Impact of the Global Financial Crisis on India Collateral Damage and Response
(Speech delivered at the Symposium on "The Global Economic Crisis and Challenges for the Asian Economy in a Changing World" organized by the Institute for International Monetary Affairs, Tokyo on February 18, 2009 By Duvvuri Subbarao, Governor)

Global outlook
1. The global economic outlook deteriorated sharply over the last quarter. In a sign of the ferocity of the down turn, the IMF made a marked downward revision of its estimate for global growth in 2009 in purchasing power parity terms – from its forecast of 3.0 per cent made in October 2008 to 0.5 per cent in January 2009. In market exchange rate terms, the downturn is sharper – global GDP is projected to actually shrink by 0.6 per cent. With all the advanced economies – the United States, Europe and Japan - having firmly gone into recession, the contagion of the crisis from the financial sector to the real sector has been unforgiving and total. Recent evidence suggests that contractionary forces are strong: demand has slumped, production is plunging, job losses are rising and credit markets remain in seizure. Most worryingly, world trade – the main channel through which the downturn will get transmitted on the way forward – is projected to contract by 2.8 per cent in 2009.

2. Policy making around the world is in clearly uncharted territory. Governments and central banks across countries have responded to the crisis through big, aggressive and unconventional measures. There is a contentious debate on whether these measures are adequate and appropriate, and when, if at all, they will start to show results. There has also been a separate debate on how abandoning the rule book driven by the tyranny of the short-term, is compromising medium-term sustainability. What is clearly beyond debate though is that this Great Recession of 2008/09 is going to be deeper and the recovery longer than earlier thought.

Emerging economies

3. Contrary to the 'decoupling theory', emerging economies too have been hit by the crisis. The decoupling theory, which was intellectually fashionable even as late as a year ago, held that even if advanced economies went into a downturn, emerging economies will remain unscathed because of their substantial foreign exchange reserves, improved policy framework, robust corporate balance sheets and relatively healthy banking sector. In a rapidly globalizing world, the 'decoupling theory' was never totally persuasive. Given the evidence of the last few months – capital flow reversals, sharp widening of spreads on sovereign and corporate debt and abrupt currency depreciations - the 'decoupling theory' stands totally invalidated. Reinforcing the notion that in a globalized world no country can be an island, growth prospects of emerging economies have been undermined by the cascading financial crisis with, of course, considerable variation across countries.



Questions that will be addressed

4. India too has been impacted by the crisis – and by much more than it was suspected earlier. What I propose to do in the rest of my speech is to address the following four questions:

Why has India been hit by the crisis?
How has India been hit by the crisis?
How have we responded to the challenge?
What is the outlook for India?


Why Has India Been Hit By the Crisis?

5. There is, at least in some quarters, dismay that India has been hit by the crisis. This dismay stems from two arguments.

6. The first argument goes as follows. The Indian banking system has had no direct exposure to the sub-prime mortgage assets or to the failed institutions. It has very limited off-balance sheet activities or securitized assets. In fact, our banks continue to remain safe and healthy. So, the enigma is how can India be caught up in a crisis when it has nothing much to do with any of the maladies that are at the core of the crisis.

7. The second reason for dismay is that India's recent growth has been driven predominantly by domestic consumption and domestic investment. External demand, as measured by merchandize exports, accounts for less than 15 per cent of our GDP. The question then is, even if there is a global downturn, why should India be affected when its dependence on external demand is so limited?

8. The answer to both the above frequently-asked questions lies in globalization. Let me explain. First, India's integration into the world economy over the last decade has been remarkably rapid. Integration into the world implies more than just exports. Going by the common measure of globalization, India's two-way trade (merchandize exports plus imports), as a proportion of GDP, grew from 21.2 per cent in 1997-98, the year of the Asian crisis, to 34.7 per cent in 2007-08.

9. Second, India's financial integration with the world has been as deep as India's trade globalization, if not deeper. If we take an expanded measure of globalization, that is the ratio of total external transactions (gross current account flows plus gross capital flows) to GDP, this ratio has more than doubled from 46.8 per cent in 1997-98 to 117.4 per cent in 2007-08.

10. Importantly, the Indian corporate sector's access to external funding has markedly increased in the last five years. Some numbers will help illustrate the point. In the five-year period 2003-08, the share of investment in India's GDP rose by 11 percentage points. Corporate savings financed roughly half of this, but a significant portion of the balance financing came from external sources. While funds were available domestically, they were expensive relative to foreign funding. On the other hand, in a global market awash with liquidity and on the promise of India's growth potential, foreign investors were willing to take risks and provide funds at a lower cost. Last year (2007/08), for example, India received capital inflows amounting to over 9 per cent of GDP as against a current account deficit in the balance of payments of just 1.5 per cent of GDP. These capital flows, in excess of the current account deficit, evidence the importance of external financing and the depth of India's financial integration.

11. So, the reason India has been hit by the crisis, despite mitigating factors, is clearly India's rapid and growing integration into the global economy.

How Has India Been Hit By the Crisis?

12. The contagion of the crisis has spread to India through all the channels – the financial channel, the real channel, and importantly, as happens in all financial crises, the confidence channel.

13. Let us first look at the financial channel. India's financial markets - equity markets, money markets, forex markets and credit markets - had all come under pressure from a number of directions. First, as a consequence of the global liquidity squeeze, Indian banks and corporates found their overseas financing drying up, forcing corporates to shift their credit demand to the domestic banking sector. Also, in their frantic search for substitute financing, corporates withdrew their investments from domestic money market mutual funds putting redemption pressure on the mutual funds and down the line on non-banking financial companies (NBFCs) where the MFs had invested a significant portion of their funds. This substitution of overseas financing by domestic financing brought both money markets and credit markets under pressure. Second, the forex market came under pressure because of reversal of capital flows as part of the global deleveraging process. Simultaneously, corporates were converting the funds raised locally into foreign currency to meet their external obligations. Both these factors put downward pressure on the rupee. Third, the Reserve Bank's intervention in the forex market to manage the volatility in the rupee further added to liquidity tightening.

14. Now let me turn to the real channel. Here, the transmission of the global cues to the domestic economy has been quite straight forward – through the slump in demand for exports. The United States, European Union and the Middle East, which account for three quarters of India's goods and services trade are in a synchronized down turn. Service export growth is also likely to slow in the near term as the recession deepens and financial services firms – traditionally large users of outsourcing services – are restructured. Remittances from migrant workers too are likely to slow as the Middle East adjusts to lower crude prices and advanced economies go into a recession.

15. Beyond the financial and real channels of transmission as above, the crisis also spread through the confidence channel. In sharp contrast to global financial markets, which went into a seizure on account of a crisis of confidence, Indian financial markets continued to function in an orderly manner. Nevertheless, the tightened global liquidity situation in the period immediately following the Lehman failure in mid-September 2008, coming as it did on top of a turn in the credit cycle, increased the risk aversion of the financial system and made banks cautious about lending.

16. The purport of the above explanation is to show how, despite not being part of the financial sector problem, India has been affected by the crisis through the pernicious feedback loops between external shocks and domestic vulnerabilities by way of the financial, real and confidence channels.

How Have We Responded to the Challenge?

17. Let me now turn to how we responded to the crisis. The failure of Lehman Brothers in mid-September was followed in quick succession by several other large financial institutions coming under severe stress. This made financial markets around the world uncertain and unsettled. This contagion, as I explained above, spread to emerging economies, and to India too. Both the government and the Reserve Bank of India responded to the challenge in close coordination and consultation. The main plank of the government response was fiscal stimulus while the Reserve Bank's action comprised monetary accommodation and counter cyclical regulatory forbearance.

Monetary policy response

18. The Reserve Bank's policy response was aimed at containing the contagion from the outside - to keep the domestic money and credit markets functioning normally and see that the liquidity stress did not trigger solvency cascades. In particular, we targeted three objectives: first, to maintain a comfortable rupee liquidity position; second, to augment foreign exchange liquidity; and third, to maintain a policy framework that would keep credit delivery on track so as to arrest the moderation in growth. This marked a reversal of Reserve Bank's policy stance from monetary tightening in response to heightened inflationary pressures of the previous period to monetary easing in response to easing inflationary pressures and moderation in growth in the current cycle. Our measures to meet the above objectives came in several policy packages starting mid-September 2008, on occasion in response to unanticipated global developments and at other times in anticipation of the impact of potential global developments on the Indian markets.

19. Our policy packages included, like in the case of other central banks, both conventional and unconventional measures. On the conventional side, we reduced the policy interest rates aggressively and rapidly, reduced the quantum of bank reserves impounded by the central bank and expanded and liberalized the refinance facilities for export credit. Measures aimed at managing forex liquidity included an upward adjustment of the interest rate ceiling on the foreign currency deposits by non-resident Indians, substantially relaxing the external commercial borrowings (ECB) regime for corporates, and allowing non-banking financial companies and housing finance companies access to foreign borrowing.

20. The important among the many unconventional measures taken by the Reserve Bank of India are a rupee-dollar swap facility for Indian banks to give them comfort in managing their short-term foreign funding requirements, an exclusive refinance window as also a special purpose vehicle for supporting non-banking financial companies, and expanding the lendable resources available to apex finance institutions for refinancing credit extended to small industries, housing and exports.

Government's fiscal stimulus

21. Over the last five years, both the central and state governments in India have made a serious effort to reverse the fiscal excesses of the past. At the heart of these efforts was the Fiscal Responsibility and Budget Management (FRBM) Act which mandated a calibrated road map to fiscal sustainability. However, recognizing the depth and extraordinary impact of this crisis, the central government invoked the emergency provisions of the FRBM Act to seek relaxation from the fiscal targets and launched two fiscal stimulus packages in December 2008 and January 2009. These fiscal stimulus packages, together amounting to about 3 per cent of GDP, included additional public spending, particularly capital expenditure, government guaranteed funds for infrastructure spending, cuts in indirect taxes, expanded guarantee cover for credit to micro and small enterprises, and additional support to exporters. These stimulus packages came on top of an already announced expanded safety-net for rural poor, a farm loan waiver package and salary increases for government staff, all of which too should stimulate demand.

Impact of monetary measures

22. Taken together, the measures put in place since mid-September 2008 have ensured that the Indian financial markets continue to function in an orderly manner. The cumulative amount of primary liquidity potentially available to the financial system through these measures is over US$ 75 bln or 7 per cent of GDP. This sizeable easing has ensured a comfortable liquidity position starting mid-November 2008 as evidenced by a number of indicators including the weighted-average call money rate, the overnight money market rate and the yield on the 10-year benchmark government security. Taking the signal from the policy rate cut, many of the big banks have reduced their benchmark prime lending rates. Bank credit has expanded too, faster than it did last year. However, Reserve Bank’s rough calculations show that the overall flow of resources to the commercial sector is less than what it was last year. This is because, even though bank credit has expanded, it has not fully offset the decline in non-bank flow of resources to the commercial sector.

Evaluating the response

23. In evaluating the response to the crisis, it is important to remember that although the origins of the crisis are common around the world, the crisis has impacted different economies differently. Importantly, in advanced economies where it originated, the crisis spread from the financial sector to the real sector. In emerging economies, the transmission of external shocks to domestic vulnerabilities has typically been from the real sector to the financial sector. Countries have accordingly responded to the crisis depending on their specific country circumstances. Thus, even as policy responses across countries are broadly similar, their precise design, quantum, sequencing and timing have varied. In particular, while policy responses in advanced economies have had to contend with both the unfolding financial crisis and deepening recession, in India, our response has been predominantly driven by the need to arrest moderation in economic growth.

What is the outlook for India?

24. The outlook for India going forward is mixed. There is evidence of economic activity slowing down. Real GDP growth has moderated in the first half of 2008/09. The services sector too, which has been our prime growth engine for the last five years, is slowing, mainly in construction, transport and communication, trade, hotels and restaurants sub-sectors. For the first time in seven years, exports have declined in absolute terms for three months in a row during October-December 2008. Recent data indicate that the demand for bank credit is slackening despite comfortable liquidity in the system. Higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence. The index of industrial production has shown negative growth for two recent months and investment demand is decelerating. All these factors suggest that growth moderation may be steeper and more extended than earlier projected.

25. In addressing the fall out of the crisis, India has several advantages. Some of these are recent developments. Most notably, headline inflation, as measured by the wholesale price index, has fallen sharply, and recent trends suggest a faster-than-expected reduction in inflation. Clearly, falling commodity prices have been the key drivers behind the disinflation; however, some contribution has also come from slowing domestic demand. The decline in inflation should support consumption demand and reduce input costs for corporates. Furthermore, the decline in global crude prices and naphtha prices will reduce the size of subsidies to oil and fertilizer companies, opening up fiscal space for infrastructure spending. From the external sector perspective, it is projected that imports will shrink more than exports keeping the current account deficit modest.

26. There are also several structural factors that have come to India's aid. First, notwithstanding the severity and multiplicity of the adverse shocks, India's financial markets have shown admirable resilience. This is in large part because India's banking system remains sound, healthy, well capitalized and prudently regulated. Second, our comfortable reserve position provides confidence to overseas investors. Third, since a large majority of Indians do not participate in equity and asset markets, the negative impact of the wealth loss effect that is plaguing the advanced economies should be quite muted. Consequently, consumption demand should hold up well. Fourth, because of India's mandated priority sector lending, institutional credit for agriculture will be unaffected by the credit squeeze. The farm loan waiver package implemented by the Government should further insulate the agriculture sector from the crisis. Finally, over the years, India has built an extensive network of social safety-net programmes, including the flagship rural employment guarantee programme, which should protect the poor and the returning migrant workers from the extreme impact of the global crisis.



RBI's Policy Stance

27. Going forward, the Reserve Bank's policy stance will continue to be to maintain comfortable rupee and forex liquidity positions. There are indications that pressures on mutual funds have eased and that NBFCs too are making the necessary adjustments to balance their assets and liabilities. Despite the contraction in export demand, we will be able to manage our balance of payments. It is the Reserve Bank's expectation that commercial banks will take the signal from the policy rates reduction to adjust their deposit and lending rates in order to keep credit flowing to productive sectors. In particular, the special refinance windows opened by the Reserve Bank for the MSME (micro, small and medium enterprises) sector, housing sector and export sector should see credit flowing to these sectors. Also the SPV set up for extending assistance to NBFCs should enable NBFC lending to pick up steam once again. The government's fiscal stimulus should be able to supplement these efforts from both supply and demand sides.

When the turn around comes

28. Over the last five years, India clocked an unprecedented nine per cent growth, driven largely by domestic consumption and investment even as the share of net exports has been rising. This was no accident or happenstance. True, the benign global environment, easy liquidity and low interest rates helped, but at the heart of India's growth were a growing entrepreneurial spirit, rise in productivity and increasing savings. These fundamental strengths continue to be in place. Nevertheless, the global crisis will dent India's growth trajectory as investments and exports slow. Clearly, there is a period of painful adjustment ahead of us. However, once the global economy begins to recover, India's turn around will be sharper and swifter, backed by our strong fundamentals and the untapped growth potential. Meanwhile, the challenge for the government and the RBI is to manage the adjustment with as little pain as possible.

Reserve Bank of India monitors disbursement of pension by its agency banks in respect of all Central Government Departments (except the Department of Post) and certain State Governments. It has been receiving several queries/ complaints from pensioners in regard to fixation, calculation and payment of pension including revision of pension/ Dearness Relief from time to time, transfer of pension account from one bank branch to another, etc. We have analysed the queries/ complaints, rights and duties of pensioners and put the same in the form of answers to these Frequently Asked Questions. It is hoped that this will cover most of the queries/ doubts in the minds of pensioners.

1. Can the pensioner draw his/ her pension through a bank branch?

Yes. Even the Government employees earlier drawing their pension from a treasury or from a post office will have the option to draw their pension from the authorized bank’s branches.

2. Who is the pension sanctioning authority?

The Ministry/ Department /Office where the Government servant last served is the pension sanctioning authority. The pension fixation is made by such authority for the first time and thereafter the refixation of pay, if any, is done by the pension paying bank based on the instructions from the Central/ State Government authorities.

3. Is it necessary for the pensioner to open a separate pension account for the purpose of crediting his/ her pension in authorized bank?

The pensioner is not required to open a separate pension account. The pension can be credited to his or her existing savings/ current account maintained with the branch selected by the pensioner.

4. Can a pensioner open a Joint Account with his/ her spouse?

Yes. All Central Government Pensioners (except the pensioners of the Telecom Department) and those State Governments which have accepted such arrangement can open Joint Account with their spouses.

5. Whether Joint Account of the pensioner with spouse can be operated either by ''Former or Survivor" or " Either or Survivor".

The Joint Account of the pensioner with spouse can be operated either by ‘‘Former or Survivor" or “Either or Survivor".

6. What is the minimum balance required to be maintained in the pension account maintained with the banks?

RBI has not stipulated any minimum balance to be maintained in pension accounts by the pensioners. Individual banks have framed their own rules in this regard. However, some of the banks have also permitted zero balance in the pensioners’ accounts.

7. Who sends the Pension Payment Orders (PPOs) to the authorized bank branch?

The concerned pension paying authorities in the Ministries /Departments/ State Governments forward the PPOs to the bank branches wherefrom the pensioner desires to draw his/her pension.

8. When is the pension credited to the pensioner's account by the paying branch?

The disbursement of pension by paying branch is spread over the last four working days of the month depending on the convenience of the pension paying branch except for the month of March when the pension is credited on or after the first working day of April.

9. Can a pensioner transfer his/ her pension account from one branch to another branch of the same bank or to the branch of another bank?

(a) Pensioner can transfer his/ her pension account from one branch to another branch of the same bank within the same centre or at a different centre;

(b) He/ She can transfer his/ her account from one authorized bank to another within the same centre (such transfers to be allowed only once in a year);

(c) He/ She can also transfer his/ her account from one authorized bank to another authorized bank at different centre.

10. What is the procedure for payment of pension in the case of the transfer of PPO to another branch or bank, as the case may be?

Pension will be paid on the basis of the photocopy of the pensioner’s PPO at the transferee (new) branch from the date of the last date of payment made at the transferor (old) branch. During this time, both the branches (old and new) are required to ensure that all the required documents are received by the transferee branch within the period of three months.

11. Is it necessary for the pensioner to be present at the branch of the bank along with documents for the purpose of identification before commencement of pension?

Yes. Before the commencement of pension, a pensioner has to be present at the paying branch for the purpose of identification. The paying branch shall obtain the specimen signatures or the thumb/toe impression from the pensioner.

12. What is the procedure to be followed by the bank branch if the pensioner is handicapped /incapacitated and is not in a position to be present at the paying branch?

If the pensioner is physically handicapped/incapacitated and unable to present at the branch, the requirement of personal appearance is waived. In such cases the bank official visits the pensioner’s residence/hospital for the purpose of identification and obtaining specimen signature or thumb/toe impression.

13. Has the pensioner got right to retain half portion of the PPO for record and to get it updated from paying branch whenever there is a change in the quantum of pension due to revision in basic pension, dearness relief, etc.?

Yes. The pensioner has right to retain half portion of the PPO for record and whenever there is a revision in the basic pension/DR etc. the paying branch has to call for the pensioner's half of the PPO and record thereon the changes according to government orders/notifications and return the same to the pensioner.

14. Whether the paying branch has to maintain a detailed record of pension payments made by it in the prescribed form?

Yes. The pension paying branch is required to maintain a detailed record of pension payments made by it from time to time in the prescribed form duly authenticated by the authorized officer.

15. Can the pension paying bank recover the excess amount credited to the pensioner’s account?

Yes. The paying branch before commencement of pension obtains an undertaking from the pensioner in the prescribed form for this purpose and therefore, can recover the excess payment made to the pensioner's account due to delay in receipt of any material information or due to any bonafide error. The bank has also right to recover the excess amount of pension credited to the deceased pensioner’s account from his/ her legal heirs/nominees.

16. Is it compulsory for a pensioner to furnish a Life Certificate/Non-Employment Certificate or Employment Certificate to the bank in the month of November?

Yes. The pensioner is required to furnish a Life Certificate/Non – Employment Certificate or Employment Certificate to the bank in the month of November. However, in case a pensioner is unable to obtain a Life Certificate from an authorized bank officer on account of serious illness / incapacitation, bank official will visit his/her residence/ hospital for the purpose of recording the life certificate.

17. Can a pensioner be allowed to operate his/ her account by the holder of Power of Attorney?

The account is not allowed to be operated by a holder of Power of Attorney. However, the cheque book facility and acceptance of standing instructions for transfer of funds from the account is permissible.

18. Who is responsible for deduction of Income Tax at source from pension payment?

The pension paying bank is responsible for deduction of Income Tax from pension amount in accordance with the rates prescribed by the Income Tax authorities from time to time. While deducting such tax from the pension amount, the paying bank will also allow deductions on account of relief to the pensioner available under the Income Tax Act. The paying branch will also issue to the pensioner in April each year a certificate of tax deduction as per the prescribed form. If the pensioner is not liable to pay Income Tax, he should furnish to the pension paying branch, a declaration to that effect in the prescribed form (15 H).

19. Can old, sick physically handicapped pensioner who is unable to sign, open pension account or withdraw his/ her pension from the pension account?

A pensioner, who is old, sick or lost both his / her hands and, therefore, can not sign, can put any mark or thumb/ toe impression on the form for opening of pension account. While withdrawing the pension amount he/ she can put thumb/toe impression on the cheque/withdrawal form and it should be identified by two independent witnesses known to the bank one of whom should be a bank official.

20. Can a pensioner withdraw pension from his/ her account when he/ she is not able to sign or put thumb/toe impression or unable to be present in the bank?

In such cases, a pensioner can put any mark or impression on the cheque/ withdrawal form and may indicate to the bank as to who would withdraw pension amount from the bank on the basis of cheque / withdrawal form. Such a person should be identified by two independent witnesses. The person who is actually drawing the money from the bank should be asked to furnish his/ her specimen signature to the bank.

21. When does the family pension commence?

The family pension commences after the death of the pensioner. The family pension is payable to the person indicated in the PPO on receipt of a death certificate and application from the nominee.

22. How the payment of Dearness Relief at revised rate is to be paid to the pensioners?

Whenever any additional relief on pension/family pension is sanctioned by the Government, the same is intimated to the agency banks for issuing suitable instructions to their pension paying branches for payment of relief at the revised rates to the pensioners without any delay. The orders issued by Govt. Departments are also hosted on their websites and banks have been advised to watch the latest instructions on the website and act accordingly without waiting for any further orders from RBI in this regard.

23. Can pensioners get pension slips?

Yes. As decided by the Central Government (Civil, Defence & Railways), pension paying banks have been advised to issue pension slips to the pensioners in prescribed form when the pension is paid for the first time and thereafter whenever there is a change in quantum of pension due to revision in basic pension or revision in Dearness Relief.

24. Which authority the pensioner should approach for redressal of his/ her grievances?

A pensioner can initially approach the concerned Branch Manager and, thereafter, the Head Office of the concerned bank for redressal of his/her complaint. They can also approach the Banking Ombudsman of the concerned State in terms of Banking Ombudsman Scheme 2006 of the Reserve Bank of India (details available at the Bank’s website www.rbi.org.in) This is applicable only in respect of complaints relating to services rendered by banks. For other issues the complainant will have to approach the respective pension paying authority.

25. Where can a pensioner get information about the changes in the pension/ Dearness Relief or any pension related issue?

The pensioner can visit the Official Website of the concerned Government Department as also Reserve Bank of India Website (www.rbi.org.in) to get the information about pension related issues.

Case: A coworker of yours was discussing her investments with a broker. Your coworker was confused because she had purchased a 10% bond but the broker kept repeating that it had a 9% yield to maturity. What is Yield to Maturity?

Yield to maturity (YTM) is the yield promised by the bondholder on the assumption that the bond will be held to maturity.

YTM also assumes that all coupon and principal payments will be made and coupon payments are reinvested at the bond's promised yield at the same rate as invested.

YTM is a measurement of the return of the bond and its calculation is identical to the calculation of internal rate of return (IRR).

Applying to the situation mentioned, the coworker purchased a bond with a coupon rate of 10 percent.

The 9 percent YTM applies if she holds on to that bond until it matures while reinvesting all interest payments she received from the instrument.

The significance of YTM is that it allows comparison of bonds with different coupon rates and prices.

1) Calculator: enter n, M, PMT, PV and VL and request k

2) Trial and Error: find k such that VL = INT({PVIFAM n) + M(PVIF M n)

3) Yield approximation formula:

YTM = INT + (M- VL)/ n

--------------------

(M + VL)/2

Where:

VL = the value of the bond

kc = the fixed coupon interest

n= the number of periods until maturity

M = the dollar principal payment at maturity

INT = periodic dollar coupon payment = kc x M

kd = discount rate on the bond

If a bond's current yield is less than its YTM, then the bond is selling at a discount.
If a bond's current yield is more than its YTM, then the bond is selling at a premium.
If a bond's current yield is equal to its YTM, then the bond is selling at par.

In the past week I have heard of two people locally getting "skimmed" at ATM machines and having their accounts cleared, So I said I would post a blog entry on the dangers of this and what you can do to make sure it doesn't happen to you.

What is ATM Skimming
ATM skimming is when someone gets the information about your card, and PIN from some means, such as a skimming tool planted on the ATM machine, and a camera located over the keypad, or simply someone standing behind your shoulder, and with this information they clone your card and they have full access to your bank account to take what they want.

What can I do to stop it?
Follow these few simple tips to make sure your hard earned cash stays where it belongs.

If the ATM looks dodgy or changed in anyway, don't use it!
Most ATM's will show a picture of what the ATM should look like on the screen before you input your PIN, Compare the picture on screen with the ATM.

Always guard your PIN
If there is someone standing too close to you, offer for them to go first, or find a different ATM, if it is just you at the ATM, Still cover your PIN with your hand, Just in case!

Always keep your eye on the ATM
Never look away from the ATM if someone is trying to talk to you, always make sure you can see the ATM while it is in your use.

If it suspicious, Walk Away
If you don't like the look of the ATM, or the person beside you is making you feel uneasy, Cancel your transaction immediately, and walk away. And just to be safe, call your bank to make sure the transaction was properly canceled.

Destroy old cards
Any old ATM cards you might have, Cut them up and bin them, These still hold information about your account, and if you don't bin them, The wrong person could get their hands on this.

Follow these simple steps to make sure your trip to the ATM doesn't end in a hole in our pocket!, And remember most important of all, Keep your PIN exactly that, YOUR Pin

What happens now, If your bank fails will the shareholders lose out?
The FDIC took over WaMu due to its failure, Washington Mutual was heavily invested in subprime home mortgages. Declining home values left WaMu seeking more capital to stay afloat. Incurring more debt by borrowing more money, the bank lost its footing when large sums of depositors withdrew money out of their accounts.

Once the FDIC stepped in they sold the bank to JP Morgan Chase for 1.9 Billion dollars, since for JP Morgan this is an asset only acquisition. Shareholders will lose all the money they had invested in the Nasdaq (WM).

Where does this leave private equity investors?

According to Welt News Online the deal leaves private equity investors including the firm TPG Capital, empty handed without anything to show for the purchase of equity securities they bought totaling $7 billion invested in WaMu.

JPMorgan Chase is now the second largest bank with rising shares for investors, According to the Wall Street Journal Online, JPMorgan is now the nation's largest deposit-gatherer with $911 billion of deposits, outranking Citigroup Inc.'s $804 billion and B of A Corp.'s $785 billion. J.P. Morgan previously ranked as the third-largest with $723 billion, before buying WaMu.

The deal also pushes J.P. Morgan to the second spot as measured by its 5,410 branches, ranking behind Bank of America and leaping over both Wells Fargo & Co. and Wachovia Corp.

J.P. Morgan infused its business by selling $10 billion of common stock, investors bid up the JPMorgan's shares by 11%. When JP Morgan sold its stock in conjuction with the WaMu deal shares rose $4.78, to $48.24 in New York Stock Exchange composite trading

Find out how to protect your money from bank failure

Having options on how best to protect your money will help with future decisions when it comes to your investment portfolio. The seizure by the government means shareholders' equity in WaMu was wiped out. The deal leaves private equity investors on the sidelines empty handed.

When it comes to asset protection for your basic bank accounts, including checking and savings they are insured and protected by The Federal Deposit Insurance Corporation up to $100,000 at all banks, for sums lost due to theft, bank closings or failures. Brokerage accounts carry their own protections in case of failure.

Brokerage accounts have protections in place in case of bank failure, with up to $500,000 in coverage (SIPC)The Securities Investor Protection Corporation insures brokerage accounts.

What do we learn? That it is important to diversify your investment strategy, this can help to protect you from shifts in the market.

QUES -1 What is a Non-Banking Financial Company (NBFC)?

ANS -1 A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company).

QUES 2. NBFCs are doing functions similar to banks. What is difference between banks & NBFCs ?

ANS 2. NBFCs are doing functions akin to that of banks; however there are a few differences:

(i) an NBFC cannot accept demand deposits;

(ii) an NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself; and

(iii) deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors unlike in case of banks.

QUES-3. Is it necessary that every NBFC should be registered with RBI?

ANS 3. In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.

However, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or Housing Finance Companies regulated by National Housing Bank.

QUES 4. What are the different types of NBFCs registered with RBI?

ANS 4. Originally, NBFCs registered with RBI were classified as:

(i) equipment leasing company;
(ii) hire-purchase company;
(iii) loan company;
(iv) investment company.

However, with effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as

(i) Asset Finance Company (AFC)
(ii) Investment Company (IC)
(iii) Loan Company (LC)

AFC would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.

The above type of companies may be further classified into those accepting deposits or those not accepting deposits.

QUES 5. What are the requirements for registration with RBI?

ANS 5. A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999). The company is required to submit its application for registration in the prescribed format alongwith necessary documents for Bank’s consideration. The Bank issues Certificate of Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.

QUES 6. Where can one find list of Registered NBFCs and instructions issued to NBFCs?

ANS 6. The list of registered NBFCs is available on the web site of Reserve Bank of India and can be viewed at www.rbi.org.in. The instructions issued to NBFCs from time to time are also hosted at the above site. Besides, instructions are also issued through Official Gazette notifications. Press Release is also issued to draw attention of the public/NBFCs.

QUES 7. Can all NBFCs accept deposits and what are the requirements for accepting Public Deposits?

ANS 7. All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid Certificate of Registration with authorisation to accept Public Deposits can accept/hold public deposits. NBFCs authorised to accept/hold public deposits besides having minimum stipulated Net Owned Fund (NOF) should also comply with the Directions such as investing part of the funds in liquid assets, maintain reserves, rating etc. issued by the Bank.

QUES 8. Is there any ceiling on acceptance of Public Deposits? What is the rate of interest and period of deposit which NBFCs can accept?

ANS 8. Yes, there is a ceiling on acceptance of Public Deposits. An NBFC maintaining required NOF/Capital to Risk Assets Ratio (CRAR) and complying with the prudential norms can accept public deposits as follows:

Category of NBFC having minimum NOF of Rs 200 lakhs	Ceiling on public deposit
AFC* maintaining CRAR of 15% without credit rating AFC with CRAR of 12% and having minimum investment grade credit rating	1.5 times of NOF or Rs 10 crore whichever is less 4 times of NOF
LC/IC** with CRAR of 15% and having minimum investment grade credit rating	1.5 times of NOF

* AFC = Asset Finance Company

** LC/IC = Loan company/Investment Company

As has been notified on June 17, 2008 the ceiling on level of public deposits for NBFCs accepting deposits but not having minimum Net Owned Fund of Rs 200 lakh is revised as under:

Category of NBFC having NOF more than Rs 25 lakh but less than Rs 200 lakh	Revised Ceiling on public deposits
AFCs maintaining CRAR of 15% without credit rating and	Equal to NOF
AFCs with CRAR of 12% and having minimum investment grade credit rating	1.5 times of NOF
LCs/ICs with CRAR of 15% and having minimum investment grade credit rating	Equal to NOF

Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests.

The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.

The RNBCs have different norms for acceptance of deposits which are explained elsewhere in this booklet.

QUES 9. What are the salient features of NBFCs regulations which the depositor may note at the times of investment?

ANS 9. Some of the important regulations relating to acceptance of deposits by NBFCs are as under:

1. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.
   
   
2. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.
   
   
3. NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
   
   
4. NBFCs (except certain AFCs) should have minimum investment grade credit rating.
   
   
5. The deposits with NBFCs are not insured.
   
   
6. The repayment of deposits by NBFCs is not guaranteed by RBI.
   
   
7. Certain mandatory disclosures are to be made about the company in the Application Form issued by the company soliciting deposits.

QUES 10. What is ‘deposit’ and ‘public deposit’? Is it defined anywhere?

ANS 10. The term ‘deposit’ is defined under Section 45 I(bb) of the RBI Act, 1934. ‘Deposit’ includes and shall be deemed always to have included any receipt of money by way of deposit or loan or in any other form but does not include:

• amount raised by way of share capital, or contributed as capital by partners of a firm;
  
  
• amount received from scheduled bank, co-operative bank, a banking company, State Financial Corporation, IDBI or any other institution specified by RBI;
  
  
• amount received in ordinary course of business by way of security deposit, dealership deposit, earnest money, advance against orders for goods, properties or services;
  
  
• amount received by a registered money lender other than a body corporate;
  
  
• amount received by way of subscriptions in respect of a ‘Chit’.

Paragraph 2(1)(xii) of the Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998 defines a ‘ public deposit’ as a ‘deposit’ as defined under Section 45 I(bb) of the RBI Act, 1934 and further excludes the following:

• amount received from the Central/State Government or any other source where repayment is guaranteed by Central/State Government or any amount received from local authority or foreign government or any foreign citizen/authority/person;
  
  
• any amount received from financial institutions;
  
  
• any amount received from other company as inter-corporate deposit;
  
  
• amount received by way of subscriptions to shares, stock, bonds or debentures pending allotment or by way of calls in advance if such amount is not repayable to the members under the articles of association of the company;
  
  
• amount received from shareholders by private company;
  
  
• amount received from directors or relative of the director of an NBFC;
  
  
• amount raised by issue of bonds or debentures secured by mortgage of any immovable property or other asset of the company subject to conditions;
  
  
• the amount brought in by the promoters by way of unsecured loan;
  
  
• amount received from a mutual fund;
  
  
• any amount received as hybrid debt or subordinated debt;
  
  
• any amount received by issuance of Commercial Paper.

Thus, the directions exclude from the definition of public deposit, amount raised from certain set of informed lenders who can make independent decision.

QUES 11. Are Secured debentures treated as Public Deposit? If not who regulates them?

ANS 11. Debentures secured by the mortgage of any immovable property or other asset of the company, if the amount raised does not exceed the market value of the said immovable property or other asset, are excluded from the definition of ‘Public Deposit’ in terms of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998. Secured debentures are debt instruments and are regulated by Securities & Exchange Board of India.

QUES 12. Whether NBFCs can accept deposits from NRIs?

ANS 12. Effective from April 24, 2004, NBFCs cannot accept deposits from NRIs except deposits by debit to NRO account of NRI provided such amount does not represent inward remittance or transfer from NRE/FCNR (B) account. However, the existing NRI deposits can be renewed.

QUES 13 Is nomination facility available to the Depositors of NBFCs?

ANS 13. Yes, nomination facility is available to the depositors of NBFCs. The Rules for nomination facility are provided for in section 45QB of the Reserve Bank of India Act, 1934. Non-Banking Financial Companies have been advised to adopt the Banking Companies (Nomination) Rules, 1985 made under Section 45ZA of the Banking Regulation Act, 1949. Accordingly, depositor/s of NBFCs are permitted to nominate one person to whom the NBFC can return the deposit in the event of the death of the depositor/s. NBFCs are advised to accept nominations made by the depositors in the form similar to one specified under the said rules, viz Form DA 1 for the purpose of nomination, and Form DA2 and DA3 for cancellation of nomination and change of nomination respectively.

QUES 14. What else should a depositor bear in mind while depositing money with NBFCs?

ANS 14. While making deposits with an NBFC, the following aspects should be borne in mind:

(i) Public deposits are unsecured.

(ii) A proper deposit receipt which should, besides the name of the depositor/s, state the date of deposit, the amount in words and figures, rate of interest payable and the date of maturity. Depositor/s should insist on the above and also ensure that the receipt is duly signed by an officer authorised by the company in that behalf.

(iii) The Reserve Bank of India does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

QUES 15. It is said that rating of NBFCs is necessary before it accepts deposit? Is it true? Who rates them?

ANS 15. An unrated NBFC, except certain Asset Finance companies (AFC), cannot accept public deposits. An exception is made in case of unrated AFC companies with CRAR of 15% which can accept public deposit without having a credit rating upto a certain ceiling depending upon its Net Owned Funds (c.f Ans to Q 8). AN NBFC may get itself rated by any of the four rating agencies namely, CRISIL, CARE, ICRA and FITCH Ratings India Pvt. Ltd.

QUES 16. What are the symbols of minimum investment grade rating of different companies?

ANS 16. The symbols of minimum investment grade rating of the Credit rating agencies are:

Name of rating agencies	Nomenclature of minimum investment grade credit rating (MIGR)
CRISIL	FA- (FA MINUS)
ICRA	MA- (MA MINUS)
CARE	CARE BBB (FD)
FITCH Ratings India Pvt. Ltd.	tA-(ind)(FD)

It may be added that A- is not equivalent to A, AA- is not equivalent to AA and AAA- is not equivalent to AAA.

QUES 17. Can an NBFC which is yet to be rated accept public deposit?

ANS 17. No, an NBFC cannot accept deposit without rating (except an Asset Finance Company complying with prudential norms and having CRAR of 15%, as explained above at Ans. to Q 8).

QUES 18. When a company’s rating is downgraded, does it have to bring down its level of public deposits immediately or over a period of time?

ANS 18. If rating of an NBFC is downgraded to below minimum investment grade rating, it has to stop accepting public deposit, report the position within fifteen working days to the RBI and reduce within three years from the date of such downgrading of credit rating, the amount of excess public deposit to nil or to the appropriate extent permissible under paragraph 4(4) of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998.

QUES 19. In case an NBFC defaults in repayment of deposit what course of action can be taken by depositors?

ANS 19. If an NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit in a court of law to recover the deposits.

QUES 20. What is the role of Company Law Board in protecting the interest of depositors? How one can approach it?

ANS 20. Where an NBFC fails to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law Board (CLB) either on its own motion or on an application from the depositor, directs by order the non-banking financial company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order.

As explained above, the depositor can approach CLB by mailing an application in prescribed form to the appropriate bench of the Company Law Board according to its territorial jurisdiction alongwith the prescribed fee.

QUES 21. Can you give the addresses of the various benches of the Company Law Board (CLB) indicating their respective jurisdiction?

ANS 21. The details of addresses and territorial jurisdiction of the bench officers of CLB are as under:

Sr.No.	Addresses	Territorial Jurisdiction
1.	Bench Officer, Company Law Board, Northern Region Bench, Shastri Bhavan, ‘A’ Wing, 5th Floor, Dr. Rajendra Prasad Road, New Delhi 110 001.	Uttar Pradesh, Jammu & Kashmir, Punjab, Himachal Pradesh, Rajasthan, Haryana and Union Territories of Chandigarh and Delhi
2.	Bench Officer, Company Law Board, Southern Region Bench, Shastri Bhavan, ‘A’ Wing, 5th Floor, Block 8, No 26, Haddows Road, Chennai 600 006.	Tamil Nadu, Andhra Pradesh, Kerala, Karnataka, Union Territories of Amindivi, Minicoy and Lakshadweep Islands and Pondicherry
3.	Bench Officer, Company Law Board, Western Region Bench, 2nd Floor, N.T.C. House, 15, Narottam Morarjee Marg, Ballard Estate, Mumbai-400 038.	Maharashtra, Gujarat, Madhya Pradesh, Goa and Union Territories of Dadra & Nagar Haveli, Daman and Diu.
4.	Bench Officer, Company Law Board, Eastern Region Bench, 9, Old Post Office Street, 6th Floor, Kolkata 700 001.	West Bengal, Orissa, Bihar, Assam, Tripura, Manipur, Nagaland, Meghalaya, Arunachal Pradesh, Mizoram, Union Territories of Andaman and Nicobar Islands.
5.	Bench Officer, Company Law Board, Principal Bench at New Delhi, Shastri Bhavan, ‘A’ Wing, 5th Floor, Dr. Rajendra Prasad Road, New Delhi 110 001.	All Principal Bench matters all over India.

QUES 22. We hear that in a number of cases official liquidators have been appointed on the defaulting NBFCs. What is their role and how one can approach them?

ANS 22. Official Liquidator is appointed by the court after giving the company reasonable opportunity of being heard in a winding up petition. The liquidator performs duties of winding up and such duties in reference thereto as the court may impose.
Where the court has appointed an official liquidator or provisional liquidator, he becomes custodian of the property of the company and runs the day-to-day affairs of the company. He has to draw up a statement of affairs of the company in prescribed form containing particulars of assets of the company, its debts and liabilities, names/residences/occupations of its creditors, the debts due to the company and such other information as may be prescribed. The scheme is drawn up by the liquidator and same is put up to the court for approval. The liquidator realizes the assets of the company and arranges to repay the creditors according to the scheme approved by the court. The liquidator generally inserts advertisement in the newspaper inviting claims from depositors/investors in compliance with court orders. Therefore, the investors/depositors should file the claims within due time as per such notices of the liquidator. The Reserve Bank also provides assistance to the depositors in furnishing addresses of the official liquidator.

QUES 23. Consumer Court play useful role in attending to depositors problems. Can one approach Consumer Forum, Civil Court, CLB simultaneously?

ANS 23. Yes, a depositor can approach any or all of the redressal authorities i.e consumer forum, court or CLB.

QUES 24. Is there an Ombudsman for hearing complaints against NBFCs?

ANS 24. No, there is no Ombudsman for hearing complaints against NBFCs. However, in respect of credit card operations of an NBFC, if a complainant does not get satisfactory response from the NBFC within a maximum period of thirty (30) days from the date of lodging the complaint, the customer will have the option to approach the Office of the concerned Banking Ombudsman for redressal of his grievance/s.

QUES 25. What are various prudential regulations applicable to NBFCs?

ANS 25. The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998. The directions interalia, prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, constitution of audit committee, disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares.

QUES 26. Please explain the terms ‘owned fund’ and ‘net owned fund’ in relation to NBFCs?

ANS 26. ‘Owned Fund’ means aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance sheet of the company after deducting therefrom accumulated balance of loss, deferred revenue expenditure and other intangible assets.
'Net Owned Fund' is the amount as arrived at above minus the amount of investments of such company in shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances made to and deposits with subsidiaries and companies in the same group, to the extent it exceeds 10% of the owned fund.

QUES 27. What are the responsibilities of the NBFCs accepting/holding public deposits with regard to submission of Returns and other information to RBI?

ANS 27. The NBFCs accepting public deposits should furnish to RBI

1. Audited balance sheet of each financial year and an audited profit and loss account in respect of that year as passed in the annual general meeting together with a copy of the report of the Board of Directors and a copy of the report and the notes on accounts furnished by its Auditors;
   
   
2. Statutory Annual Return on deposits - NBS 1;
   
   
3. Certificate from the Auditors that the company is in a position to repay the deposits as and when the claims arise;
   
   
4. Quarterly Return on liquid assets;
   
   
5. Half-yearly Return on prudential norms;
   
   
6. Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore and above or with assets of Rs. 100 crore and above irrespective of the size of deposits ;
   
   
7. Monthly return on exposure to capital market by companies having public deposits of Rs. 50 crore and above; and
   
   
8. A copy of the Credit Rating obtained once a year along with one of the Half-yearly Returns on prudential norms as at (v) above.

QUES 28. What are the documents or the compliance required to be submitted to the Reserve Bank of India by the NBFCs not accepting/holding public deposits?

ANS 28. The NBFCs having assets of Rs. 100 crore and above but not accepting public deposits are required to submit a Monthly Return on important financial parameters of the company. All companies not accepting public deposits have to pass a board resolution to the effect that they have neither accepted public deposit nor would accept any public deposit during the year.

However, all the NBFCs (other than those exempted) are required to be registered with RBI and also make sure that they continue to be eligible to retain the Registration. Further, all NBFCs (including non-deposit taking) should submit a certificate from their Statutory Auditors every year to the effect that they continue to undertake the business of NBFI requiring holding of CoR under Section 45-IA of the RBI Act, 1934.

RBI has powers to cause Inspection of the books of any company and call for any other information about its business activities. For this purpose, the NBFC is required to furnish the information in respect of any change in the composition of its Board of Directors, address of the company and its Directors and the name/s and official designations of its principal officers and the name and office address of its Auditors. With effect from April 1, 2007, non-deposit taking NBFCs with assets of Rs 100 crore and above were advised to maintain minimum CRAR of 10% and also comply with single/group exposure norms. The companies have to achieve CRAR of 12% by March 31, 2009 and 15% by March 31, 2010.

QUES 29. The NBFCs have been made liable to pay interest on the overdue matured deposits if the company has not been able to repay the matured public deposits on receipt of a claim from the depositor. Please elaborate the provisions.

ANS 29. As per Reserve Bank’s Directions, overdue interest is payable to the depositors in case the company has delayed the repayment of matured deposits, and such interest is payable from the date of receipt of such claim by the company or the date of maturity of the deposit whichever is later, till the date of actual payment. If the depositor has lodged his claim after the date of maturity, the company would be liable to pay interest for the period from the date of claim till the date of repayment. For the period between the date of maturity and the date of claim it is the discretion of the company to pay interest.

QUES 30. Can a company pre-pay its public deposits?

ANS 30. AN NBFC accepts deposits under a mutual contract with its depositors. In case a depositor requests for pre-mature payment, Reserve Bank of India has prescribed Regulations for such an eventuality in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 wherein it is specified that NBFCs cannot grant any loan against a public deposit or make premature repayment of a public deposit within a period of three months (lock-in period) from the date of its acceptance. However, in the event of death of a depositor, the company may, even within the lock-in period, repay the deposit at the request of the joint holders with survivor clause / nominee / legal heir only against submission of relevant proof, to the satisfaction of the company.

An NBFC subject to above provisions, which is not a problem company, may permit after the lock–in period, premature repayment of a public deposit at its sole discretion, at the rate of interest prescribed by the Bank.

A problem NBFC is prohibited from making premature repayment of any deposits or granting any loan against public deposit/deposits, as the case may be. The prohibition shall not, however, apply in the case of death of depositor or repayment of tiny deposits i.e. up to Rs. 10000/- subject to lock in period of 3 months in the latter case.

QUES 31. What is the liquid asset requirement for the deposit taking companies? Where these assets are kept? Do depositors have any claims on them?

ANS 31. In terms of Section 45-IB of the RBI Act, 1934, the minimum level of liquid asset to be maintained by NBFCs is 15 per cent of public deposits outstanding as on the last working day of the second preceding quarter. Of the 15%, NBFCs are required to invest not less than ten percent in approved securities and the remaining 5% can be in unencumbered term deposits with any scheduled commercial bank. Thus, the liquid assets may consist of Government securities, Government guaranteed bonds and term deposits with any scheduled commercial bank.

The investment in Government securities should be in dematerialised form which can be maintained in Constituents’ Subsidiary General Ledger (CSGL) Account with a scheduled commercial bank (SCB) / Stock Holding Corporation of India Limited (SHICL). In case of Government guaranteed bonds the same may be kept in dematerialised form with SCB/SHCIL or in a dematerialised account with depositories [National Securities Depository Ltd. (NSDL)/Central Depository Services (India) Ltd. (CDSL)] through a depository participant registered with Securities & Exchange Board of India (SEBI). However in case there are Government bonds which are in physical form the same may be kept in safe custody of SCB/SHCIL.

NBFCs have been directed to maintain the mandated liquid asset securities in a dematerialised form with the entities stated above at a place where the registered office of the company is situated. However, if an NBFC intends to entrust the securities at a place other than the place at which its registered office is located, it may do so after obtaining the permission of RBI in writing. It may be noted that liquid assets in approved securities will have to be maintained in dematerialised form only.

The liquid assets maintained as above are to be utilised for payment of claims of depositors. However, deposit being unsecured in nature, depositors do not have direct claim on liquid assets.

QUES 32. Please tell us something about the companies which are NBFCs, but are exempted from registration?

ANS 32. Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and Chit Fund Companies are NBFCs but they have been exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain conditions.

Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board of India, and Insurance companies are regulated by Insurance Regulatory and Development Authority. Similarly, Chit Fund Companies are regulated by the respective State Governments and Nidhi Companies are regulated by Ministry of Corporate Affairs, Government of India.

It may also be mentioned that Mortgage Guarantee Companies have been notified as Non-Banking Financial Companies under Section 45 I(f)(iii) of the RBI Act, 1934.

QUES 33. There are some entities (not companies) which carry on activities like that of NBFCs. Are they allowed to take deposits? Who regulates them?

ANS 33. Any person who is an individual or a firm or unincorporated association of individuals cannot accept deposits except by way of loan from relatives, if his/its business wholly or partly includes loan, investment, hire-purchase or leasing activity or principal business is that of receiving of deposits under any scheme or arrangement or in any manner or lending in any manner.

QUES 34. What is a Residuary Non-Banking Company (RNBC)? In what way it is different from other NBFCs?

ANS 34. Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company. These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilisation of deposits and requirement of deployment of depositors' funds as per Directions. Besides, Prudential Norms Directions are applicable to these companies also.

QUES 35. We understand that there is no ceiling on raising of deposits by RNBCs, then how safe is deposit with them?

ANS 35. It is true that there is no ceiling on raising of deposits by RNBCs but every RNBC has to ensure that the amounts deposited and investments made by the company are not less than the aggregate amount of liabilities to the depositors.

To secure the interest of depositor, such companies are required to invest in a portfolio comprising of highly liquid and secure instruments viz. Central/State Government securities, fixed deposits with scheduled commercial banks (SCB), Certificate of deposits of SCB/FIs, units of Mutual Funds, etc.

QUES 36. Can RNBC forfeit deposit if deposit installments are not paid regularly or discontinued?

ANS 36. No Residuary Non-Banking Company shall forfeit any amount deposited by the depositor, or any interest, premium, bonus or other advantage accrued thereon.

QUES 37. Please tell us something on rate of interest payable by RNBCs on deposits and maturity period of deposits?

ANS 37. The amount payable by way of interest, premium, bonus or other advantage, by whatever name called by a RNBC in respect of deposits received shall not be less than the amount calculated at the rate of 5% (to be compounded annually) on the amount deposited in lump sum or at monthly or longer intervals; and at the rate of 3.5% (to be compounded annually) on the amount deposited under daily deposit scheme. Further, a RNBC can accept deposits for a minimum period of 12 months and maximum period of 84 months from the date of receipt of such deposit. They cannot accept deposits repayable on demand.

Q.1. What is RTGS System?

Ans The acronym "RTGS" stands for Real Time Gross Settlement. RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a "real time" and on "gross" basis. This is the fastest possible money transfer system through the banking channel. Settlement in "real time" means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. "Gross settlement" means the transaction is settled on one to one basis without bunching with any other transaction. Considering that money transfer takes place in the books of the Reserve Bank of India, the payment is taken as final and irrevocable.

Q.2. How RTGS is different from National Electronics Funds Transfer System (NEFT)?

Ans NEFT is also an electronic fund transfer system that operate on a deferred net settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place at a particular point of time. All transactions are held up till that time. For example, NEFT settlement takes place 6 times a day during the week days (9.30 am, 10.30 am, 12.00 noon. 1.00 pm, 3.00 pm and 4.00 pm) and 3 times during Saturdays (9.30 am, 10.30 am and 12.00 noon). Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time. Contrary to this, in RTGS, transactions are processed continuously throughout the RTGS business hours (9.00 am to 4.30 pm on week days and 9.00am to 12.00 noon on Saturday).

Q.3. Is there any minimum / maximum amount stipulation for RTGS transactions?

Ans The RTGS system is primarily for large value transactions. The minimum amount to be remitted through RTGS is Rs.1 lakh. There is no upper ceiling for RTGS transactions. No minimum or maximum stipulation has been fixed for EFT and NEFT transactions.

Q.4. What is the time taken for effecting funds transfer from one account to another under RTGS?

Ans. Under normal circumstances the beneficiary branches are expected to receive the funds in real time as soon as funds are transferred by the remitting bank. The beneficiary bank has to credit the beneficiary's account within two hours of receiving the funds transfer message.

Q.5. Would the remitting customer receive an acknowledgement of money credited to the beneficiary's account?

Ans The remitting bank receives a message from the Reserve Bank that money has been credited to the receiving bank. Based on this the remitting bank can advise the remitting customer that money has been delivered to the receiving bank.

Q.6. Would the remitting customer get back the money if it is not credited to the beneficiary's account? When?

Ans Yes. It is expected that the receiving bank will credit the account of the beneficiary instantly. If the money cannot be credited for any reason, the receiving bank would have to return the money to the remitting bank within 2 hours. Once the money is received back by the remitting bank, the original debit entry in the customer's account is reversed.

Q.7. Till what time RTGS service window is available?

Ans The RTGS service window for customer's transactions is available from 9.00 hours to 16.30 hours on week days and from 9.00 hours to 12.00 noon on Saturdays i.e. to accept the customer transactions for settlement at the RBI during 9.00 hours to 16.30 hours on week days and between 9.00 hours and 12.00 noon on Saturday. However, the timings between these hours would vary depending on the customer timings the branches have. For inter-bank transactions, the service window is available from 9.00 hours to 18.00 hours on week days and from 9.00 hours to 14.00 hours on Saturdays.

Q.8. What about Processing Charges/Service Charges for RTGS transactions?

Ans While RBI has waived its processing charges for all electronic payment products till March 31, 2009, levy of service charges by banks is left to the discretion of the respective banks
Q.9. What is the essential information that the remitting customer would have to furnish to a bank for the remittance to be effected?

Ans The remitting customer has to furnish the following information to a bank for effecting a RTGS remittance:

1. Amount to be remitted
2. His account number which is to be debited
3. Name of the beneficiary bank
4. Name of the beneficiary customer
5. Account number of the beneficiary customer
6. Sender to receiver information, if any
7. The IFSC code of the receiving branch

Q.10. How would one know the IFSC code of the receiving branch?

Ans The beneficiary customer can obtain the IFSC code from his branch. The IFSC code is also available in the cheque leaf. This code number and bank branch details can be communicated by the beneficiary to the remitting customer.

Q.11. Do all bank branches in India provide RTGS service?

Ans No, all the bank branches in India are not RTGS enabled. As on April 30, 2008 more than 44,000 bank branches are RTGS enabled.
Q.12. Is there any way that a remitting customer can track the remittance transaction?

Ans It would depend on the arrangement between the remitting customer and the remitting bank. Some banks with internet banking facility provide this service. Once the funds are credited to the account of the beneficiary bank, the remitting customer gets a confirmation from his bank either by an e-mail or by a short message on the mobile.

Q.13. How can a remitting customer know whether the bank branch of the beneficiary accepts remittance through RTGS?

Ans For a funds transfer to go through RTGS, both the sending bank branch and the receiving bank branch would have to be RTGS enabled.
Q.14. How much volume and value of transactions are routed through RTGS on a typical day?

Ans On a typical day, RTGS handles about 30,000 transactions a day for an approximate value of Rs.2,00,000 crore.

Q.15. Whom do I can contact, in case of non-credit or delay in credit to the beneficiary account?

Ans Contact your bank / branch. If the issue is not resolved satisfactorily, the Customer Service Department of RBI may be contacted at -
The Chief General Manager,
Reserve Bank of India,
Customer Service Department,
1st Floor, Amar Building, Fort,
Mumbai-400001

Q.1. What is NEFT System?

Ans: National Electronic Funds Transfer (NEFT) system is a nation wide funds transfer system to facilitate transfer of funds from any bank branch to any other bank branch.

Q. 2. Are all bank branches in the system part of the funds transfer network?

Ans: No. As on July 20, 2008, 46363 branches of 87 banks are participating. Steps are being taken to widen the coverage both in terms of banks and branches.

Q.3. Whether the system is centre specific or has any geographical restriction?

Ans: No, there is no restriction of centres or of any geographical area inside the country. The system uses the concept of centralised accounting system and the bank's account, that are sending or receiving the funds transfer instructions, gets operated at one centre, viz, Mumbai only. The individual branches participating in NEFT could be located anywhere across the country, as detailed in the list provided on our website.

Q.4. What is the funds availability schedule for the beneficiary?

Ans: The beneficiary gets the credit on the same Day or the next Day depending on the time of settlement.

Q.5. How does the NEFT system operate?

Step-1: The remitter fills in the NEFT Application form giving the particulars of the beneficiary (bank-branch, beneficiary's name, account type and account number) and authorises the branch to remit the specified amount to the beneficiary by raising a debit to the remitter's account. (This can also be done by using net banking services offered by some of the banks.)

Step-2: The remitting branch prepares a Structured Financial Messaging Solution (SFMS) message and sends it to its Service Centre for NEFT.

Step-3: The Service Centre forwards the same to the local RBI (National Clearing Cell, Mumbai) to be included for the next available settlement. Presently, NEFT is settled in six batches at 0900, 1100, 1200, 1300, 1500 and 1700 hours on weekdays and 0900, 1100 and 1200 hours on Saturdays

Step-4: The RBI at the clearing centre sorts the transactions bank-wise and prepares accounting entries of net debit or credit for passing on to the banks participating in the system. Thereafter, bank-wise remittance messages are transmitted to banks.

Step-5: The receiving banks process the remittance messages received from RBI and effect the credit to the beneficiaries' accounts.

Q.6. How is this NEFT System an improvement over the existing RBI-EFT System?

Ans: The RBI-EFT system is confined to the 15 centres where RBI is providing the facility, where as there is no such restriction in NEFT as it is based on the centralised concept. The detailed list of branches of various banks participating in NEFT system is available on our website. The system also uses the state-of-the-art technology for the communication, security etc, and thereby offers better customer service.

Q.7. How is it different from RTGS and EFT?

Ans: NEFT is an electronic payment system to transfer funds from any part of country to any other part of the country and works on Net settlement, unlike RTGS that works on gross settlement and EFT which is restricted to the fifteen centers only where RBI offices are located.

Q.8. Any limit on the amount of individual transaction?

Ans There is no value limit for individual transactions.

Q.9. What about Processing Charges/Service Charges

Ans While RBI has waived the processing charges till March 31, 2009, levy of service charges by banks is left to the discretion of the respective banks.

Q.10. What is IFS Code (IFSC)? How it is different from MICR code?

Ans: Indian Financial System Code (IFSC) is an alpha numeric code designed to uniquely identify the bank-branches in India. This is 11 digit code with first 4 characters representing the banks code, the next character reserved as control character (Presently 0 appears in the fifth position) and remaining 6 characters to identify the branch. The MICR code has 9 digits to identify the bank-branch.

Q.11. How I will know, what is the IFS Code of my bank-branch?

Ans: RBI had since advised all the banks to print IFSC on cheques leaves issued to their customers. You may also contact your bank-branch and get the IFS Code of that branch.

Q.12. Whom I can contact, in case of non-credit or delay in credit to the beneficiary account?
Ans: Contact your bank / branch. If the issue is not resolved satisfactorily, the Customer Service Department of RBI may be contacted on nefthelpdeskncc@rbi.org.in or write to -

The General Manager,
Reserve Bank of India,
National Clearing Centre
First Floor, Free Press House
Nariman Point
Mumbai – 400 027

Q.14. Is it necessary to have a bank account to originate the NEFT transaction?

Ans: Yes, NEFT is an account to account funds transfer system.

Q.15. Is it necessary that the beneficiary should have an account at the destination bank-branch?

Ans: Yes, NEFT is an account to account funds transfer system.

Q.16. Can I receive foreign remittances through NEFT?

Ans: This system can be used only for remitting Indian Rupee among the participating banks within the country.

Q.17. Can I send remittances abroad using the NEFT?

Ans: No

Q.18. Can I originate a transaction to receive funds from another account?

Ans: No

Q.19. Can I send/receive funds from/to NRI accounts?

Ans: Yes, subject to applicability of provisions of FEMA

Q.20. Would the customer receive an acknowledgement of money credited to the beneficiary?

Ans: No, however electronic acknowledgement is generated for the customer that his money is received by the beneficiary at the sender branch.

Q.21. Would the remitting customer get back the money if it is not credited to the beneficiary’s account?

Ans: Yes, the remitting customer gets back the money if it is not credited to the beneficiary account.

Q.22. Till what time NEFT service window is available?

Ans: There are six settlements at 0900, 1100, 1200, 1300, 1500 and 1700 hours on weekdays and 0900, 1100 and 1200 hours on Saturdays.

Q.23. What is the essential information that the remitting customer would have to furnish for the remittance to be effected?

Ans: The essential information that the remitting customer has to furnish is:

Beneficiary details such as beneficiary name and account number
Name and IFSC of the beneficiary bank branch.
Q.24. Is there any way a remitting customer can track the remittance transaction?

Ans: The remitting customer can track the remitting transaction through the remitting branch only, as the remitting branch is informed about the status of the remitted transactions.

Almost all the Indian Banks provide services to the NRIs. There are different types of accounts for them. They are:
Non-Resident (Ordinary) Account - NRO A/c
Non-Resident (External) Rupee Account - NRE A/c
Non-Resident (Foreign Currency) Account - FCNR A/c
An Indian resident who is earning forign exchange can also maintain Foreign Currency account in the country with an authorised dealer bank but only to the maximum limit of 50% of such foreign exchange earnings under the Exchange Earners Foreign Currency Account (EEFC) Scheme.

Some of the FAQs given below will make it easy to understand the services provided by banks to the NRIs.

FAQ's

What are the special features of each bank account?

The special features are as under:

NRO A/c.: The funds, credited to this account, cannot be repatriated outside India in foreign exchange, without prior permission of the Reserve Bank of India. Interest, earned is eligible for repatriation outside India, net of Indian taxes. The remittance of interest (net of taxes) will be permitted by the authorised dealer who maintains the account, if the account holder makes an application to the authorised dealer, in the prescribed form. No RBI permission is required for remittance of interest.

NRE A/c.: The funds, standing to the credit of this account, as well as interest earned thereon, are remittable outside India in free foreign exchange, without permission of the RBI. The interest income is not subject to Indian Income-tax. Credits to the accounts should be in the form of remittance in foreign exchange from outside India, as well as other funds, which are eligible to be remitted outside India, in free foreign exchange. Funds, emanating from local sources, are not eligible to be credited to these accounts, unless these funds are otherwise remittable outside India, in terms of the existing Exchange Control Regulations.

FCNR A/c.: These accounts can be opened in four foreign currencies:
Pounds Sterling;
US Dollars;
Japanese Yen;
Euro.


For the purpose of opening an account, remittance in foreign exchange, in the same currency, should be received in India. The accounts can be opened only as fixed deposits, with a minimum maturity of one year and, a maximum maturity of three years. The principal, as well as interest, earned on these accounts, is remittable outside India, in the same currency or, in other convertible currency, as desired by the account holder. The interest, earned on these deposits, is exempt from Indian Income-tax.


Can Non Resident accounts be opened/ operated by the Power of Attorney holder in India, on behalf of the non-resident?

The accounts cannot be opened by the Power of Attorney holder in India. However, the latter can operate the accounts for the purpose of local payments to be made on behalf of the non-resident account holder. The Power of Attorney holder is not permitted to make gifts from these accounts and, is not allowed to make remittances outside India.


What happens to the status of these accounts when the non-resident holder becomes a person, resident in India?

The accounts are to be re-designed as resident accounts, when the non-resident account holder becomes a person, resident in India. In the case of fixed deposits opened by the account holder, before becoming resident in India, the contracted rate of interest will be paid till maturity of the deposits. Similarly, FCNR deposits will be eligible to be held in respective currencies till maturity of the deposits, even after the non-resident holder become a resident in India. He will, however, cease to get tax exemption on interest on the erstwhile deposits (NRE/FCNR deposits), after he becomes resident in India. In certain situations, it might be advisable for the account holder to convert the account to a Resident Foreign Currency Account Deposit (RFC)


What are the various facilities available to NRIs/OCBs?

The facilities available to NRIs/OCBs for making investment in India are as follows:
opening and maintenance of bank accounts in India;


investment in shares and securities of Indian companies, government securities, units of domestic mutual funds and ,deposits with Indian companies/firms;


investment in immovable properties in India;


investment in proprietorship/partnership concerns in India.



Are NRIs permitted to send remittances outside India out of the assets in India that are inherited by them?

Yes. RBI will consider application from NRIs for remittance of assets, inherited by them in India. Such remittance may be permitted up to US$ 100,000 per year.


Can a person of Indian origin acquire any immovable property in India by way of inheritance?

A person of Indian origin, resident outside India, may acquire any immovable property in India by way of inheritance from a person, resident outside India, who had acquired such property in accordance with the provisions of foreign exchange law in force at the time of acquisition by him or the provisions of Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000. Immovable property, by way of inheritance, can also be acquired by a person of Indian origin resident outside from a person resident in India.


Can NRIs and Overseas Corporate Bodies (OCBs) invest in India?

The Government of India has adopted a liberal policy, with respect to investments by NRIs and OCBs in India. Such investments are allowed, both, through the RBI route and also through the Government route, i.e., through the Foreign Investment Promotion Board (FIPB) NRIs and OCBs are permitted to invest up to 100% equity in real estate development activity and civil aviation sectors. Investment, made by the NRIs and OCBs, are fully repatriable, except in the case of real estate, which has a 3 year lock-in period on original investment and, 16% cap on dividend repatriation. For those proposals that do not qualify under the automatic route, Government approval is granted through FIPB.


What is the extent and application of Foreign Exchange Management Act (FEMA)?

FEMA extends to the whole of India. It also applies to all branches, offices and agencies outside India, owned or controlled by a person, resident in India. It also applies to any contravention, there under, committed in or, outside India, by any person to whom the Act applies.


What is the penalty for contravention of FEMA?

Any person, contravening FEMA, shall be liable, upon adjudication, to a penalty up to three times the sum involved in such contravention, where such amount is quantifiable, or up to Rupees Two hundred thousand, where the amount is not quantifiable. In addition, where such contravention is a continuing one, the person will be liable to further penalty, which may extend to Rupees Five thousand for every day after the first day, during which the contravention continues.


Can a person of Indian origin resident outside India gift properties acquired earlier in terms of the provisions of FERA/FEMA?

Yes. A person of Indian origin resident outside India may transfer residential or commercial property in India by way of gift to a person resident in India or to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India. A Person of Indian origin resident outside India may also transfer by way of gift agriculture land/farm house/plantation property in India to a person resident in India who is a citizen of India.


Can an NRI account be opened in the name of crew members of shipping companies?

Yes, if their posting is not based in India and they derive their income from other country in foreign currency.