PWC'S BANKING INSIGHTS FEBRUARY 2018
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PwC’s Banking Insights Click to launch February 2018
Impact assessment of
Preface regulatory changes in
February 2018
3 5
Other notifications
Contacts
in February 2018
20 21
Preface
Preface
Earlier this month, the Reserve Bank of
India (RBI) barred banks from issuing
letters of undertaking (LoUs), in light of the
recently perpetrated 2 billion USD fraud by
Impact assessment one of India’s public sector banks.
of regulatory changes
This move by the Regulator is likely to
in February 2018
have an impact on trade financing in India
and raise credit costs for importers who
have relied on LoUs for cheaper overseas
credit to pay suppliers. The move also puts
Other notifications companies that have received credit based
in February 2018 on LoUs in a spot as they have to now repay
their borrowings since there will be no
rollover of existing LoUs.
The Regulator has also barred lenders from
issuing letters of comfort (LoCs) as trade
Contacts credit for importing goods into India with
immediate effect. It has, however, allowed
banks to continue to issue letters of credit
and bank guarantees. Borrowers will now
have to explore alternative instruments like
bank guarantees and letters of credit, and,
in the long run, foreign funding like external
commercial borrowings (ECBs).
The Ministry of Finance has also directed all
public sector banks to probe all NPAs and 250 crore INR and red flags whenever the in his recent speech has also stressed on
NPA accounts amounting to 50 crore INR original covenants of the loans are violated. the need for ownership neutrality to ensure
and above for possible frauds and report This directive could have an unnerving a level-playing field in its supervisory
all such cases to the Central Bureau of effect on lending by public sector bankers enforcement and have enough control to
Investigation (CBI). Besides, the ministry as the priority is now likely to shift to put in place preventive measures to
had asked banks to monitor loans above unearthing fraud. RBI Governor Urjit Patel pre-empt frauds.
3 PwC PwC’s Banking Insights
Preface
Preface
The Regulator has been getting a lot of fraud. The revised stressed asset framework
heat in light of this fraud. The fact that the is a great move in this direction and will lay
three-level scrutiny, adopted for audit of down a steady-step approach. This approach
banks in India, failed to unearth this fraud is aimed at ensuring early resolution of
Impact assessment is particularly alarming. Banks’ concurrent stressed assets in a transparent and time-
of regulatory changes
auditors are expected to run daily checks bound manner so that maximum value
in February 2018
on all transactions. Further, quarterly could be realised by the lenders while also
inspections by statutory auditors and an recognising the potential value of stressed
annual inspection by the Regulator is also assets, as well as strengthening the credit
expected to be conducted. Considering this, culture in the economy for both borrowers
Other notifications there is an increasing need for a strong audit and banks.
in February 2018 framework, as well as the need to record off
This issue covers an impact analysis of
balance sheet exposure items, which were at
key regulations issued in the month of
the centre of the fraud, somewhere within
February 2018, including those around the
the formal reporting mechanisms.
payment of agency commission for small
Further, as rightly pointed out by the saving schemes, relief to MSME borrowers
Contacts Regulator, there is a strong link between under the Goods and Service Tax (GST)
such corporate frauds and the stressed framework, as well as revised guidelines
assets problem that the economy is relating to the participation of a person
grappling with. Some common causes of resident in India and foreign portfolio
frauds include serious gaps in underwriting investors (FPIs) in the Exchange Traded
standards and liberal cash flow projections Currency Derivatives (ETCD) market. Our
at the credit assessment stage. Almost all thought leadership on the revised stressed
of these fraud cases get seasoned for 2 to 3 assets framework is also part of
years as NPAs before they are reported as this document.
4 PwC PwC’s Banking Insights
Impact assessment of regulatory changes in February 2018
Preface
Special article: Resolution of Stressed Assets – Revised Framework 1
Circular reference: Applicability:
Impact assessment
of regulatory changes RBI/2017-18/131 DBR.No.BP All Scheduled Commercial Banks (Excluding Regional Rural Banks (RRB), All-India
in February 2018 BC.101/21.04.048/2017-18 Financial Institutions (Exim Bank, NABARD, NHB and SIDBI)
Dated 12 February 2018
Introduction
Other notifications Non-performing assets (NPAs) have Soon, most projects were getting stuck,
in February 2018 become a major challenge for both public especially in power and highways. Banks
and private sector banks in India. In the found their loans going sour, which led to
exuberant milieu that started way back the whole situation of NPAs. Initially, the
in 2004–05 and continued for three years extent of NPA was hidden by ‘ever-greening’.
until the global financial crisis of 2008, It was revealed later as the Reserve Bank of
large corporations conceived major project India (RBI) tightened the norms.
Contacts
proposals in capital-intensive sectors such as
In the recent past too, Indian banks have
power, ports, airports, housing and highway
been saddled with increasing levels of
construction. Banks were only too keen to
stressed assets and NPAs. Indian banks’
lend, often without sufficient evaluation of
gross NPAs stood at 8.40 lakh crore INR as
risks and returns. Things started worsening
on 30 September 2017. The ratio of NPAs
with the policy paralysis brought about by
was particularly disturbing when it came to
the spectrum and coal mining scandals.
public sector banks (PSBs):
Gross NPAs (in lakh crore INR)
Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
Public Sector Banks 2.28 2.27 2.35 2.51 2.73 2.78 2.96 3.14 4.95 5.40 5.92 6.30 6.46 6.19 7.33 7.34
Private Banks 0.24 0.23 0.26 0.27 0.30 0.32 0.35 0.37 0.46 0.56 0.62 0.75 0.87 0.92 0.96 1.06
Total 2.52 2.51 2.61 2.78 3.03 3.11 3.31 3.51 5.41 5.96 6.54 7.06 7.33 7.11 8.29 8.40
1. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11218&Mode=0
5 PwC PwC’s Banking Insights
Preface
In this context, the RBI and the government accounts be taken to the bankruptcy courts advances (GNPAs) of the banking sector
are proactively taking steps to resolve NPA (Insolvency and Bankruptcy Code rose along with the worsening of the
challenges in the banking sector. [IBC], 2016). banking stability indicator (BSI) between
The government has empowered the RBI to September 2016 and March 2017 due
Impact assessment During 2016–17, while deposit growth
chalk out plans for addressing the bad loans to deterioration in asset quality and
of regulatory changes of scheduled commercial banks (SCBs)
in February 2018 problem, with a focus on large stressed profitability. The macro stress test2 indicates
picked up, credit growth remained sluggish,
accounts that have been classified partly that under the baseline scenario, GNPAs of
putting pressure on net interest income
or wholly as non-performing from amongst SCBs may rise from 9.6% in March 2017 (as
(NII), particularly of PSBs, and they also
the top 500 exposures in the banking shown in the chart below) to 10.2%
continued to show a negative return on
system, and mandated that a dozen such by March 2018.
Other notifications assets (RoA). The gross non-performing
in February 2018
Stressed assets
20
15
Contacts
Percentage
10
5
0
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
PSBs PVBs FBs All SCBs
GNPA to total advances Restructured standard advances to total advances Source: Moneylife.in
2. Financial Stability Report, RBI, June 2017
6 PwC PwC’s Banking Insights
Preface
The RBI also reinforced its supervisory recruiting staff and giving increments to was amended in 2016 as it took banks years
and enforcement frameworks by revising employees. Further, the bank can disburse to recover the assets.
the prompt corrective action (PCA) loans only to those companies whose
Experts have pointed out that the NPA
framework and establishing an Enforcement borrowing is above investment grades.
Impact assessment problem has to be tackled before the time a
Department. Once PCA is triggered by the
of regulatory changes The Securitisation and Reconstruction company starts defaulting. This needed risk
in February 2018 regulator, the bank faces restrictions on
of Financial Assets and Enforcement of assessment by the lenders and red-flagging
spending money on opening branches,
Security Interest Act (SARFAESI) Act, 2002, of the early signs of a possible default.
Why did the existing schemes fail?
Other notifications
The NPA story is not new in India and several steps have been taken by the government on legal, financial and policy-level reforms. Taking
in February 2018
note of the existing stressed assets and NPA situation, the RBI introduced a host of schemes and frameworks with the aim of curtailing the
growing NPAs. These are tabled as under:
Joint Lenders‘ Forum Strategic Debt Insolvency and Scheme for Sustainable
and Corrective Restructuring (SDR) Bankruptcy Code, 2016 Structuring of Stressed
Contacts Action Plan Assets (S4A)
Banks would need to This was introduced This is the strongest RBI introduced (S4A) for
constitute a with the aim of measure taken so far, the resolution of bad
committee called JLF helping banks to yet due to lack of loans of large projects.
and roll out a CAP recover their loans operational guidelines This is aimed at
comprising by taking control of and a legal strengthening the lenders’
rectification, distressed listed framework, the code ability to deal with
restructuring and companies. too has its fair share stressed assets by
recovery of loans. of critics. providing an avenue for
reworking the financial
structure of entities facing
genuine difficulties.
January June May June
2014 2015 2016 2016
7 PwC PwC’s Banking Insights
Preface
However, these measures have been riddled because of differences among creditors on
with their own set of problems: how best to resolve them. As per the JLF
framework, at least 75% of creditors by
• As NPAs kept on increasing, the RBI rolled
value of the loan and 60% by number of
Impact assessment out quite a few measures to improve the asset
lenders in the JLF were needed to agree to
of regulatory changes quality of banks. The RBI had strong notions
in February 2018 the restructuring plan. Obtaining consensus
that some of the banks are underreporting
of creditors was a major bone of contention
their NPAs. Asset classification practices
for the JLF, which in turn reduced the
were not as per the set standards and several
effectiveness of the forum.
banks resorted to ever-greening of accounts.
Other notifications Here, banks were postponing bad-loan • The Strategic Debt Restructuring (SDR)
in February 2018 classification while depicting accounts as mechanism introduced soon after was also
performing. To resolve this, during 2015, not lucrative for lenders. While the scheme
the RBI had conducted an inspection of seemed interesting to begin with, it was soon
selected banks’ balance sheets at random evident that there were no buyers in cases
and released an Asset Quality Review (AQR) where it was being invoked.
report. This report revealed a higher level of
Contacts • Soon after, the RBI introduced the S4A
asset quality deterioration or NPAs with the
Scheme. This scheme, however, only covered
inspected banks. As per the review, almost all
projects that had already started commercial
PSBs had higher NPAs than reported. In the
production. Further, the scheme was also
case of private sector banks, the impact was
silent about unsecured creditors, who could
limited to big lenders in the industry.
always approach a court of law and play
• The so-called Joint Lenders’ Forums (JLFs) spoilsport. Ultimately, by being unsecured
mandated that banks adopt measures for creditors, they would not get their dues, but
early identification to tackle stressed loans, they could certainly delay the process; the
which gave them a jumpstart, especially in banks would then lose time, precious for the
large and complex cases of corporate debt, revival of a company.
8 PwC PwC’s Banking Insights
Preface
The revised framework
The RBI has issued various instructions aimed at the resolution of stressed assets in the economy, including the introduction of certain
schemes at different points of time. In view of the enactment of the IBC, it has been decided to substitute the existing guidelines with a
Impact assessment harmonised and simplified generic framework for the resolution of stressed assets.
of regulatory changes
in February 2018
What’s in store for lenders under the revised framework?
• As per the Framework for Revitalising • Further, banks would also have to revised clause eliminates chances of banks
Distressed Assets in the Economy – incorporate changes in their reporting interpreting assets. Currently, while one
Guidelines on Joint Lenders’ Forum (JLF) process to include the following: bank classified an account as stressed, or
Other notifications
and Corrective Action Plan (CAP), banks NPA, others continued to show them as
in February 2018 -- The CRILC Main report will now
were required to identify incipient stress in standard. This required the RBI auditors to
be sent monthly, as against the
the account by creating three sub-categories force show them as divergence in
quarterly frequency.
under the Special Mention Account (SMA), NPA reporting.
before a loan turned into an NPA, as stated in -- Banks will also need to submit a weekly
-- RPs framed by banks against defaulting
the table below: report on all borrower entities in default
entities shall be deemed to have been
Contacts with an exposure of 50 million INR and
implemented only on satisfaction of
Sub- Basis for classification – above. The first such weekly report shall be
conditions laid down by the RBI. This
categories principal or interest payment submitted for the week ending 23 February
or any other amount wholly involves ensuring that the borrower is no
2018. This will ensure early identification
or partly overdue between longer in default. In case the RP involves
and reporting of stressed assets by banks.
restructuring, banks will also need to
SMA-0 1–30 days • Formation and implementation of resolution ensure that all related documentation has
plans (RPs) by lenders been completed by all lenders and the
SMA-1 31–60 days
-- Under the revised framework, all lenders new capital structure and/or terms and
must put in place board-approved policies conditions post-restructuring are duly
SMA-2 61–90 days reflected in the books of accounts. Banks
for the resolution of stressed assets,
including the timelines for resolution. As will need to disclose the implementation of
The revised framework, however, requires soon as there is a default in the borrower RPs in their notes to accounts.
banks to identify signs of incipient stress in entity’s account with any lender, all lenders
loan accounts and classify stressed assets as − singly or jointly − shall initiate steps
SMAs, immediately on default. to cure the default. This means that the
9 PwC PwC’s Banking Insights
Preface
-- In case of RPs involving restructuring, ••If there is a default within the specified ••Strategic Debt Restructuring
banks will need to engage with a CRA for period, the lenders should file an (SDR) Scheme
Impact assessment an independent credit evaluation of the insolvency application.
of regulatory changes
••Change in ownership outside SDR
residual debt. Additionally, where the
in February 2018 ••For accounts with exposure of 100 crore
exposure is 5 billion INR and above, banks ••Scheme for Sustainable Structuring of
INR to 2,000 crore INR, a timeline for
will need to obtain 2 such independent Stressed Assets (S4A)
resolution will be announced over a
credit evaluations (ICEs). Further, banks ••The JLF which was overseeing stressed
two-year period.
need to ensure that RPs with a credit asset negotiations in the case of large
Other notifications opinion of RP4 or better only are taken up ••These timelines will lead to speedy
consortium loans also stands disbanded.
in February 2018 for implementation. recovery of the loan from the borrower.
-- The new framework puts down strict -- The revised framework lays down
timelines over which insolvency additional requirements for upgrading
proceedings must be initiated. These large accounts, post NPA classification.
timelines come into effect starting Banks will need to ensure that, in
Contacts 1 March 2018. addition to demonstrating satisfactory
performance, the credit facilities of the
••For accounts with an exposure of 2,000
borrowers shall also be rated as investment
crore INR or more, banks will have to
grade (BBB or better) by CRAs at the end
ensure that a resolution plan is in place
of the specified period.
within 180 days after a ‘default’.
-- The new framework will subsume almost
••If the resolution plan is not implemented
all stressed asset schemes.
within 180 days, the account must be
This includes:
referred to the IBC within 15 days.
••Corporate Debt Restructuring Scheme
••For large accounts where a resolution
plan is being implemented, the account ••Flexible structuring of existing long-term
should not be in default at any point project loans
during the specified period.
10 PwC PwC’s Banking InsightsPreface
Conclusion
With the new framework in place, the RBI The entire process should involve a high Central Repository of Information on Large
aims at a harmonised and simplified generic degree of transparency and precision. With Credits (CRILC) reporting. Strengthening
Impact assessment mechanism for the resolution of stressed the intensity of frauds and scams increasing this would ensure early and accurate
of regulatory changes assets. This framework has been introduced in the banking sector, it is essential to ensure identification of bad loans and NPAs and
in February 2018 keeping in mind the regulator’s stance on the accuracy and integrity of reporting. subsequent remedial action by the RBI and
ensuring speedy resolution of bad loans in There must be a strong audit framework the government.
the future. A predominant theme of the new in place to ensure that banks accurately
While bank books might get worse over the
framework is reliance on the IBC to resolve report the required information to the RBI
next 12 months, in the long term, the new
Other notifications stressed assets while doing away with as well as integrate regulatory submissions
NPA rules will ensure that the books reflect
in February 2018 a number of interim schemes introduced like risk-based supervision (RBS) and
the actual underlying asset quality.
before India adopted a bankruptcy
code in 2016.
In the long run, the new reforms will bring a
good structural change that can strengthen
Contacts the banking system in future. The new
rules will instil a sense of transparency and
more investor confidence in the financials
of banks and change the way banks do
business. There will be greater prudence
in lending. Cowboy lending, especially
towards larger projects where banks lack
the capacity to conduct proper appraisals,
could be on its way out. Chief financial
officers will read loan covenants more
carefully because the tolerance for defaults
is being lowered considerably. They will
need to ensure loan repayment terms are
more realistic.
11 PwC PwC’s Banking InsightsPreface
Small savings schemes – Payment of agency commission3
Circular reference: Background and objective:
Impact assessment
of regulatory changes DGBA.GBD.No.1972/15.02.005/2017-18 All public sector banks, ICICI Bank Ltd., Samriddhi Account Scheme, 2016, Public
in February 2018 Dated 1 February 2018 Axis Bank Ltd. and HDFC Bank Ltd. were Provident Fund Scheme, 1968, and Senior
authorised to receive subscriptions under Citizen Savings Scheme Rules, 2004, etc.
four small savings schemes—namely,
As a result of this, the RBI has decided to
Applicability: National Saving Time Deposit Scheme,
pay agency commission to the authorised
1981, National Saving (Monthly Income
Other notifications All Agency Banks handling Small banks for handling the work relating to the
Account) Scheme, 1987, National Saving
in February 2018 Saving Schemes additional four small saving schemes along
Recurring Deposit Scheme, 1981 and
with the existing ones as per the extant
National Saving Certificates (VIII Issue)
rates advised by the RBI Department of
Scheme, 1989, in addition to the existing
Government and Bank Accounts circular.
small saving schemes such as the Sukanya
Contacts Extract from the regulation:
• Please refer to Government of India • In view of the above, it has been decided Reserve Bank of India, Nagpur on a daily
Notification F. No. 7/10/2014-NS dated to pay agency commission to authorized basis like the transactions of Public Provident
October 10, 2017, wherein, all Public Sector banks for handling the work relating to the Fund, 1968, in order to have uniformity in
Banks, ICICI Bank Ltd., Axis Bank Ltd., and above four small saving schemes also as reporting, reconciliation and accounting.
HDFC Bank Ltd., were authorized to receive per the extant rates advised by our Master
• The Agency banks are required to observe
subscriptions under National Saving Time Circular RBI/2017-18/2 DGBA.GBD.
the rules and regulations of the respective
Deposit Scheme, 1981, National Saving No.2/31.12.010/2017-18 dated July 1, 2017.
scheme. Non-observance of rules and
(Monthly Income Account) Scheme, 1987, Agency banks are advised to expedite the
regulations would attract penal action.
National Saving Recurring Deposit Scheme, implementation of the above schemes.
Pecuniary liabilities, if any, arising from such
1981 and National Saving Certificates (VIII
• All the transactions i.e. receipt, payment, non-observance shall be borne entirely by
Issue) Scheme, 1989 in addition to the
penalty, interest, etc. may be directly the bank.
existing small saving schemes.
reported to the Central Account Section,
3. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11214&Mode=0
12 PwC PwC’s Banking InsightsPreface
Impact assessment
• All the authorised banks have to report all non-core banking solution branches.
their transactions—that is, receipt, payment,
Impact assessment • Every bank shall also submit periodic
of regulatory changes penalty, interest, etc. to the Central Account
reports to the Central Government
in February 2018 Section, RBI, Nagpur.
concerning the deposits of subscription and
• The bank has to ensure that it has a withdrawals etc. under the said scheme. In
dedicated software for the operation and case of any pecuniary liability arising from
accounting of small savings schemes with the non-observance of reporting under the
Other notifications specific functionalities for each scheme. schemes, it is to be entirely borne by the
in February 2018 respective bank.
• All banks shall ensure that remittances are
credited to the government account of the • Also, all banks are entitled to receive
RBI, Central Accounts Section, Nagpur, agency commission as per the following
within one day in case of core banking rates based on their reports submitted to
solution branches and three days in case of the RBI: Rates for agency commission
Contacts
Sr. no. Type of transaction Unit Revised rate
a. (i) Receipts - Physical mode Per transaction ₹ 50/-
(ii) Receipts - e-mode Per transaction ₹ 12/-
b. Pension payments Per transaction ₹ 65/-
c. Payments other than pension Per ₹100 turnover 5.5 paise
13 PwC PwC’s Banking InsightsPreface
Relief for MSME Borrowers registered under Goods and Services Tax (GST)4
Circular reference: Extract from the regulation: borrower does not exceed INR 250 million as
Impact assessment on January 31, 2018.
of regulatory changes RBI/2017-18/129 DBR.No.BP. It has been represented to us that
in February 2018 BC.100/21.04.048/2017-18 formalisation of business through • The borrower’s account was standard as on
Dated 7 February 2018 registration under GST had adversely August 31, 2017.
impacted the cash flows of the smaller • The amount from the borrower overdue as
Applicability: entities during the transition phase with on September 1, 2017 and payments from
consequent difficulties in meeting their the borrower due between September 1,
Other notifications All banks and NBFCs regulated by the repayment obligations to banks and
in February 2018 Reserve Bank of India 2017 and January 31, 2018 are paid not later
NBFCs. As a measure of support to these than 180 days from their respective original
entities in their transition to a formalised due dates.
Background and objective: business environment, it has been decided
that the exposure of banks and NBFCs to • A provision of 5% shall be made by the
The government’s move to GST created banks/ NBFCs against the exposures not
upheaval among unorganised and small a borrower classified as micro, small and
Contacts medium enterprise under the Micro, Small classified as NPA in terms of this circular. The
business entities to the extent that the provision in respect of the account may be
entities started facing severe liquidity and Medium Enterprises Development
(MSMED) Act, 2006, shall continue to be reversed as and when no amount is overdue
crunch. Consequently, the quality of the beyond the 90/120 day norm, as the case
loans extended by the banks or NBFCs to classified as a standard asset in the books of
banks and NBFCs subject to the may be.
these MSME borrowers also deteriorated,
thereby creating pressure to qualify assets as following conditions: • The additional time is being provided for the
non-performing. However, in line with the • The borrower is registered under the GST purpose of asset classification only and not
government’s intention to support MSMEs, regime as on January 31, 2018. for income recognition, i.e., if the interest
the RBI has rolled out some relief in the from the borrower is overdue for more
• The aggregate exposure, including non-fund than 90/120 days, the same shall not be
non-performing asset (NPA) classification
based facilities, of banks and NBFCs, to the recognised on accrual basis.
for MSME borrowers.
4. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11216&Mode=0
14 PwC PwC’s Banking InsightsPreface
Impact assessment
Impact assessment
of regulatory changes Consequent to the regulation, the banks • Despite the relief in NPA classification, the
in February 2018 need not classify overdues from the entities regulator has continued its prudent stance
classified as MSME, subject to the fulfilment by mandating banks/NBFCs to create
of certain conditions: provision of 5% for assets which fall into
such a category. Also, there is no change in
• The relief can only be passed on to the
the income recognition for NPAs—that is, if
Other notifications borrowers who hold a valid registration
the account is overdue for more than 90/120
in February 2018 under GST, as on 31 January 2018.
days, income shall be recognised on a cash
• The lenders shall continue to classify the basis only, even though the loan account
assets as standard, despite the fact that continues to be standard.
the advance has been overdue for a period
more than 90/120 days from the due date.
Contacts However, the lender should ensure that the
loan was standard as on 31 August 2017.
• Payments due between 1 September 2017
and 31 January 2018 need to be repaid
by the borrower within 180 days from the
due date. The benefit of not classifying the
account as an NPA shall not be applicable if
dues are not paid within 180 days from the
due date.
15 PwC PwC’s Banking InsightsPreface
Levy of Penal Interest – Delayed Reporting5
Circular reference: Extract from the regulation:
Impact assessment
of regulatory changes RBI/2017-18/130 DCM (CC) No. • Presently, penal interest is levied for all cases
in February 2018 2885/03.35.01/2017-18 where the bank has enjoyed “ineligible”
Dated 9 February 2018 credit in its current account with the RBI on
account of wrong/delayed/non-reporting
Applicability: of transactions i.e. the currency chest had
reported a net deposit. However, instances of
Other notifications All Banks having currency chests and delayed reporting where the currency chest
in February 2018 Director Treasuries (State Governments) had “net deposit” i.e. the currency chest did
not enjoy RBI funds, are being dealt with
Background and objective: differently by issue offices due to absence of
With the objective of making good quality clear instructions on the subject.
currency notes and coins available to • On a review, it has been decided that, penal
Contacts
citizens and withdrawing soiled notes from interest at the prevailing rate for delayed
circulation, the RBI formulated a Clean reporting of the instances where the
Note Policy. currency chest had reported “net deposit”
For realising the objectives of the Clean may not be charged. However, in order
Note Policy and ensuring discipline among to ensure proper discipline in reporting
banks on timely and accurate reporting of currency chest transactions, a flat penalty
currency chest transactions, the RBI has of ₹ 50,000 may be levied on the currency
issued guidelines/instructions on the levy chests for delayed reporting as in the case of
of penal interest for delayed reporting/ wrong reporting of soiled note remittances to
wrong reporting/non-reporting of currency RBI/diversions shown as “Withdrawal” (para
chest transactions and inclusion of ineligible 1.5 of the Master Direction).
amounts in currency chest balances. • Other instructions contained in the Master
These guidelines are updated from time to Direction remain unchanged.
time and as and when fresh instructions
are issued.
5. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11217&Mode=0
16 PwC PwC’s Banking InsightsPreface
Impact assessment
Impact assessment
of regulatory changes • As per RBI’s notification - RBI/2017-18/130 irrespective of the value of remittance and -- The sub-treasury offices (STOs) should
in February 2018 DCM (CC) No. 2885/03.35.01/2017-18 period of such delayed reporting. report all transactions directly to the issue
dated 9 February 2018, banks having office of the RBI by 11 PM on the same day.
• Banks having currency chests will continue
currency chests will no longer have to pay
to adhere to the following timelines for • All the other instructions contained in the
penal interest at the rate of 2% over the
reporting their currency chest transactions: RBI’s Master Direction on the Levy of Penal
prevailing bank rate for the period of
Other notifications Interest for Delayed Reporting/Wrong
delayed reporting of ineligible amounts in -- All currency chest transactions shall be
in February 2018 Reporting/Non-Reporting of Currency Chest
chest balances. invariably reported through Integrated
Transactions and Inclusion of Ineligible
However, they will continue to report Computerised Currency Operations and
Amounts in Currency Chest Balances will
all currency chest transactions as per Management System (ICCOMS) on the
remain unchanged.
the timelines defined by the RBI in its same day by 9 PM by uploading data
Master Direction, RBI/DCM/2017- through secured website (SWs) to their • The banks will have to make operational
Contacts 18/59 Master Direction DCM (CC) No. respective link offices. Link offices should changes in light of this revision. The changes
G - 2/03.35.01/2017-18, failing which invariably report the consolidated position will include keeping a record of penalties
they will attract a penalty of 50,000 INR to the issue offices latest by 11 PM on the with respect to any delayed reporting after
same day. 9 February 2018.
17 PwC PwC’s Banking InsightsPreface
Risk Management and Inter-bank Dealings: Revised guidelines relating to
participation of a person resident in India and Foreign Portfolio Investor (FPI) in the
Impact assessment
of regulatory changes
Exchange Traded Currency Derivatives (ETCD) Market6
in February 2018
Circular reference: Extract from the regulation:
RBI/2017-18/134 A. P. (DIR Series) • Currently, persons resident in India and • The onus of complying with the provisions
Circular No. 18 FPIs are allowed to take a long (bought) or of this circular rests with the participant
Other notifications Dated 26 February 2018 short (sold) position in USD-INR up to USD in the ETCD market and in case of any
in February 2018 15 million per exchange without having to contravention the participant shall be
Applicability: establish existence of underlying exposure. liable to any action that may be warranted
In addition, residents & FPIs are allowed as per the provisions of Foreign Exchange
All Category-I Authorised Dealer Banks to take long or short positions in EUR-INR, Management Act, 1999 and the regulations,
GBP-INR and JPY-INR pairs, all put together, directions, etc. issued thereunder. These
Background and objective: up to USD 5 million equivalent per exchange limits shall also be monitored by the
Contacts
Persons resident in India and foreign without having to establish existence of any exchanges, and breaches, if any, may be
portfolio investors (FPIs) are permitted underlying exposure. reported to the Reserve Bank of India.
to take positions (long and short) up to a • It has now been decided to permit persons • All other operational guidelines, terms and
certain limit with defined thresholds for resident in India and FPIs to take positions conditions shall remain unchanged.
each currency pair (USD-INR, GBP-INR) (long or short), without having to establish
• This circular has been issued under Sections
per exchange. However, the limits have now existence of underlying exposure, up to a
10(4) and 11(1) of the Foreign Exchange
been revised in terms of value and the limits single limit of USD 100 million equivalent
Management Act, 1999 (42 of 1999) and is
per exchange have been revised for across all currency pairs involving INR, put
without prejudice to permissions/approvals,
all exchanges. together, and combined across all exchanges.
if any, required under any other law.
6. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11222&Mode=0
18 PwC PwC’s Banking InsightsPreface
Impact assessment
of regulatory changes
in February 2018
Impact assessment
• Persons resident in India and FPIs can now • If the participants contravene with the
take long (bought) or short (sold) positions provisions of this circular, they shall be liable
Other notifications without having to establish the existence to any action that may be warranted as
in February 2018 of underlying exposure, up to a single limit per the provisions of the Foreign Exchange
of 100 million USD equivalent across all Management Act, 1999, and the regulations,
currency pairs—that is, USD-INR, EUR-INR, directions, etc. issued thereunder.
GBP-INR and JPY-INR combined across all
• It is expected that after the revision of the
exchanges.
currency derivatives trading limit, the Indian
Contacts • The participants of the ETCD market, market will receive a boost. This move made
including all category-I authorised dealer by the RBI will make investing in stock
banks shall transact in accordance with exchanges more attractive compared to other
and ensure compliance with the revised exchanges (Singapore and Dubai) which
guidelines under this notification. offer lower tax rates. The Indian market
will also have an advantage of getting more
• The exchanges will monitor these limits and
volumes in the derivatives segment as a
report any breaches to the RBI.
result of the positive news.
19 PwC PwC’s Banking InsightsOther notifications in February 2018
Preface
Circular ref. no.
RBI/2017-2018/132
Dated 15 February 2018 7
Impact assessment
of regulatory changes
in February 2018 Name of the circular
Acceptance of coins
Brief instructions
Other notifications
••Banks to issue a direction to all its branches
in February 2018
to accept coins of all denominations tendered
at their counters either for exchange or for
deposit in accounts.
••Banks to arrange for polythene bags where
Contacts
such denominations may be kept and a
notice to this effect should be displayed
suitably inside as also on the outside of the
branch premises for the information of
the public.
••Banks should modify their existing policies
and procedures around the currency chest
procedure to also allow coins to be remitted
as part of the process.
7. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11219&Mode=0
20 PwC PwC’s Banking InsightsContacts
Preface
Vivek Iyer Dnyanesh Pandit
Impact assessment
of regulatory changes Partner Director
in February 2018 vivek.iyer@pwc.com dnyanesh.pandit@pwc.com
Mobile: +91 9167745318 Mobile: +91 9819446928
Other notifications
in February 2018
Vernon Dcosta Rajeev Khare
Director Manager
vernon.dcosta@pwc.com rajeev.khare@pwc.com
Mobile: +91 9920651117 Mobile: +91 9702942146
Contacts
Dhruv Khandelwal Sharon Mathias
Assistant Manager Experienced Consultant
dhruv.khandelwal@pwc.com sharon.mathias@pwc.com
Mobile: +91 9820589399 Mobile: +91 9870170625
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21 PwC PwC’s Banking InsightsAbout PwC At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 158 countries with more than 2,36,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com In India, PwC has offices in these cities: Ahmedabad, Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune. For more information about PwC India’s service offerings, visit www.pwc.com/in PwC refers to the PwC International network and/or one or more of its member firms, each of which is a separate, independent and distinct legal entity. Please see www.pwc.com/structure for further details. © 2018 PwC. All rights reserved pwc.in Data Classification: DC0 This document does not constitute professional advice. The information in this document has been obtained or derived from sources believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take. © 2018 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity. VB/March2018-12378
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