pwc’s banking insights october 2017€¦ · impact assessment 1. the rbi vide circular dated 12...

PwC’s Banking InsightsOctober 2017

2 PwC PwC’s Banking Insights - October 2017

Impact assessment of regulatory changes in October 2017 Other notifications in October 2017 ContactsPreface

On 8 November 2016, the Indian government announced an unprecedented policy move—the demonetisation of 500 INR and 1,000 INR notes. Demonetisation has been one of the critical and decisive factors to influence India’s GDP and its economic scenario. A year after demonetisation, a paradox of sorts has emerged. While intellectuals and analysts in India have excoriated the step, Indians, at large, have reacted positively to it. The transitory economic consequences of the move were evident from the slow growth experienced by the country in the two quarters right after demonetisation. While it may or may not have achieved the desired results, it is a mistake to view such a bold policy move in isolation from other economic steps and political incentives.

Demonetisation has led to a growth in the number of digital transactions. Further, several businesses have moved from the unorganised sector to the organised sector—for example, the jewellery industry. To give impetus to the economic growth of the country, as mentioned by us in our last edition, the government has opted for the recapitalisation of banks. This will give banks enough ammunition to be on the offensive by lending more as well as improving the balance sheets of public sector undertaking (PSU) banks and the financial sector as a whole. The tweaking of the Goods and Services Tax (GST) has also led to fear in the minds of market participants of widening fiscal deficits, thus leading to wild movements in bond yields. We expect the government to meet its revenue targets and fiscal deficit to remain in the range decided by the government in the budget.

The economic scenario in India is rapidly changing. The effects of this have been seen in the banking and financial services sector. While the sector is poised for rapid growth, there has also been a rise in the number of non-performing assets (NPAs) of banks and non-banking financial companies (NBFCs). The Reserve Bank of India (RBI) may come out with a list of an additional 50 bad loan accounts, including accounts which are close to being termed as stressed accounts. The central bank is likely to set 31 March 2018 as the deadline for banks to resolve the issue or go ahead with bankruptcy proceedings against

borrowers. The list may contain accounts that fall under the Special Mention Account-2 (SMA-2) category. The profitability of lenders who classify loan accounts as NPAs will reduce as they will be required to set aside funds for these accounts.

The RBI has released regulations around facilities for hedging trade exposures invoiced in Indian rupees, the Sovereign Gold Bond (SGB) Scheme and gold monetisation schemes in the month of October 2017. An impact analysis of the same is part of this document. Further, the RBI is also looking forward to developing electronic trading by setting up a framework for the authorisation of electronic trading platforms, driven primarily by regulatory initiatives to reform over the counter (OTC) derivatives market, changes in market structures and technology advancements. The RBI has released draft guidelines in this regard.


Other notifications in October 2017 ContactsPreface Impact assessment of regulatory changes in October 2017

Risk Management and Inter-Bank Dealings – Facilities for Hedging Trade Exposures invoiced in Indian Rupees1

Background and objective:With continuous efforts taken by the Government of India as well as the RBI towards improving and enhancing the horizons of trade facilitation by banks in India, this circular provides impetus to inter-company import/exports involving group operations outside India or persons residing outside India. This step comes in the wake of India’s significant jump in the World Bank’s Ease of Doing Business Ranking. India is expected to see further improvement in the coming years.

The circular provides for hedging of currency risk arising out of trade transactions involving exports from and imports to India for invoices denominated in Indian currency (INR). Products such as rupee foreign exchange forward contracts as well as foreign currency options are recognised instruments which can be used for hedging transactions. The circular now allows corporate treasuries (of the group and being a group entity) of such non-residents to undertake hedges for and on behalf of such non-residents with AD Category – I banks in India as per the existing Model I and Model II.

Circular reference: RBI/2017-18/75 A.P. (DIR Series) Circular No. 08 Dated: 12 October 2017

Applicability:All Authorised Dealer Category – I Banks

1 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11144&Mode=0



Key regulationsModel I

1. Under this model, the non-resident exporter/importer or its central treasury approaches his banker overseas with appropriate documents with a request for hedging their rupee exposure arising out of a confirmed import or export order invoiced in rupees.

2. The AD bank should satisfy itself about the existence of the underlying trade transaction and offer a forward price (no two-way quotes should be given) to the overseas bank.

The AD bank, therefore, will ‘not be’ dealing directly with the overseas importer/exporter.

Model II

1. Under this model, the non-resident exporter/importer or its central treasury approaches the AD bank in India with a request for forward cover in respect of the underlying transaction for which he furnishes appropriate documentation (scanned copies would be acceptable), on a pre-deal basis to enable the AD bank in India to satisfy itself that there is an underlying trade transaction.

2. AD banks should evolve appropriate arrangements to mitigate credit risk. Credit limits can be granted based on the credit analysis done by self/the overseas branch.

Other key regulations include:

i. Obtaining necessary KYC/AML certifications in the prescribed format.

ii. Ensuring that the amount and tenor of the hedge should not exceed that of the underlying transaction and should be in consonance with the extant regulations regarding tenor of payment/realisation of the proceeds.

iii. The contracts may, however, be rolled over on or before maturity, subject to maturity of the underlying exposure.

iv. On cancellation of the contracts, gains may be passed on to the customer subject to the customer providing a declaration that he is not going to rebook the contract or that the contract has been cancelled on account of cancellation of the underlying exposure.

Impact assessment1. The RBI vide circular dated 12 October 2017

has revised the circular on Risk Management and Inter-Bank Dealings – Facilities for Hedging Trade Exposures invoiced in Indian rupees. Vide this circular non-residents are permitted to hedge the currency risk arising out of INR invoiced exports from and imports to India with AD Category – I banks in India. The revised circular permits the central treasury of such non-residents to undertake hedges for and on behalf of such non-residents with AD category – I banks in India as per the existing Model I and Model II.

2. Allowing corporate or central treasuries to enter into contracts will also increase the benefit arising from economies of scale. The applying entity may get sanctioned hedging limits at lucrative rates or existing limits may be enhanced as corporates may now choose to include export and import activities of group companies.



Scheme of Penalties for bank branches based on performance in rendering customer service to the members of public2

Background and objective:The RBI has the sole right to issue currency notes in the country; it also manages the circulation of the same in the economy. Being the issuer of currency in India, it has issued various guidelines on its ‘Clean Note Policy’ for the withdrawal of soiled and mutilated notes from circulation and putting an adequate quantity of fresh notes into circulation.

The RBI formulated the ‘Currency Distribution & Exchange Scheme (CDES)’ for bank branches, including currency chests, in order to ensure that all bank branches provide better customer service to members of the public with regard to the exchange of notes and coins, in keeping with the objectives of the Clean Note Policy. Therefore, the Apex Bank has decided to impose penalties on banks for deficiencies in the exchange of notes and coins/remittances sent to the RBI/operations of currency chests, etc.

Circular reference: RBI/2017-18/76DCM (CC) No.G-3/03.44.01/2017-18 Dated: 12 October 2017

Applicability:All Banks




Extract from the regulation: Banks shall levy penalties for the below irregularities:

• Shortages in soiled note remittances and currency chest balances

• Counterfeit notes detected in soiled note remittances and currency chest balances

• Mutilated notes detected in soiled note remittances and currency chest balances

• Non-compliance with operational guidelines by currency chests detected by RBI officials

• Violation of any term of agreement with the RBI (for opening and maintaining currency chests) or deficiency in service in providing exchange facilities, as detected by the RBI officials

Impact assessment:• Banks shall implement the RBI’s Clean Note Policy and formulate standard operating procedures

that shall be followed by all their branches and currency chests.

• The operational risk department of the banks shall set key risk indicators (KRIs) related to the Clean Note Policy and breaches to the same shall be assessed.

• Operational loss shall be assessed by the operational risk department and due action shall be taken to strengthen the process.

• Banks shall also assign the responsibility of reviewing the adherence to the Clean Note Policy and the RBI guidelines related to currencies to concurrent auditors and internal auditors.

• Surprise verification of cash at bank branches and currency chests shall be conducted by the operational risk management team occasionally.

• Training shall be given to bank staff for better handling of cash to adhere to the RBI’s Clean Note Policy and avoid operational losses.

• Penalties levied by the RBI shall be assessed and immediate action shall be taken to resolve the issue and correct the operational gap.

• Banks shall equip their branches and currency chests in such manner that they adhere to the guidelines of the Clean Note Policy.

Scheme of Penalties for bank branches based on performance in rendering customer service to the members of public

Thus, the RBI is taking the necessary steps to maintain a sense of discipline among banks with respect to the handling of currency. It has issued instructions/guidelines relating to the levy of penal interest for delayed reporting/wrong reporting/non-reporting and cases of shortages/inclusion of counterfeit banknotes, as well as for operational gaps in handling currency for bank branches and currency chests with a dual objective of adherence to the Clean Note Policy and improvements in rendering customer services to the public.


ContactsPreface Impact assessment of regulatory changes in October 2017 Other notifications in October 2017

Circular ref. no.RBI/2017-2018/70Dated: 4 October 20173

Name of the circularSection 24 and Section 56 of the Banking Regulation Act, 1949 – Maintenance of SLR and holdings of SLR in HTM category

Brief instructions1. The reduction in the statutory liquidity ratio (SLR) by 50 basis points would result in liquidity

that could be used by the banks to comply with the liquidity coverage ratio (LCR) requirements of 100%, applicable from January 2019.

2. The permitted limit for classifying investments in the HTM category is 25%. However, any excess HTM classification is allowable if total SLR holdings in this category are not more than 19.5% of the net demand and time liabilities (NDTL). Previously, the limit on total SLR holdings was 20.5%. The reduction in limits will be brought about in a phased manner, ensuring that the investments can be liquidated with ease.

3. The excess SLR securities, over and above 19.5%, can be moved from the HTM to the AFS/HFT category. The RBI has eased out the process for banks and they need not wait for the beginning of the financial year to perform the transfer from one category to another. The same can be done during the year in order to comply with the limit requirements.

4. As per the current regulations, if the value of sales and transfers of securities to/from the HTM category exceeds 5% of the book value of investments held in the HTM category at the beginning of the year, a disclosure is required in the notes to accounts, appended to the financial statements of the bank. However, this requirement has been done away with to meet the requirements of this circular. Banks can now transfer the investments to the extent of meeting this circular’s requirements, without making any disclosure in the notes to accounts.






Brief instructions1. The Government of India has vide this notification

announced the SGB Scheme.

2. Under the scheme, SGBs (the Bonds) will be issued in a series of weekly issuances which will be open for subscription from Monday to Wednesday of every week starting from 9 October 2017.

3. This notification contains all the terms and conditions of issuance of the SGBs that have been announced by the Government of India vide its Notification F.No. 4(25)-B/(W&M)/2017 dated 6 October 2017.

Brief instructions1. Clause 13 of the original notification which read ‘the

holding of these bonds by banks as collateral shall be counted towards statutory liquidity ratio holding’ has been amended to read as: ‘bonds acquired by the banks through the process of invoking lien/hypothecation/pledge alone shall be counted towards statutory liquidity ratio’.

2. This implies that the inclusion for the statutory liquidity ratio has been modified to now include only bonds which have been acquired by the process of invoking a lien, hypothecation or pledge alone towards the statutory liquidity ratio.

Name of the circularSovereign Gold Bond Scheme

Name of the circularSovereign Gold Bonds Scheme

4 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11139&Mode=05 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11151&Mode=0




Brief instructions1. Interest rates on small savings schemes for the third

quarter of the financial year 2017–18 starting 1 October 2017 shall remain unchanged from those notified for the second quarter of FY 2017–18.

2. The circular needs to be referred by branches of banks operating government small saving schemes for necessary action.

3. The circular should also be displayed on the notice boards of the branches for the information of the subscribers to these schemes.

Name of the circularInterest rates for Small Savings Schemes


Brief instructions1. The circular issued is in the nature of a supporting

document to the guideline (RBI/2017-18/71 IDMD.CDD.No.929/14.04.050/2017-18) in which the SGB Scheme was announced.

2. This circular elaborates the operational guidelines regarding the scheme and addresses certain matters such as application forms, KYC norms, cancellations and agency arrangements.

3. Banks need to take note that application forms from investors will be received by branches during normal banking hours from Monday to Wednesday of every week (both days inclusive.)

Name of the circularSovereign Gold Bonds Scheme, Operational Guidelines




Circular ref. no.RBI/2017-18/80 Dated: 18 October 20179

Brief instructions1. Aajeevika - National Rural Livelihoods Mission

(NRLM) was launched by the Ministry of Rural Development in June 2011.

2. The central bank issued the revised guidelines on the Interest Subvention Scheme under the DAY-NRLM.

3. All women self-help groups (SHGs) will be eligible for interest subvention on credit up to 3 lakh INR at 7%per annum.

4. Banks will be subvented to the extent of difference between the weighted average interest charged and 7%, subject to the maximum limit of 5.5% for the year 2017–18.

Name of the circularDeendayal Antyodaya Yojana - National Rural Livelihoods Mission (DAY-NRLM) - Aajeevika - Interest Subvention Scheme


Brief instructions1. The Central Account Section (CAS), Nagpur, RBI,

will reimburse of payments made by banks, relating to Medium and Long Term Government Deposit (MLTGD).

2. All agency banks are advised to immediately pay the interest amount already due to the depositors.

3. All agency banks shall make the payment of interest to the depositors on the due dates and raise the claims to the government through the RBI (CAS, Nagpur).

Name of the circularGold Monetisation Scheme, 2015

5. This subvention will be available to banks on the condition that they make SHG credit available at 7% per annum, the notification said.

6. The Ministry of Rural Development, in consultation with state governments, will harmonise state-specific interest subvention schemes, if any, in line with the central scheme.

7. The interest subvention scheme on credit to women SHGs in 2017–18 is applicable in 250 districts across the country.



Preface Impact assessment of regulatory changes in October 2017 Other notifications in October 2017 Contacts

Vernon DcostaDirector [email protected]: +91 9920651117

Dnyanesh Pandit Director [email protected]: +91 9819446928

Vivek Iyer [email protected] Mobile: +91 9167745318

Rajeev [email protected]: +91 9702942146

Dhruv KhandelwalAssistant [email protected]: +91 9820589399

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pwc’s banking insights october 2017€¦ · impact assessment 1. the rbi vide circular dated 12...

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