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Core Investment Companies

Core Investment Companies (CICs)

6. Whether the investment of a company in its subsidiary's subsidiary (step down subsidiary) will be taken into account for determining not less than ninety percent of its net assets. +

Ans: All direct investments in group companies, as appearing in the CICs balance sheet will be taken into account for this purpose. Investments made by subsidiaries in step down subsidiaries or other entities will not be taken into account for computing 90 percent of net assets.

Indian Currency

A) Basics of Indian Currency/Currency Management

6. What is the role of the Reserve Bank of India in currency management ? +

In terms of Section 22 of the Act, Reserve Bank has the sole right to issue banknotes in India. Section 25 states that the design, form and material of bank notes shall be such as may be approved by the Central Government after consideration of the recommendations made by the Central Board of RBI.

The Reserve Bank, in consultation with the Central Government and other stake holders, estimates the quantity of banknotes that are likely to be needed denomination-wise in a year and places indents with the various currency printing presses for supply of banknotes. The Reserve Bank in terms of its clean note policy, provides good quality banknotes to the members of public. With this objective in view the banknotes received back from circulation are examined and those fit for circulation are reissued while the others (soiled and mutilated) are destroyed so as to maintain the quality of banknotes in circulation.

In respect of coins, the role of RBI is limited to distribution of coins that are supplied by Government of India. The Government of India is responsible for the designing and minting of coins in various denominations as per the Coinage Act, 2011.

Targeted Long Term Repo Operations (TLTROs)

Q6: What happens if a bank fails to deploy the funds availed under TLTRO scheme in specified securities within the stipulated timeframe? +

Ans: The banks have already been given sufficient time to deploy funds availed under TLTRO scheme. It has now been decided to allow up to 30 working days for deployment in specified securities for those banks who have availed funds under the first tranche of TLTRO conducted on March 27, 2020. However, if a bank fails to deploy funds within the specified time frame, the interest rate on un-deployed funds will increase to prevailing policy repo rate plus 200 bps for the number of days such funds remain un-deployed. This incremental interest will have to be paid along with regular interest at the time of maturity.

Housing Loans

6. What is monthly reducing balances method? +

Borrowers benefit more from a loan that's calculated on a monthly reducing basis than on an annual basis. In case of monthly resets, interest is calculated on the outstanding principal balance for that month. The principal paid is deducted from the opening principal outstanding balance to arrive at the opening principal for the next month and interest is computed on the new, reduced principal outstanding. In case of annual resets, principal paid is adjusted only at the end of the year. Hence, you continue to pay interest on a portion of the principal that has been paid back to the lender.

Government Securities Market in India – A Primer

6. What is Liquidity Adjustment Facility (LAF) and whether Re-repo in Government Securities Market is allowed? +

LAF is a facility extended by RBI to the scheduled commercial banks (excluding RRBs) and PDs to avail of liquidity in case of requirement or park excess funds with RBI in case of excess liquidity on an overnight basis against the collateral of G-Secs including SDLs. Basically, LAF enables liquidity management on a day to day basis. The operations of LAF are conducted by way of repurchase agreements (repos and reverse repos – please refer to paragraph numbers 30.4 to 30.8 under question no. 30 for more details) with RBI being the counter-party to all the transactions. The interest rate in LAF is fixed by RBI from time to time. LAF is an important tool of monetary policy and liquidity management. The substitution of collateral (security) by the market participants during the tenor of the term repo is allowed from April 17, 2017 subject to various conditions and guidelines prescribed by RBI from time to time. The accounting norms to be followed by market participants for repo/reverse repo transactions under LAF and MSF (Marginal Standing Facility) of RBI are aligned with the accounting guidelines prescribed for market repo transactions. In order to distinguish repo/reverse repo transactions with RBI from market repo transactions, a parallel set of accounts similar to those maintained for market repo transactions but prefixed with ‘RBI’ may be maintained. Further market value of collateral securities (instead of face value) will be reckoned for calculating haircut and securities acquired by banks under reverse repo with RBI will be bestowed SLR status.

RBI vide its notification FMRD.DIRD.01/14.03.038/2018-19 dated July 24, 2018 has issued Repurchase Transactions (Repo) (Reserve Bank) Directions, 2018 applicable to all the persons eligible to participate or transact business in market repurchase transactions (repos).

Scheduled commercial banks, Primary Dealers along with Mutual Funds and Insurance Companies (subject to the approval of the regulators concerned) maintaining Subsidiary General Ledger account with RBI are permitted to re-repo the government securities, including SDLs and Treasury Bills, acquired under reverse repo, subject to various conditions and guidelines prescribed by RBI time to time.

Remittances (Money Transfer Service Scheme (MTSS) and Rupee Drawing Arrangement (RDA))

Rupee Drawing Arrangement (RDA)

6. Can cash payment be made to the beneficiary under RDA ? +

No cash disbursement of remittances is allowed under RDA. The remittances have to be credited to the bank account of the beneficiary.

FAQs on Non-Banking Financial Companies

Definition of public deposits

6. Whether deposits received from relatives and friends of the directors are reckoned as public deposits? +

Money received by a private limited NBFC from relatives and friends of directors who are not its shareholders, is public deposit. In the case of public limited companies, the deposits received from shareholders also are public deposit.

Domestic Deposits

I. Domestic Deposits

6. Whether banks can prematurely repay the term deposit on their own? +

The term deposit is a contract between the bank and the customer for a definite term and it cannot be paid prematurely at bank’s option-. Term deposit can be paid prematurely at the request of the customer.

Annual Return on Foreign Liabilities and Assets (FLA) under FEMA 1999

Eligible entities and requirements to submit the FLA return

Q6. If the old/new entity fails to fill the FLA form before the due date, can the entity submit the FLA form? +

Ans: Yes, entities can fill the FLA return even after due date, after taking approval from RBI. But in that case, penalty clause may be invoked on the entity for late submission.

Framework for Compromise Settlements and Technical Write-offs

A. COMPROMISE SETTLEMENT IN WILFUL DEFAULT AND FRAUD CASES

6. As per Prudential Framework for Resolution of Stressed Assets dated June 7, 2019, lenders are not permitted to restructure borrower accounts classified as fraud or wilful defaulter, except in case of change in ownership. Why a different treatment is prescribed for compromise settlements for such borrowers?

Restructuring in general entails the lenders having a continuing exposure to the borrower entity even after restructuring and hence, in case of borrowers classified as fraud or wilful defaulter, permitting lenders to continue their credit relationship with the borrower entity would be fraught with moral hazard. On the other hand, a compromise settlement entails a complete detachment of the lender with the borrower. Therefore, permitting lenders to settle with the borrowers as per their commercial judgement would enhance recovery prospects.