Know Your Customer (KYC) guidelines for non-banking financial Institutions (NBFCs)

Banks are advised to constitute an ad hock committee to undertake procedures and performance audit on public services rendered by them. The uniform margin to be applied on all advances against shares/financing of initial public offerings/issues of guarantees raised from 40 percent to 50m percent.  Banks are advised to constitute a Special Committee to monitor and follow up fraud cases involving amounts of Rs. 1 crore and above. General permission is granted to foreign companies to establish branch offices/units in special economic zones to undertake manufacturing and service activities. The limit for foreign exchange remittance for miscellaneous purposes without documentation formalities rose from USD 500 to USD 5000. Indian students studying abroad to be treated as NRIs. Final guidelines on investment by financial institutions (FIs) in debt securities issued.

Consequently, the last date for processing applications also extended up to October 31, 2004. Quantum of margin on advance against term deposit left to the discretion of banks.

Interest payable on maturity proceeds of the deposit account of a deceased depositor now to be decided by individual banks subject to their board laying down a transparent policy in this regard. Non-banking financial institutions (NBFCs) registered with the Reserve Bank permitted to take up the insurance agency business on a fee basis and without risk participation, without the Reserve Bank’s prior permission.  As a step towards further simplification and liberalization of foreign exchange facilities available to residents, resident individuals permitted to freely remit up to USD 25,000 per calendar year for any purpose.

Indian and foreign banks, including those not having operational approval for the schemes marketed by them in India to residents either for soliciting foreign currency deposits for their foreign/ overseas branches or for acting as agents for overseas mutual funds or any other foreign financial services company. The real time gross settlement (RTGS) system put in live operations for setting inter bank transactions on a transaction by transaction (i.e., gross) basis, in an online at real time mode.

As a step towards further without the Reserve Banks’s prior approval short term credit to overseas offices of Indian companies, advertisement on foreign TV, royalty/lump-sum fee, use of trademark/ franchise, hiring charges of transponders.

The limit for export of goods by way of gift raised from rupees one lakh to rupees five lakh per annum. Authorised Dealers (ADs) are permitted to make remittances up to USD 100,000 for import bills/documents which are received directly by importers from their overseas suppliers.  Ads are permitted to grant rupee loans to non-resident Indians (NRIs) as per policy laid down by the Bank’s board of directors. The quantum of loan, the rate of interest, margins, etc., on such loans to be decided by ads.

It was agreed that the interest rates on non-resident (external) rupee (NRE) deposits for one to three years contracted effective close of business in for US dollar of the maturity period of the deposit exceeds three years. Interest rates on NRE savings deposits linked to LIPOR/SWAP rates for six-month maturity on US dollar deposits.

Following the recommendations of the Committee on Procedures and Performance Audit on Public Services (Chairman:Shri S.S. Tarapore) revised norms were issued regarding cheque drop box facility, delivery of cheque books over the counter and statement of accounts/pass book.  Banks are advised to issue an acknowledgement receipt when a currency note tendered at the their branch counter is found to be forged and are impounded.  Scheduled commercial banks advised not to allow offshore banking units (OBUs) set up in special economic zones (SEZs) to open foreign currency accounts of residents.

The Reserve Bank amended its guidelines on dividend payable by banks. According to the revised guidelines, only those banks which comply with certain minimum prudential requirements would be eligible to declare dividends without the Reserve Bank’s prior approval. Series of measures announced for improving flow of credit to agriculture, such as, rescheduling/restructuring debts of farmers who have suffered production and income loss on account of natural calamities, formulating guidelines for onetime settlement for small and marginal farmers, waiver of margin/security for agricultural loans up to Rs. 50,000 and Rs. 5 lakhs in the case of agri-business and agri-clinics, loans to storage units designed to store agricultural produce/products irrespective of their location, to be treated as indirect agricultural finance.

Banks are advised to scrupulously ensure that their branches do not open current accounts of entities which enjoy credit facilities (fund based or non-fund based) from the banking system without specifically obtaining a no objection certificate from the lending bank (s). The Reserve Bank announced the Gold Card scheme benefits based on the performance record of exporters. Gold Card holder would enjoy a simpler and more efficient credit delivery mechanism in recognition of his good in advance, their account holders any change in the prescribed minimum balance and the charges that would be levied if the prescribed minimum balance is not maintained.  The Reserve Bank is clarified that non-resident Ordinary (NRO) counts may be held by NRIs jointly with residents.

In order to give fillip to other types of electronic modes of transfer, the Reserve Bank decided to waive the service charges applicable for Electronic Funds Transfer (EFT) and Electronic Clearing Service (ECS) from June 1, 2004 to March 31, 2006.  Banks are advised to align the pricing of credit to the assessment of credit risk by putting in place comprehensive and rigorous risk assessment procedures for borrowers. The Reserve Bank reiterated that micro finance institutions cannot accept public deposits unless they comply with the extant regulatory framework.  Automated value-free transfer of securities between market participants and the Clearing Corporation of India Ltd. enabled for collateralize borrowing and lending operations (CBLO).

The Reserve Bank is clarified to banks that NRO accounts may be held by NRIs jointly with residents. NBFCs advised not to accept fresh NRI deposits from April 24, 2004 but allowed to renew the deposits already accepted.  Banks advised that the subsidy under the Swarna Jayanti Swarozgar Yojna (SJSRY) would be a back-ended subsidy for a lock-in period of two years. The margin requirement on all advances against shares/financing of IPOs/issue of guarantees by banks reduced from 50 percent margins of 20 percent (within the margin of 40 percent) in respect of guarantees issued by them for capital market operations.

Graded higher provisioning to be introduced according to the age of NPAs in ‘doubtful for more than three years’ category with effect to banks on their own policies on clarified that sub-standard assets would attract 20 percent provisioning. With a view to providing a boost to infrastructure lending, banks allowed to raise long term bonds with a minimum maturity of five years. Banks are advised to draw a road map for migration to Basel II by the end of 2004 and make a quarterly review of the progress made.

The Reserve Bank is clarified that the process of identifying willful alters and the mechanism relating to redresses of grievances were two distinct processes. The borrower should be suitably advised before being classified as a willful defaulter. Banks’ boards allowed raising single or group exposure limit by 5 percent of capital funds under exceptional a draft policy framework for ownership and governance in private sector banks for discussion before finalization.  Pursuant to the recommendations of the Ganguly Group Report, the Reserve Bank advised that persons to be appointed as directors in private sector banks would have to fulfill specific criteria prior to their appointment. With a view to ensuring a smooth transition to the implementation of capital charge for market risk over a two year periods.

With a view to ensuring that existing small account holders are not inconvenienced and the Know Your Customer (KYC) guidelines procedure is completed in time, the Reserve Bank advised banks to limit the application of KYC procedures to existing accounts where the credit or debit summation for the financial year transactions. Reserve Bank merged the functions handled by its Industrial and Export Credit Department with those of the other departments. The Reserve Bank circulated amongst banks a list of deficiencies noticed in the sanctioning/monitoring of borrower accounts and suggestions for minimizing frauds.

The Reserve Bank clarified that where due diligence is carried out at the request of a prospective customer who is a corporation or large borrower enjoying credit facilities from more than one bank, banks should inform the under multiple banking arrangements.   Keeping in view the importance of credit discipline for reduction of current accounts they should insist on a declaration from the account holder stating that he is not enjoying any credit facility with any other commercial bank. UCBs advised that from the year ending March 31, 2005, they would be required to classify an asset as non-performing if interest and/or installment of principal remains overdue for a period of more than 90 days. The cash reserve ratio (CRR) to be maintained by SCBs increased by one-half of one percentage point of their net demand and time liabilities (NDTL) in two stages. CRR increased to 4.75 percent from September 18, 2004 and to 5.00 percent from October 2, 2004.

SCBs to be paid interest at the fortnight beginning with the Reserve Bank under the CRR requirement.  Taking into account the changes brought in due to the introduction of technology and the need to cut down on operational costs while enhancing customer service, banks permitted to open central processing centres/back offices. These would be verification and processing of documents, issuance of cheque books, demand drafts, etc. and other functions incidental to banking business having no interface with customers. A sub-committee of SLBC for Export Promotion set up to take up exporters ‘problems relating to export finance and other related issues.

SCBS advised to arrange for a special review/scrutiny of the computation of their DTL/NDTL as well as verification of the integrity of the software used by them for this purpose by internal value of goods/software exported to Latin American within a period of 360 days from the date of shipment, discontinued from September 1, 2004. Accordingly, exporters exporting to Latin American countries on or after September 1, 2004, would be under obligation to realize full export proceeds within the prescribed period of six months from the date of export. UCBs advised to apply the 90 day impairment normal for gold loans and small loans up to rupees one lakh with effect from the financial year ending March 31, 2005.

With a view to providing an option to issuers to raise short-term resources through commercial paper (CP) as also an avenue to investors to invest in quality from 15 days to 7 days. Banks are permitted to extend finance to non-banking finance companies (NBFCs) against second hand assets assistance to customers directly for purchase of second hand assets. SCBs advised to formulate a comprehensive and transparent policy covering issues relating to (I) immediate credit to local/outstation cheques (ii) time frame for collection of local/outstation cheques and (iii) interest payment for delayed collection.

The Reserve Bank issued detailed guidelines based on the recommendations of the Financial Action Task Force and the paper issued on Customer Due Diligence for banks by the Basal Committee on Banking Supervision. Banks advised to ensure that a proper policy framework on ‘Know Your Customer’ and Anti-Money Laundering measures is formulated and put in place with their board’s approval within housing sector, banks permitted, with the approval of their boards, to extend direct finance to housing of their priority sector lending. With a view of rationalizing banks investments under priority sector lending and encouraging banks to increasing lend directly to the farmers/other priority sector borrowers; it was been decided that the extant guidelines in respect of classifying the investments by banks in the bonds issued by the specified institutions as under priority sector lending should continue.

With stabilization of reporting of call/notice money transactions over the negotiated dealing system (NDS) as also to reduce money transactions to the Reserve Bank discontinued from December 11, 2004. Deals between non-NDS members should, however, continue to be reported to the Reserve Bank.  Foreign banks advised that the amount of shortfall in their priority sector obligation should be placed with the Small Industries Development Bank of India (SIDBI) for a tenor of three years. Funds placed with SIDBI would have a graded interest rate structure linked to the Bank Rate.

(Source : Credit Information Review)

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