INTRODUCTION

The Reserve Bank of India is India's Central Banking Institution, which controls
the Monetary Policy of the Indian Rupee. It commenced it's operations on 1 April
1935 during the British Rule in accordance with the provisions of the Reserve
Bank of India Act, 1934.The original share capital was divided into shares of 100
each fully paid, which were initially owned entirely by private shareholders.
Following India's independence on 15 - August - 1947, the RBI was nationalized in
the year of 1949.
The RBI plays an important part in the Development Strategy of the Government of India. It is a
member bank of the Asian Clearing Union. The general superintendence and direction of the RBI is
entrusted with the 21-member Central Board of Directors: theGovernor (Dr. Raghuram Rajan), 4
Deputy Governors, 2 Finance Ministry representatives, 10 government-nominated directors to
represent important elements from India's economy, and 4 directors to represent local boards
headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of these local boards consists of
5 members who represent regional interests, and the interests of co-operative and indigenous
banks.
The RBI plays an important part in the Development Strategy of the Government
of India. It is a member bank of the Asian Clearing Union.

OBJECTIVE AND REASONS FOR ESTABLISHMENT OF RBI

The main objectives for establishment of RBI as the central bank of India
were as follows:
To manage the Monetary and credit system of the country
To stabilize internal and external value of rupee
For balanced and systematic development of banking in the country
For the development of organized money market in the country
For proper arrangement of agriculture finance
For proper arrangement of industrial finance
For proper management of public debt
To establish monetary relations with other countries of the world and
international financial institutions
For centralization of cash reserves of commercial banks
To maintain balance between demand and supply of currency

Urjit patel committee

The conduct of monetary policy has undergone fundamental changes and regime shifts all over the
world, mainly in response to the challenges and opportunities thrown up by structural changes in
economic activity as well as by financial liberalisation and its outcomes. A clearer focus on price stability
as a principal though not necessarily the sole objective of monetary policy has evolved through a
broad consensus. With the deregulation of financial markets and globalisation, the process of monetary
policy formulation has acquired a much greater market orientation than ever before. This has been
accompanied by institutional changes even as central banks have strived for operational autonomy in
pursuit of their goals.
I.2 The global financial crisis and its aftermath have posed formidable challenges for central banks and
subjected their mandates to close scrutiny and re-evaluation in the face of unprecedented financial
instability. In advanced economies (AEs), this has necessitated use of unconventional monetary policy
tools including asset purchases and forward guidance. In the case of emerging market economies
(EMEs), the conduct of monetary policy has been complicated by, inter alia, systemic externalities
associated with monetary policies of advanced economies. Consequently monetary policy in emerging
countries has been required to contend not only with supply shocks but also to manage external shocks
emanating from surges and ebbs in capital flows, volatility in exchange rates and asset prices, and exit
from their own (overly) accommodative policies.
I.3 Indias monetary policy framework has undergone several transformations reflecting underlying
macroeconomic and financial conditions. In the post global financial crisis years particularly, there has
been considerable debate around the monetary policy framework, especially due to the coexistence of
persistent high inflation and sluggish growth.
I.4 Against this backdrop, Governor Dr. Raghuram G. Rajan, in a statement after assuming office on
September 4, 2013 observed that:
The primary role of the central bank, as the RBI Act suggests, is monetary stability, that is, to sustain
confidence in the value of the countrys money. Ultimately, this means low and stable expectations of
inflation, whether that inflation stems from domestic sources or from changes in the value of the currency,
from supply constraints or demand pressures. I have asked Deputy Governor Urjit Patel, together with a
panel he will constitute of outside experts and RBI staff, to come up with suggestions in three months on
what needs to be done to revise and strengthen our monetary policy framework. A number of past
committees, including the FSLRC, have opined on this, and their views will also be considered carefully.
I.5 Accordingly, an Expert Committee to Revise and Strengthen the Monetary Policy Framework was
appointed on September 12, 2013. The main objective of the Committee is to recommend what needs to
be done to revise and strengthen the current monetary policy framework with a view to, inter alia, making
it transparent and predictable.
I.6 The Committee comprised of:
Chairman:
1. Dr. Urjit R. Patel, Deputy Governor, Reserve Bank of India
Members:
2. Dr. P.J. Nayak

3. Professor Chetan Ghate, Associate Professor, Economics and Planning Unit, Indian Statistical
Institute, New Delhi
4. Professor Peter J. Montiel, Professor of Economics, Williams College, USA
5. Dr. Sajjid Z. Chinoy, Chief Economist and Executive Director, J.P. Morgan
6. Dr. Rupa Nitsure, Chief Economist, Bank of Baroda
7. Dr. Gangadhar Darbha, Executive Director, Nomura Securities
8. Shri Deepak Mohanty, Executive Director, Reserve Bank of India
Member Secretary:
9. Dr. Michael Debabrata Patra, Principal Adviser, Monetary Policy Department, Reserve Bank of
India
The Secretariat of the Committee comprised Dr. Mridul Saggar, Director, Department of Economic and
Policy Research, Shri Sitikantha Pattanaik, Director, Monetary Policy Department, Dr. Praggya Das,
Director, Monetary Policy Department and Dr. Abhiman Das, Director, Department of Statistics and
Information Management.
I.7 The terms of reference of the Committee were:
1. To review the objectives and conduct of monetary policy in a globalised and highly interconnected environment.
2. To recommend an appropriate nominal anchor for the conduct of monetary policy.
3. To review the organisational structure, operating framework and instruments of monetary policy,
particularly the multiple indicator approach and the liquidity management framework, with a view
to ensuring compatibility with macroeconomic and financial stability, as well as market
development.
4. To identify regulatory, fiscal and other impediments to monetary policy transmission, and
recommend measures and institutional pre-conditions to improve transmission across financial
market segments and to the broader economy.
5. To carefully consider the recommendations of previous Committees/Groups in respect of all of the
above.
The Committee commenced its work from September 26, 2013. The Memorandum appointing the
Committee is at Annex A.
I.8 The Committee gained immensely from deliberations with experts/economists/analysts (Annex B).
Helpful comments and suggestions were received from Professor Anil Kashyap, University of Chicago
and Dr. Sujit Kapadia, Bank of England, which are greatly appreciated. The Committee also benefited
from discussions with various officials in the Reserve Bank of India (RBI) including Shri Chandan Sinha,
Principal Chief General Manager, Department of Banking Operations and Development; Shri G.
Mahalingam, Principal Chief General Manager, Financial Markets Department; Dr. B. K. Bhoi, Adviser,
Monetary Policy Department; Shri Jeevan Kumar Khundrakpam, Director, Monetary Policy Department;

Shri A.K. Mitra, Director, Monetary Policy Department and Shri J. B. Singh, Assistant Adviser, Monetary
Policy Department.
I.9 The Committee wishes to place on record appreciation for the team of resource persons who
supported the Committees work. Drawn from the Monetary Policy Department, the Department of
Economic and Policy Research and the Department of Statistics and Information Management, the
contributions of resource persons, i.e., Dr. Saibal Ghosh, Shri Sanjib Bordoloi, Dr. Saurabh Ghosh, Dr.
Snehal Herwadkar, Shri S. M. Lokare, Shri Asish Thomas George, Shri Rajesh Kavediya, Shri G. V.
Nadhanael, Smt. Abhilasha and Shri Joice John are gratefully acknowledged. The Committee is
appreciative of the administrative support from Smt. Indrani Banerjee, Shri P. B. Kulkarni and Shri M. Z.
Rahman of the Monetary Policy Department and technical support from the Department of Information
Technology.
I.10 The Committee had six formal meetings and a number of informal meetings.
I.11 The Report is organised in six chapters: Chapter II revisits the choice of nominal anchor for Indias
monetary policy. Chapter III evaluates the effectiveness and transparency of organisational structure,
operating framework and instruments of monetary policy. Chapter IV addresses various impediments to
transmission of monetary policy. Chapter V discusses the conduct of monetary policy in a globalised
environment and Chapter VI provides a summary of the Committees recommendations.
R The recommendations of the Committee are set out in this Chapter.
The Choice of Nominal Anchor
(1) Inflation should be the nominal anchor for the monetary policy framework. This nominal anchor should
be set by the Reserve Bank as its predominant objective of monetary policy in its policy statements. The
nominal anchor should be communicated without ambiguity, so as to ensure a monetary policy regime
shift away from the current approach to one that is centered around the nominal anchor. Subject to the
establishment and achievement of the nominal anchor, monetary policy conduct should be consistent with
a sustainable growth trajectory and financial stability (Para No: II.25).
The Choice of Inflation Metric
(2) The RBI should adopt the new CPI (combined) as the measure of the nominal anchor for policy
communication. The nominal anchor should be defined in terms of headline CPI inflation, which closely
reflects the cost of living and influences inflation expectations relative to other available metrics ( Para No:
II.36).
Numerical Target and Precision
(3) The nominal anchor or the target for inflation should be set at 4 per cent with a band of +/- 2 per cent
around it (a) in view of the vulnerability of the Indian economy to supply/external shocks and the relatively
large weight of food in the CPI; and (b) the need to avoid a deflation bias in the conduct of monetary
policy. This target should be set in the frame of a two-year horizon that is consistent with the need to
balance the output costs of disinflation against the speed of entrenchment of credibility in policy
commitment (Para No: II.42).
Time Horizon for Attaining Price Stability
(4) In view of the elevated level of current CPI inflation and hardened inflation expectations, supply
constraints and weak output performance, the transition path to the target zone should be graduated to

bringing down inflation from the current level of 10 per cent to 8 per cent over a period not exceeding the
next 12 months and to 6 per cent over a period not exceeding the next 24 month period before formally
adopting the recommended target of 4 per cent inflation with a band of +/- 2 per cent. The Committee is
also of the view that this transition path should be clearly communicated to the public (Para No: II.43).
(5) Since food and fuel account for more than 57 per cent of the CPI on which the direct influence of
monetary policy is limited, the commitment to the nominal anchor would need to be demonstrated by
timely monetary policy response to risks from second round effects and inflation expectations in response
to shocks to food and fuel (Para No: II.44).
Institutional Requirements
(6) Consistent with the Fiscal Responsibility and Budget Management (Amendment) Rules, 2013, the
Central Government needs to ensure that its fiscal deficit as a ratio to GDP is brought down to 3.0 per
cent by 2016-17 (Para No: II.47).
(7) Administered setting of prices, wages and interest rates are significant impediments to monetary policy
transmission and achievement of the price stability objective, requiring a commitment from the
Government towards their elimination (Para No: II.48).
Organisational Structure for Monetary Policy Decisions
(8) Monetary policy decision-making should be vested in a monetary policy committee (MPC) ( Para No:
III.22).
Monetary Policy Committee: Composition & Tasks
(9) The Governor of the RBI will be the Chairman of the MPC, the Deputy Governor in charge of monetary
policy will be the Vice Chairman and the Executive Director in charge of monetary policy will be a
member. Two other members will be external, to be decided by the Chairman and Vice Chairman on the
basis of demonstrated expertise and experience in monetary economics, macroeconomics, central
banking, financial markets, public finance and related areas (Para No: III.23).
(10) External members will be full time with access to information/analysis generated within the Reserve
Bank and cannot hold any office of profit, or undertake any activity that is seen as amounting to conflict of
interest with the working of the MPC. The term of office of the MPC will ordinarily be three years, without
prospect of renewal (Para No: III.24).
(11) Each member of the MPC will have one vote with the outcome determined by majority voting, which
has to be exercised without abstaining. Minutes of the proceedings of the MPC will be released with a lag
of two weeks from the date of the meeting (Para No: III.25).
(12) In view of the frequency of data availability and the process of revisions in provisional data, the MPC
will ordinarily meet once every two months, although it should retain the discretion to meet and
recommend policy decisions outside the policy review cycle (Para No: III.26).
(13) The RBI will also place a bi-annual inflation report in the public domain, drawing on the experience
gained with the publication of the document on Macroeconomic and Monetary Developments. The
Inflation Report will essentially review the analysis presented to the MPC to inform its deliberations ( Para
No: III.27).

(14) The Chairman, or in his absence the Vice Chairman, shall exercise a casting vote in situations
arising on account of unforeseen exigencies necessitating the absence of a member for the MPC meeting
in which voting is equally divided (Para No: III.28).
Accountability of MPC
(15) The MPC will be accountable for failure to establish and achieve the nominal anchor. Failure is
defined as the inability to achieve the inflation target of 4 per cent (+/- 2 per cent) for three successive
quarters. Such failure will require the MPC to issue a public statement, signed by each member, stating
the reason(s) for failure, remedial actions proposed and the likely period of time over which inflation will
return to the centre of the inflation target zone (Para No: III.29).
(16) With the establishment of the MPC, there would be a need to upgrade and expand analytical inputs
into the decision making process through prepolicy briefs for MPC members, structured presentations on
key macroeconomic variables and forecasts, simulations of suites of macroeconometric models as
described in Chapter II, forward looking surveys and a dedicated secretariat. This will require restructuring
and scaling-up of the monetary policy department (MPD) in terms of skills, technology and management
information systems, and its reorganization (Para No: III.30).
The Operating Framework of Monetary Policy
(17) As an overarching prerequisite, the operating framework has to subserve stance and objectives of
monetary policy. Accordingly, it must be redesigned around the central premise of a policy rule. While
several variants are available in the literature and in country practice, the Committee is of the view that a
simple rule defined in terms of a real policy rate (that is easily communicated and understood), is suitable
to Indian conditions and is consistent with the nominal anchor recommended in Chapter II. When inflation
is above the nominal anchor, the real policy rate is expected, on average, to be positive. The MPC could
decide the extent to which it is positive, with due consideration to the state of the output gap (actual
output growth relative to trend/potential) and to financial stability (Para No: III.59).
(18) A phased refinement of the operating framework is necessary to make it consistent with the conduct
of monetary policy geared towards the establishment and achievement of the nominal anchor (Para No:
III.60).
Phase-I
(19) In the first or transitional phase, the weighted average call rate will remain the operating target, and
the overnight LAF repo rate will continue as the single policy rate. The reverse repo rate and the MSF rate
will be calibrated off the repo rate with a spread of (+/-) 100 basis points, setting the corridor around the
repo rate. The repo rate will be decided by the MPC through voting. The MPC may change the spread,
which however should be as infrequent as possible to avoid policy induced uncertainty for markets (Para
No: III.61).
Liquidity Management
(20) Provision of liquidity by the RBI at the overnight repo rate will, however, be restricted to a specified
ratio of bank-wise net demand and time liabilities (NDTL), that is consistent with the objective of price
stability. As the 14-day term repo rate stabilizes, central bank liquidity should be increasingly provided at
the 14-day term repo rate and through the introduction of 28-day, 56-day and 84-day variable rate
auctioned term repos by further calibrating the availability of liquidity at the overnight repo rate as
necessary (Para No: III.62).

(21) The objective should be to develop a spectrum of term repos of varying maturities with the 14-day
term repo as the anchor. As the term yield curve develops, it will provide external benchmarks for pricing
various types of financial products, particularly bank deposits, thereby enabling more efficient
transmission of policy impulses across markets (Para No: III.63).
(22) During this phase, the RBI should fine-tune and sharpen its liquidity assessment with a view to be in
a position to set out its own assessment of banks reserves. This will warrant a juxtaposition of topdown
approaches that estimate banks reserves demand consistent with macroeconomic and financial
conditions appropriate for establishing the nominal anchor, and bottom-up approaches that aggregate
bank-wise assessments of liquidity needs submitted by banks themselves to the RBI on a daily basis. As
these liquidity assessments become robust, they should be announced for market participants prior to the
commencement of market operations every day and could be subjected to review and revision during the
day for fine-tuning them with monetary and liquidity conditions. It is envisaged that the RBI will expand
capabilities to conduct liquidity operations on an intra-day basis if needed, including by scaling up trading
on the NDS-OM platform (Para No: III.64).
(23) Consistent with the repo rate set by the MPC, the RBI will manage liquidity and meet the demand for
liquidity of the banking system using a mix of term repos, overnight repos, outright operations and the
MSF(Para No: III.65).
Phase-II
(24) As term repos for managing liquidity in the transition phase gain acceptance, the policy rate voted
on by the MPC will be a target rate for the short end of the money market, to be achieved through active
liquidity management. The 14-day term repo rate is superior to the overnight policy rate since it allows
market participants to hold central bank liquidity for a relatively longer period, thereby enabling them to on
lend/repo term money in the inter-bank market and develop market segments and yields for term
transactions. More importantly, term repos can wean away market participants from the passive
dependence on the RBI for cash/treasury management. Overnight repos under the LAF have effectively
converted the discretionary liquidity facility into a standing facility that could be accessed as the first
resort, and precludes the development of markets that price and hedge risk. Improved transmission of
monetary policy thus becomes the prime objective for setting the 14-day term repo rate as the operating
target (Para No: III.66).
(25) Based on its assessment of liquidity, the RBI will announce the quantity of liquidity to be supplied
through variable rate auctions for the 14-day term repos alongside relatively fixed amounts of liquidity
provided through longer-term repos (Para No: III.67).
(26) The RBI will aim at keeping 14-day term repo auction cut-off rates at or close to the target policy rate
by supplementing its main policy operation (14-day term repos) with (i) two-way outright open market
operations through both auctions and trading on the NDS-OM platform; (ii) fine tuning operations involving
overnight repos/reverse repos (with a fine spread between the repo and reverse repo rate) and (iii)
discretionary changes in the CRR that calibrate bank reserves to shifts in the policy stance ( Para No:
III.68).
(27) The MSF rate should be set in a manner that makes it a truly penal rate to be accessed only under
exceptional circumstances (Para No: III.69).
(28) An accurate assessment of borrowed and non-borrowed reserves and forward looking projections of
liquidity demand would assume critical importance in the framework. So far, the governments cash
balances have been the prime volatile autonomous driver of liquidity, making accurate liquidity projections
a difficult task. Therefore, continuing with reforms in the Government securities market, which envisage

that the debt management function should be with the Government, the cash management function
should concomitantly also be with the Government (Para No: III.70).
New Instruments
(29) To support the operating framework, the Committee recommends that some new instruments be
added to the toolkit of monetary policy. Firstly, to provide a floor for the new operating framework for
absorption of surplus liquidity from the system but without the need for providing collateral in exchange, a
(low) remunerated standing deposit facility may be introduced, with the discretion to set the interest rate
without reference to the policy target rate. The introduction of the standing deposit facility (analogous to
the marginal standing facility for lending purposes) will require amendment to the RBI Act for which the
transitional phase may be utilised. The standing deposit facility will also be used for sterilization
operations, as set out in Chapter 5, with the advantage that it will not require the provision of collateral for
absorption which had turned out to be a binding constraint on the reverse repo facility in the face of
surges in capital flows during 2005-08 (Para No: III.71).
(30) Secondly, term repos of longer tenor may also be conducted since term repo market segments could
help in establishing market based benchmarks for a variety of money market instruments and shorterterm
deposits/loans (Para No: III.72).
(31) Thirdly, dependence on market stabilisation scheme (MSS) and cash management bills (CMBs) may
be phased out, consistent with Government debt and cash management being taken over by the
Governments Debt Management Office (DMO) (Para No: III.73).
(32) Fourthly, all sector specific refinance should be phased out (Para No: III.74).
Addressing Impediments to Transmission of Monetary Policy
Statutory Liquidity Ratio
(33) Consistent with the time path of fiscal consolidation mentioned in Chapter 2, SLR should be reduced
to a level in consonance with the requirements of liquidity coverage ratio (LCR) prescribed under the
Basel III framework. [Para No: IV.22 (a)].
(34) Government should eschew suasion and directives to banks on interest rates that run counter to
monetary policy actions [Para No: IV.22 (b)].
Small Savings Schemes
(35) More frequent intra-year resets of interest rates on small saving instruments, with built-in automaticity
linked to benchmark G-sec yields, need to be brought in. Also, the benchmark should be based on the
average of the previous six months or even shorter intervals so as to better capture changes in interest
rate cycles within a year [Para No: IV.22 (c)].
Taxation
(36) All fixed income financial products should be treated on par with bank deposits for the purposes of
taxation and TDS. Furthermore, the tax treatment of FMPs and bank deposits should also be harmonized
[Para No: IV.22 (d)].
Subventions

(37) With a sharp rise in the ratio of agricultural credit to agricultural GDP, the need for subventions on
interest rate for lending to certain sectors would need to be re-visited [Para No: IV.22 (e)].
Financial Markets Pricing Benchmarks
(38) Unless the cost of banks liabilities moves in line with the policy rates as do interest rates in money
market and debt market segments, it will be difficult to persuade banks to price their loans in response to
policy rate changes. Hence, it is necessary to develop a culture of establishing external benchmarks for
setting interest rates out of which financial products can be priced. Ideally, these benchmarks should
emerge from market practices. The Reserve Bank could explore whether it can play a more active
supportive role in its emergence (Para No: IV.28).
(39) The RBIs liquidity management operations should strive to ensure consistency with the stance of
monetary policy. Accordingly, an increase in the policy rate to convey an anti-inflation policy stance should
be accompanied by tightening of liquidity conditions through liquidity management operations, whereas
an easing of the policy stance should be associated with accommodative liquidity conditions (Para No:
IV.29).
(40) There should be close coordination between the settings of monetary policy and macro-prudential
policies, since variations in macro-prudential instruments such as capital buffers, provisions, loanto- value
ratios and the like alter the cost structures and lendable resources of banks, thereby impacting monetary
transmission (Para No: IV.30).
Open Market Operations (OMOs)
(41) OMOs have to be detached from fiscal operations and instead linked solely to liquidity management.
OMOs should not be used for managing yields on government securities (Para No: IV.35).
Conduct of Monetary Policy in a Globalised Environment
Managing Surges in Capital Inflows/ Sudden Outflows
(42) In view of the cross country and Indian experience with global spillovers driving episodes of large and
volatile capital inflows as well as outflows, a flexible setting of monetary policy by the RBI in the short-run
is warranted. This presages readiness to use a range of instruments at its command, allowing flexibility in
the determination of the exchange rate while managing volatility through capital flow management (CFM)
and macro-prudential measures (including sector specific reserve requirements) (Para No: V.25).
(43) With regard to inflows that are excessive in relation to external financing requirements and the need
for sterilized intervention: (a) the RBI should build a sterilization reserve out of its existing and evolving
portfolio of GoI securities across the range of maturities, but accentuated towards a strike capability to
rapidly intervene at the short end; and (b) the RBI should introduce a remunerated standing deposit
facility, as recommended in Chapter-III, which will effectively empower it with unlimited sterilization
capability (Para No: V.26).
(44) As a buffer against outflows, the RBIs strategy should be to build an adequate level of foreign
exchange reserves, adequacy being determined not only in terms of its existing metrics but also in terms
of intervention requirements set by past experience with external shocks and a detailed assessment of tail
events that materialised in the country experiences. As a second line of defence, swap arrangements,
including with regional financing initiatives, should be actively pursued. While retaining the flexibility to
undertake unconventional monetary policy measures as demonstrated in response to announcement

effects of QE taper but with clarity in communication and better co-ordination, the Committee
recommends that the RBI should respond primarily through conventional policy measures so as to ensure
common set of shared expectations between the markets and the RBI, and to avoid the risk of falling
behind the curve subsequently when the exceptional measures are unwound (Para No: V.27).
(45) In addition to the above, the RBI should engage proactively in the development of vibrant financial
market segments, including those that are missing in the spectrum, with regulatory initiatives that create
depth and instruments, so that risks are priced, hedged, and managed onshore (Para No: V.28).
eccommendations:

Impact of bimal jalan committee:

businesstoday.intoday.in/story/new-banking-licences-winners-face-challenges-sayskpmg/1/200632.html

Despite the impressive strides made by the financial sector in business

expansion, profitability, return on assets (RoA) and competitiveness, vast
segments of the population are still untouched by it. There is still a need to
bridge the gap between the privileged and the underprivileged sections.
Until now, financial inclusion had been the responsibility of public sector
banks alone. But by using inclusive growth as one of the criteria for new
licences (new banks have to open 25 per cent of their branches in rural areas),
the RBI will have made the new private sector banks responsible as well.
Currently, public sector banks have more branches than any other bank group
in the rural and semi-urban areas.
So, what attracted the 26 applicants who have sought new banks licences?
The fact that India is one of the top 10 economies of the world, with relatively
low domestic credit to gross domestic product (GDP) ratio, and thus provides
a great opportunity for the banking sector to grow. The sector is expected to
become the fifth-largest by 2020 and the third-largest by 2025. Also, banking
credit is likely to grow at a 17 per cent compound annual growth rate (CAGR)
in the medium term (from 2011/12 to 2016/17), leading to increased credit
penetration.
The new banks cannot survive by being mirror images of existing banks. They
have to harness their knowledge based on products they are familiar with. The
applicants are a diverse bunch including non-banking financial companies
(NBFCs) engaged in asset or commodity-based financing, industrial houses
(engineering, infrastructure, telecom, media, technology companies), services
companies (transporters, distributors, exporters, importers), all of them
scattered across geographies. The successful transition from an NBFC to a
bank, for instance, will depend on strong management, as it would be moving
into new businesses with uncharted risk areas..

www.crisil.com/crisil-young.../AditiKhanna%20-%20Runner%20up.pdf

the general sentiment in the industry, especially among the private players about the decision and its
repercussions is not one of alarm or even serious concern. In the words of DBS CEO Mr. Sanjiv

Bhasin, the new entrants are unlikely to make a material difference because of the growing nature
of the sector, as well as the fact that they would take substantial time to set up, raise capital, get
people, systems and a strategy in place, by when there would be an even bigger market. 12 The public
sector banks however are likely to be slightly wary as they will be the first ones standing in the line
of fire due to the increased competition.
A healthy competitive banking sector that caters to all segments of the society
and is deep and liquid enough to ensure efficient flow of capital to not just the
most profitable ventures but also those in need of it is the need of the hour. It is
of utmost importance to ensure that India achieves the coveted spot of one of
the strongest and robust economies of the world.

National Institute of Bank Management Conclave on Implications of New Bank

Licences
http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=838

Implications for the Promoter

34. As I mentioned earlier, the Promoters/Promoter Group have to first set up a non-operative financial
holding company (NOFHC) for holding the new bank and other regulated financial services entities, in
which the Promoters/Promoter Group have significant influence or control.
First of all, for setting up of NOFHC, the Promoters/Promoter Groups have to identify companies which
will hold the voting equities of the NOFHC. As the guidelines require that at least 51 per cent of the voting
equity of the NOFHC should be held by a company/companies in the Promoter Group, in which public
hold not less than 51 per cent of the voting equity, the Promoters have to necessarily dilute their
shareholdings in such companies to comply with the requirement, if there are no such companies for the
present.
Secondly, the Promoters/Promoter Groups have to re-organize their business structure in respect of the
financial services that they undertake through the Group entities. They have to move all the regulated
financial services entities, in which they have significant influence or control, into the fold of NOFHC.
What this means is that, they cannot hold the voting equity of the financial services entities directly, but
only through the NOFHC. This would require some amount of restructuring of their financial services
business.
Thirdly, Promoters/Promoter Groups currently undertaking various types of lending business through nonbanking financial companies (NBFCs) would have to transfer the lending business to the new bank. As
per the guidelines and the clarifications issued, lending activities must be conducted from inside the bank.
But, para-banking activities, such as credit cards, primary dealer, leasing, hire purchase, factoring etc.,
can be conducted either inside the bank departmentally or outside the bank through subsidiary/joint
venture/associate structure. Activities such as insurance, stock broking, asset management, asset
reconstruction, venture capital funding and infrastructure financing through Infrastructure Development
Fund (IDF) sponsored by the bank can be undertaken only outside the bank. This would require some
amount of demerger of business for Groups that have NBFCs for lending business. They have the option
of converting such NBFC into the new bank, provided all the activities that the NBFC currently undertakes

could be undertaken by the new bank departmentally. Otherwise, activities that banks are not permitted to
undertake departmentally have to be demerged/divested into other entities or wound down.
Fourthly, the Promoters/Promoter Groups converting the NBFCs into the new banks or transferring the
business from NBFCs into the new banks will have to comply with the cash reserve ratio (CRR), statutory
liquidity ratio (SLR) and priority sector lending (PSL) targets in respect of the liabilities and loan assets
taken over from the NBFCs, once the new bank commences its business.
Fifthly, the Promoters/Promoter Groups have to comply with the requirement of opening of 25 per cent of
their total number of branches in unbanked rural centres. The rule will apply in case of conversion of
existing NBFCs into new banks, and therefore, the Promoters/Promoter Groups have to plan their
business accordingly.
Sixthly, the bank and financial entities held by NOFHC shall not have any credit and investments
(including investments in the equity/debt capital instruments) exposure to the Promoters/Promoter Group
entities or individuals associated with the Promoter Group or the NOFHC.
35. The implications for the Promoters/Promoter Groups discussed above would vary depending upon the
number of regulated financial services entities in the Group, the size of their business and their present
business structure. Considering these implications, RBI has extended the validity of in-principle approval
from 12 months to 18 months from the date of issue, for the Promoters/Promoter Group to comply with all
such matters during this time, but before the banks commence the business.
Implications for the Banking Industry
36. A few new banks would enter the banking industry after a decade with the last such licence issued in
2004. However, they would be the game changer in many aspects. I would like to mention how their
presence would have implications for the banking industry.

First and foremost, with the setting-up of new banks under the NOFHC, financial holding
company (FHC) structure will be introduced in the banking industry for the first time. This will be a
marked departure from the present bank-subsidiary model under which Indian banks operate.
The Government of India is also contemplating a holding company structure for public sector
banks. The existing private sector banks are expected to follow suit, in line with the Shyamala
Gopinath Committee recommendations.

Secondly, the new banks will bring in new business model, new products, new processes, new
technologies, etc. The level of productivity, efficiency and customer service would be expected to
be higher. The existing banks may have to re-orient some of their businesses, technologies, etc.

Thirdly, the existing banks would face competition, both on their assets and liabilities side of the
balance sheet, from the new generation banks and have to devise ways to withstand the
competition or they may lose their existing customers, who may move away to new banks. Banks
that cannot compete would be vulnerable to acquisitions/take over. Possibility of voluntary
amalgamation amongst some banks cannot be ruled out.

Fourthly, the public sector banks, as a group have a dominant market share of about 72 per cent.
They are likely to shed some weight over time and the share of private sector banks as a group
would increase.

Fifthly, Indian financial system is bank dominated. The financial system will be broadened and
deepened with the entry of new banks in the private sector. The market share of the banks, as a
segment, in the financial systems assets would increase over non-banks, if the business houses
with major NBFCs come out successful in getting bank licences. In that case, they would convert
NBFCs into new banks or transfer the lending activities of the Group NBFC into the new bank, as
per the requirement.

Implications for the Economy

37. Finance is fuel for the economy. Banks being at the core of the financial system, provide this fuel. The
progress of the real economy depends upon the growth of the banking and financial system. An efficient
financial system transforms the savings into investments and channelizes the investments to productive
sectors of the economy to spur growth. India is an emerging market economy and has the potential to
grow faster. As the Indian economy refocuses on the expansion of manufacturing and infrastructure
sectors, the credit needs of the real economy would be much higher compared to the services sector.
Entry of new banks would, in a way, help in the economic development of the country.
Implications for the Common Man
38. Financial inclusion is the basic tenet of new bank licensing policy. As per the data furnished in Basic
Statistical Returns (BSR) of banks, it is estimated that rural India had only 7 branches per 100,000 adults
in 2011 in sharp contrast to most of the developed countries and even BRICS nations having over 40
branches. Further, certain regions, such as, north-eastern, eastern and central regions, are more
excluded in terms of banking penetration. Entry of new banks, with the mandated opening of 25 per cent
of brick and mortar branches in unbanked rural centres, would cover regions that were hitherto financially
excluded.
39. The common man would be benefitted from the innovative products and superior banking technology
of the new generation banks. They would be able to reach out to the masses more easily by use of
information and communication technology (ICT) enabled devices.
Implications for the Reserve Bank
40. In the context of new bank licensing, serious concerns have been raised on the issue of allowing
industrial/business houses to own banks. This would be a new experiment in India after nationalization of
commercial banks in 1969. The RBIs regulatory and supervisory effectiveness will be tested in preventing
the new banks promoted by industrial and business houses from self-dealing. The new bank guidelines
have adequate arrangements for ring-fencing of the financial services activities of the Promoter Groups
from their non-financial (manufacturing/trading/others) activities and addressed the issues concerning
conflict of interests by prohibiting lending to and investments in Promoter Group entities. RBI has also
been vested with adequate powers through amendments to the Banking Regulation Act, 1949 to
supervise these banks in a consolidated manner. However, it is yet to be tested whether the ring-fence
would work effectively or could be circumvented. Therefore, we in the RBI need to be extra vigilant to
protect the interests of the depositors.

Drawbacks of new bank license

http://www.hindustantimes.com/businessbankinginsurance/banking-on-newlicences/article1-1086029.aspx

Why has the Reserve Bank of India (RBI) suddenly decided to issue new bank
licences to companies?
New banks are required to increase banking access, reach and penetration, while
expanding geographic coverage. The financial inclusion programme, which seeks to bring
every Indian household under the organised banking arm, would mean more banks have to
come in the fray. Besides, increased participation from the private sector will mean more
competition, which will ultimately benefit customers.
How many have applied?
Twenty six companies, private and public have applied for the licences.
When was the proposal of introducing new banks made?
President Pranab Mukherjee, who was the finance minister in 2010-11, had announced in
his budget speech that new banks would be required to increase banking network in the
country. At present, over 40% of Indians have no access to banking services.
When was the last time that the RBI issued bank licences?
It was 10 years ago in 2003-04. Yes Bank and Kotak Mahindra Bank got licences.
Why are RBI's guidelines on new licence so stringent that it almost discourages
companies to apply?
Besides regulating the banking industry, the RBI is also responsible for framing India's
monetary policies. It has to ensure that there is no conflict of interest when a company
forays into banking. Companies wishing to enter the sector should also be financially sound
since they would be handling people's money. The RBI, while framing the guidelines,
studies 11 other economies to assess their banking sectors. Out of these, eight, including
Singapore, Korea, Indonesia do not allow companies to bank. However, countries allow
para-banking outfits with sound financials to foray into the sector. Countries such as the US,
Japan and Canada that allow companies to get into banking have stringent rules on
ownership. While in Japan, companies that have set up banks cannot have a stake not more
than 5% in the bank, in Canada it is 10%.
Have banks in India failed in the past?
Yes, quite a few. Global Trust Bank, Times Bank are some of the examples. The RBI had to
immediately intervene to merge them with other big banks to ensure that people's money
was safe.
Is it the first time that private banks will be set up in India?
No. In fact, most public sector banks including the State Bank of India were private banks
before being nationalised. The government nationalised the Imperial Bank of India in 1955,

which later became SBI. The RBI took 60% stake in it. In April 1980, the government
nationalised six more banks.
What was the reason behind nationalisation?
The government wanted to break the ownership and control of banks from a few business
families. The move was also meant to prevent the concentration of wealth and economic
power while mobilising savings and catering for the priority sectors.
When did the government embark on liberalization?
In the early 1990s. Several licenses were given for setting up private banks which came to
be known as the new generation tech-savvy banks. Global Trust Bank, which failed was one
of the first new generation banks to be set up. However, it was later amalgamated with
Oriental Bank of Commerce. Besides GTB, UTI Bank, which was later renamed Axis Bank,
ICICI Bank and HDFC Bank also got licences.
Is the central bank now open to having more foreign banks as well?
Yes, it is keen that foreign banks apply to enter India. A few had placed their proposals a
couple of years ago.
Why is the RBI then again giving licenses to companies?
Today, the regulatory regime is strong and the banking industry in India is modern,
sophisticated and well-equipped. It is ready for players to bring in healthier competition and
increase penetration.
How many banks are there in India today?
India, the second-largest populated and one of the fastest growing economies in the world,
has 26 public sector banks, over 20 private sector banks and several regional rural and cooperative banks. Besides, there are about 30 foreign banks operating in India.
2.ndtv profits
.http://profit.ndtv.com/news/banking-finance/article-risks-on-allowing-businesshouses-into-banking-space-far-outweigh-benefits-imf-warns-316402

Risks on allowing business

houses into banking space far
outweigh benefits, IMF warns

The International Monetary Fund (IMF) has said that it would be prudent to gain
sufficient experience by implementing a comprehensive framework before deciding on
the entry of "mixed groups and conglomerates" into commercial banking.
"In the current context, the risks may outweigh the benefits... The legal, operational, and
regulatory framework for consolidated supervision of both bank-led groups and financial
conglomerates is still missing some important elements," IMF said in its report -- India:
Financial System Stability Assessment Update.
According to the IMF, consolidated supervision frameworks and capabilities are weak
even for bank led groups in the majority of jurisdictions assessed under the Financial
Sector Assessment Programme (FSAP) and frameworks for the oversight of financial
conglomerates continue to be a work in progress at the international level.
"Even greater complexity is introduced in supervisory frameworks when a significant
part of the group is engaged in non-financial activity, the risks of which are not well
captured by current supervisory frameworks. This may lead to concerns of 'under the
radar' risk transfer; concentration of risk exposures; and contagion across the group," it
said.
IMF said that while several elements of the 2003 policy have been retained, entry
requirements have been raised.
"The key difference with the past policy is the express eligibility of large industrial
houses to promote new banks; or to convert NBFCs they own into new banks," i

3. ndtv profits
http://profit.ndtv.com/news/market/article-final-norms-on-new-bank-licenses-afteramending-banking-act-2622

Final norms on new bank

licenses after amending Banking
Act

Impacts of Nachiket mor committee

http://www.ifmr.co.in/blog/2014/01/07/rbi-releases-report-of-the-nachiket-morcommittee-on-comprehensive-financial-services/

RBI Releases Report of the Nachiket

Mor Committee on Comprehensive
Financial Services
the Committee has outlined six vision statements for full financial inclusion and financial
deepening in India:
1. Universal Electronic Bank Account (UEBA): Each Indian resident, above the age of eighteen
years, would have an individual, full-service, safe, and secure electronic bank account.
2. Ubiquitous Access to Payment Services and Deposit Products at Reasonable Charges: The
Committee envisions that every resident in India would be within a fifteen minute walking
distance of a payment access point.
3. Sufficient Access to Affordable Formal Credit: Each low-income household and smallbusiness would have access to a formally regulated lender that is capable of assessing and
meeting their credit needs. Such a lender must also be able to offer them a full-range of
suitable credit products at an affordable price.
4. Universal Access to a Range of Deposit and Investment Products at Reasonable
Charges: Each low-income household and small-business would have access to providers
that can offer them suitable investment and deposit products. Such services must be
available to them at reasonable charges.
5. Universal Access to a Range of Insurance and Risk Management Products at Reasonable
Charges: Each low-income household and small business would have access to providers
that have the ability to offer them suitable insurance and risk management products. These
products must at minimum allow them to manage risks related to: (a) commodity price
movements; (b) longevity, disability, and death of human beings; (c) death of livestock; (d)
rainfall; and (e) damage to property.

6. Right to Suitability: Each low-income household and small-business would have a legally
protected right to be offered only suitable financial services. She will have the right to seek
legal redress if she feels that due process to establish Suitability was not followed or that
there was gross negligence.

Inclusion indecisiveness
Government and RBI should move fast on financial inclusion

http://www.business-standard.com/article/opinion/inclusion-indecisiveness114042401075_1.html
The Mor committee provides a comprehensive solution encompassing services, new
delivery mechanisms and the optimal use of technology, for both authentication and
delivery. If the government and the RBI find the recommendations unacceptable for
whatever reason, they should say so clearly as soon as possible; at least the RBI still has
the authority to do that. If they see merit in them, then the focus should be precisely on
building the right support structure, including an appropriate prudential framework and,
particularly, supervisory capacity. On the face of it, there is little question that
mainstream commercial banks are pushing inclusion because they are mandated to, not
because they see great opportunities in it. In whatever shape or form, other institutions
must play a key role in the process. Whether as suggested by the Mor committee or in
any other avatar, these will pose regulatory and supervisory challenges to the RBI.
Either way, the bullet has to be bitten and it might as well be now rather than later.

'India not yet ready for differentiated banks

http://www.business-standard.com/article/finance/india-not-yet-ready-fordifferentiated-banks-114042200148_1.html
"The differential banking activity licences issued to RRBs and local area banks (LABs)
could achieve limited success which prompted authorities to call for large size banks to
go for rapid financial inclusion in a time bound manner."
It would be very difficult for a differentiated bank to survive by selling only one or two
products, it said. Only the foreign lenders, which undertake niche business activities
even though they have a universal banking licence, could be possibly interested in
differentiated licencing, SBI Research said.
Additionally, the differentiated licensing model can be tried for fee-based business areas
like credit card, remittances, payment and settlement business, it said. The RBIconstituted Nachiket Mor Committee for financial inclusion first mooted the idea of

having differentiated banks in the country. The panel's suggestions include specialised
payment banks, retail banks, wholesale banks, infrastructure banks etc.
RBI granted universal banking license to two applicants - Bandhan and IDFC -- and
added that some of the nearly two dozen aspirants were more suited for differentiated
banking licence.
http://articles.economictimes.indiatimes.com/2014-01-13/news/46149801_1_pslinterest-subvention-priority-sector-lending

Nachiket Mor committee suggestions credit positive for

banks: Moody's
"The recommendations in the report, if fully implemented, would be a significant credit positive overhaul of
the Indian banking system. The key issue, of course, is its implementation, since some of these issues
are politically controversial," Moody's Investors Service said in a note.
It pointed out that proposals on priority sector lending (PSL), including deregulation of interest rates, are
welcome and will benefit state-run ones which have higher stress on their PSL books.
"Deregulating interest rates on PSL loans, so that banks have the flexibility to price risk as they deem
appropriate, is one of the key recommendations in the report and is credit positive for India's banks," it
said.
The Committee on Comprehensive Financial Services for Small Businesses and Low Income
Households, headed by ex-ICICI Bank executive Mor, presented its report last week. It recommended that
banks be asked not to lend below the base rate and makes a case for benefits such as interest
subvention or loan waivers to be directly passed to the borrowers.

Drawbacks of Nachiket mor committee

http://articles.economictimes.indiatimes.com/2014-01-16/news/46264332_1_financial-inclusion-nachiketmor-bank-account

Exploring feasibility of Nachiket Mor panel's road map

for financial inclusion by 2016
The Mor Committee's report, presented last week, is ambitious and aggressive. And therefore, some say,
impractical. "What India could not achieve in 60 years, the Mor committee wants to achieve in two years,"
says a rural finance practitioner, not wanting to be named. The report is based on four building blocks,
each of which has a key question facing it.
POINT OF ENTRY: Should Aadhaar form the underpinning of bank accounts and transactions?
The Mor panel pins much hope and responsibility on Aadhaar, the unique identity number currently being
issued by the government. The panel's big proposal of every Indian resident above the age of 18 years
having a full-fledged bank account that can be accessed from anywhere by January 1, 2016, is predicated
on Aadhaar. It wants the Unique Identification Authority of India (UIDAI), which issues Aadhaar, to
automatically open a bank account at the time of issuing an Aadhaar number to an individual. According
to Mor, since UIDAI has verified all the personal details of an individual, a bank need not replicate that
process.

http://www.livemint.com/Opinion/rSlVyk6J9fqPMzj0H4yuxL/Why-the-Nachiket-Morcommittee-report-on-financial-inclusion.html
http://www.livemint.com/Opinion/rSlVyk6J9fqPMzj0H4yuxL/Why-the-Nachiket-Morcommittee-report-on-financial-inclusion.html
The Mor committee report impresses to deceive. It is a good academic work that lays a broad design
principle, but does not look at the gorilla in the room. This gorilla is the last mile delivery.
Unfortunately this aspect is couched in a lofty vision statement putting all its eggs in the Aadhaar
basket. There is much more to inclusion than electronic transfers and Aadhaar. The report provides
lip service to the last mile and concentrates on financial sector architecture. If only this had been
flipped and a large part of the report had focused on the last mile, the architecture could have been
fixed in Basel.
The Mor committee, however, seems to think that a radically new approach is needed which
recognizes the singularity of purpose, but plurality of approaches. While the past policy interventions
have been in the nature of incremental and cumulative achievements, the Mor committee seems to
adopt the residual and saturation approach. While this aggressive approach is welcome, the
committee does seem to underestimate the task involved in covering the residue of uncovered
population. It is, therefore, no wonder that the voices of reason come in the nature of an additional
note from two members of the panel (the chairman and managing director of Bank of Baroda and
chief executive officer of Axis Bank); both can rightfully claim to have a good footprint and are aware
of the impossibility of this task in the given time framework.

The approach of the Mor committee is to look at the larger structure available for delivery of financial
services, the supporting systems needed and the legal and regulatory framework under which such
a system could operate. The approach is neutral to institutional forms. The committee also seeks to
externalize all the costs of delivery. It advocates interoperability at the last mile. The interoperability
is not only about the access to banking services at a touch point that is 15 minutes away by walk,
but also about other financial services. These services are to be delivered ethically without any misselling through a concept of suitability. While it has been a challenge to open plain vanilla accounts
and get the direct benefit transfers for these customers rolling out, the task of offering a product that
passes the suitability criteria is daunting indeed. Clearly the costs of these products as per the tone
of the committee report are to be borne by the customer.

Urjit patel committee

Impact
http://www.moneycontrol.com/news/economy/monetary-policy-to-now-targetinflation_1318534.html
Monetary policy to now target inflation
Read more at: http://www.moneycontrol.com/news/economy/monetary-policy-to-now-target-inflation_1318534.html?
utm_source=ref_article
The concept of inflation targeting in India was first suggested by a panel, headed by RBI Deputy Governor Urjit Patel,
in January 2014. The panel had recommended transforming RBI to US Federal Reserve type body with the main
objective of capping retail inflation at 4 per cent, with a band of (+/-) 2 per cent. As per the agreement, the RBI is also
required to make public every six months a document explaining the sources of inflation and the inflation forecast for
the period between 6-8 months. In the Budget, Finance Minister Arun Jaitley had said a monetary policy framework
would be put in place to keep inflation below 6 per cent. "To ensure that our victory over inflation is institutionalised
and hence continues, we have concluded a monetary policy framework agreement with the Reserve Bank of India.
The framework objective is to keep inflation below 6 per cent and we will move to amend the RBI Act this year and
provide for monetary policy committee.
JAN

http://www.idfcmf.com/insights/2014/01/urjit-patel-committee-and-bond-view-ahead/
We would be inclined not to take this report very seriously had it not been commissioned explicitly (and referred to on
multiple occasions) by the RBI Governor himself. Indeed, clarifying the monetary policy framework is one of the
central pillars that Rajan has been mentioning since taking office. Further contributing to its sanctity is the fact that the
Deputy Governor in charge of monetary policy has chaired the committee. While we still believe that implementation
may take some time and the report may not necessarily get accepted in its entirety, given its credentials and its
context, we have to consider the implications with respect to its impact on the monetary policy reaction function.
Notwithstanding recent murmurs of rate cuts on the back of falling inflation, it has been our long standing view that
there is little scope in India for a rate easing cycle given its macro-economic imbalances. This view may gain
generalized acceptance, despite CPI inflation falling towards 8 8.5% over next few readings, should the
recommendations of the committee get accepted. Hence falling inflation which was hitherto a large bullish trigger for

bonds, may cease to be so if the market starts to believe that the central bank is explicitly targeting an inflation rate
that is even lower. Even so the near term demand supply dynamics for bonds remains quite favorable given that the
auction supply for this financial year is almost over and the fact that the RBI has recently shown renewed propensity
to plug liquidity deficits via OMOs. This may cause yields to remain in a range or even rally further on bond supply
cues, market positioning etc. However, a larger near term rally would be predicted on a explicit assurance that the
committees recommendations are not likely to be adopted anytime soon. Furthermore, and given our view that India
doesnt have room for rate cuts, the bond rally will anyway stall ahead of the fresh supply due from April. Given the
large maturities of government bonds due next year (INR 168,000 crores more than half of which is due in April and
May), it is likely that weekly bond supply starting April will be sizeable.

http://www.business-standard.com/article/finance/expert-speak-rbi-s-urjit-patelcommittee-report-114012200711_1.html
The Urjit Patel Committee report to revise and strengthen the monetary
policy framework suggests some sweeping changes to overhaul the existing operating
structures including a shift to CPI as the nominal anchor for inflationand moving to a
model followed by the Federal Reserve to set up a monetary policy committee headed
by the governor to vote on rate decisions. It also lays out a prescriptive roadmap to
bring down inflation and makes recommendations for the government to reduce its
fiscal deficit.

Introduction off Nachiket mor

Photograph
The Reserve Bank of India has today released on its website for public comments, the Report of the Committee on
Comprehensive Financial Services for Small Business and Low Income Households and additional comments
members in this regard. The Comments may be emailed or sent by post to the Principal Chief General Manager, Rural
Planning and Credit Department, Reserve Bank of India, Central Office, 10th floor, Shahid Bhagat Singh Marg, Mumbai 400
001 on or before January 24, 2014.
The Committee, while laying down its vision statement for financial inclusion and deepening, has suggested providing a
universal bank account to all Indians above the age of eighteen years and has recommended a Vertically Differentiated
Banking System with Payments Banks for Deposits & Payments and Wholesale Banks for credit outreach with relaxed entry
point norms of ` 50 crore.
On priority sector, the Committee has recommended Adjusted Priority Sector Lending Target of 50 per cent against the current
requirement of 40 per cent with sectoral and regional weightages based on the level of difficulty in lending. The Committee has
also recommended risks and liquidity transfers through markets. In view of the fact that banks may choose to focus their
priority sector strategies on different customer segments and asset classes, the Committee has recommended that the
regulator provide specific guidance on differential provisioning norms at the level of each asset class. A banks overall Non
Performing Assets Coverage Ratio would therefore be a function of its overall portfolio asset mix.
On definition of Non-Banking Finance Companies (NBFCs), the Committee has recommended only two categories - one for
core investment companies and another category for all other NBFCs. The Committee has advocated regulatory convergence
between banks and NBFCs based on the principle of neutrality with regard to classification of non-performing assets and the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 eligibility.
The Committee has suggested that a State Finance Regulatory Commission (SFRC) be created into which all the existing
State Government-level regulators could be merged and functions like the regulation of Non-Government Organisations-Micro
Finance Institutions and local Money Services Business could be added on. The Committee has desired that the Reserve
Bank should issue regulations on suitability, applicable specifically for individuals and small businesses, to all regulated entities

within its purview so that the violation of such regulations would result in penal action for the institution as contemplated under
the relevant statutes through a variety of measures, including fines, cease-and-desist orders, and modification and cancellation
of licences.
Background
It may be recalled that the Reserve Bank of India had, in September 2013, set up a Committee on Comprehensive Financial
Services for Small Business and Low Income Households, under the Chairmanship of Dr. Nachiket Mor, Member on the
Reserve Banks Central Board of Directors. The Committee had very senior and experienced financial and legal experts as
members. Shri S. Karuppasamy and Dr. Deepali Pant Joshi, both Executive Directors, Reserve Bank of India were Expert
Observers on the Committee. Shri A. Udgata, Principal Chief General Manager, Reserve Bank of India, Rural Planning and
Credit Department was the Member Secretary. Research and Technical Support to the Committee was provided by the IFMR
Finance Foundation.
Alpana Killawala
Principal Chief General Manager
Press Release : 2013-2014/1367

http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30353