Get complete information on NR Accounts and Their Importance

NRO Accounts

The earliest form of non-resident account is the non-resident ordinary account or NRO Account. This is a sort of automatic account. When any of you, after completion of your studies take up a job abroad, then your existing bank account in India will automatically be designated as NRO Account by the bank.

But when? When the bank is informed of your going abroad for job or getting married to a person living abroad (say in USA). It can also be opened after your going abroad with money received locally like dividend received from the companies, interest received on fixed deposits, provident fund money received from your previous employer, etc. Because mostly the money in the account comes from local sources, the funds are not allowed to be remitted abroad.

However, in August 1994, India notified acceptance of current account convertibility to IMF. The significance of this acceptance is that normally India now cannot place restrictions on money remitted abroad on account of any ‘Current Account’ transactions.

The current account here refers to those transactions which form part of current account in Balance of Payment statement (like export / import transactions, etc.) and not current accounts maintained with banks. Interest/ dividend payments, family remittances received from overseas Indians, etc., are also current account transactions for Balance of Payment (BOP) purposes.

Money received as deposit in NRE / FCNR account is a capital account transaction whereas interest on such account is a current account transaction. The reason being, principal amount forms part of ‘Capital Account’ of BOP. India, so far, has not fully moved over to capital account convertibility.

NRNR A/C Significance

When India faced BOP crisis in 1991-92, the NRNR Account Scheme was intro­duced for mobilizing foreign exchange from people outside India including from NRIs. It is a 3 year term deposit account with higher rate of interest with no right to repatriation.

It means funds for this account should come from abroad in foreign exchange but maturity proceeds will be repaid only in Rupees. Thus, India get foreign exchange without being paid back in fore. This helps in improving foreign exchange reserves in the country.

But after acceptance of current account convertibility, India cannot place restrictions on repa­triation of interest earned on NRNR Account. Hence, interest can now be remitted abroad as in the case of NRO Account. These accounts can be maintained by any non-residents.

NRE and FCNR Accounts

These accounts are basically intended to help NRIs to save their money in India rather than in the places where they live. It also helps the country to receive valuable for­eign exchange from people of Indian origin. The Government and RBI expect that these savings would remain and will be spent in India because the account holders being NRIs may eventually come back to India. This is, however, not a rational view.

Non-Resident Special Rupee (NRSR) Account

You are told in the preceding paragraphs that interest earned on NRO Account is now eligible for remittance abroad. Similarly, there are many other items of income accru­ing in India for NRIs. For example, rent from houses/building, dividend on shares, prof­its/income from shops, business, etc.

There are large numbers of NRIs living abroad and these NRIs have substantial incomes from India. Under current account convertibility all these sums could be taken out of India.

Hence, for those NRIs who voluntarily give an undertaking that they will not take outside India any money from NRO Accounts are per­mitted to open NR Special Rupee accounts. This account scheme is discontinued with effect from April 1, 2002.

Banking Sector Reforms Second Narasimham Committee Report (Major Recommendations)

The Committee on Banking Sector Reform with Mr. M Narasimham as Chairman, popularly known as the second one by the same Chairman on the same/related subject, was constituted on December 26, 1997 to review the record of financial sector reforms of the Narasimham Committee on Financial System (1991), and to suggest remedial measures for strengthening the banking system covering areas of banking policy, institutional structure, supervisory system, legislative and technological changes. The major recommendations of the Committee are summarized below.

A. Strengthening the Banking System

To strengthen the banking system, the Committee recommended an increase in the minimum capital adequacy ratio (CRAR) to 10 per cent by 2002. Besides, the entire portfolio of Government securities should be marked to market in three years.

Also, a 5 per cent weight age is to be assigned for Government and other approved securities to hedge against market risk. Net NPAs have to be brought down to below 5 per cent by 2000 and to 3 per cent by 2000 and 2002, respectively and net NPAs to 3 per cent and 0 per cent respectively.

The Committee proposed asset Reconstruction Company (ARC) to tide over the backlog of NPAs. In case of prudential norms relating to income recognition, the present norm of 180 days should be brought down to 90 days in a phased manner by 2002.

As regards asset classification, an asset may be classified as ‘doubtful’ if it is in substandard category for 18 months in the first instance and eventually for 12 months and “losses if it has been so identi­fied but not written off. These norms which should be regarded as the minimum may be brought into force in a phased manner.

B. Systems and Methods in Banks

To bring about efficiency in banks, the Committee recommended a number of mea­sures. These include revision of operational manual and its regular updating, simplifica­tion of documentation systems, in production of computer audit, and evolving of a filtering mechanism to reduce concentration of exposures in lending and drawing geographical / industry /sectoral exposure norms with Board’s concurrence.

Besides, the Committee has suggested induction of one more whole time director in nationalized banks in view of chang­ing environment. As outsourcing of services would improve productivity. It suggested the same may be introduced in the fields of building maintenance, cleaning security dispatch of mail, computer-related work, etc. subject to relevant Laws.

The Committee suggested a reduction in the minimum stipulated holdings of the Gov­ernment/Reserve Bank in the equity of nationalized banks /State Bank of India to 33 per cent.

In regard to tenure of a Chief Executive of a bank, the Committee indicated a mini­mum period of three years but the reasonable length of tenure should be not less than five years.

C. Structural Issues

The Committee recommended that after the convergence of activities between Devel­opment Financial Institutions DFIs and banks over a period of time, they should get con­verted into banks, resulting in the existence of only two intermediaries, viz., banks and non- banks. While mergers between strong financial institutions would make sense, the weak banks in the system will have to be given a revival package subject to a set of criteria.

The licensing of new private sector banks needs a review for their enhancement, while foreign banks will have to be encouraged to extent their operations on certain norms.

All appointments of chairmen, managing directors and executive directors of public sector banks and financial institutions, should be determined by an Appointments Board. The Committee felt the urgent need to raise the competency levels in public sector banks by resorting to a lateral induction of talented personnel. It also felt that the remuneration struc­ture should be flexible and market driven.

The Committee recommended the corporatization of IDBI. It also desired that the mini­mum net worth of NBFCs should at the same time be raised to Rs. 2 crore progressively. For purposes of registration with the Reserve Bank, however, the minimum limit for net worth has been doubled to Rs. 50 lakh. Besides, no deposit insurance corporation for NBFCs was proposed.

The Committee proposed prudential and regulatory standards besides new capital norms for Urban Co-operative Banks (UCBs).

D. Integration of Financial Markets

The Committee recommended that banks and primary dealers alone should be allowed in the inter-bank call and notice money markets. Non-Bank Financial Institutions would get access to other forms of instruments in money market like bill rediscounting, CPs Treasury Bills, etc. It also suggested opening the Treasury Bill Market Foreign Institutional Investors for broadening its base.

E. Rural and Small Industrial Credit

The Committee proposed review and strengthening of the operation of Rural Financial Institutions (RFIs) is terms of appraisal, supervision and follow up, loan recovery strategies and development of bank-client relationships in view of higher NPAs in public sector banks due to directed lending.

In regard to capital adequacy requirements, RRBs and co-operative banks should reach a minimum of 8 per cent capital to risk weighted assets ratio over a period of 5 years. It also proposed that all regulatory and supervisory functions over rural credit institutions should rest with the Board for Financial Regulation and Supervision (BFRS).

F. Regulation and Supervision

The Committee made a suggestion that the “Basle Core Principles of Effective Bank Supervision’ should be regarded as the minimum to be attained. It should be made obliga­tory for banks to take into account risk weights for market risks to facilitate soundness and stability of the system.

For effective conduct of monetary policy by the Reserve Bank, delineation of supervi­sion/ regulation from monetary policy is required implying that the Executive associated with monetary authority should not be in the Supervisory Board, to avoid weakening of monetary policy of banking regulation and supervision.

The process of separating BFS from the Reserve Bank would need to be initiated and to supervise the activities of banks, finan­cial institutions and NBFCs, a new agency in the name of BFR would have to be formed. With a view to achieving an integrated system of supervision over the financial system, the Committee recommended bringing Urban Co-operative Banks within the ambit of the BFS.

G. Legal and Legislative Framework

The Committee recommended the amendment to RBI Act and Banking Regulations Act with regard to the formation of BFRS. It also gives more autonomy and powers to pub­lic sector banks (Nationalization Act).

As wide ranging changes in the legal framework affecting the working of the financial sector are sought by the Committee, an Expert Com­mittee could be constituted comprising representatives from the Ministry of Law, Banking Division, Ministry of Finance, the Reserve Bank of India and some outside experts.

Financial Markets-Reform Measures

Since the early 1990s, various measures were initiated in all segments of financial mar­kets aimed at improving depth and liquidity in the markets. The reforms also emphasized on improving the transparency and efficiency of the markets. The key reform measures undertaken in different market segments are briefly presented below.

Money Market

A ceiling of 10 per cent on call money rates imposed by the Indian Banks Association was withdrawn in 1989.

Initially, the participation in the call market was gradually widened by including non- banks, such as, financial institutions, non-banking finance companies, primary/satellite dealers, mutual funds, corporate (through primary/dealers), etc. The process of transfor­mation of call money market of a pure inter-bank market commenced effective May 2001.

The 182-day treasury bills were introduced effective November 1986, followed subse­quently by phasing out of on-tap treasury bills, introduction of auctioning system in 91-day treasury bills since January 1993, and introduction of 14-day and 364-day treasury bills. The system of ad hoc treasury bills (with a fixed 4.6 per cent interest rate since July 1974) which were issued by the Central Government to the Reserve Bank was abolished effective April, 1997. Currently only the 91-day and 364-day treasury bills exist.

The Discount and Finance House of India (DFHI) was set up in April 1988, and was allowed to participate in the call/notice money market both as a borrower and lender com­mencing from July, 1988.

Several new financial instruments were introduced, such as inter-bank participation certificates (1988), certificates of deposit (June 1989), commercial paper (January 1990) and repos (December, 1992).

Derivative products like forward rate agreements and interest rate swaps were intro­duced in July 1999 to enable banks, FIs and PDs to hedge interest rate risks.

A full-fledged Liquidity Adjustment Facility was introduced on June 5, 2000 with a view to modulating short-term liquidity under diverse market conditions.

With a view to adopting the sound risk management procedures and eliminating coun­try-party risk, the Clearing Corporation of India Ltd. was set up on February 15, 2002. The CCIL acts as a central counter-party to all trades involving foreign exchange, government securities and other debt instruments routed through it and guarantees their settlement.

Annexure – I

The segments refinance facility for banks is gradually being phased out.

Government Securities Market

New auction-based instruments were introduced with varying maturities such as 364- day, 182 day, 91-day and 14-day treasury bills and the zero coupon bond. The auction sys­tem was also introduced for Government of India dated securities. An innovative feature of ‘part payment’ was added to the auction of Government of India dated securities.

In the long-term segment, Floating Rate Bonds (FRBs) benchmarked to the 364-day treasury bills yields and a 10 year loan with embedded call and put options exercisable on or after 5 years from the date of issue were introduced.

A system of Primary Dealers (PDs) was made operational in March 1996.

Foreign Institutional Investors (FIIs) were allowed to set up 100 per cent debt funds to invest in Government (Central and State) dated securities in both primary and secondary markets.

The system of automatic monetization of budget deficit through ad hoc treasury bills which hampered the development of the market was phased out over a period of three years from 1993-94 to 1996-97 and was replaced by the system of Ways and Means Ad­vances (WMA) with effect from April 1,1997.

The Delivery-overawes-Payment system (DVD) was introduced in 1995 for the settlement of transactions in Government securities. A screen-based trade reporting system with the use of VSAT communication network complemented by a centralized Subsidiary General Ledger (SGL) accounting system was put in place.

The Negotiated Dealing System (NDS) (Phase I) was operationalised in February 2002 to enable on-line electronic bidding facility in the primary auctions of Central/State Gov­ernment securities, OMO/LAF auctions, screen-based electronic dealing and reporting of transactions in money market instruments, including repo and to facilitate information on trades with minimal time lag.

Since timely flow of information is a critical factor in evolving the efficient price dis­covery mechanism, improvements were brought in transparency of operations and data dissemination.

A practice of pre-announcing a calendar of treasury bills and government securities auctions to the market was introduced.

Retail trading in Government securities at select stock exchanges commenced in Janu­ary 2003.

Foreign Exchange Market

The current account was gradually made convertible leading to the acceptance of obli­gations under Article VII of the IMF. The exchange rate, which was pegged to a basket of currencies, was made market-determined in a phased manner. Several transactions in the capital account were also gradually liberalized over the years.

In line with the liberal policy environment of the 1990s, the Foreign Exchange Regula­tion Act, 1973 (FERA) was replaced by the Foreign Exchange Management Act (FEMA) in 1999.

Capital Market

With the repeal of the Capital Issues (Control) Act, 1947, companies were given free­dom to price their issues. The book-building process in the new issue of capital was intro­duced with a view to further strengthen the price discovery process.

In the secondary market, the floor-based open outcry trading system was replaced by electronic trading system in all the stock exchanges.

The account period settlement system was replaced by rolling settlement, thus, reduc­ing the scope for speculation. The rolling settlement cycle was shortened from T+5 to T+3 with effect from April 1, 2002. This process was enabled by a shift to electronic book entry transfer system through depository mechanism.

The Indian companies were allowed to raise funds from abroad, through American/ Global Depository Receipts (ADRs/GDRs), foreign currency convertible bonds (FCCBs) and external commercial borrowing (ECBs). The Reserve Bank allowed two-way fungibility of ADRs/GDRs in February 2002.

Foreign institutional investors (FIIs) were allowed to participate in the capital market.

For strengthening the process of information flows from the listed companies, several measures were introduced:

(i) while sufficient disclosures are mandatory for the companies at the stage of public issue, the listed companies am also required under the listing agree­ment to make disclosures on a continuing basis;

(ii) for ensuring quick flow of information to the public, the decision pertaining to dividend, bonus and right announcements or any material event are now required to be disclosed to the public within 15 minutes of the con­clusion of the board meeting in which the decisions are taken;

(iii) The accounting practices were streamlined with norms introduced for segment reporting, related party transactions and consolidated balance sheets.

Insider trading was made a criminal offence. The regulations governing substantial acquisition of shares and takeovers of companies were also introduced aimed at protecting the interests of minority shareholders by making the takeover process more transparent.

For providing market participants instruments for hedging and risk management, sev­eral types of derivative products on equities were introduced. Non-transparent products like ‘badla’ were banned.

Source: RBI Report on Currency and Finance

ANNEXURE -II Indian Banks’ Association (IBA)

IBA is an Association of Commercial Banks. Foreign Banks operating in India are also members of this Association. It is an advisory service organization for the Commercial Banks. It takes care of the interest of banking industry and serves as a forum for exchange of views among bankers. Its main activities include the following:

(1) Promoting banking culture, encouraging academic achievement in banking re­lated matters;

(2) Exchange of ideas and views on systems, procedures, operations and administra­tion of banks in India;

(3) Help evolve common ideas and thinking on major banking policies and prob­lems;

(4) Collection and interpretation of banking data for improved performance of banks;

(5) Negotiating with labour union of banks on wage settlement, service conditions, customer service, etc.

(6) Encouraging sports and cultural activities among bank employees;

(7) Organizing meetings and seminars and releasing publicity measures to project the good of banks;

(8) Conduct examination and award diplomas in banking related subjects;

(9) Co-ordinate with RBI on behalf of banks;

(10) Advising members of public through advertisements about new banking facili­ties, customer service, proposed labour strike, bank closure, etc.

Normally, one of the Chairmen of a Commercial Bank is elected as the Chairman of IBA. The secretariat of IBA is situated in Mumbai and the expenses of its secretariat are met through member-banks’ subscriptions, examination fees, etc. It also brings out a monthly journal, nown as “The Indian Institute of Bankers”.

ANNEXURE – IV Securitization Act (For Recovery of NPAs)

Recovery of Non Performing Assets (NPAs) is one of the biggest problems for the Indian banking industry. Money borrowed by business persons and industrial houses are not repaid promptly. Further interest payments due on the loans are also not paid on time.

A loan becomes an NPA, when the borrower fails to repay the loan or interest payment within six months from the due date for such payments.

Thus, after 180 days from the due date of loan repayment/interest payment, loans are classified by banks/financial institutions as NPAs. (The period of delay in payment of interest or principal amount for 180 days for classifying a loan asset as NPA has been cut down to 90 days from April 2003 by the Reserve Bank of India).

In many such cases, the default is deliberate and willful; default arises even when a borrower has sufficient funds to pay the interest and principal amount but does not pay it to the bank.

Banks and financial institutions in India (financial institutions, generally, lend money for long term like, project related purposes while, banks usually lend money for short term like, working capital needs) are reportedly carrying about Rs. 75,000/- crore of NPAs in their books as at the beginning of 2002.

Of this, nearly Rs. 60,000/- crore is accounted for by public sector banks. Hence, the new Securitization Act will primarily help public sector banks to reduce the level of NPAs through recovery and avoidance of fresh NPAs.

Banks and financial institutions usually lend money against securities. Therefore, if banks are given powers to seize and sell the assets furnished as security for loans, banks may be in a position to reduce the level of NPAs with them.

For this purpose, Parliament has recently enacted an Act known as “Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002”. The Act is briefly known as Securitization Act. In a simple sense, it may be referred to NPA Recovery Act. The provisions of this Act are applicable both for banks and financial institutions as lenders of funds.

The Securitization Act is essentially about reducing NPAs in financial institutions and banks. The non performing assets (they are also called ‘bad loans’) create three main diffi­culties for the banks.

One, the banks are required to make provisions against NPAs. As provisioning is done by debit to P & L A/c, this leads to reduced profit for that year.

Second, bad loans do not generate interest’s income for the banks. As such interest incomes of the banks fall.

Third, fall in interest income reduces the capacity of banks to make fresh loans and the problem of mismatch in assets-liabilities of banks.

Under the provisions of the new Act, lenders (banks and financial institutions) can seize the assets offered as security for loans by borrowers and sell them for manages them for recovery of dues from borrowers. The lenders can do this without the intervention of courts. The lending institutions are how­ever, required to give a 60 days’ notice to the borrowers before enforcing their right of sei­zure and sale of assets.

The Act basically deals with three types of actions by banks and financial institutions in respect of financial assets held by them. These are (1) Securitization of Assets, (2) Setting up of Asset Reconstruction Companies, and (3) Enforcement of Securities for recovery of loans.

Securitization of Asset refers to bundling of various loan assets held by banks into a single type of asset like bonds and sell the bonds in the market for raising fresh funds. Thus, the banks can unlock or create fresh funds out of existing loans instead of waiting for repay­ments of such loans on maturity dates.

In case of Asset Reconstruction Companies (ARC), banks and financial institutions can sell poor quality loan assets to the ARC and get them relieved of such bad quality assets from their balance sheet. Thus, banks will realize immediate sale proceeds and the poor quality or worthless assets are removed from their balance sheet and transferred to ARC.

The Enforcement of Securities functions refers to seize and sell assets offered as collat­eral securities for loans, making loan recovery very easy. The new Act referred to above enables banks and financial institutions to recover loans from defaulting borrowers in a easier way without the hassle and involvement of courts.

The Act will put a hammer on the head of willful defaulters who, despite the fact of having capacity to repay the loan, avoid paying the dues to banks. Earlier the borrowers deliberately avoid payments knowing full well that court cases for recovery of loans takes a lot of time, cost and uncertainty of court verdict.

The tricky borrowers many a time dis­poses of the assets without the knowledge of lenders during the pendency of court cases. The new act makes all such tricks of borrowers as a thing of the past.

Banks have since started taking advantage of the new Act and seized possession of borrowers’ as a thing of the past. Banks have since started taking advantage of the new Act and seized possession of borrowers’ assets in many cases.

Many banks have already started exercising their power under the Act for recovery of bad loans. It is good to note that banks are able to recover sizeable amount of bad loans from defaulting borrowers during the year 2002-03.