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RBI tells banks to fall in line on investments

Debjoy Sengupta

The Reserve Bank of India has issued a circular to all state and central co-operative banks asking them to ensure that all their investment decisions are in conformity with prescribed norms.

It also warned that any deviation would be viewed seriously.

State and central co-operative banks have been instructed to inform the regional RBI offices on the steps being taken in this regard.

RBI's circular noted that a recent scrutiny of investment transactions of some district central co-operative banks has revealed that some of these did not observe guidelines issued by the apex bank and had undertaken transactions that might have exposed them to significant risks.

The circular should be viewed in the light of revelations that several central and state co-operative banks were involved in the gilt scam.

The set of guidelines prohibits all central and state co-operative banks not to undertake any purchase or sale of transactions with broking firms or other intermediaries on principal to principal basis.

State and district central co-operative banks should seek a scheduled commercial bank, a primary dealer or a financial institution as a counter party for their transaction.

Preference should be for direct deals with such counter parties. It will be desirable to check prices from the banks or PDs with whom the state and central co-operative banks may be maintaining constituent SGL account.

SCBs and DCCBs should take the advantage of non-competitive bidding facility provided to them for acquiring Government of India securities in the primary auctions by RBI.

If a deal is put through with the help of the broker, the role of the broker should be restricted to that of bringing the two parties to the deal together.

Under no circumstances, banks should give the power of attorney or any other authorisation to broker or intermediaries to deal on their behalf in the money and securities market.

Only brokers registered with the National Stock Exchange and the Bombay Stock Exchange or Over the Counter Exchange of India should be utilised for acting as intermediary.

A disproportionate part of the business should not be transacted with or through one or a few brokers. Banks should have a list of approved brokers.

A limit of five per cent of total transactions (both purchases and sales) entered into by a bank during a year should be treated as the aggregate upper contract limit for each of the approved broker.

Brokers should not be used in the settlement process at all. Both fund settlement and delivery of security should be done with the counter parties directly.

CSGL accounts should be used for holding the securities and such accounts should be maintained in the same bank with whom the cash account is maintained.

For all transactions delivery versus payment must be insisted upon by the banks.

All transaction must be monitored to see that delivery takes place on settlement day. The funds account and investment account should be reconciled on the same day before close of business.

Dealing and back-up functions should be properly segregated. Officials deciding about purchase and sale transactions should be separated from those responsible for settlement and accounting.

All investment transactions should be perused by the board at every meeting and the banks should keep a proper record of the SGL forms received and issued to facilitate counter checking by their internal control systems, Nabard inspectors and other auditors.

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