R EPORT ON 15 MASTER

CIRCULARS OF RBI
Credit Management Assignment

Sushoveeta Sahu
PRN: 18020942084
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1) M ASTER CIRCULAR ON E XPOSURE NORMS
The purpose of this master circular is better risk management of banks by avoidance of
concentration risk. It provides a sytem of rules and regulations issued to SCBs relating to
the credit exposures. The exposure norms have been issued to single/group borrowers,
specific sectors/industry.
This circular is applicable to all commercial banks (excluding Regional Rural Banks.)
a) Credit exposures to Single/Group Borrowers:
 Single Borrower: Ceiling limit = 15% of capital funds.
Ceiling limit = 5% more in case of infrastructure
projects.
 Group Borrower: Ceiling limit = 40% of capital funds.
Ceiling limit = 10% more in case of infrastructure projects.
 NBFCs: Both investment and lending including off balance sheet items of a bank
should not exceed 10% of banks capital funds.
 The exposure norms in this circular are also applicable to consortium lending and
bills discounted under Letter of Credit(LC).
 Hire Purchase, leasing and factoring Services: Ceiling limit = not more than 10%
of total advances.
 Joint Ventures in India/Wholly-owned Subsidiaries Abroad and Overseas Step
down Subsdiaries of Indian corporates: The ceiling limit = 20% of banks’ capital
funds(Tier 1 and Tier 2).
 Capital Markets:
o Advances given to stock brokers should be 40% networth.
o Financing IPO to individuals should not exceed Rs.10,00,000.
o For Disinvestment programme of India, the limit is 40% of networth.
o Bank finance to employees for purchase of shares under ESOP/IPO/FPO of its
own company is 90% of purchase price or Rs.20,00,000, whichever is less.
o The overall capital market exposure should not exceed 40% of networth.
 The following are exempted from the exposure norms:
o Rehabilitation of Sick/Weak Industries.
o Food Credit
o Guarantee by the Government of India
o Loans against own term deposits.
o Exposure on NABARD.

2) Master Circular on Credit Facilities to Minority Communities

This Master Circular directs all SCBs (Excluding RRBs and Foreign Banks who have less
than 20 branches) regarding the credit facilities to minority communities to that fair and
adequate measures are taken to promote smooth flow of bank credit to minority
communities which are Sikhs, Muslims, Christians, Zoroastrians, Buddhists and Jain.

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 RBI mandated for creation of a special cell headed by someone having equivalent post
of “Deputy General Manager” or “Assistant General Manager” who should function as
a “Nodal Officer”
 The “Lead Banks” in the identified “Minority Concentration Districts” will have to
exercise a very active role so that the minority communities have access to bank credit
for taking up productive activities.
 Banks are advised to maintain proper records to ensure timely sanction and
disbursement of loan applications.
 To ensure fair operations and to monitor the performance of banks in providing credit
to minority communities, RBI made it mandatory to furnish the data on priority
advances to RBI and to the “Government of India”, “Ministry of Finance” and
“Ministry of Minority Affairs” on half yearly basis.
 With the objective to ensure that the bank staffs and officers are aware of the various
programmes for welfare of minority communites, the Lead Banks should organize
programmes like induction , lecture sessions on financing of “priority sector” , “poverty
alleviation programmes” and Entrepreneur Development Programmes which will help
create jobs that will require financing of the banks.
The main objective of RBI behind this is to make sure that the “minority communities
receive a fair and equitable portion of the credit within the overall target of the
priority sector.”

3) “MASTER C IRCULAR ON CREDIT F ACILITIES TO SCS AND STS ”

This Master circular is directed to all the Scheduled Commercial Banks incorporating the
instructions regarding the credit facilities to the SC and ST communities.
 Bank staff should help the SC/ST borrowers who may be illiterate in filling up
forms and fulfilling other formalities so that they are able to avail credit facilities.
 A certain weightage is to be given to SCs/STs in the credit planning process.
 To encourage the borrowers belonging to the SC/ST communities “take advantage
of the credit facilities, awareness should be created among them about various
schemes of the bank.”
 RBI also ensured that there are “reservations for SC/ST beneficiaries under major
centrally sponsored schemes” such as:
o “Deendayal Antyodaya Yojana - National Rural Livelihoods Mission”
o “Deendayal Antyodaya Yojana - National Urban Livelihoods Mission”
o Differential Rate of Interest Scheme
 RBI had also asked banks to set up a special cell at the Head Office of banks for
monitoring the flow of credit to SC/ST beneficiaries.

4) Master Circular on Branch Licensing

This Master Circular is directed to all the Regional Rural Banks(RRBs) regarding the
“licensing of new branches and shifting of existing branches governed by the provisions of

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Section 23 of the Banking Regulation Act, 1949. According to this provision banks cannot
open new branches without prior permission of RBI.”
 The licensing policy of the branches covers the opening of branches in all Tier cities
wherein Tier 1 comprises of “metropolitan and urban cities”; Tier 2, 3 and 4 comprise
“semi urban centers” and Tier 5 and 6 comprise “rural centres.”
 To obtain approval from RBI for opening of branches, the following conditions have to
be met:
o “Operating profits are being made.
o Net worth shows improvement,
o No default in maintenance of CRR and SLR during the last two years.
o Net NPA ratio does not exceed 8%”.
 RRBs are permitted to open branches in Tier 2 to Tier 6 centres if the following
conditions are fulfilled:
o “CRAR of at least 9%
o Net NPA ratio less than 5%;
o No default in maintenance of CRR / SLR for the last year; and
o Net profit in the last financial year.”
 RRBs can shift their branches to the same rural centres without taking permission
from RBI.
 But, for shifting the branches in semi urban/urban/metropolitan cities prior approval
of RBI has to be taken.
 RRBs can merge two of their loss making branches which are in close proximity, This
is done with “a view of rationalising the spatial spread and reducing operating costs.”
 The RBI has issued the guidelines for opening of satellite offices of RRBs. Satellite
offices are part of the RRbs and is some distance away from the head office which
controls it.
o The “satellite office” should be established at fixed in the nearby villages.
o Each satellite office should function on particular days of a week.
o All banking transactions can be carried out at the “satellite offices”.
 With the motive to envisage the extension of banking facilities RBI also suggested
mobile offices which will be through a well- protected van which would visit places
proposed to be served by it on certain days.
 RBI also allowed rhe RRBs to open one Regional Office for every 50 branches.
 RRBs were also given permission to use the services of some intermediaries such as
cooperatives, NGOs, insurance agents, post offices, agri business centres, well-
functioning panchayats and community based organisations to provide financial and
banking services through the Business Correspondence Model. This was done with the
objective of “insuring greater financial inclusion and increasing the outreach of the
banking sector.”

5)" Master Circular on Capital adequacy standards and risk

management guidelines for standalone primary dealers.”

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This master circular is for all the standalone primary dealers ( firms that buy govt.
securities directly from govt,. with the intension of reselling them to others.)

The following are some of the guidelines issued:

 Primary sellers are required to preserve a minimum CRAR ration of 15% on an on
going foundation.
 Of the 15% capital charge for credit risk, at least 50% should be met by tier 1 capital.
 Subordinated debt should not exceed 50% of Tier 1 capital.
 The total Tier 2 capital ought to now not exceed a 100% of Tier 1 capital
 All the primary dealers are required to report their position of the capital adequacy on
a quarterly basis.
 RBI has also asked the PDs to report the rupee interest rate derivative transactions to
the chief general manager, IMDB, RBI on the last working day of every month. The
motive behind this is to capture the interest rate risk arising out of Rupee interest
rate derivative business.
 The circular has also specified the process to be followed for calculating the market
risk.

6) “Master Circular on KYC Guidelines- Anti Money Laundering

standards- Prevention of Money Laundering Act, 2002, Obligation of
NBFCs in terms of Rules notified under.”
 This master circular deals with KYC guidelines which have been considered the global
benchmark for framing Anti Money laundering and fighting financing of terrorism
rules. This circular is directed to all the NBFCs, Miscellaneous Non Banking
Companies and residuary Non-Banking companies.
 This master circular deals with the “Know Your Customer” (KYC) “guidelines in the
context of the recommendations made by the Financial Action Task Force (FATF) on
Anti Money Laundering (AML) standards and on Combating Financing of Terrorism.”
 All Banks and financial institutions are required to follow certain customer
identification procedure for opening of accounts and monitoring transactions of
suspicious nature.
 KYC also enable banks/FIs to understand their customers and their financial dealings
better and manage their risks prudently.
 KYC Policy has the four key elements namely:
1) ‘Customer Acceptance Policy
2) Customer Identification procedures
3) Monitoring of Transactions
4) Risk Management’
This master circular has provided detailed guidelines and the documentation required as
part of KYC compliance in case of :
 Customer Due Diligence requirements (CDD) while opening accounts

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 Periodic Updation of KYC
 Monitoring of transactions
 Ongoing monitoring etc.
 For combating financing of terrorism, the UN periodically circulates the“Al-Qaida
Sanctions List”, which includes names of ‘individuals and entities associated with the
Al-Qaida’ and the “1988 Sanctions List”, which consists of ‘individuals (Section A of
the consolidated list) and entities (Section B) associated with the Taliban’
 Banks/FIs have to be certain that they do not have any account with the names of
people/entities acting inside the above lists. In case any accounts resembling any of
the individuals/entities in the list is found, it should be reported to ‘FIU-IND.’

7) Master Circular on Wilful Defaulters

 This master circular is directed to all the ‘Scheduled Commercial Banks and all India
Notified Financial Institutions.’
 The purpose of this circular is to install a system so as to disseminate credit score
rating statistics on willful defaulters via way of cautioning financial establishments
and banks to make sure that further credit is not made available to them.
 According to the circular, a willful default is deemed to have occurred in any of the
following events in which the unit has defaulted in meeting its repayment obligations:
a) To the lender even when it has the potential to honour the said obligations.
b) To the lender when the finance from the lender was not utilised for the specific
functions for which finance was availed but has diverted the finances for different
functions.
c) To the lender when the unit has additionally disposed off or eliminated the
movable constant property or immovable belongings given for the motive of
securing a term mortgage without the information of the financial institution /
lender”.
 The willful default have to be identified keeping in view the perspective of the
borrower and not on the premise of remote incidents/transactions.
 The willful default should be deliberate, intentional and calculated.
 Penal measures against willful defaulters as specified in the circular are as follows:
o The willful defaulters should not be granted any additional facilities by any
bank/FI.
o The creditors may work for criminal proceedings against willful defaulters,
wherever essential.
 he banks and FIs need to adopt a proactive approach for effective management of the
willfully defaulting borrower unit, anywhere viable.
 Now, it is vital at the a part of FIs and banks to vicinity a transparent mechanism for
the whole technique in order that the penal provisions are not misused.
 Apart from this, the banks are also asked to report to the credit information
companies whenever,
o Outstanding amount falls below Rs.25 lakh

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o Banks have agreed for a compromise agreement and the borrower has
completely paid the compromised amount.
o Credit Information Companies (CICs) had been counseled to disseminate the
information bearing on match filed towards willful defaulters on their respective
websites.

8) Master Circular on SHG-Bank Linkage Programme

 This circular is directed to all commercial banks.
 The circular puts a highlight on the guidelines issued to SHGs for [Link] after
expansion and development of formal credit in the country, the rural poor consisting of
marginal farmers, landless labourers, petty traders and rural artisans were still
dependent on local moneylenders.
 To curb this problem, NABARD launched the SHG-Bank Linkage Programme which
brought positive and encouraging results.
 SHG-Bank Linkage Programmes has been emphasized by RBI in their Monetary
Policy Statements and Union Budget announcements from time to time.
 Banks were cautioned to do not forget lending to SHGs as a part of their mainstream
operations to make SHGs sustainable.
 Lending to SHGs should be presented under a separate heading under the priority
sector viz. “Advances to SHGs”
 The SHGs, whether registered or unregistered are eligible to open savings bank
account with banks.
 Bank lending to SHG ought to be an essential a part of the bank’s credit plan.
 To promote this programme further, banks were even asked to remove all operational
irritants and the loan disbursement procedure and documentation should be made
simple and the banks should incentivize their branches adequately for financing the
SHGs.
 This will help the banks to embody the idea of “Total Financial Inclusion”.

(9) Master Circular on Mobile Banking

 The purpose of this master circular is to offer a consolidated record containing all rules
/ policies / approaches prescribed to be followed via banks for operationalising Mobile
Banking in India.
 Because of their ubiquitous nature, mobile phones, as a medium for extending banking
services, have attained extra importance.
 ‘Mobile Banking transaction’ means undertaking banking transactions with the usage
of mobile telephones by using bank customers getting access to / credit score / debit to
their bills

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 Banks who have implemented Core Banking System (CBS) are allowed to offer mobile
banking services (through SMS, USSD or cellular banking application) after acquiring
neccessary permission from the Department of Payment & Settlement Systems.
 Technology used for mobile banking must be comfy and must ensure confidentiality,
integrity, authenticity and non-repudiability because Information Security is most
vital to the business of cellular banking offerings and its underlying operations.
 There is no daily cap on transactions through mobile banking.
 To increase the penetration of mobile banking the following are suggested in the
circular:
a) Account opening form need to clearly indicate the option for mobile banking. While
opening the account, customer have to be made aware about the mobile banking
facilities.
b) ATMs and Kiosks also alert the clients to prompt the mobile banking facility.
c) Mobile banking transactions shall be authorised validation only through a two step
authentication.
d) Mpin should be one of the factors of authentication.

10) Master Circular on Lead Bank Scheme

 This master circular directed to all the lead banks consolidates the relevant guidelines
issued by RBI on Lead Bank Scheme.
 The Lead District Manager (LDM) should be the Chairman of Block Level Bankers’
Committee (BLBC) which coordinates “between credit institutions and field level
development agencies at block level.”
 The circular has also specified the role of the LDMs from their basic necessities such
as office space to their monitoring and organizing role like monitoring the
implementation of the District Credit Plan, coordinate with the banks to set up
financial literacy camps etc.
 There are also many committees that are formed for effective management of the Lead
Bank Scheme like the District Level Review Committee (DLRC), District Consultative
Committee (DCC) and State Level Bankers’ Committee.
 RBI has also specified the steps for implementation of Lead Bank Scheme. The steps
are as follows:
o “Preparation of credit plans
o Potential linked credit plans
o Monitoring the performance of credit plans
o Revised mechanism of Data flow for LBS for a meetings.”
 The Lead Bank scheme governed by means of RBI has been extended to the districts
in metropolitan areas, accordingly bringing the complete country under the fold of the
Lead Bank Scheme.

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 Lead Banks and SLBC convenor banks are cautioned with the aid of RBI to be
awarene to a 100% financial inclusion, as a result shifting the point of interest of Lead
Bank Scheme to inclusive increase and financial inclusion.
 RBI additionally rolled out a road map to provide banking offerings in villages the
population mare than 2000 was rolled out in 2009 via which all of the identified
villages were furnished with banking offerings via enterprise correspondents,
branches or thru other modes including ATMs and cell trucks.
 Later in 2012, a roadmap was rolled out for unbanked villages with less than 2000
population and also for the unbanked villages having population more than 5000.
 Banks were cautioned to keep a credit deposit ration of 60% in appreciate in their
semi-city and rural branches one by one.
 In order to ensure credit is available to all the borrowers and considering the
technological developments fot the different ways available with banks to avoid
multiple financing, banks RBI has advised to dispense a “No Due Certificate” from the
individual borrowers for all types of loans.”
 The list of “State-wise SLBC Convenor Banks and District-wise Lead Banks” has been
published in this circular.
 The circular has also published the format of the SLBC website with the indicative list
of contents, format in which the details of the meeting held by SLBC should be made,
format for Annual credit plan targets of the lead banks and SLBC to be recorded etc.

11) “Master Circular on Cash Reserve Ratio (CRR) and

Statutory Reserve Ratio (SLR)”
 The purpose of this circular is to prescribe the large info of the Reserve requirements
of all the Scheduled Commercial Banks apart from Regional Rural Banks.
 The RBI has prescribed statutory returns i.e “Form A Return (for CRR) under section
42(2) of the RBI Act, 1934 and Form VIII Return (for SLR) under section 24 of the
Banking Regulation Act. 1949.”
 CRR: The SCBs under Section 42(1A) of RBI Act, 1934 “are required to maintain an
additional average daily balance which shall not be less than the rate specified by
RBI.”x
 At present, effective from the fortnight beginning February 2013, the CRR prescribed
is 4%.
 CRR will be calculated with reference to the “excess of the total Demand Time
Liabilities (DTL) of the bank over the total of its DTL at the close of the business on
the date specified in the notification.”
 “Demand Liabilities: Liabilities of a bank which are payable on demand such as
current deposits, savings bank deposits etc
 Time Liabilities: Liabilities which are payable otherwise than on demand such as
Fixed Deposits, recurring deposits, cash certificates etc.
 Other Demand and Time Liabilities (ODTL): Interest accrued on deposits, bills
payable, unpaid dividends etc.”
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 Loans from FCNR accounts has to be included as part of bank credit while filing
“Form A return”.
 All the SCBs are required to hold minimal CRR balances up to 95% of the average
each day required reserves on all days of the fortnight with effect from the fortnight
beginning from September 21, 2013.
 SLR: All the SCBs are required to maintain statutory assets in the form of cash, gold
reserves, T-Bills, securities under Market Stabilization Scheme, any other RBI
approved security before providing credit to the customers.
 If a banking fails to maintain the SLR, it will likely be penalized for that day at the
price of 3% per annum above the financial institution fee at the shortfall.

12) Master Circular on Prudential Norms on Capital Adequacy-

Basel 1 Framework
 This master circular “prescribes the risk weights for the balance sheet assets, non-
funded items and other off-balance sheet exposures along with the minimum capital
funds along with the minimum capital funds to be maintained as ratio to the
aggregate of the risk weighted assets and other exposures, as also, capital
requirements in the trading book, on an ongoing basis.”
 The circular “deals with providing explicit capital charge for market and credit risk
and addresses the issues involved in computing capital charges for interest rate
related instruments in both trading and banking books”.
 Capital is divided into Tier 1 and Tier II capital.
 Tier I consist of
o Paid-up capital , statutory reserves, and other disclosed free reserves, if any;
o Perpetual Non-cumulative Preference Shares (PNCPS)
o Innovative Perpetual Debt Instruments (IPDI)
o Capital reserves representing surplus arising out of sale proceeds of assets.
 Because it is absolutely available to cover the losses, it is considered as bank’s highest
quality capital.
 Tier II capital consists of
o Undisclosed reserves
o Revaluation reserves
o General provision and loss reserves
o Hybrid Debt capital instruments
o Subordinated Debt
o Investment reserve account
 Loss absorption potential of Tier II capital is lower than Tier I capital.
 “Tier II capital should be limited to a maximum of 100 per cent of total Tier I elements
for the purpose of compliance with the norms.”
 The circular also mentions norms on cross holdings.

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 Banks are counseled to keep away from getting into swap transactions involving
conversion of rupee liabilities in respect of Tier 1/Tier II bonds into floating charge
foreign currency.
 It is obligatory for banks to maintain a minimum CRAR of 9% on an on- going basis.

13) Master Circular on Loans and Advances

This master circular directed to all scheduled commercial banks provides a
framework of the rules and regulations issued by the RBI to banks on statutory and other
restrictions on loans and advances.
The following are some of the important guidelines:
 a bank cannot grant any loans and advances on the security of its own shares.
 Banks are not allowed to enter tinto any commitment for granting any loans and
advances to or on behalf of any of its directors.
 The following items are not included in “Loans and Advances”:
1) “loans or advances against Government securities, life insurance policies or
fixed deposit;
2) loans or advances to the Agricultural Finance Corporation Ltd;
3) such loans or advances as can be made by a banking company to any of its
directors (who immediately prior to becoming a director
4) such loans or advances as are granted by the banking company to its
Chairman and Chief Executive Officer, who was not an employee of the
banking company immediately prior to his appointment as Chairman/
Managing Director/CEO
5) such loans or advances as are granted by a banking company to its whole-
time director
6) such loans or advances as are granted by a banking company to its whole-
time director etc”.
 The relatives of the Banks’s Chairman/MD or other directors should not be availed
loans and advances without prior approval of the Board.
 Banks aren't allowed to grant loans for putting in of new units that devour Ozone
Depleting Substances (ODS) together with chlorofluorocarbons (CFC).
 Banks are allowed to grant advances against the security of shares, debentures or
bonds to individuals subject to the following conditions:
1) “The loan is to meet contingencies and personal needs or for subscribing to
new or rights issues of shares / debentures / bonds or for purchase in the
secondary market.
2) The loan should not exceed the limit of Rupees ten lakhs per individual if the
securities are held in physical form and Rupees twenty lakhs per individual if
the securities are held in dematerialised form.
3) Banks should maintain a minimum margin of 50 percent of the market value
of equity shares / convertible debentures held in physical form and 25% in
case of dematerialized form”.
 Banks may provide need based finance to marker makers.
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 Banks may grant loans to individuals for subscribing to IPOs.
 Banks can grant advances against units of mutual funds.
 The banks might also sanction term loans on merits to eligible Indian promoters for
acquisition of overseas joint ventures / totally owned subsidiaries beneath the
refinance scheme of Export Import Bank of India (EXIM Bank).
 “Banks are allowed lend against CDs and buy back their own CDs, until further
notice”.
 Banks are not allowed to grant loans against bullions or primary gold.
While granting loan proposals regarding actual property, banks have to ensure that the
debtors have received prior permission from authorities / nearby governments / different
statutory government wherever required.
14) Master Circular on Prudential Norms On Income
Recognition, Asset Classification And Provisioning Pertaining
To Advances

 In line with the international practices, the Reserve Bank of India has introduced,
“prudential norms for income recognition, asset classification and provisioning for the
advances portfolio of the banks so as to move towards greater consistency and
transparency in the published accounts.”
 The coverage of income recognition should be goal and based on report of recuperation
in preference to subjective. The category of assets of banks must be executed on the
premise of goal standards. This might ensure a uniform and steady application of the
norms. Also, the provisioning should be made on the premise of the type of assets as in
step with the length for which the asset has remained non-acting.
 “Banks are requested to ensure that while granting loans and advances, realistic
repayment schedules are made on the basis of cash flows with borrowers. This would
facilitate prompt repayment by the borrowers and thus improve the record of recovery
in advances.”
 This master circular clearly defines Non Performing Assets and their categorization as
Substandard, Doubtful and Loss assets.
 An becomes NPA when it ceases to generate income for the income. It is a loan which
has remained overdue for a period of more than 90 days.
 ‘Substandard Asset : Asset which has remained NPA for a period less than or equal to
12 months.
 Doubtful Assets: if the asset has remained in the substandard category for a period of
12 months.
 Loss Assets: asset which is considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted.’
 In conformity with the prudential norms, provisions should be made for the NPAs
according to the above classes.

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 This master circular also contains “guidelines on sale of financial assets to
securitisation company and reconstruction company and Guidelines on purchase and
sale of NPAs.”

15) Master Circular on Housing Finance

 The reason of this circular is to consolidate framework of policies/regulations and
rationalization on Housing Finance issued via Reserve Bank of India from time to
time.
 The guidelines are applicable to all “Scheduled Commercial Banks, excluding Regional
Rural Banks.”
 Banks play a completely crucial role in supplying credit to the housing sector with
their vast branch network throughout the country.
 Keeping in view the targets of the National Housing Finance Policy of the Central
Government, RBI has mandated the banks to obtain the prescribed target of ‘Housing
Finance’ announced yearly thru its Housing Finance Allocation Scheme.
 Banks can allocate their funds as housing finance under three categories:
 “Direct Finance: finance provided to individuals or groups of individuals
including co-operative societies.
 Indirect finance: finance which is channeled by way of term loans to
housing finance institutions, housing boards, other public housing
agencies, etc., primarily for augmenting the supply of serviced land and
constructed units.
 Investment in bonds of NHB/HUDCO.”
 Banks should no longer offer credit score for production of homes intended merely for
Government/Semi-Government workplaces, inclusive of Municipal and Panchayat
offices.
 Banks should compile the data relating to “Housing Finance at half-yearly intervals
on the lines of format prescribed by RBI”.

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