ALL INDIA INSTITUTIONS
Amendments to NBFC Guidelines

The Reserve Bank of India has amended and clarified certain directions relating to non-banking finance companies (NBFCs) regulations issued by it earlier in January 1998. The major modifications / clarifications are :

¨ Micro finance : NBFCs which are (i) engaged in micro financing activities, (ii) licensed under section 25 of the Companies Act, 1956 and (iii) which are not accepting public deposits would be exempted from the purview of registration, maintenance of liquid assets and transfer of profits to reserve fund; 

¨ MBCs : The mutual benefit companies (MBCs) in existence as on January 09, 1997 and having net owned fund (NOF) of Rs.10 lakh would be exempted from the requirements of registration, maintenance of liquid assets, creation of reserve fund and also from certain provisions of NBFC Directions on acceptance of public deposits and prudential norms which do not apply to notified nidhi companies; 

¨ Government NBFCs: The Government NBFCs would be exempted from applicability of the provisions of RBI Act relating to maintenance of liquid assets and creation of reserve funds, and the directions relating to acceptance of public deposits and prudential norms. Requirement of registration of these companies would, however, continue; 

¨ Permissible limit : The NBFCs have been permitted to maintain up to five per cent of the public deposits in the form of term deposits with scheduled commercial banks out of the present requirement of 15 per cent of public deposits to be invested in liquid assets. These instructions are effective retrospectively from the first day of the quarter beginning January 01, 2000. 

¨ Change of name : An NBFC intending to change its present name would need to obtain prior permission of the Reserve Bank before approaching the Registrar of Companies for change of name; ¨ PAN : All NBFCs should furnish the details of Permanent Account Number (PAN) issued by Income Tax Authorities to each of their directors to the respective Regional Office of the Reserve Bank within two months, failing which the grant or continuance of the certificate of registration would be reconsidered; 

¨ Management change : Any NBFC seeking change in management or merger or amalgamation with any other company has to give an option to every depositor to decide whether to continue the deposits with the company under the new management or the transferee company or not. The company would also be obliged to make the payment to the depositors who seek the repayment of their deposits. 

¨ Introduction : The NBFCs should obtain proper introduction of the new depositors before opening their deposit accounts and accepting the deposits. They should also obtain written confirmation from their introducers. In the absence of such introduction, any other document of identity of the prospective deposit holders may be obtained and kept on their record, the evidence on which they have relied upon for the purpose of such introduction; 

¨ Subordinated debt : The subordinated debt instruments with a minimum maturity period of 60 months or above at the time of their initial offer which (a) are unsecured and subordinated to the claims of other creditors, (b) are free from restrictive clauses, (c) are not redeemable at the instance of the holder or without the consent of the supervisory authority of the NBFC, would only be exempted from the definition of public deposits; 

¨ Shareholder deposits : The deposits accepted by a private limited NBFC from the first named shareholders would only be exempted from the purview of public deposits. The deposits accepted from the rest of the joint shareholders would be treated as public deposits. 

¨ Opening of branch : An NBFC having a certificate of registration and otherwise en titled to accept public deposits is allowed to open its branch/office or allow its agents to operate for mobilisation of public deposits within the State where its registered office is situated if its NOF is more that Rs.50 crore and anywhere in India and its fixed deposits programme has been rated by one of the approved credit rating agencies at `AA' or above. An RNBC registered with the Reserve Bank and otherwise complying with all the statutory requirements is allowed to open additional branches/offices and/or allow its agents to operate for mobilisation of deposits within the State of the location of its registered office if its NOF is upto Rs.50 crore and anywhere in India if its NOF is above Rs.50 crore; 

¨ Prior notice : The NBFC/RNBCs would be required to give 30 days' notice to the Reserve Bank prior to the opening of any branch / office for mobilisation of public deposits within the specified area of operation and prior public notice of three months in leading newspapers before closing a branch. These directions are applicable prospectively; 

¨ Reporting : The auditors of these companies would be entrusted with the responsibility of direct reporting to the Reserve Bank, alongwith other contraventions, if any, on the matters of non-compliance with the directions of the Reserve Bank on control over opening and closing of branches and engaging agents for mobilisation of public deposits by the NBFCs. 

¨ Internal audit : All NBFCs having asset size of Rs.50 crore or above should have compulsory internal audit system accountable to the chief executive officer of the company. All these companies should also mandatorily constitute an audit committee from among the members of their board of directors; 

¨ Suitfiled/decreed debts : In order to monitor the level of loan delinquencies in the NBFC sector, NBFCs have been advised to furnish, in their prudential norms return, information on suit filed/decreed debts by and against them. 

¨ Disclosure on exposure : The disclosures relating to exposure to each NBFC's group companies and associations should be included in the application form for soliciting deposits without any further delay; ¨ Extention of time : The Reserve Bank of India may not, in the normal course, grant extension of time to those NBFCs which have not attained the prescribed minimum NOF of Rs.25 lakh by January 09, 2000 and accordingly their application may not be considered for registration; 

¨ Furnishing details : The NBFCs not holding public deposits need not furnish the return to the Reserve Bank of India on and from the quarter ended December 1999. 

ALM Guidelines for FIs

The Reserve Bank of India has issued comprehensive guidelines on asset liability management (ALM) system for the ten all-India term lending and refinancing institutions (FIs). The guidelines to these institutions were issued for instituting a structured asset liability management (ALM) system by them. The guidelines will be effective from April 1, 2000. The Reserve Bank has also advised to constitute an Asset Liability Committee (ALCO) headed by CEO/CMD/DMD/ED on which the senior management of the FI from the concerned department would need to be represented. 

The purpose of the ALM guidelines is mainly to strengthen the management information system (MIS) within the FIs so as to sensitise them to the market risk assumed by them. Under the ALM guidelines, the FIs should prepare periodical statements on liquidity gap and interest rate sensitivity and put up the report to their top management. To begin with, these statements should be compiled at quarterly intervals beginning from April 01, 2000 but after the initial phase-in period of one year, the liquidity gap report should be required to be prepared at fortnightly intervals and the interest rate sensitivity statement at monthly intervals, with effect from April 1, 2001. 

In the ALM systems prescribed for FIs not only the items of assets and liabilities appearing on the balance sheets of FIs are captured but also the cash flows emanating from these items over the entire life of the asset, liability or contingent commitments. While the Reserve Bank has prscribed prudential limits on negative liquidity gaps at 10 per cent and 15 per cent of the cash outflows in the first two time buckets (viz. 1 to 14 days and 15 to 28 days), the FIs themselves have to evolve internal prudential limits for cumulative negative liquidity gaps across all time buck ets as also for the interest rate gaps in various time buckets with the approval of their Board/ALCO. The ALM system also aims at capturing the foreign currency portfolio of the FIs and therefore, the FIs should compile currency-wise liquidity and interest rate sensitivity (IRS) reports in respect of their foreign currency exposures-for which separate formats have been prescribed. For the time being, the FIs should furnish the data to the Reserve Bank about their liquidity gaps and interest rate gaps for which necessary prescriptions will be made by the Reserve Bank separately in due course, after the system stabilises. 

Utilisation of Special Reserves

The Reserve Bank of India has issued revised guidelines on the utilisation of special reserves created under section 36(1)(viii) of the Income-Tax Act 1961 to all-India term lending institutions for the purpose of making provisions for non-performing assets (NPAs) or general provision for standard assets both for current year and for any shortfall in provisions of the earlier years. The Reserve Bank of India has advised all-India term lending institutions that such provisions should not be directly debited to special reserves but should be provided for in the profit and loss account of the year `above the line' and the current profit, i.e. profit for the year be determined. The transfer, if any, from the special reserves should be shown `below the line'. 

Priority Sector Lending - Housing Finance

The Reserve Bank of India has advised all primary (urban) co-operative banks that : 

i The direct housing loans by banks upto Rs.10 lakh for construction of houses by individuals in urban and metropolitan areas would be eligible for inclusion under priority sector; 

ii All investments in bonds issued by National Housing Bank (NHB)/Housing and Urban Development Corporation (HUDCO) exclusively for financing of housing, irrespective of the loan size, per dwelling unit, would be reckoned for inclusion under priority sector advances; 

iii The overall target of 60 per cent of total advances for priority sector, of which 25 per cent advances for weaker section remains unchanged. PMRY - Affidavit on Income of the Applicant

The Government of India has now decided to allow applicants under the Prime Minister Rozgar Yojna (PMRY) to submit to the District Industrial Centre (DIC)/banks a declaration about their eligibility under the scheme on plain paper. Earlier, the applicants had to submit the details about their eligibility on a non-judicial stamp paper. The formal affidavit on the relevant non-judicial stamp paper should be submitted to the bank only when the loan amount is sanctioned. 

Relief to PMRY Beneficiaries of orissa

The Government of India has decided to allow banks to re-schedule the repayment of loans disbursed under Prime Minister's Rozgar Yojana (PMRY) in Orissa. It has also allowed extension of the cut-off date for closure of disbursements of sanctioned loans during the programme year 1998-99 under PMRY from December 31, 1999 to February 29, 2000 in Orissa State. The relaxations have been given in view of the widespread damage caused in the State by super cyclone on October 29-30, 1999. 

Collection of Outstation Cheques

The Reserve Bank of India has advised all Commercial Banks to issue necessary instructions to their branches to ensure strict compliance of its instructions on automatic credit of interest in respect of delayed collection of outstation cheques. The advice has been reiterated so as to avoid any room for representations, complaints from public. 

The Reserve Bank had earlier advised all commercial banks to ensure that the account holders should be paid penal interest on the amount of cheques/instruments drawn on the collecting bank's own outstation branches or on those of other banks if the proceeds are not realised/credited to the customer's accounts or the unpaid instruments are not returned to the customers within a period of 14 days from the date of their lodgements. The penal interest should be paid beyond 14 days till the proceeds are ralised/credited to the customers' accounts or the instruments are returned in cases of such delays in collection of outstation cheques. In the case of instruments drawn on State Headquarters banks have to pay interest beyond 10 days if they are not collected within 10 days except that in respect of the state capital in North Eastern region and Sikkim, the norms of 14 days would remain unchanged. 

The commercial banks were also advised to pay a penal interest for such delays as under : 

i Where the proceeds of an instrument are to be credited to the cash credit/overdraft/loan amount of a party at the prime lending rate fixed from time to time. 

ii In other cases at 2 per cent per annum above the rate of interest applicable to balances in savings bank accounts. 

The Reserve Bank has reiterated its earlier advice as it was brought to the Bank's notice that banks do not give automatic credit of interest for delayed collection of outstation cheques, but they comply with the same only if the matter is brought to their notice. 

Micro Finance

Micro Finance : The most acceptable definition of micro finance is the provision of thrift credit and other financial services and products of very small amount to the poor in rural, semi-urban or urban areas to enable them to raise their income levels and improve standard of living. 

Micro Credit : Micro Credit is defined as supply of credit to the poor. It is one of the micro finance service. Unlike, direct bank loans to weaker sections and loans under SGSY, banks have a discretion to determine rate of interest on micro credit. 

Self Help Group : Self Help Group (SHG) is a registered or un-registered group of the micro entrepreneurs having homogenous social and economic background, voluntarily coming together to save small amount reglarly, to mutually agree to contribute to a common fund and to meet their emergency needs on mutual help basis. Besides, SHGs facilitate providing of collateral free loans at the doorstep of the borrower on the terms and conditions decided by the group. The group members use collective wisdom and peer pressure to ensure proper end use of the credit and its timely repayment. The peer pressure has been recognised as an effective substitute for collaterals. As a result of watch and vigil on the economic activities of each other, the recovery performance under micro credit movement is ashigh as 80 to 90 per cent. In order to supplement the income of the poor families, women are encouraged to form SHGs to undertake economic activities. In India, women SHGs are about 84 per cent. SHGs also ensure social economic development of its members by undertaking adult education programme, skill development programmes, etc. 

Financing through SHGs conduits : Individually, poor are economically weak and fragile; but organised in a group, they gain empowernment. Besides, financing through SHG reduces transaction costs of both lenders and borrowers as a result of providing credit at the doorstep of borrowers without lengthy formalities. Lenders get benefit as a result of handling of a single account of SHG instead of a large number of small sized individual accounts. The borrowers organised in a SHG are able to minimise expenditure on travel (to and fro branch and other places) for completing paper work, loss of work days, in canvassing the loans, etc. Furthermore the peer pressure is used both for the proper utilization of credit and timely repayment of loans. There are 19 members per SHG in India. 

Role of NGOs : Non-Governmental Organisation (NGO) is a voluntary organisation established to undertake social intermediation like organising the SHGs of micro-entrepreneurs, entrusting them to the interested banks, arranging adult education and skill development programmes, etc. While some of the NGOs borrow bank funds for on-lending to SHGs, other undertake only social intermediation. 

SHG-Bank linkage : In order to strengthen the efforts of NGOs and augment the resources of SHGs, a scheme of linkage of SHGs with banks was launched in 1992 under the aegis of the National Bank for Agriculture and Rural Development (NABARD). Under the scheme NABARD provides refinance assistance to the banks at an interest rate of 6.5 per cent. The NABARD also supports various micro finance institutions for capacity building through grants and revolving fund assistance. It also provides resources to NGOs and imparts training to bank officials engaged in micro-finance. At the end of March 1999 under scheme there were about 33,000 SHGs with 5.6 lakh micro entrepreneurs with outstanding loans of Rs.570 million. The number of banks and NGOs involved were 202 and 550 respectively. NABARD has taken an ambitious programme of covering 75 lakh micro rural entrepreneurs under SHG movement in next five years with the support of banking system. RBI asks state govts to limit guarantees

The RBI has asked state governments to set internal limits on the guarantees given to back state corporation bonds. States have also been advised not to provide indiscriminate guarantees and to hold corporations responsible whenever possible. 

This was formally conveyed in a meeting of the RBI Governor Dr. Bimal Jalan with the state finance secretaries. At the same time, the RBI has told banks that although state guaranteed bonds would carry a risk weightage of 20 per cent, in case of irregular servicing of loans, 
the risk weightage would be increased to 100 per cent. 

Public debt alarmingly high : RBI

The Reserve Bank's report on finances of state governments (1999-2000) has raised concern about the long-term sustainability of public debt of the state governments. 

The report has estimated outstanding liability of states at Rs.4,09,258 crore by March 2000, a 19.9 per cent rise over Rs.3,41,259 crore by end-March 1999. 

In terms of GDP it is estimated to reach 20.5 per cent during 1999-2000 compared with 19.4 percent in 1998-99. 

The growing debt problem of states reflects the high level at which the aggregate expenditure of the state governments has stayed (around 15 per cent of GDP), the sluggishness in own tax revenues and relatively low return from investments.

RBI to woo FIs for more investments

The RBI would be providing risk weights and non-performing assets (NPA) norms on securitised paper in order to facilitate greater investment by financial institutions (FIs) in the short run. Securitised paper would also be included as investible securities in the investment policy of FIs, according to the recommendations of the in-house working group on asset securitisation of RBI. 

The working Group submitted its report to the RBI on December 20. The working group (under the Chairmanship of Shri V.S.N. Murthy, Chief General Manager in the department of non-banking supervision) was set up in June 1999, to examine the regular framework for securitisation of assets and to recommend proper and transparent accounting and disclosure standards. The group was also to suggest amendments to various statutes for promoting securitisation of debts in the country. 

Since securitisation provides capital relief, improves market allocation efficiency and has the potential of improving financial ratios of the FIs, the committee recommends a focussed approach on FIs, which are perhaps the largest potential investors for such paper. 

Non performing Assets of Banks up by 6,057 crore

The RBI estimates show that the gross non-performing assets (NPAs) in the banking system increased by Rs.6,057 crore during 1998-99 to Rs.57,710 crore. The net NPAs during the same period increased by Rs.2,979 crore to Rs.24,211 crore. The NPAs of Public Sector banks showed a marginal decline, all other bank groups showed an increase in their NPA levels. The gross NPAs ratio to total assets of all banks, declined from 6.4 per cent in 1997-98 to 6.2 per cent in 1998-99 and net NPAs to net total assets declined from 3 per cent in 1997-98 to 2.9 per cent in 1998-99. 

Insurance norms for NBFCs soon

The RBI is expected to soon spell out draft norms for the non banking finance companies' entry into the insurance sector. The RBI is unlikely to allow the NBFCs to underwrite insurance risks and would restrict them to act as an insurance intermediary, officials said. 

The RBI has released tough conditionalities for commercial banks' foray into the insurance sector. 

IDBI decides to offer 49% stake in IT offshoot to software major

IDBI has decided to offer a 49 per cent stake in its proposed information technology subsidiary to a software major. IDBI Chairman, Shri G.P. Gupta, said that offering a stake to an outside major will help the institution encash value from its holdings. "We will also offer employees of the subsidiary an attractive employee stock option scheme in line with industry practice," Shri Gupta said. 

The IT subsidiary which is being carved out of its 60 strong information technology department is expected to focus on the areas of shared services, networks, e-commerce in the financial services business domain. The formation of the subsidiary is expected to stop the exodus of trained and experienced professionals from the department. A senior IDBI official admitted that the institution had lost 22-23 people in the department over the last one year some of whom had as much as 10 years of hands on experience. The IT department of IDBI supports a user base of 1700 personal computers spread over 17 locations and running off 32 legacy application systems in a Unix environment. IDBI will sign the shareholders agreement with Principal Financial Group in January this year. Once the pact is inked, principal Consulting (India) Pvt. Ltd. MD, Sanjay Sachdev is expected to assume charge as CEO of IDBI Mutual Fund. 

The present CEO, Mr. S.K. Bansal, previously General Manager in the treasury division of IDBI, will assume charge as chief financial officer of the AMC once the new CEO comes in. 

IDBI not to found MNCs acquisitions in India

IDBI, one of the country's premier development financial institutions, has taken a position that it would not found takeovers by MNCs in India. 

The Chairman of IDBI, Shri G.P. Gupta, said this at FICCI's Executive Committee meeting that MNCs would have to create assets by setting up greenfield projects for availing of finance. 

IDBI clears Rs.1,000 crore equity corpus

The board of IDBI on December 30, 1999, cleared plans to float an equity support scheme with an initial corpus of Rs.1,000/- crore. The scheme will extend assistance to good projects that are unable to tap the equity markets besides investing in the securities of existing companies with high growth potential. Talking to press the IDBI Chairman, Shri G.P. Gupta, said that the scheme would also take sizeable exposure in "start-ups in the high-tech and knowledge sectors" besides extend financial assistance for mergers and acquisitions and corporate restructuring. The fund corpus of the scheme will be stepped up at a later stage. 

FIs to pick up IDBI stake in SIDBI

The government of India wants IDBI to offload majority of its holding in the Small Industrial Development Bank of India (SIDBI) in favour of Unit Trust of India (UTI), Life Insurance Corporations, General Insurance Corporation (GIC) and other financial institutions. "The centre will not be able to buy IDBI's holding in SIDBI", sources close to the finance ministry said. 

After it is delinked from its promoter IDBI, SIDBI plans to go to public, according to SIDBI Managing Director, Dr. Sailendra Narain. 

Refinance to SIDCs for Infrastructure Projects

SIDBI vide its circular dated January 7, 2000 has decided to revise upwards with immediate effect the ceiling on project cost and refinanceable loan limit for SIDCs in `A' and `B' category in respect of infrastructure projects benefiting SSI units as under:- 

(Rs. crore) 
Category of SIDCs Ceiling on
Project Cost Refinanceable Loan Limit
`A' and `B' 20 (12) for `A' category SIDC (8) for `B' category SIDC 5 (4) for `A' category SIDC (2.5) for `B' category SIDCs
`C' 5 1.5 No change

(The figures in brackets are the limits applicable at present)

The balance amount of loan, if any is to be financed by the Corporations out of their own sources. The credit risk in financing of infrastructure project also lies with the SIDCs. All other conditions applicable to the scheme remain the same. ICICI disbursements up 23% during April-
December

ICICI has disbursed Rs.17,016 crore during the first nine months of 1999-2000, up by 23 per cent from Rs.13,800 crore during the previous corresponding period. 

The FI's sanctions are pegged at Rs.32,670 crore, up by 19 per cent from Rs.27,490 crore during the corresponding period last year. 

ICICI's net non-performing assets (NPAs) have declined to 7.4 percent on September 30, 1999 from 7.6 per cent on June 30, 1999. 

In absolute terms, the institution's net 
NPAs outstanding on September 30, 1999 were Rs.3,583 crore down from Rs.3,623 crore on March 31, 1999. 

ICICI ventures into e-commerce

ICICI Ltd. has set up an exclusive subsidiary ICICI Web Trade Ltd. to venture into e-commerce for retail equity trading by taking stock option route. The website will be available at icicidirect.com. 

Effectively ICICI has followed the US model of setting up of a company (.com) by giving the offer of stock option to the prospective employees right from the day one. 

The joint Managing Director of ICICI Ms. Lalita Gupta said that the venture is the first one to be set up on this pattern. 

ANSWERS TO COSIDICI CYBERQUIZ-1

Ans 1 On December 10, 1999 in New Delhi. 

Ans 2 Akshar Singhal, a 14 year old class IX student from Jaipur was recently certified as the youngest Microsoft Certified Systems Engineer (MCSE). Earlier Govind Jajoo., another 14 year old boy from Jaipur, became the youngest Indian to become a Microsoft Computer Professional (MCP). 

Ans 3 Named After Andrew Lippman, Associate Director of World famous MIT Media Lab, it states that `the rate of change in society is proportional to the age which people can access dominant technology of the time'. The dominant technology to-day is computing and the rate of change is four years, says Lippman. 

Ans 4 `Being Digital' published in 1995. 

And 5 Tim Berners-Lee, a graduate of Oxford University, while working at CERN, the European Particle Physics Laboratory, invented the World Wide Web in 1989. For further details visit his website http://www.w3.org/people/ Berners-Lee. He is now working in MIT. 

Ans 6 A bit is an acronym for binary digit, that is, O and I. A. byte is a collection of eight bits which represents a character or a symbol. 

Ans 7 GUI stands for Graphical User Interface which allows us to select files, programmes, etc. by clicking on the pictorial representations on the screen of a computer rather than typing complex commands. 

Ans 8 Compact Disc-Read Only Memory. The memory in a CD-ROM is permanent. 

Ans 9 The Reserve bank of India, Mumbai, India's Central bank can be accessed through two URLs : http://www.rbi.org.in and http:www.reservebank.com. 

Ans 10 National Centre for Software Technology (NCST), Mumbai. 
 
 

COSIDICI 
To set-up 
Documentation and Information Centre
(with the aid of IDBI)

The Council of State Industrial Development and Investment Corporations of India (COSIDICI) is in the process of establishing a Documentation and Information Centre with the financial assistance of Rs.2 lakhs extended by the Industrial Development Bank of India (IDBI). 

The Centre to be equipped with data-base books, publications and other information material will help enrich developmental activities of the COSIDICI and upgrade its bi-monthly Journal `COSIDICI COURIER'. 

The Centre will have a technical library, consisting of books and reference material on a variety of subjects such as management, banking, finance, industrial development, rural development, economic planning, information technology, technical feasibility reports on industries etc. Executives of our member-corporations, industry repesentatives and research scholars from academic institutions/universities would have free access to the propoced Documentation and Information Centre. The Council is grateful to the IDBI for extending the financial assistance. 

IMPORTANT ANNOUNCEMENT

 COSIDICI YEAR BOOK 2000 :  WELCOMING THE NEXT MILLENNIUM will be a prestigious flagship publication of COSIDICI. It will be fully illustrated with photographs, diagrams, charts, etc., along with profiles of Member corporations, articles, success stories etc. 
LAST DATE FOR RECEIPT OF MATERIAL 
30th March 2000 
Please stick to deadline and send your material to 
Editor
COSIDICI YEAR BOOK 2000
Council of State Industrial Development and Investment 
Corporations of India (COSIDICI) 
SCOPE Complex, Core-6, Floor I, 7 Lodhi Road, Post Box No. 3067 
New Delhi - 110 003
Tel.: 436 0052, 436 5771, 436 0101 Extn. 2630 and 2631
Fax No. : 436 0052