Dear Colleagues,I take this opportunity to wish you and all your family members HAPPY and PROSPEROUS NEW YEAR 2015 while the Kotak Group has entered into the NEW YEAR with plenty of hope and action towards becoming Bigger and Bolder, it is up to all of us to live up to these expectations and make it happen . The ensuing merger of the ING Vysya Bank Ltd., with our Bank, once all requisite clearances are obtained, is an opportunity and challenge for us in the year 2015 and the combined entity becomes the fourth largest Private Sector Bank in the country. In addition we have also been permitted by IRDA and RBI to open our General Insurance Business subsidiary. As may be seen the above two steps make us much bigger and we all need to rise to the occasion and ensure that we continue to comply with the regulations and work towards the success of the combined entity.

During the quarter, Annual Financial Inspection of our Bank under the Risk Based Supervision framework was undertaken by the RBI. While we await their final findings, the preliminary observations have given us the indication of good number of positives as well as some of the areas where we have to put in efforts to strengthen the controls. We would be sharing with you all the observations and action to be taken from the bank’s side. The lessons drawn from the inspection process will also be shared with you all for future guidance.

On the regulatory and statutory front, the Research Analyst guidelines of SEBI and Officially Valid Documents introduced for KYC requirements under PMLA throw a set of challenges to the banks in India. There has also been some serious talk and action from government on the KYC and AML front. Prime Minister in one of his speeches on black money had stressed the need for banks to do complete search for beneficial owners. Banks thus have increased responsibility in identifying the source and end beneficiary of transactions to ensure that nothing illegal is routed through the banks.

In order to facilitate a scientific and quantitative approach to compliance monitoring and testing, we are introducing a new IT system named “Cermo+” which provides a complete check list of action points emerging from various regulatory and statutory instructions to all the employees pertaining to their respective work area. This enables all of you to know what is expected of you and you are also sure of how much you are complied with the requisite actions. I request you to make use of this system not only to provide us periodical certifications of compliance but also as a guide in your day to day work life.

Shweta Burse joined Compliance Department from Privy where she worked for 4 years.

Smitha Fernandes to the AML team of the Bank. She has joined the Compliance department from Branch Banking – Retail Liabilities where she worked for 7 years.

Welcome!

Congratulations!Hakim Ujjainwala has successfully completed the CAIIB course.

T V Sudhakar Head Compliance

Sumit Sachdeva - Wholesale Banking-Large CorporatesSundaram TV – Operations ITSunita K Shirsagar - Credit Card-Customer ServicePraveen U - Home Finance LAP- Credit BranchesFenil Gada - Credit Monitoring - WB

To participate in the contest go to page no. 2 of the newsletter

WINNERS OF LAST QUARTER!

Oct – Dec 2014

Content

Compliance Contest

News from Reserve Bank of India

Securities and Exchange Board of India

Penalties

AML/ KYC case studies

Defining Contours of New India

Suspicious Customer Behavior Indicators

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Non-Cooperative Borrowers

Previously, RBI had provided specific prudential measures and reporting requirements in respect of Non-Cooperative Borrowers on ‘Framework for Revitalizing Distressed Assets in the Economy - Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP)’.

RBI has now advised all banks/FIs to take some additional measures in classifying/declassifying a borrower as non-cooperative borrower and reporting information on such borrowers to Central Repository of Information on Large Credits (CRILC). The additional measures to be followed is detailed in the circular like Committee of higher functionaries headed by an Executive Director and consisting of two other senior officers of the rank of General Managers / Deputy General Managers as decided by the Board of the concerned bank / FI, Show Cause Notice to the concerned borrower and order of the Committee should be reviewed by another Committee headed by the Chairman / CEO and MD and consisting, in addition, of two independent directors of the Bank / FI

DBR.No.CID.BC.54/20.16.064/2014-15 December 22, 2014

Overseas Direct Investments by Indian Party – Rationalization / Liberalization

In order to grant more flexibility to the Indian party, RBI has further liberalized certain regulations related to Overseas Direct Investments by Indian Party as under.

I. Creation of charge on shares of JV / WOS / step down subsidiary (SDS) in favour of domestic / overseas lender

II. Creation of charge on the domestic assets in favour of overseas lenders to the JV / WOS / step down subsidiary

III. Creation of charge on overseas assets in favour of domestic lender.

Detailed procedures are listed in referred circular.

A.P. (DIR Series) Circular No.54 dated December 29, 2014

Mobile Banking Transactions in India - Operative Guidelines for Banks

After issuing consolidated guidelines related to mobile banking, RBI has noted lack of awareness as well as standardization of procedures at banks which have led to a situation of slow pick-up of mobile banking services despite the high mobile density in the country. This is of particular importance when customers are using inter-operable mobile banking platforms. RBI has further observed that there is a need for greater degree of standardization in procedures relating to on-boarding of customers for mobile banking (new customers, existing account holders whose mobile numbers are available with the bank but not registered for mobile banking, and existing account holders where mobile number is not available with the bank), as also the subsequent processes for authentication, including accessible options for generation of MPIN by customers.

RBI has therefore instructed all banks to provide options for easy registration for mobile banking services to their customers, through multiple channels, thus minimizing the need for the customer to visit the branch for such services. The time taken between registration of customers for mobile banking services and activation of the service should also be minimal. RBI has also issued few suggestions and best practices that can be adopted by banks for registering / on-boarding customers for mobile banking, Similarly, in order to quicken the process of MPIN generation and also widen the accessibility of this process to their mobile banking registered customers, banks can consider adopting various channels / methods such as

a. Through the ATM channels (similar to option available for change of PIN on their own ATMs as well as in inter-operable ATM networks)

b. Through an option provided in the USSD menu for mobile banking (both their own USSD platform, if any, as well as under the inter-operable USSD Platform for mobile banking)

COMPLIANCE CONTEST

1. It has been decided by the Government of India to withdraw the _____ scheme and restrictions placed on import of gold.

2. In small accounts, total withdrawal and transfers should not exceed Rs._____ in a month.

3. Banks are required to classify the customers into ____, ____ and _____ categories depending on their AML risk assessment.

4. The banks have also been allowed to set up subsidiaries and joint venture companies for undertaking _______business with risk participation.

5. The maximum validity of gift cards is _____ year/s

6. AD Category -I banks have been allowed to remit up to USD _______per financial year, under the LRS Scheme, for any permitted current or capital account transactions or a combination of both.

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c. Bank’s own internet banking website, with necessary safeguards

d. Use of MPIN mailers (like PIN mailers for cards)

e. Common website can also be designed as an industry initiative

RBI has also advised banks to undertake customer education and awareness programme in multiple languages through different channels of communication to popularise their process of mobile banking registration/activation and its usage etc.

FIDD.GSSD.BC NO.44/09.10.001/2014-15 dated December 03, 2014

Withdrawal of all old series of Banknotes issued prior to 2005

RBI has extended the date for exchanging the pre-2005 banknotes to June 30, 2015. Further, RBI has advised to facilitate the exchange of such notes for full value without causing any inconvenience to the public, whatsoever. These notes will retain their legal tender status and the public can continue to use these for any transaction/ payment. RBI has instructed all banks to issue suitable instructions to all the branches to provide exchange facilities to members of public and to stop re-issue of the pre- 2005 series banknotes. RBI has also instructed to ensure that such notes are not dispensed through the ATMs/ over your counters. The methodology to be followed for dealing with the Pre-2005 series banknotes contained in earlier circulars remains unchanged.

DCM(Plg) No.G-8 /3004/10.27.00/2014-15 dated December 31, 2014

Inter-Governmental Agreement (IGA) with United States of America (US)under Foreign Accounts Tax Compliance Act (FATCA)- Registration

RBI had issued guidelines for Registration of Inter-Governmental Agreement (IGA) with United States of America (US) under Foreign Accounts Tax Compliance Act (FATCA). Now, Government of India, has advised that to avoid withholding tax, Foreign Financial Institutions (FFIs) in Model 1 jurisdictions, such as India, need to register with IRS and obtain a Global Intermediary Identification Number (GIIN) before January 1, 2015. The FFIs who have registered but have not obtained a GIIN should indicate to the withholding agents that the GIIN is applied for, which may be verified by the withholding agents in 90 days. Accordingly, banks/ Financial Institutions may take action appropriately.

DBR.AML.No. 9644/14.07.018/2014-15 dated December 30, 2014

Foreign Exchange Management (Deposit) Regulations, 2000 - Exemption thereof

In terms of earlier FEMA Regulation, nothing contained in the regulations applies to the deposits held in accounts maintained with an authorised dealer by the United Nations Organisation and its subsidiary/affiliate bodies in India and its or their officials in India.

RBI has observed that Authorised Dealer banks are frequently coming across cases related to opening of accounts for multilateral organizations, of which India is a member nation. With the objective of bringing all the multilateral Organisations at par, for opening of accounts in India, RBI has reviewed the extant instructions and RBI has included in the exemptions deposits held in accounts maintained with an authorised

dealer by any multilateral organization of which India is a member nation, and its subsidiary/affiliate bodies in India, and its or their officials in India.

A.P. (DIR Series) Circular No.51dated December 17, 2014

Extension of RTGS time window

RBI has decided to advance RTGS business hours to 8:00 hours from 9.00 hours and extend closing time of RTGS to 20.00 hours on week days. RTGS business window will be open from 8.00 hours to 15.30 hours on Saturdays.

DPSS (CO) RTGS No. 1064 / 04.04.002 / 2014-15 dated December 15, 2014.

White Label ATMs (WLAs) in India – Guidelines

Based on the review of the operations of White Label ATM (WLA) as well as representations received from the stakeholders, RBI has decided to -

a) allow WLAs to accept international credit/debit/prepaid cards. The cards issued under card payment network schemes (authorized under the PSS Act 2007) will be allowed for the purpose. The WLA operators (WLAO) have to ensure that they have established technical connectivity with the respective card network operators either directly or through their sponsor banks. However, in the case of cards issued under any other card scheme, the routing and settlement should take place based on the bilateral arrangement put in place by the existing authorized networks for such purpose.

b) permit the facility of Dynamic Currency Conversion (DCC) for the use of international cards at WLAs if the operator so decides to implement the DCC facility. The currency conversion rate will only be obtained from authorised dealer bank. WLAO will be restricted to converting the amount requested by the international cardholder (based on the DCC option selected by him) to his home currency using a Base Exchange Rate provided by the AD bank.

c) enable delinking cash supply from that of sponsor bank arrangements. WLAO may now tie up with other commercial banks for cash supply at WLAs. While the cash would be owned by the WLAO, the responsibility of ensuring the quality and genuineness of cash loaded at such WLAs would be that of the cash supplier bank. A suitable Service Level Agreements (SLA) may be drawn up between the WLAO and the cash supplier bank for adequate supply of genuine and good quality notes.

d) WLAOs who have been authorised under PSS Act 2007 and have commenced operations are required to intimate RBI regarding commencement of the services indicated in para (a), (b) and (c) above

DPSS.CO.PD. No. 1025/02.10.003/2014-2015 dated December 5, 2014.

Import of Gold (under 20: 80 Scheme) by Nominated Banks / Agencies / Entities

RBI had issued various circulars on Import of Gold (under 20: 80 Scheme) in consultation with Government of India. Now, RBI has withdrawn the 20:80 scheme and restrictions placed on import of gold. Accordingly, all instructions issued about the scheme from time to time starting with A.P.

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(DIR Series) Circular No.25 dated August 14, 2013 stand withdrawn with immediate effect.

A.P. (DIR Series) Circular No.42 dated November 28, 2014.

Issue of Long Term Bonds by Banks – Financing of Infrastructure and Affordable Housing

In addition to earlier RBI circular related to issue of Long Term Bonds by Banks for Financing of Infrastructure and Affordable Housing, RBI has now allowed banks to extend loans to individuals against long-term bonds issued by them under the provisions mentioned in circular. Boards of the banks should lay down a policy in this regard prescribing suitable margins, purpose of the loan and other safeguards. Further, such loans should be subject to a ceiling, say, Rs.10 lakh per borrower, and tenure of loan should be within the maturity period of the bonds. It is also clarified that banks are not permitted to lend against such bonds issued by other banks.

DBR.BP.BC.No.50/08.12.014/2014-15 dated November 27, 2014.

Routing of funds raised abroad to India

RBI has noticed that some Indian companies are accessing overseas market for debt funds through overseas holding / associate / subsidiary / group companies. It has also been reported that such borrowings are raised at rates exceeding the ceiling applicable in terms of extant FEMA regulations and that the funds so raised are routed to the Indian companies which accounts for sole/major operations of the group. Different modalities/structures are resorted to for channeling such funds for Indian operations including investment in rupee bonds floated by the Indian company.

On a review of the matter in light of the existing regulatory framework, RBI has clarified as under:

i. Indian companies or their AD Category – I banks are not allowed to issue any direct or indirect guarantee or create any contingent liability or offer any security in any form for such borrowings by their overseas holding / associate / subsidiary / group companies except for the purposes explicitly permitted in the relevant Regulations.

ii. Further, funds raised abroad by overseas holding / associate / subsidiary / group companies of Indian companies with support of the Indian companies or their AD Category – I banks as mentioned at (i) above cannot be used in India unless it conforms to the general or specific permission granted under the relevant Regulations.

Indian companies or their AD Category – I banks using or establishing structures which contravene the above shall render themselves liable for penal action as prescribed under FEMA, 1999.

A.P. (DIR Series) Circular No. 41 dated November 25, 2014

External Commercial Borrowings (ECB) Policy – Parking of ECB proceeds

Previously, eligible ECB borrowers are required to bring ECB proceeds, meant for Rupee expenditure in India for permitted end uses, such as, local sourcing of capital goods, on-lending to Self-Help Groups or for micro credit, payment for spectrum allocation, etc., immediately for credit to their Rupee accounts with AD Category - I banks in India. With a view

to providing greater flexibility to the ECB borrowers in structuring draw down of ECB proceeds and utilisation of the same for permitted end uses, RBI has permitted AD Category -I banks to allow eligible ECB borrowers to park ECB proceeds (both under the automatic and approval routes) in term deposits with AD Category- I banks in India for a maximum period of six months pending utilisation for permitted end uses. The facility will be with the following conditions:

i. The applicable guidelines on eligible borrower, recognised lender, average maturity period, all-in-cost, permitted end uses, etc. should be complied with.

ii. No charge in any form should be created on such term deposits i.e. to say that the term deposits should be kept unencumbered during their currency.

iii. Such term deposits should be exclusively in the name of the borrower.

iv. Such term deposits can be liquidated as and when required.

The amended ECB policy came into force with immediate effect. All other aspects of ECB policy remain unchanged.

A.P. (DIR Series) Circular No. 39 dated November 21, 2014

Release of Foreign Exchange for Haj/ Umrah pilgrimage

RBI has allowed Authorised Dealers and Full Fledged Money Changers to release the full amount of BTQ entitlement in cash or up to the cash limit specified by the Haj Committee of India, to the Haj/ Umrah pilgrims also.

A.P. (DIR Series) Circular No.40 dated November 21, 2014

Export of Goods / Software / Services – Period of Realisation and Repatriation of Export Proceeds – For exporters including Units in Special economic zone (SEZs), Status Holder Exporters, Export Oriented Units (EOUs), Units in Electronic Hardware Technology Park (EHTPs), Software Technology Parks (STPs) and Business Technology Parks(BTPs)

Previously, the Units located in SEZs, Status Holder Exporters, EOUs, Units in EHTPs, STPs & BTPs would realize and repatriate full value of goods/software/services, to India within a period of twelve months from the date of export. On a review, RBI has reduced the period of realization and repatriation of export proceeds of all exporters including Units in SEZs, Status Holder Exporters, EOUs, Units in EHTPs, STPs& BTPs from twelve months to nine months from the date of export for until further notice. The provisions in regard to period of realization and repatriation to India of the full exports made to warehouses established outside India remain unchanged.

A.P. (DIR Series) Circular No. 37 dated November 20, 2014

Levy of penal charges on non-maintenance of minimum balances in savings bank accounts

RBI has issued following new guidelines for levying charges in savings bank account for non-maintenance of minimum balance. The guidelines come into effect from April 1, 2015.

i. In the event of a default in maintenance of minimum balance/average minimum balance as agreed to between the bank and customer, the bank should notify the customer clearly by SMS/

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email/ letter etc. that in the event of the minimum balance not being restored in the account within a month from the date of notice, penal charges will be applicable.

ii. In case the minimum balance is not restored within a reasonable period, which shall not be less than one month from the date of notice of shortfall, penal charges may be recovered under intimation to the account holder.

iii. The policy on penal charges to be so levied may be decided with the approval of Board of the bank.

iv. The penal charges should be directly proportionate to the extent of shortfall observed. In other words, the charges should be a fixed percentage levied on the amount of difference between the actual balance maintained and the minimum balance as agreed upon at the time of opening of account. A suitable slab structure for recovery of charges may be finalized.

v. It should be ensured that such penal charges are reasonable and not out of line with the average cost of providing the services.

vi. It should be ensured that the balance in the savings account does not turn into negative balance solely on account of levy of charges for non-maintenance of minimum balance

In the meantime, RBI has advised all banks to take immediate steps to update customer information so as to facilitate sending alerts through electronic modes (SMSs/emails etc) for effective implementation of the guidelines.

DBR.Dir.BC.No.47/13.03.00/2014-15 dated November 20, 2014

Cheque related fraud cases - preventive measures

RBI has also given below some of the preventive measures for banks to follow in cheque related fraud cases. The list is only indicative.

I. Ensuring the use of 100% CTS - 2010 compliant cheques.

II. Strengthening the infrastructure at the cheque handling Service Branches and bestowing special attention on the quality of equipment and personnel posted for CTS based clearing, so that it is not merely a mechanical process.

III. Ensuring that the beneficiary is KYC compliant so that the bank has recourse to him/her as long as he/she remains a customer of the bank.

IV. Examination under UV lamp for all cheques beyond a threshold of say, Rs.2 lakh.

V. Checking at multiple levels, of cheques above a threshold of say, Rs. 5 lakh.

VI. Close monitoring of credits and debits in newly opened transaction accounts based on risk categorization.

VII. Sending an SMS alert to payer/drawer when cheques are received in clearing.

The threshold limits mentioned above can be reduced or increased at a later stage with the approval of the Board depending on the volume of cheques handled by the bank or it’s risk appetite. In addition to the above, RBI has also given following preventive measures for dealing with

suspicious or large value cheques (in relation to an account’s normal level of operations):

a) Alerting the customer by a phone call and getting the confirmation from the payer/drawer.

b) Contacting base branch in case of non-home cheques.

The above may be resorted to selectively if not found feasible to be implemented systematically.

RBI has received some cases wherein even though the original cheques were in the custody of the customer, cheques with the same series had been presented and encashed by fraudsters. In this connection, RBI has advised all banks to take appropriate precautionary measures to ensure that the confidential information viz., customer name / account number / signature, cheque serial numbers and other related information are neither compromised nor misused either from the bank or from the vendors’ (printers, couriers etc.) side. Due care and secure handling is also to be exercised in the movement of cheques from the time they are tendered over the counters or dropped in the collection boxes by customers.

DBS.CFMC.BC.No. 006 /23.04.001/2014-15 dated November 05, 2014

Basel III Framework on Liquidity Standards–Monitoring tools for Intraday Liquidity Management

The BCBS has issued the final document ‘Monitoring indicators for intraday liquidity management’ in April 2013. The document is a set of quantitative tools developed by the BCBS in consultation with the Committee on Payment and Settlement Systems (CPSS), to enable banking supervisors to monitor banks’ intraday liquidity risk and their ability to meet payment and settlement obligations on a timely basis under both normal and stressed conditions. Accordingly, RBI has also issued final guidelines on Monitoring Tools for intraday liquidity management. The complete guidelines to be followed are detailed in the circular. Further RBI has instructed all banks to report the monitoring tools, as given in this circular, to the RBI on a monthly basis from 1 January 2015 to coincide with the implementation of the LCR reporting requirements as advised in their circular on “Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards”.

DBR.BP.BC.No.46/21.04.098/2014-15 dated November 03, 2014.

Revisions to Basel II-Advanced Approaches of Operational Risk-TSA and AMA

RBI had issued guidelines on Basel II-Advanced Approaches of Operational Risk as contained in circulars dated March 31, 2010 on ‘Implementation of The Standardised Approach (TSA) for Calculation of Capital Charge for Operational Risk’ and further circular dated April 27, 2011 on ‘Implementation of the Advanced Measurement Approach (AMA) for Calculation of Capital Charge for Operational Risk’.

RBI has now carried out certain revisions/additions to the guidelines which are detailed in the circular. The revisions/additions may be read in conjunction with the existing guidelines contained in the TSA/AMA circulars as indicated there against.

DBOD.No.BP.BC.43/21.06.017/2014-15 dated October 16, 2014.

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KYC/AML Standards/ Combating of Financing of Terrorism (CFT) guidelines - clarifications on periodic updation of low risk customers, non-requirement of repeated KYC for the same customer to open new accounts and partial freezing of KYC non-compliant accounts

In terms of RBI circular on ‘Client Due Diligence’, the requirement of applying client due diligence measures to existing clients at an interval of two/eight/ten years in respect of high/medium/low risk clients respectively, would continue taking into account whether and when client due diligence measures have previously been undertaken and the adequacy of data obtained. In order to further ease the difficulties in complying with the KYC requirements, within the overall framework of the Prevention of Money Laundering Act, 2002 (PMLA) and Rules (PMLR), RBI has clarified as under:

i. Banks need not seek fresh proofs of identity and address at the time of periodic updation, from those customers who are categorised as ‘low risk’, in case of no change in status with respect to their identities and addresses. A self-certification by the customer to that effect should suffice in such cases. In case of change of address of such ‘low risk’ customers, they could merely forward a certified copy of the document (proof of address) by mail/post, etc. Banks may not insist on physical presence of such low risk customer at the time of periodic updation.

ii. If an existing KYC compliant customer of a bank desires to open another account in the same bank, there should be no need for submission of fresh proof of identity and/or proof of address for the purpose.

As regards non-compliance of KYC requirements by the customers despite repeated reminders by banks, RBI has decided that banks should impose ‘partial freezing’ on such KYC non-compliant in a phased manner. Meanwhile, the account holders can revive accounts by submitting the KYC documents as per instructions in force. While imposing ‘partial freezing’, banks are advised to ensure that the option of ‘partial freezing’ is exercised after giving due notice of three months initially to the customers to comply with KYC requirement and followed by a reminder for further period of three months. Thereafter, banks may impose ‘partial freezing’ by allowing all credits and disallowing all debits with the freedom to close the accounts. If the accounts are still KYC non-compliant after six months of imposing initial ‘partial freezing’ banks may disallow all debits and credits from/to the accounts, rendering them inoperative. Further, it would always be open to the bank to close the account of such customers.

RBI has instructed banks to revise their KYC policy in the light of the above instructions and ensure strict adherence to the same

DBOD.AML. BC. No. 44/14.01.001/2014-15 dated October 21, 2014

Usage of ATMs –Rationalisation of number of free transactions - Clarifications

RBI had reduced’ ATMs is reduced from the present five to three transactions per month for transactions carried out at the ATMs located in six metro centres, viz. Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad.

RBI has received several references from various stakeholders requesting clarifications about total number of free ATM transactions that banks have to mandatorily provide to their customers in other bank ATMs from November 1, 2014. In this connection, RBI has clarified as under:

Prior to the issuance of the latest instructions, banks were mandated not to charge any fees to their savings bank account customers for five ATM transactions (inclusive of both financial and non-financial) in a month carried out at other bank ATMs irrespective of the location of the ATMs. With the issuance of the latest instructions while this overall cap remains unchanged, THREE transactions (inclusive of both financial and non-financial) would be free of charge if carried out at other bank ATMs located in six metro centres,viz., Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad. Accordingly, if transactions are carried out at both the six metro centres and other locations, the total number of transactions (inclusive of both financial and non-financial) free of charge at other bank ATMs would continue to remain at FIVE.

Banks are, however, free to offer more number of free transactions per month at other bank ATMs as well as own ATMs in any geographical location. Banks are also free to decide on the combination (for metro & non-metro locations) of free transactions while adhering to the minimum requirements.

Previously, certain restrictions were placed on the number of withdrawals permitted in small/no frills/basic savings bank deposit accounts, including ATM withdrawals, during a month. RBI has clarified that the applicability of free transactions (inclusive of both financial and non-financial) at other bank ATMs to small / no frills / basic savings deposit account holders as indicated in their circular dated August 14, 2014 is subject to the provisions indicated in the above circular.

DPSS.CO.PD.No.659/02.10.002/2014-2015 dated October 10, 2014.

KYC – clarification on proof of address

RBI has noticed that despite issuing clear instructions regarding the requirement of one proof of address whether permanent or current, some banks are still insisting on submission of a proof of address for the current address even when a customer produces a proof of permanent address, which prevents many prospective customers, especially migrant workers, from opening bank accounts.

RBI has instructed all banks to ensure that customers are not unnecessarily asked to submit additional proofs of addresses for current addresses in cases where proofs of addresses for permanent addresses are already available. RBI has also requested all banks to confirm latest by October 17, 2014, that the above mentioned instruction has been communicated to all their branches and the same have been meticulously complied with.

DBOD.AML No.5487/14.01.001/2014-15 dated October 13, 2014

Reporting of integrally connected transactions

Query Whether integrally connected transactions referred to in our Master Circular DBOD. AML. BC. No.22/14.01.001/2014-15 dated July 1, 2014 on Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under PMLA, 2002 and circular DBOD. AML. BC. No. 26/14.01.001/2014-15 dated July 17, 2014 is with reference to ‘a single account of a customer’ or ‘all accounts of the same customer’

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Response It is clarified that for determining ‘integrally connected transactions’ referred to in our above mentioned circulars are with reference to ‘all accounts of the same customer’.

DBOD Mail Box Clarification dated October 08, 2014

Base Rate Guidelines

References – DBOD Circular No.Dir.BC.88/13.03.00/2009-10 dated April 9, 2010, DBOD Circular No.Dir.BC.34/13.03.00/2011-12 dated September 9, 2011, Mail Box Clarification dated April 9, 2012 Mail Box Clarification dated December 31, 2012

Query: Exemption from Base Rate Guidelines had been granted to banks for finance extended to the beneficiaries of the schemes of National Handicapped Finance and Development Corporation (NHFDC), National Scheduled Tribes Finance and Development Corporation (NSTFDC), National SafaiKarmacharis Finance and Development Corporation (NSKFDC) and National Scheduled Castes Finance & Development Corporation (NSFDC) to the extent refinance is available from NHFDC / NSTFDC / NSKFDC/ NSFDC. Whether similar exemption can be granted to bank finance extended to the beneficiaries of the schemes of National Backward Classes Finance & Development Corporation (NBCFDC) and special refinance scheme for flood affected areas of Jammu & Kashmir formulated by National Housing Bank (NHB)?

Response: Banks may charge interest at the rates prescribed under the scheme of National Backward Classes Finance & Development Corporation (NBCFDC) and special refinance scheme for flood affected areas of Jammu & Kashmir formulated by National Housing Bank (NHB) to the extent refinance is available. Such lending, even if it is below the Base Rate, would not be considered as a violation of our Base Rate Guidelines. Interest rate charged on the part not covered under refinance should not be below Base Rate.

DBOD Mail Box Clarification dated October 08, 2014

Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances - Projects under Implementation

Query: Whether the ceiling of 10 per cent of the original project cost, applicable on financing of other cost overruns (excluding Interest During Construction) when there is an extension of date of commencement of commercial operations [upto two years and one year for infrastructure and non-infrastructure project loans respectively] for not treating the accounts as ‘restructured asset’, is inclusive of cost overruns arising out fluctuations in the value of Indian Rupee against other currencies?

Response: It is clarified that ceiling of 10 per cent of the original project cost prescribed in paragraph 6 (ii) of circular DBOD.No.BP.BC.33/21.04.048/2014-15 dated August 14, 2014 on ‘Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances - Projects under Implementation’ is applicable to financing of all other cost overruns (excluding interest during construction), including cost overruns on account of fluctuations in the value of Indian Rupee against other currencies, arising out of extension of date of commencement of commercial operations.

DBOD Mail Box Clarification dated November 07, 2014

SLR Holdings under Held to Maturity Category

Query: Banks may please refer to our circular No. DBOD.No.BP.BC.42/21.04.141/2014-15 dated October 7, 2014 on “Fourth Bi-monthly Monetary Policy Statement, 2014-15 - SLR Holdings under Held to Maturity Category’’. In order to enable banks to shift their excess SLR securities from the HTM category to AFS/HFT as indicated in paragraph 3 of the circular, banks have been allowed shifting of the excess securities at the beginning of January, July and September 2015, in addition to the shifting permitted at the beginning of the accounting year, i.e., April 2015. Such transfer to AFS/HFT category would be excluded from the 5 per cent cap prescribed for value of sales and transfers of securities to/from HTM category under Paragraph 2.3(ii) of the Master Circular on Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks.

Response: The above exemption is also extended to cases of sale of securities from HTM category to enable the banks to reduce the SLR securities in HTM category in accordance with the regulatory instructions.

DBOD Mail Box Clarification dated December 15, 2014

Clarification on the applicability of Novation guidelines when transfers between entities happen by operation of law, Main Circular :DBOD.No.BP.BC.76/21.04.157/2013-14 dated December 9, 2013 on ‘Novation of OTC Derivative Contracts.

Banks may please refer to the captioned circular.

2. Paragraph 2 of the said circular indicates the purpose of novation of OTC derivative contracts.

3. In partial modification of the captioned circular, the following is appended to paragraph 2

Novation contracts are not mandatory when the transfer happens by operation of law.

DBOD Mail Box Clarification dated December 12, 2014

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Single registration for Stock Brokers & Clearing Members.

As per the amendment, the existing requirement of obtaining registration as stock broker/ clearing member for each stock exchange/clearing corporation has been done away with and instead a single registration with any stock exchange/ clearing corporation shall be required. For operating in any other stock exchange(s)/ clearing corporation(s), approval will be required from the concerned stock exchange or clearing corporation.

CIR/ MIRSD/ 4/ 2014 dated October 13, 2014.

Facilitating transaction in Mutual Fund schemes through the Stock Exchange Infrastructure.

SEBI had permitted Mutual Fund Distributors to use recognised stock exchanges’ infrastructure to purchase and redeem mutual fund units directly from Mutual Fund/Asset Management Companies on behalf of their clients.

In this regard, in order to broad base the reach of this platform, it is decided to permit nondemat transactions also in the Mutual fund through stock exchange platform. The other provisions of the above mentioned circular remain unchanged.

CIR/MRD/DSA/32/2013 dated October 04, 2013

Registration for the purpose of Foreign Accounts Tax Compliance Act (FATCA)

The Government of India has informed SEBI vide communication dated December 30, 2014 that as per the FAQs published on the US Internal Revenue Service (IRS) website, Foreign Financial Institutions (FFIs) in Model 1 jurisdictions need to register with the US IRS and obtain a Global Intermediary Identification Number (GIIN) before January 01, 2015, or at the earliest, in order to avoid withholding. The FFIs who have registered but have not obtained a GIIN should indicate to the withholding agents that the GIIN is applied for

CIR/MIRSD/6/2014 dated December 30, 2014

Single Registration for Depository Participants.

As per the amendment, the existing requirement of obtaining certificate of initial registration to act as a participant and subsequently permanent registration to continue to act as a participant for each depository has been done away with. Henceforth, one certificate of initial registration and subsequently permanent registration through any depository shall be required after commencement of the Securities and Exchange Board of India (Depositories and Participants) (Amendment) Regulations, 2014.

CIR/ MIRSD/5/ 2014 dated December 30, 2014

Single Registration for Depository Participants.

As per the amendment, the existing requirement of obtaining certificate of initial registration to act as a participant and subsequently permanent registration to continue to act as a participant for each depository has been done away with. Henceforth, one certificate of initial registration and subsequently permanent registration through any depository shall be required after commencement of the Securities and Exchange Board of India (Depositories and Participants) (Amendment) Regulations, 2014.

CIR/ MIRSD/5/ 2014 dated December 30, 2014

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Penalties:RBI imposes monetary penalty on two banks; cautions three banks for violating KYC/AML Instructions

The Reserve Bank of India has imposed monetary penalty onICICI Bank Ltd., and Bank of BarodaRs. 5.00 and Rs.2.50 Millionrespectively for violation of its instructions on Know Your Customer (KYC)/Anti Money Laundering (AML).

Background:

Complaintwas made by a reputed statutory organisation in August, 2013 to RBI that a fraud was perpetrated in five banks, namely, State Bank of India, ICICI Bank Ltd., Bank of Baroda, Axis Bank Ltd. and State Bank of Patiala with the connivance of certain officials of the statutory organization. The investigation revealed that the fraudsters had managed to open fictitious accounts in the name of the statutory organisation in the above five banks and operated the accounts mainly for encashingcheques/demand drafts/postal orders of which they were not the rightful owners, for periods ranging from one month to two years, without being detected by the banks.The findings of the scrutiny revealed violation of certain regulatory guidelines issued by the Reserve Bank, namely:

• non-adherence to certain aspects of know your customer Know Your Customer(KYC) norms like customer identification and acceptance procedure.

• internal norms regarding customer identification procedure of a bank being violative of Know Your Customer (KYC) directions issued by Reserve Bank.

• non-adherence to instructions on monitoring of transactions in customer accounts.

Based on the findings of the scrutiny, Reserve Bank after due process came to the conclusion that some of the violations of serious nature were substantiated and warranted imposition of monetary penalty as determined above on two banks, namely, ICICI Bank Ltd. and Bank of Baroda. Failure on the part of these banks to take timely remedial measures had aggravated the seriousness of the contraventions and their impact.In respect of the three remaining banks, namely, State Bank of India, Axis Bank Ltd. and State Bank of Patiala, where such scrutinies were conducted and after obtaining banks’ written and oral submissions, it was decided not to impose any monetary penalty as the banks’ explanations regarding the circumstances which led to the fictitious accounts getting opened and operated without detection, was judged to be reasonable. However, these banks have been cautioned to put in place appropriate measures and review them from time to time to ensure strict compliance of Know Your Customer (KYC) requirements in future.

AML/ KYC case studies1. Payments structured to avoid detection Over a four year period, Mr. A and his uncle operated a money remittance service known as Company S and conducted

their business as an agent of a larger money remitting business that was suspected of being used to finance terrorism. Later, an investigation was initiated in relation to company S based on a suspicious transaction report.

The investigation showed that over the four year period, Mr. A’s business that received over US $ 4 million in cash from individuals wishing to transmit money to various countries. When Mr. A’s business received the cash from customers, it was deposited into multiple accounts at various branches of banks in country X. in order to avoid reporting requirements in place in Country X, Mr. A and others always deposited the cash with the banks in sums of less than US$ 10,000 in a single day.

Mr. A was charged and pleaded guilty to a conspiracy to “structure” currency transactions in order to evade the financial reporting requirements.

Key Message This case underlines the need to have mechanisms in place to monitor and link transactions (especially cash deposits)

made by the same individual or entity through different banks.2. Underground banking activity revealed through large turnover in small business Investigations were triggered by the several reports of suspected money laundering submitted by various banks over a

period of three years in respect of Mr. P who operated from one of the Middle East(Country N). Although the suspect ran asmall business with a declared annual turnover of around UD$150,000, however betweenUS$1.7mnand 3.5 mnof transactions flowed through his private accounts.

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Defining Contours of New India(Extract of the Speech byShri S. S. Mundra, Deputy Governor, Reserve Bank of India at the Mint’s Annual Banking Conclave, 2015 on “A New Banking Landscape for New India” on January 29, 2015)

What are the defining contours of the new India? What are the themes that would play out over the next decade or two? To my mind, there are seven key themes which would define the Indian economy and Indian banking sector in the days to come. These are:

• demography

• urbanization

• digitization

• industrialization

• education

• inclusion and

• global integration

Let me elaborate on a few of these in greater detail and delve upon the impact they could have on the banking system going forward.

a) Demography

Much has been talked about the demographic dividend that India possesses. At its current pace of growth, the Indian population is predicted to exceed China by 2025. Further, while China’s working-age population may peak around 2015 and shrink for a decade and a half thereafter, 68% of India population would be within the working age range (15-64) until 2030. Life expectancy of the Indian population is also slated to increase to about 70 years by 2030. While on the one hand the numbers present sustained opportunity for the banks in terms of new stream of customers, it also presents challenges. These challenges are in the form of diverse behavior patterns that customers in different age groups display. The banks would need to continuously foretell the customers’ preferences and focus their strategies on meeting them proactively.

b) Urbanisation

India is also witnessing a growing trend of urbanisation. By 2030, urban population is estimated to rise to 631mn recording an annual increase of 2.6% as against an annual rise of 1.1% in the overall population. This would mean that 41.8 % of the population would be living in urban agglomerations as against 31% today. While even at that percentage, the urban population would be far lower than the global average at 50% presently; this would open up huge business opportunities for the banks for creation of public infrastructure, housing, consumption, education needs of customers and so on.

Investigations revealed that the suspect’s business was the headquarters in the said Middle East country and had tie-up with an international underground bank with branches in several Central Asian and European countries and a chain of 14 branches in Country N. In addition to being used by Asian nationals to transfer small accounts to support their families back home - a traditional use of the hawala system was used to transfer considerable sums for human trafficking into Europe.

The suspect and the Manager of one branch were arrested. A number of properties were searched throughout. A forfeiture notice amounting to approximately US$350,000 was issued against the suspect and around US$140,000 in cash was confiscated in preparation for forfeiture. The suspect and the Manager were sentenced for human trafficking and the accused voluntarily renounced his claim to the confiscated cash.

Key message This is a classic case where the profile of customer relating to the size of the business activities of the account holder

demonstrated that the legitimate business activity could not possibly generate the funds available to the owner of the business.

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c) Digitization

Digitisation is another area which is being pursued relentlessly by the new Government. There is massive focus on enhancing internet penetration in the country through accelerated broadband connectivity. The internet penetration has seen a sharp growth over the last year, however, the extent of internet penetration at 20% pales in comparison to other developing countries like China (46%), Brazil (53%) and Russia (59%); let alone the developed nations like US, UK and Japan where the number is in excess of 85%. In these low numbers lie the inherent opportunities for the banking sector. As the number of internet users in the country grows, the banks would be able to better utilize this medium as a delivery channel. On the other hand, the mobile penetration in the country is significantly high at around 930.20 mn and beckons as an opportunity to be tapped.

d) Industrialization

The new Government’s ‘Make in India’ pitch also touches the right cords and efforts are afoot to increase the presently stagnant share of manufacturing in GDP to around 25-30 % by 2025 from 15% at present. If that materializes, it would mean addition of 90 million domestic jobs and attendant corporate and retail business opportunities.

e) Education

Likewise, there is tremendous scope of improving the level of education in the country by strategic focus on the four Es i.e. Expansion, Equity and Inclusion, Excellence & Employability. It would entail significant changes in consumer awareness, needs, demands and expectations.

f) Financial Inclusion

The launch of the PMJDY scheme with a focus on linking each household with a bank account has received extremely positive response. At last count, the number of accounts opened under the scheme had reached 12.14 crore. I don’t need to emphasize the avenues that this scheme has opened for the bankers. Moreover, it is just a stepping stone. Major part of the work has to commence now.

g) Global Integration

That brings me to the last theme of growing global integration, which I believe is already having significant repercussions on the financial sector. Be it the quantitative easing by the advanced economies and the subsequent withdrawal of it, convertibility of currency, making or breaking of regional alliance of economies and currencies etc. There could be other hitherto unforeseen developments too affecting the global structure of finance. Let me highlight two recent headlines reported in Financial Times: One, the potential exclusion of Russia from the SWIFT payment system and the other about withdrawal from correspondent banking relationships in 30 jurisdictions by three of the world’s biggest banks. Ostensibly, the motivation for these banks to sever their ties with the lenders in developing nations has been to limit the risk of being hit by regulatory sanctions on account of breaches, money laundering and terrorist finance. Events such as these, though having their origin in specific jurisdictions, have the potential to significantly impact the business and finance elsewhere in the globe.

Under the circumstances, it would be important for the banks to keep track of emerging trends and be prepared not only to negotiate through the imminent challenges, but simultaneously be ready to latch on to the opportunities that present themselves.

(Source: RBI Website)

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Suspicious Customer Behavior IndicatorsBelow are some of the broad suspicious behavior indicators of customers / bearers who may display during their visit to the branches while carrying out transactions. Such suspicious behaviors need to be reported to str.reporting@kotak.com without any delay.

• Customers who are reluctant in providing normal information while opening an account, providing minimal or fictitious information or when applying to open an account, providing information that is difficult or expensive for the institution to verify.

• Customer expressing unusual curiosity about any secrecy of information involved in the transaction.

• Customers who decline to provide information that in normal circumstances would make the customer eligible for banking services

• Customer giving confusing details about a transaction

• Customer reluctant or refuses to state a purpose of a particular large / complex transaction / source of funds involved or provides a questionable purpose and / or source.

• Customers who use separate tellers to conduct cash transaction or foreign exchange transactions

• Customers who deposit cash / withdrawals by means of numerous deposit slips / cheque leaves so that the total of each deposits is unremarkable, but the total of all credits / debits is significant.

• Customer’s representatives avoiding contact with the branch.

• Customers who repay the problem loans unexpectedly

• Customers who appear to have accounts with several institutions within the same locality without any apparent logical reason.

• Customers seeks to change or cancel a transaction after the customer is informed of currency transaction reporting / information verification or record keeping requirements relevant of the transaction.

• Customers regularly issues large value cheques without balance and then deposits cash.

• Walk-in-customers make enquiries to deposit cash into customer accounts basis email or telephonic instructions without personally knowing the account holders.

Disclaimer:

The material contained in this document aims at providing a summary of various guidelines, notifications, circulars etc. issued by various regulatory authorities from time to time and is for information purposes only. The same should not be construed as an advice on any matter. For complete information on the matter provided therein, readers are advised to refer to the detailed guidelines, notifications, circulars etc. available on the websites of the respective regulators or they may consult the respective compliance departments before acting on any matter.

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