impact assessment of regulatory changes in May 2017 Contacts



Preface Impact assessment of regulatory changes in May 2017

Impact assessment:

• Banks shall update their credit policy to include the requirement of additional ratings documents and state the extent of information needed in the rating documents. For example, the rating shall be obtained from two rating agencies and shall be for two scenarios, i.e. pre PCE and post PCE.

• The risk and compliance team shall be informed about this guideline and the capital computation logic for PCE finance shall be updated. For example, the lower of the two or more ratings shall be considered for capital computation.

• The risks of banks will be minimised as ratings will be obtained from more than one rating agency.

ContactsOther notifications in April and May 2017



Circular ref. no. Name of the circular Brief impact/instructions

RBI/2016-17/284 Dated 20 April 20179

Compliance with Ghosh Committee Recommendations—

1. Compliance with the Jilani Committee recommendations need not be reported to the Audit Committee of the Board (ACB).

2. Compliance with the Ghosh Committee recommendations also need not be reported to the ACB.

RBI/2016-17/283 Dated 18 April 201710

Disclosure in the ‘Notes to Accounts’ to the Financial Statements – Divergence in the asset classification and provisioning – Notification

1. In order to ensure greater transparency and promote better discipline with respect to compliance with Income Recognition, Asset Classification and Provisioning (IRACP) norms, banks shall make suitable disclosures, wherever either (a) the additional provisioning requirements assessed by RBI exceed 15% of the published net profits after tax for the reference period, or (b) the additional gross NPAs identified by RBI exceed 15% of the published incremental gross NPAs for the reference period, or both.

2. The disclosures shall be made in the notes to accounts in the ensuing annual financial statements published immediately following the communication of such divergence by RBI to the bank.

3. The instructions are issued under the provisions of section 35A of the Banking Regulation Act, 1949. It may be noted that any contravention/non-compliance of the above instructions shall attract penalties under the act.

RBI/2016-17/274 Dated 12 April 201711

Security Substitution Facility for term repos conducted by Reserve Bank of India under the Liquidity Adjustment Facility—Notification

The securities offered for substitution by market participants shall be of similar market value based on the latest prices published by the Fixed Income Money Market and Derivatives Association of India (FIMMDA).

9Compliance with Ghosh Committee Recommendations. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10934&Mode=0



10Disclosure in the “Notes to Accounts” to the Financial Statements- Divergence in the asset classification and provisioning. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10932&Mode=0

11Security Substitution Facility for term repos conducted by Reserve Bank of India under the Liquidity Adjustment Facility. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10919&Mode=0



RBI/2016-17/313 Dated 30 May 201712

Submission of Annual Information Return relating to issue of Bonds for Rs. 5 lakh or more under Section 285 BA of Income Tax Act, 1961 - Change thereof

Few agency banks were submitting annual information returns (AIR, now changed to SFT) in respect of savings bonds to income tax authorities as well as to RBI. As RBI consolidates and submits this information to the Income Tax Department, and in order to avoid the duplication of data relating to savings bonds, agency banks/Stock HoldingCorporation of India Limited may henceforth ensure that the required information is furnished only to public debt offices of the respective jurisdiction and need not be submitted to income tax authorities separately.

RBI/2016-17/308 Dated 25 May 201713

Continuation of Interest Subvention Scheme for short-term crop loans on interim basis during the year 2017-18 - regarding

The Ministry of Agriculture & Farmers Welfare, Government of India (GoI), has initiated the process for continuation of the Interest Subvention Scheme. It has been decided by GoI, as an interim measure, to implement the Interest Subvention Scheme for the year 2017-18 till further instructions are received on the terms and conditions approved for the Scheme for 2016-17. All banks are, therefore, advised to take note and implement the Interest Subvention Scheme for 2017-18 accordingly.



12Submission of Annual Information Return relating to issue of Bonds for Rs.5 lakh or more under Section 285 BA of Income Tax Act, 1961 - Change thereof. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10979&Mode=0

13Continuation of Interest Subvention Scheme for short-term crop loans on interim basis during the year 2017-18 – regarding. Retrieved from https://rbi.org.in/SCRIPTs/NotificationUser.aspx?Id=10978&Mode=0




RBI/2016-17/304 Dated 18 May 201714

Minimum qualifications and experience for CFO and CTO

Banks, while inviting applications for the positions of CFO and CTO, should stipulate, at a minimum, the qualifications and experience for the CFO and CTO as detailed below. Banks may, however, prescribe additional qualifications and experience as they deem fit, taking into account the risk profile, size and scale of operations.

Chief Financial OfficerMinimum Qualification: Qualified Chartered Accountant.Experience: Fifteen years in overseeing financial operations, preferably accounting and taxation matters, in banks/large corporates/PSUs/ FIs/financial services organizations, of which 10 years should be in Banks/FIs (of which five years should be at senior management level).

Chief Technology OfficerMinimum Qualification: Engineering Graduate or MCA or equivalent qualification from a recognized University / Institution.Experience: 15 years of experience in relevant areas is mandatory. He/she should have worked in Banking-IT related areas/projects involving IT Policy and Planning/ Financial Networks and Applications/ Financial Information Systems/ Cyber Security Technologies/ Payment Technologies, etc., of which five years should be at senior management level.


14Minimum qualifications and experience for CFO and CTO. Retrieved from https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=10970&Mode=0




RBI/2016-17/302 Dated 11 May 201715

Submission of Statutory returns (SLR-Form VIII) in XBRL platform

Reporting of statutory liquidity ratio (SLR) has been moved from PCRPCD to Extensible Business Reporting Language (XBRL) platform. Submission of returns (Form VIII) in XBRL is required to be done from the month of April 2017.

RBI/2016-17/300 Dated 08 May 201716

National Electronic Funds Transfer (NEFT) system – Settlement at half-hourly intervals

As announced in the First Bi-monthly Monetary Policy Statement for 2017-18, additional settlements in the NEFT system at half-hour intervals are being introduced to enhance the efficiency of the system and add to customer convenience. Accordingly, it is decided to introduce 11 additional settlement batches during the day, taking the total number of half hourly settlement batches during the day to 23.The participating banks are, therefore, advised to carry out the required changes in their CBS system to initiate the NEFT transactions for half hourly settlement as above, and also to accept and credit the inward NEFT transactions on half hourly basis. IDRBT/IFTAS will communicate the technical changes required to be carried out by participating banks and provide required support in implementing the same.The additional batches will be introduced from 10 July 2017. Banks shall accordingly ensure their readiness in terms of technical and operational aspects.

16National Electronic Funds Transfer (NEFT) system – Settlement at half-hourly intervals. Retrieved from https://rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=10958

15Submission of Statutory returns (SLR-Form VIII) in XBRL platform. Retrieved from https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=10964&Mode=0



Vernon Dcosta Director [email protected] Mobile: +91 9920651117

Dnyanesh Pandit Director [email protected] Mobile: +91 9819446928

Vivek Iyer Partner [email protected] Mobile: +91 9167745318

Rajeev Khare Manager [email protected] Mobile: +91 9702942146

Pranati Joshi Assistant Manager [email protected] Mobile: +91 9920188080

Preface Impact assessment of regulatory changes in May 2017 Other notifications in April and May 2017 Contacts


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