RBI/2006-2007/43 DBOD
No. Dir. BC. 9/13.03.00/2007-08 July
2, 2007 Aashadha 11, 1929(Saka) All
Scheduled Commercial Banks (Excluding
RRBs) Dear
Sir, Master
Circular- Loans and Advances – Statutory and Other Restrictions Please
refer to the Master Circular DBOD. No. Dir. BC. 8/13.03.00/2006-07 dated July
1, 2006 consolidating the instructions/guidelines issued to banks till June 30,
2006 relating to statutory and other restrictions
on Loans and Advances.The Master Circular has been suitably updated by incorporating
the instructions issued up to June 30, 2007 and has been placed on the
RBI website (http://www.rbi.org.in). Yours
faithfully (P.
Vijaya Bhaskar) Chief
General Manager
Table
of Contents
Master
Circular on Loans and Advances - Statutory and Other Restrictions 1.
Statutory Restrictions 1.1 Advances against
bank's own shares In
terms of Section 20(1) of the Banking Regulation Act, 1949, a bank cannot grant
any loans and advances on the security of its own shares. 1.2
Advances to bank's Directors Section 20(1) of the
Banking Regulation Act, 1949 also lays down the restrictions on loans and advances
to the directors and the firms in which they hold substantial interest. 1.2.1
Banks are prohibited from entering into any commitment for granting any loans
or advances to or on behalf of any of its directors, or any firm in which any
of its directors is interested as partner, manager, employee or guarantor, or
any company (not being a subsidiary of the banking company or a company registered
under Section 25 of the Companies Act, 1956, or a Government company) of which,
or the subsidiary or the holding company of which any of the directors of the
bank is a director, managing agent, manager, employee or guarantor or in which
he holds substantial interest, or any individual in respect of whom any of its
directors is a partner or guarantor. 1.2.2 There are certain
exemptions in this regard. In terms of the explanation to the Section,
‘loans or advances’ shall not include any transaction which the Reserve Bank may
specify by general or special order as not being a loan or advance for the purpose
of this Section. While doing so the RBI shall, keep in view the nature of the
transaction, the period within which, and the manner and circumstances in which,
any amount due on account of the transaction is likely to be realised, the interest
of the depositors and other relevant considerations. 1.2.3.
If any question arises whether any transaction is a loan or advance for the purpose
of this Section, it shall be referred to RBI, whose decision thereon shall be
final. 1.2.4 For the above purpose, the term 'loans and
advances' shall not include the following: (a) loans or
advances against Government securities, life insurance policies or fixed deposit; (b)
loans or advances to the Agricultural Finance Corporation Ltd; (c) such loans or advances as can be made by a banking company to any of its directors (who immediately prior to becoming a director, was an employee of the banking company) in his capacity as an employee of that banking company and on the same terms and conditions as would have been applicable to him as an employee of that banking company, if he had not become a director of the banking company. The banking company includes every bank to which the provisions of Section 20 of the Banking Regulation Act, 1949 apply; (d) such loans or advances as are granted
by the banking company to its Chairman and Chief Executive Officer, who was not
an employee of the banking company immediately prior to his appointment as Chairman/
Managing Director/CEO, for the purpose of purchasing a car, personal computer,
furniture or constructing/ acquiring a house for his personal use and Festival
Advance, with the prior approval of the RBI and on such terms and conditions as
may be stipulated by it; (e) such loans or advances as
are granted by a banking company to its whole-time director for the purpose of
purchasing furniture, car, Personal Computer or constructing/acquiring house for
personal use, Festival advance with the prior approval of RBI and on such terms
& conditions as may be stipulated by it; (f) call loans
made by banking companies to one another; (g) facilities
like bills purchased/discounted (whether documentary or clean and sight or usance
and whether on D/A basis or D/P basis), purchase of cheques, other non-fund based
facilities like acceptance/co-acceptance of bills, opening of L/Cs and issue of
guarantees, purchase of debentures from third parties, etc.; (h)
line of credit/overdraft facility extended by settlement bankers to National Securities
Clearing Corporation Ltd.(NSCCL) / Clearing Corporation of India Ltd. (CCIL) to
facilitate smooth settlement; and (i) a credit limit granted
under credit card facility provided by a bank to its directors to the extent the
credit limit so granted is determined by the bank by applying the same criteria
as applied by it in the normal conduct of the credit card business. Note:
For obtaining the prior approval of the Reserve Bank as stipulated in clauses
(d) and (e) above, the bank should make an application to the concerned regional
office of the Bank. 1.2.5 Purchase of or discount of bills
from directors and their concerns, which is in the nature of clean accommodation
is reckoned as ‘loans and advances’ for the purpose of Section 20 of the Banking
Regulation Act, 1949. 1.2.6 As regards giving guarantees
and opening of L/Cs on behalf of the bank’s directors, it is pertinent to note
that in the event of the principal debtor committing default in discharging his
liability and the bank being called upon to honour its obligations under the guarantee
or L/C, the relationship between the bank and the director could become one of
the creditor and debtor. Further, it is possible for the directors to evade the
provisions of Section 20 by borrowing from a third party against the guarantee
given by the bank. Such transactions may defeat the very purpose of restrictions
imposed under Section 20, if the bank does not take appropriate steps to ensure
that the liabilities thereunder do not devolve on them. 1.2.7
In view of the above, while extending non-fund based facilities such as guarantees,
L/Cs, acceptance on behalf of directors and the companies/firms in which the directors
are interested; it should be ensured that - (a) adequate
and effective arrangements have been made to the satisfaction of the bank that
the commitments would be met by the openers of L/Cs, or acceptors, or guarantors
out of their own resources, (b) the bank will not be called
upon to grant any loan or advance to meet the liability consequent upon the invocation
of guarantee, and (c) no liability would devolve on the
bank on account of L/Cs/ acceptances. In case, such contingencies
arise as at (b) & (c) above, the bank will be deemed to be a party to the
violation of the provisions of Section 20 of the Banking Regulation Act, 1949. 1.2.9
Restrictions on Power to Remit Debts Section 20A
of the Banking Regulation Act, 1949 stipulates that notwithstanding anything to
the contrary contained in Section 293 of the Companies Act, 1956, a banking company
shall not, except with the prior approval of the Reserve Bank, remit in whole
or in part any debt due to it by - (a) any of its directors,
or (b) any firm or company in which any of its directors
is interested as director, partner, managing agent or guarantor, or (c)
any individual, if any of its directors is his partner or guarantor. Any
remission made in contravention of the provisions stated above shall be void and
have no effect. 1.3 Restrictions on Holding
Shares in Companies 1.3.1 In terms of Section 19(2)
of the Banking Regulation Act, 1949, banks should not hold shares in any company
except as provided in sub-section (1) whether as pledgee, mortgagee or absolute
owner, of an amount exceeding 30 percent of the paid-up share capital of that
company or 30 percent of its own paid-up share capital and reserves, whichever
is less. 1.3.2 Further, in terms of Section 19(3) of the
Banking Regulation Act, 1949, the banks should not hold shares whether as pledgee,
mortgagee or absolute owner, in any company in the management of which any
managing director or manager of the bank is in any manner concerned or interested. 1.3.3
Accordingly, while granting loans and advances against shares, statutory provisions
contained in Sections 19(2) and 19(3) should be strictly observed. 1.4
Restrictions on Credit to Companies for Buy-back of their Securities In
terms of Section 77A(1) of the Companies Act, 1956, companies are permitted to
purchase their own shares or other specified securities out of their free
reserves, or securities premium account, or the
proceeds of any shares or other specified securities, subject
to compliance of various conditions specified in the Companies (Amendment) Act,
1999. Therefore, banks should not provide loans to companies for buy-back of shares/securities. 2.
Regulatory Restrictions 2.1 Granting loans
and advances to relatives of Directors Without prior
approval of the Board or without the knowledge of the Board, no loans and advances
should be granted to relatives of the bank's Chairman/Managing Director or other
Directors, Directors (including Chairman/Managing Director) of other banks and
their relatives, Directors of Scheduled Co-operative Banks and their relatives,
Directors of Subsidiaries/Trustees of Mutual Funds/Venture Capital Funds set up
by the financing banks or other banks, as per details given below. 2.1.1
Lending to directors and their relatives on reciprocal basis There
have been instances where certain banks have developed an informal understanding
or mutual/reciprocal arrangement among themselves for extending credit facilities
to each other’s directors, their relatives, etc. By and large, they did not follow
the usual procedures and norms in sanctioning credit limits to the borrowers,
particularly those belonging to certain groups or directors, their relatives,
etc. Facilities far in excess of the sanctioned limits and concessions were allowed
in the course of operation of individual accounts of the parties. Although, there
is no legal prohibition on a bank from giving credit facilities to a director
of some other banks or his relatives, serious concern was expressed in Parliament
that such quid pro quo arrangements are not considered to be ethical. The
banks should, therefore, follow the guidelines indicated below in regard to grant
of loans and advances and award of contracts to the relatives of their directors
and directors of other banks and their relatives: 2.1.2
Unless sanctioned by the Board of Directors/Management Committee, banks should
not grant loans and advances aggregating Rs. 25 lakhs and above to - (a)
directors (including the Chairman/Managing Director) of other banks *; (b)
any firm in which any of the directors of other banks * is interested as
a partner or guarantor; and (c) any company in which any of the directors of
other banks * holds substantial interest or is interested as a director or
as a guarantor. 2.1.3 Unless sanctioned by the Board of
Directors/Management Committee, banks should also not grant loans and advances
aggregating Rs.25 lakhs and above to - (a) any relatives
of their own Chairmen/Managing Directors or other Directors; (b) any relatives
of the Chairman/Managing Director or other directors of other banks *; (c)
any firm in which any of the relatives as mentioned in (a) & (b) above is
interested as a partner or guarantor; and (d) any company in which any of the
relatives as mentioned in (a) & (b) above hold substantial interest or is
interested as a director or as a guarantor. * including
directors of Scheduled Co-operative Banks, directors of subsidiaries/trustees
of mutual funds/venture capital funds. 2.1.4 The proposals
for credit facilities of an amount less than Rs.25 lakh to these borrowers may
be sanctioned by the appropriate authority in the financing bank under powers
vested in such authority, but the matter should be reported to the Board. 2.1.5
The Chairman/Managing Director or other director who is directly or indirectly
concerned or interested in any proposal should disclose the nature of his interest
to the Board when any such proposal is discussed. He should not be present in
the meeting unless his presence is required by the other directors for the purpose
of eliciting information and the director so required to be present shall not
vote on any such proposal. The above norms relating to grant
of loans and advances will equally apply to awarding of contracts. 2.1.6
The scope of the term ‘relative’ will be as under: Spouse Father Mother
(including step-mother) Son (including step-son) Son's Wife Daughter
(including step-daughter) Daughter's Husband Brother (including step-brother) Brother’s
wife Sister (including step-sister) Sister’s husband Brother (including
step-brother) of the spouse Sister (including step-sister) of the spouse 2.1.7
The term ‘loans and advances’ will not include loans or advances against - Government
securities Life insurance policies Fixed or other deposits Stocks and
shares Temporary overdrafts for small amounts, i.e. upto Rs. 25,000/- Casual
purchase of cheques up to Rs. 5,000 at a time Housing loans,
car advances, etc. granted to an employee of the bank under any scheme applicable
generally to employees. 2.1.8 The term ‘substantial interest’
shall have the same meaning as assigned to it in Section 5(ne) of the Banking
Regulation Act, 1949. 2.1.9 Banks should evolve, inter alia,
the following procedure for ascertaining the interest of a director of a financing
bank or of another bank, or his relatives, in credit proposals/award of contracts
placed before the Board/Committee or other appropriate authority of the financing
banks. (i) Every borrower should furnish a declaration to
the bank to the effect that - (a) (where the borrower is
an individual) he is not a director or specified near relation of a director of
a banking company; (b) re the borrower is a partnership firm) none of the partners
is a director or specified near relation of a director of a banking company; and (c)
re the borrower is a joint stock company) none of its directors, is a director
or specified near relation of a director of a banking company. (ii)
The declaration should also give details of the relationship of the borrower to
the director of the bank. 2.1.10 In order to ensure compliance
with the instructions, banks should forthwith recall the loan when it transpires
that the borrower has given a false declaration. 2.1.11
The above guidelines should also be followed while granting loans/ advances or
awarding contracts to directors of scheduled co-operative banks or their relatives. 2.1.12
These guidelines should also be followed by banks when granting loans and advances
and awarding of contracts to directors of subsidiaries/trustees of mutual funds/venture
capital funds set up by them as also other banks. 2.1.13
These guidelines should be duly brought to the notice of all directors and also
placed before the bank's Board of Directors. 2.2
Restrictions on Grant of Loans & Advances to Officers and Relatives of Senior
Officers of Banks 2.2.1 The statutory regulations
and/or the rules and conditions of service applicable to officers or employees
of public sector banks indicate, to a certain extent, the precautions to be observed
while sanctioning credit facilities to such officers and employees and their relatives.
In addition, the following guidelines should be followed by all the banks with
reference to the extension of credit facilities to officers and the relatives
of senior officers: (i) Loans & advances to officers
of the bank No officer or any Committee comprising, inter
alia, an officer as member, shall, while exercising powers of sanction of any
credit facility, sanction any credit facility to his/her relative. Such a facility
shall ordinarily be sanctioned only by the next higher sanctioning authority.
Credit facilities sanctioned to senior officers of the financing bank should be
reported to the Board. (ii) Loans and advances and award
of contracts to relatives of senior officers of the bank Proposals
for credit facilities to the relatives of senior officers of the bank sanctioned
by the appropriate authority should be reported to the Board. Further, when a
credit facility is sanctioned by an authority, other than the Board to - any
firm in which any of the relatives of any senior officer of the financing bank
holds substantial interest, or is interested as a partner or guarantor; or any
company in which any of the relatives of any senior officer of the financing bank
holds substantial interest, or is interested as a director or as a guarantor, such
transaction should also be reported to the Board. 2.2.2
The above norms relating to grant of credit facility will equally apply to the
awarding of contracts. 2.2.3 Application of the Guidelines
in case of Consortium Arrangements In the case of consortium
arrangements, the above norms relating to grant of credit facilities to relatives
of senior officers of the bank will apply to the relatives of senior officers
of all the participating banks. 2.2.4 Scope of certain
expressions (i) The scope of the term ‘relative’ is the
same as mentioned at para 2.1.6. (ii) The term ‘Senior Officer’ will refer
to - a) any officer in senior management level in Grade
IV and above in a nationalised bank, and b) any officer in equivalent scale c)
in the State Bank of India and associate banks, and d) in any banking company
incorporated in India. (iii) The term ‘credit facility’
will not include loans or advances against - a) Government
securities b) Life Insurance policies c) Fixed or other deposits d) Temporary
overdrafts for small amount i.e. upto Rs. 25,000/-, and e) Casual purchase
of cheques up to Rs. 5,000/- at a time. (iv) Credit facility
will also not include loans and advances such as housing loans, car advances,
consumption loans, etc. granted to an officer of the bank under any scheme applicable
generally to officers. (v) The term ‘substantial interest’
shall have the same meaning assigned to it in Section 5(ne) of the Banking Regulation
Act, 1949. 2.2.5 In this context, banks may, inter alia, (i)
evolve a procedure to ascertain the interest of the relatives of a senior officer
of the bank in any credit proposal/award of contract placed before the Board Committee
or other appropriate authority of the financing bank; (ii)
obtain a declaration from every borrower to the effect that - (a)
if he is an individual, that he is not a specified, near relation to any senior
officer of the bank, (b) if it is a partnership or HUF firm, that none of the
partners, or none of the members of the HUF, is a near, specified relation of
any senior officer of the bank, and (c) if it is a joint stock company, that
none of its directors, is a relative of any senior officer of the bank. (iii)
ensure that the declaration gives details of the relationship, if any, of the
borrower to any senior officer of the financing bank. (iv)
make a condition for the grant of any credit facility that if the declaration
made by a borrower with reference to the above is found to be false, then the
bank will be entitled to revoke and/or recall the credit facility. (v)
consider in consultation with their legal advisers, amendments, if any, required
to any applicable regulations or rules, inter alia, dealing with the service
conditions of officers of the bank to give effect to these guidelines. 2.3
Restrictions on Grant of Financial Assistance to Industries Producing / Consuming
Ozone Depleting Substances (ODS) 2.3.1 Government
of India has advised that as per the Montreal Protocol, to which India is a party,
Ozone Depleting Substances (ODS) are required to be phased out as per schedule
prescribed therein. The list of chemicals given in Annex
1, Annex 2 to the Montreal Protocol is annexed
for ready reference. The Protocol has identified the main ODS and set a time limit
on phasing out their production/consumption in future, leading to a complete phase
out eventually. Projects for phasing out ODS in India are eligible for grants
from the Multilateral Fund. The sectors covered in the phase out programme are
given below.
Sector |
Type of substance |
Foam
products | Chlorofluorocarbon
- 11 (CFC - 11) | Refrigerators
and Air-conditioners | CFC
– 12 | Aerosol
products | Mixtures
of CFC - 11 and CFC – 12 |
Solvents in cleaning applications |
CFC - 113 Carbon Tetrachloride, Methyl Chloroform |
Fire
extinguishers | Halons
- 1211, 1301, 2402 |
2.3.2
Banks should not extend finance for setting up of new units consuming/producing
the above ODS. In terms of circular No. FI/12/96-97 dated February 16, 1996 issued
by the erstwhile Industrial Development Bank of India no financial assistance
should be extended to small/medium scale units engaged in the manufacture of the
aerosol units using CFC and no refinance would be extended to any project assisted
in this sector. 2.4 Restrictions on Advances against Sensitive
Commodities under Selective Credit Control (SCC) 2.4.1
Issue of Directives (i) With a view to preventing
speculative holding of essential commodities with the help of bank credit and
the resultant rise in their prices, in exercise of powers conferred by Section
21 & 35A of the Banking Regulation Act, 1949, the Reserve Bank of India, being
satisfied that it is necessary and expedient in the public interest to do so,
issues, from time to time, directives to all commercial banks, stipulating specific
restrictions on bank advances against specified sensitive commodities. (ii)
The commodities, generally treated as sensitive commodities are the following: (a)
food grains i.e. cereals and pulses, (b) selected major
oil seeds indigenously grown, viz. groundnut, rapeseed/mustard, cottonseed, linseed
and castorseed, oils thereof, vanaspati and all imported oils and vegetable oils, (c)
raw cotton and kapas, (d) sugar/gur/khandsari, (e)
cotton textiles which include cotton yarn, man-made fibres and yarn and fabrics
made out of man-made fibres and partly out of cotton yarn and partly out of man-made
fibres. 2.4.2 Commodities currently exempted from Selective
Credit Control (i) Presently the following commodities
are exempted from all the stipulations of Selective Credit Controls:
Sr.
No. | Commodity |
Exemption w.e.f. |
1. |
Pulses |
21.10.1996 |
2. |
Other food grains (viz. course grains) |
21.10.1996 |
3. |
Oilseeds (viz. groundnut, rapeseed/mustard, cotton
seed, linseed, castorseed) |
21.10.1996 |
4. |
Oils (viz. groundnut oil, rapeseed oil, mustard oil,
cottonseed oil, linseed oil, castor oil) including vanaspati |
21.10.1996 |
5. |
All imported oil seeds and oils |
21.10.1996 |
6. |
Sugar, including imported sugar, excepting buffer
stocks and unreleased stock of sugar with Sugar Mills |
21.10.1996 |
7. |
Gur and Khandsari |
21.10.1996 |
8. |
Cotton and Kapas |
21.10.1996 |
9. |
Paddy/Rice |
18.10.1994 |
10. |
Wheat * |
12.10.1993 |
* Temporarily covered under SCC w.e.f.
8.4.97 to 7.7.97. |
Banks
are free to fix prudential margins on advances against these sensitive commodities. 2.4.3
Commodities covered under Selective Credit Control (i)
Presently, the following commodities are covered under stipulations of Selective
Credit Control: a) Buffer stock of sugar with Sugar Mills b)
Unreleased stocks of sugar with Sugar Mills representing levy
sugar, and free sale sugar 2.4.4
Stipulations of Selective Credit Control (i)
Margin on sugar
Commodity |
Minimum Margin |
With effect from |
(a)
Buffer stocks of sugar |
0% |
01.04.1987 |
(b) Unreleased stocks of sugar with Sugar Mills
representing - levy sugar free sale sugar |
10% @
|
22.10.1997 10.10.2000
|
@ Margins on credit for
free sale sugar will be decided by banks including RRBs and LABs based on their
commercial judgement. (ii) Valuation of sugar stocks (a)
The unreleased stocks of the levy sugar charged to banks as security by the sugar
mills shall be valued at levy price fixed by Government. (b)
The unreleased stocks of free sale sugar including buffer stocks of sugar charged
to the bank as security by sugar mills, shall be valued at the average of the
price realised in the preceding three months (moving average) or the current market
price, whichever is lower; the prices for this purpose shall be exclusive of excise
duty. (iii) Interest rates Banks
have the freedom to fix lending rates for the commodities coming within the purview
of Selective Credit Control. (iv) Other operational stipulations (a)
The other operational stipulations vary with the commodities. These stipulations
are advised whenever Selective Credit Controls are reintroduced for any specific
sensitive commodities. (b) Although, none of the earlier
stipulations are currently applicable to the only sensitive commodity covered
under Selective Credit Control viz. buffer stocks and unreleased stocks of levy/free
sale sugar with Sugar Mills, yet these are reproduced in Annex
3 for understanding therefrom the underlying objectives of Selective Credit
Control so that banks do not allow the customers dealing in Selective Credit Control
commodities any credit facilities which would directly or indirectly defeat the
purpose of the directives. (v) Delegation of powers (a)
The matter relating to delegation of powers with regard to approval of credit
proposals relating to sensitive commodities coming under Selective Credit Control
was reviewed and it was decided that the existing practice of banks’ submitting
credit proposals above Rs.1 crore to Reserve Bank of India for its prior approval
under Selective Credit Control shall be discontinued and banks will have the freedom
to sanction such credit proposals in terms of their individual loan policies.
Accordingly, banks need not forward the credit proposals above Rs.1 crore in respect
of borrowers dealing in sensitive commodities to Reserve Bank of India for its
prior approval. (b) Banks are also advised to circulate
these instructions among their controlling offices/branches and take all necessary
steps to ensure that the powers delegated at various levels are exercised with
utmost caution without sacrificing the broad objectives of the Selective Credit
Control concept. 2.5 Restriction on payment
of commission to staff members including officers Section
10(1)(b)(ii) of Banking Regulation Act, 1934, stipulates that a banking company
shall not employ or continue the employment of any person whose remuneration or
part of whose remuneration takes the form of commission or a share in the profits
of the company. Further, clause (b) of Section 10(1)(b)(ii) permits payment of
commission to any person who is employed only otherwise than as a regular staff.
Therefore, banks should not pay commission to staff members and officers for recovery
of loans. 3. Restrictions on other loans
and advances 3.1 Loans and Advances against Shares, Debentures
and Bonds Banks are required to strictly observe
regulatory restrictions on grant of loans and advances against shares, debentures
and bonds which are detailed in the Master Circular on 'Bank Finance Against Shares
and Debentures' dated August 28, 1998 and the Circular on Financing of acquisition
of equity in overseas companies dated June 7, 2005. The
restrictions, inter alia, on loans and advances against shares and debentures,
are- No loans to be granted against partly paid shares. No
loans to be granted to partnership/proprietorship concerns against the primary
security of shares and debentures. 3.2
Money Market Mutual Funds All
the guidelines issued by the Reserve Bank of India on Money Market Mutual Funds
(MMMF) have been withdrawn and the banks are to be guided by the SEBI Regulations
in this regard. However the banks/ FIs which are desirous of setting up MMMFs
would have to take necessary clearance from the RBI for undertaking this additional
activity before approaching SEBI for registration. 3.3
Advances against Fixed Deposit Receipts (FDRs) Issued by Other Banks There
have been instances where fake term deposit receipts, purported to have been issued
by some banks, were used for obtaining advances from other banks. In the light
of these happenings, the banks should desist from sanctioning advances against
FDRs, or other term deposits of other banks. 3.4
Advances to Agents/Intermediaries based on Consideration of Deposit Mobilisation Banks
should desist from being party to unethical practices of raising of resources
through agents/intermediaries to meet the credit needs of the existing/prospective
borrowers or from granting loans to intermediaries, based on the consideration
of deposit mobilisation, who may not require the funds for their genuine business
requirements. 3.5 Loans against Certificate
of Deposits (CDs) Banks cannot grant loans against
CDs. 3.6 Bank Finance to Non-Banking Financial
Companies (NBFCs) 3.6.1 The following activities
undertaken by NBFCs, are not eligible for bank credit: (i)
Bills discounted/rediscounted by NBFCs, except for rediscounting of bills
discounted by NBFCs arising from the sale of – (a) commercial
vehicles (including light commercial vehicles), and (b) two-wheeler and three-wheeler
vehicles, subject to the following conditions: the bills
should have been drawn by the manufacturers on dealers only the
bills should represent genuine sale transactions as may be ascertained from the
chassis/engine numbers and before rediscounting the bills,
banks should satisfy themselves about the bona fides and track record of NBFCs
which have discounted the bills. (ii) Investments of NBFCs
both of current and long term nature, in any company/entity by way of shares,
debentures, etc. However, Stock Broking Companies may be provided need-based credit
against shares and debentures held by them as stock-in-trade. (iii)
Unsecured loans/inter-corporate deposits by NBFCs to/in any company. (iv)
All types of loans/advances by NBFCs to their subsidiaries, group companies/entities. (v)
Finance to NBFCs for further lending to individuals for subscribing to Initial
Public Offerings (IPOs). 3.6.2 Banks should not grant bridge
loans of any nature, or interim finance against capital/debenture issues and/or
in the form of loans of a bridging nature pending raising of long-term funds from
the market by way of capital, deposits, etc. to all categories of Non-Banking
Financial Companies, i.e. equipment leasing and hire-purchase finance companies,
loan and investment companies, Residuary Non-Banking Companies (RNBCs) and Venture
Capital Funds (VCFs). 3.7 Bank Finance
to Equipment Leasing Companies (i) Banks should
not enter into lease agreements departmentally with equipment leasing companies
as well as other Non-Banking Financial Companies engaged in equipment leasing. (ii)
As banks can only support lease rental receivables arising out of lease of equipment/machinery
owned by the borrowers, lease rentals receivables arising out of sub-lease of
an asset by a Non-Banking Non Financial Company (undertaking nominal leasing activity)
or by a Non-Banking Financial Company should be excluded for the purpose of computation
of bank finance for such company. 3.8 Financing
Infrastructure/ Housing Projects 3.8.1 Housing Finance (i)
Banks should not grant finance for construction of buildings meant purely for
Government/Semi-Government offices, including Municipal and Panchayat offices.
However, banks may grant loans for activities, which will be refinanced by institutions
like NABARD. (ii) Projects undertaken by public sector entities
which are not corporate bodies (i.e. public sector undertakings which are not
registered under the Companies Act or which are not corporations established under
the relevant statute) may not be financed by banks. Even in respect of projects
undertaken by corporate bodies, as defined above, banks should satisfy themselves
that the project is run on commercial lines and that bank finance is not in lieu
of or to substitute budgetary resources envisaged for the project. The loan could,
however, supplement budgetary resources if such supplementing was contemplated
in the project design. (iii) In case of housing projects
which the government is interested in promoting, either for weaker sections or
otherwise a part of the project cost may be met by the Government through subsidies
made available and/or contributions to the capital of the institution taking up
the project. In such cases bank finance should be restricted to the project cost
excluding the amount of subsidy/ capital contribution from the Government. The
bank should ensure the commercial viability of the project. 3.8.2
Guidelines for Financing of Infrastructure Projects In
view of the critical importance of the infrastructure sector and high priority
being accorded for development of various infrastructure services, the matter
has been reviewed in consultation with Government of India and the revised guidelines
on financing of infrastructure projects are set out as under. (a)
Definition of ‘infrastructure lending’ Any credit facility
in whatever form extended by lenders (i.e. banks, FIs or NBFCs) to an infrastructure
facility as specified below falls within the definition of 'infrastructure
lending'. In other words, a credit facility provided to a borrower company engaged
in developing or operating and maintaining,
or developing, operating and maintaining any infrastructure
facility that is a project in any of the following sectors, or any infrastructure
facility of a similar nature : i. a road, including toll
road, a bridge or a rail system; ii. a highway project including other activities
being an integral part of the highway project; iii. a port, airport, inland
waterway or inland port; iv. a water supply project, irrigation project, water
treatment system, sanitation and sewerage system or solid waste management
system; v. telecommunication services whether basic or cellular, including
radio paging, domestic satellite service (i.e., a satellite owned and operated
by an Indian company for providing telecommunication service), network of trunking,
broadband network and internet services; vi. an industrial park or special
economic zone ; vii. generation or generation and distribution of power; viii.
transmission or distribution of power by laying a network of new transmission
or distribution lines; ix. construction relating to projects involving agro-processing
and supply of inputs to agriculture; x. construction for preservation and storage
of processed agro-products, perishable goods such as fruits, vegetables and flowers
including testing facilities for quality; xi. construction of educational institutions
and hospitals; xii. any other infrastructure facility of similar nature. (b)
Criteria for Financing Banks/FIs are free to finance
technically feasible, financially viable and bankable projects undertaken by both
public sector and private sector undertakings subject to the following conditions: (i)
The amount sanctioned should be within the overall ceiling of the prudential exposure
norms prescribed by RBI for infrastructure financing. (ii)
Banks/ FIs should have the requisite expertise for appraising technical feasibility,
financial viability and bankability of projects, with particular reference to
the risk analysis and sensitivity analysis. (iii)
In respect of projects undertaken by public sector units, term loans may be sanctioned
only for corporate entities (i.e. public sector undertakings registered under
Companies Act or a Corporation established under the relevant statute). Further,
such term loans should not be in lieu of or to substitute budgetary resources
envisaged for the project. The term loan could supplement the budgetary resources
if such supplementing was contemplated in the project design. While such
public sector units may include Special Purpose Vehicles (SPVs) registered under
the Companies Act set up for financing infrastructure projects, it should be ensured
by banks and financial institutions that these loans/investments are not used
for financing the budget of the State Governments. Whether such financing is done
by way of extending loans or investing in bonds, banks and financial institutions
should undertake due diligence on the viability and bankability of such projects
to ensure that revenue stream from the project is sufficient to take care of the
debt servicing obligations and that the repayment/servicing of debt is not out
of budgetary resources. Further, in the case of financing SPVs, banks and financial
institutions should ensure that the funding proposals are for specific monitorable
projects. (iv) Banks may also lend
to SPVs in the private sector, registered under the Companies Act for directly
undertaking infrastructure projects which are financially viable and not for acting
as mere financial intermediaries. Banks may ensure that the bankruptcy or financial
difficulties of the parent/ sponsor should not affect the financial health of
the SPV. (c) Types of Financing by Banks (i)
In order to meet financial requirements of infrastructure projects, banks may
extend credit facility by way of working capital finance, term loan, project loan,
subscription to bonds and debentures/ preference shares/ equity shares acquired
as a part of the project finance package which is treated as 'deemed advance"
and any other form of funded or non-funded facility. (ii)
Take-out Financing Banks may
enter into take-out financing arrangement with IDFC/ other financial institutions
or avail of liquidity support from IDFC/ other FIs. A brief write-up on some of
the important features of the arrangement is given in para 3.9.2(f). Banks may
also be guided by the instructions regarding take-out finance contained in Circular
No. DBOD. BP. BC. 144/ 21.04.048/ 2000 dated February 29, 2000. (iii)
Inter-institutional Guarantees Banks are permitted
to issue guarantees favouring other lending institutions in respect of infrastructure
projects, provided the bank issuing the guarantee takes a funded share in the
project at least to the extent of 5 per cent of the project cost and undertakes
normal credit appraisal, monitoring and follow-up of the project. For detailed
instructions on inter-institutional guarantee, please see para 3.9. (iv)
Financing promoter's equity In terms of Circular
No. DBOD. Dir. BC. 90/ 13.07.05/ 98 dated August 28, 1998, banks were advised
that the promoter's contribution towards the equity capital of a company should
come from their own resources and the bank should not normally grant advances
to take up shares of other companies. In view of the importance attached to the
infrastructure sector, it has been decided that, under certain circumstances,
an exception may be made to this policy for financing the acquisition of the promoter's
shares in an existing company, which is engaged in implementing or operating an
infrastructure project in India. The conditions, subject to which an exception
may be made, are as follows: (i)
The bank finance would be only for acquisition of shares of existing companies
providing infrastructure facilities as defined in paragraph (a) above. Further,
acquisition of such shares should be in respect of companies where the existing
foreign promoters (and/ or domestic joint promoters) voluntarily propose to disinvest
their majority shares in compliance with SEBI guidelines, where applicable. (ii)
The companies to which loans are extended should, inter alia, have a satisfactory
net worth. (iii) The company financed
and the promoters/ directors of such companies should not be a defaulter to banks/
FIs. (iv) In order to ensure that
the borrower has a substantial stake in the infrastructure company, bank finance
should be restricted to 50% of the finance required for acquiring the promoter's
stake in the company being acquired. (v)
Finance extended should be against the security of the assets of the borrowing
company or the assets of the company acquired and not against the shares of that
company or the company being acquired. The shares of the borrower company / company
being acquired may be accepted as additional security and not as primary security.
The security charged to the banks should be marketable. (vi)
Banks should ensure maintenance of stipulated margins at all times. (vii)
The tenor of the bank loans may not be longer than seven years. However, the Boards
of banks can make an exception in specific cases, where necessary, for financial
viability of the project. (viii)
This financing would be subject to compliance with the statutory requirements
under Section 19(2) of the Banking Regulation Act, 1949. (ix)
The banks financing acquisition of equity shares by promoters should be within
the regulatory ceiling of 40 per cent of their net worth as on March 31 of the
previous year for the aggregate exposure of the banks to the capital markets in
all forms (both fund based and non-fund based). (x)
The proposal for bank finance should have the approval of the Board. (d)
Appraisal (i) In respect of financing of infrastructure
projects undertaken by Government owned entities, banks/Financial Institutions
should undertake due diligence on the viability of the projects. Banks should
ensure that the individual components of financing and returns on the project
are well defined and assessed. State Government guarantees may not be taken as
a substitute for satisfactory credit appraisal and such appraisal requirements
should not be diluted on the basis of any reported arrangement with the Reserve
Bank of India or any bank for regular standing instructions/periodic payment instructions
for servicing the loans/bonds. (ii)
Infrastructure projects are often financed through Special Purpose Vehicles. Financing
of these projects would, therefore, call for special appraisal skills on the part
of lending agencies. Identification of various project risks, evaluation of risk
mitigation through appraisal of project contracts and evaluation of creditworthiness
of the contracting entities and their abilities to fulfill contractual obligations
will be an integral part of the appraisal exercise. In this connection, banks/FIs
may consider constituting appropriate screening committees/special cells for appraisal
of credit proposals and monitoring the progress/performance of the projects. Often,
the size of the funding requirement would necessitate joint financing by banks/FIs
or financing by more than one bank under consortium or syndication arrangements.
In such cases, participating banks/ FIs may, for the purpose of their own assessment,
refer to the appraisal report prepared by the lead bank/FI or have the project
appraised jointly. (e) Prudential requirements (i) Prudential
credit exposure limits Credit exposure to borrowers
belonging to a group may exceed the exposure norm of 40 per cent of the bank's
capital funds by an additional 10 per cent (i.e. up to 50 per cent), provided
the additional credit exposure is on account of extension of credit to infrastructure
projects. Credit exposure to single borrower may exceed the exposure norm of 15
per cent of the bank's capital funds by an additional 5 per cent (i.e. up to 20
per cent) provided the additional credit exposure is on account of infrastructure
as defined in paragraph (a) above. In addition to the exposure permitted above,
banks may, in exceptional circumstances, with the approval of their Boards, consider
enhancement of the exposure to a borrower up to a further 5 per cent of capital
funds. The bank should make appropriate disclosures in the ‘Notes on account’
to the annual financial statements in respect of the exposures where the bank
had exceeded the prudential exposure limits during the year. (ii) Assignment
of risk weight for capital adequacy purposes Banks may
assign a concessional risk weight of 50 per cent for capital adequacy purposes,
on investment in securitised paper pertaining to an infrastructure facility subject
to compliance with the following: The
infrastructure facility should satisfy the conditions stipulated in paragraph
(a) above. The infrastructure facility should be generating
income/ cash flows which would ensure servicing/ repayment of the securitised
paper. The securitised paper should be rated at least 'AAA'
by the rating agencies and the rating should be current and valid. The rating
relied upon will be deemed to be current and valid if- (i)
The rating is not more than one month old on the date of opening of the issue,
and the rating rationale from the rating agency is not more than one year old
on the date of opening of the issue, and the rating letter and the rating rationale
is a part of the offer document. (ii)
In the case of secondary market acquisition, the 'AAA' rating of the issue should
be in force and confirmed from the monthly bulletin published by the respective
rating agency. (iii) The securitised
paper should be a performing asset on the books of the investing/ lending institution. (iii)
Asset-Liability Management The long-term financing
of infrastructure projects may lead to asset – liability mismatches, particularly
when such financing is not in conformity with the maturity profile of a bank’s
liabilities. Banks would, therefore, need to exercise due vigil on their asset-liability
position to ensure that they do not run into liquidity mismatches on account of
lending to such projects. (iv) Administrative arrangements Timely
and adequate availability of credit is the pre-requisite for successful implementation
of infrastructure projects. Banks/ FIs should, therefore, clearly delineate the
procedure for approval of loan proposals and institute a suitable monitoring mechanism
for reviewing applications pending beyond the specified period. Multiplicity of
appraisals by every institution involved in financing, leading to delays, has
to be avoided and banks should be prepared to broadly accept technical parameters
laid down by leading public financial institutions. Also, setting up a mechanism
for an ongoing monitoring of the project implementation will ensure that the credit
disbursed is utilised for the purpose for which it was sanctioned. (f)
Take-out financing/liquidity support (i) Take-out
financing arrangement Take-out financing structure
is essentially a mechanism designed to enable banks to avoid asset-liability maturity
mismatches that may arise out of extending long tenor loans to infrastructure
projects. Under the arrangements, banks financing the infrastructure projects
will have an arrangement with IDFC or any other financial institution for transferring
to the latter the outstandings in their books on a pre-determined basis. IDFC
and SBI have devised different take-out financing structures to suit the requirements
of various banks, addressing issues such as liquidity, asset-liability mismatches,
limited availability of project appraisal skills, etc. They have also developed
a Model Agreement that can be considered for use as a document for specific projects
in conjunction with other project loan documents. The agreement between SBI and
IDFC could provide a reference point for other banks to enter into somewhat similar
arrangements with IDFC or other financial institutions. (ii) Liquidity
support from IDFC As an alternative to take-out financing
structure, IDFC and SBI have devised a product, providing liquidity support to
banks. Under the scheme, IDFC would commit, at the point of sanction, to refinance
the entire outstanding loan (principal+ unrecovered interest) or part of the loan,
to the bank after an agreed period, say, five years. The credit risk on the project
will be taken by the bank concerned and not by IDFC. The bank would repay the
amount to IDFC with interest as per the terms agreed upon. Since IDFC would be
taking a credit risk on the bank, the interest rate to be charged by it on the
amount refinanced would depend on the IDFC’s risk perception of the bank (in most
of the cases, it may be close to IDFC’s PLR). The refinance support from IDFC
would particularly benefit the banks which have the requisite appraisal skills
and the initial liquidity to fund the project. 3.9
Issue of Bank Guarantees in favour of Financial Institutions 3.9.1
Banks may issue guarantees favouring other banks/FIs/other lending agencies for
the loans extended by the latter, subject to strict compliance with the following
conditions. (i) The Board of Directors should reckon the
integrity/robustness of the bank’s risk management systems and, accordingly, put
in place a well-laid out policy in this regard. The Board
approved policy should, among others, address the following issues: a)
Prudential limits, linked to bank’s Tier I capital, up to which guarantees favouring
other banks/FIs/other lending agencies may be issued. b) Nature and extent
of security and margins c) Delegation of powers d) Reporting system e)
Periodical reviews (ii) The guarantee shall be extended
only in respect of borrower constituents and to enable them to avail of additional
credit facility from other banks/FIs/lending agencies (iii)
The guaranteeing bank shall assume a funded exposure of at least 10% of the exposure
guaranteed. (iv) Banks should not extend guarantees or letters
of comfort in favour of overseas lenders including those assignable to overseas
lenders, except for the relaxations permitted under FEMA. (v)
The guarantee issued by the bank will be an exposure on the borrowing entity on
whose behalf the guarantee has been issued and will attract appropriate risk weight
as per the extant guidelines. (vi) Banks should ensure compliance
with the recommendations of the Ghosh Committee and other internal requirements
relating to issue of guarantees to obviate the possibility of frauds in this area. 3.9.2
Lending banks Banks extending credit facilities against
the guarantees issued by other banks/FIs should ensure strict compliance with
the following conditions: (i) The exposure assumed by the
bank against the guarantee of another bank/FI will be deemed as an exposure on
the guaranteeing bank/FI and will attract appropriate risk weight as per the extant
guidelines. (ii) Exposures assumed by way of credit facilities
extended against the guarantees issued by other banks should be reckoned within
the inter bank exposure limits prescribed by the Board of Directors. Since the
exposure assumed by the bank against the guarantee of another bank/FI will be
for a fairly longer term than those assumed on account of inter bank dealings
in the money market, foreign exchange market and securities market, the Board
of Directors should fix an appropriate sub-limit for the longer term exposures
since these exposures attract greater risk. (iii) Banks
should monitor the exposure assumed on the guaranteeing bank/FI, on a continuous
basis and ensure strict compliance with the prudential limits/sub limits prescribed
by the Board for banks and the prudential single borrower limits prescribed by
RBI for FIs. (iv) Banks should comply with the recommendations
of the Ghosh Committee and other internal requirements relating to acceptance
of guarantees of other banks to obviate the possibility of frauds in this area. However,
the above conditions will not be applicable in the following cases: (a)
In respect of infrastructure projects, banks may issue guarantees favouring other
lending institutions, provided the bank issuing the guarantee takes a funded share
in the project at least to the extent of 5 percent of the project cost and undertakes
normal credit appraisal, monitoring and follow up of the project. (b)
Issuance of guarantees in favour of various Development Agencies/Boards, like
Indian Renewable Energy Development Agency, National Horticulture Board, etc.
for obtaining soft loans and/or other forms of development assistance from such
Agencies/Boards with the objective of improving efficiency, productivity, etc.,
subject to the following conditions: Banks should satisfy
themselves, on the basis of credit appraisal, regarding the technical feasibility,
financial viability and bankability of individual projects and/or loan proposals
i.e. the standard of such appraisal should be the same, as is done in the case
of a loan proposal seeking sanction of term finance/loan. Banks
should conform to the prudential exposure norms prescribed from time to time for
an individual borrower/group of borrowers. Banks should
suitably secure themselves before extending such guarantees. (c)
Issue of guarantees favouring HUDCO/State Housing Boards and similar bodies for
loans granted by them to private borrowers who are unable to offer clean or marketable
title to property, provided banks are otherwise satisfied about the capacity of
borrowers to adequately service such loans. d) Issuance
of guarantees by consortium member banks unable to participate in rehabilitation
packages on account of temporary liquidity constraints, in favour of the banks
which take up their share of the limit. Banks should not
grant co-acceptance/guarantee facilities under Buyers Lines of Credit Schemes
introduced by IDBI, SIDBI, Exim Bank, Power Finance Corporation (PFC) or any other
financial institution, unless specifically permitted by the RBI. 3.10
Discounting/Rediscounting of Bills by Banks Banks
may adhere to the following guidelines while purchasing / discounting / negotiating
/ rediscounting of genuine commercial / trade bills: (i)
Since banks have already been given freedom to decide their own guidelines for
assessing / sanctioning working capital limits of borrowers, they may sanction
working capital limits as also bills limit to borrowers after proper appraisal
of their credit needs and in accordance with the loan policy as approved by their
Board of Directors. (ii) Banks should clearly lay down a
bills discounting policy approved by their Board of Directors, which should be
consistent with their policy of sanctioning of working capital limits. In this
case, the procedure for Board approval should include banks’ core operating process
from the time the bills are tendered till these are realised. Banks may review
their core operating processes and simplify the procedure in respect of bills
financing. In order to address the often-cited problem of delay in realisation
of bills, banks may take advantage of improved computer / communication networks
like the Structured Financial Messaging system (SFMS) and adopt the system of
‘value dating’ of their clients’ accounts. (iii) Banks should
open letters of credit (LCs) and purchase / discount / negotiate bills under LCs
only in respect of genuine commercial and trade transactions of their borrower
constituents who have been sanctioned regular credit facilities by the banks.
Banks should not, therefore, extend fund-based (including bills financing) or
non-fund based facilities like opening of LCs, providing guarantees and acceptances
to non-constituent borrower or / and non-constituent member of a consortium /
multiple banking arrangement. (iv) Sometimes, a beneficiary
of the LC may want to discount the bills with the LC issuing bank itself. In such
cases, banks may discount bills drawn by beneficiary only if the bank has sanctioned
regular fund-based credit facilities to the beneficiary. With a view to ensuring
that the beneficiary’s bank is not deprived of cash flows into its account, the
beneficiary should get the bills discounted / negotiated through the bank with
whom he is enjoying sanctioned credit facilities. (v) Bills
purchased / discounted / negotiated under LC (where the payment to the beneficiary
is not made ‘under reserve’) will be treated as an exposure on the LC issuing
bank and not on the borrower. All clean negotiations as indicated above will be
assigned the risk weight as is normally applicable to inter-bank exposures, for
capital adequacy purposes. In the case of negotiations ‘under reserve’, the exposure
should be treated as on the borrower and risk weight assigned accordingly. (vi)
While purchasing / discounting / negotiating bills under LCs or otherwise, banks
should establish genuineness of underlying transactions / documents. (vii)
Banks should ensure that blank LC forms are kept in safe custody as in case of
security items like blank cheques, demand drafts etc. and verified / balanced
on daily basis. LC forms should be issued to customers under joint signatures
of the bank’s authorised officials. (viii) The practice
of drawing bills of exchange claused ‘without recourse’ and issuing letters of
credit bearing the legend ‘without recourse’ should be discouraged because such
notations deprive the negotiating bank of the right of recourse it has against
the drawer under the Negotiable Instruments Act. Banks should not therefore open
LCs and purchase / discount / negotiate bills bearing the ‘without recourse’ clause. (ix)
Accommodation bills should not be purchased / discounted / negotiated by banks.
The underlying trade transactions should be clearly identified and a proper record
thereof maintained at the branches conducting the bills business. (x)
Banks should be circumspect while discounting bills drawn by front finance companies
set up by large industrial groups on other group companies. (xi)
Bills rediscounts should be restricted to usance bills held by other banks. Banks
should not rediscount bills earlier discounted by non-bank financial companies
(NBFCs) except in respect of bills arising from sale of light commercial vehicles
and two / three wheelers. (xii)
Banks may exercise their commercial judgment in discounting of bills of the services
sector. However, while discounting such bills, banks should ensure that actual
services are rendered and accommodation bills are not discounted. Services sector
bills should not be eligible for rediscounting. Further, providing
finance against discounting of services sector bills may be treated as unsecured
advance and, therefore, should be within the norm prescribed by the Board of the
bank for unsecured exposure limit. (xiii)
In order to promote payment discipline which would, to a certain extent, encourage
acceptance of bills, all corporates and other constituent borrowers having turnover
above threshold level as fixed by the bank’s Board of Directors should be mandated
to disclose ‘aging schedule’ of their overdue payables in their periodical returns
submitted to banks. (xiv) Banks should
not enter into Repo transactions using bills discounted / rediscounted as collateral. 3.11
Advances against Bullion/Primary gold (a) Banks
should not grant any advance against bullion/ Primary gold. (b) Banks should
desist from granting advances to the silver bullion dealers which are likely to
be utilised for speculative purposes. 3.12
Advances against Gold Ornaments & Jewellery Hallmarking
of gold jewellery ensures the quality of gold used in the jewellery as to caratage,
fineness and purity. Therefore, banks would find granting of advances against
the security of such hallmarked jewellery safer and easier. Preferential treatment
of hallmarked jewellery is likely to encourage practice of hallmarking which will
be in the long-term interest of consumer, lenders and the industry. Therefore,
banks while considering granting advances against jewellery may keep in view the
advantages of hallmarked jewellery and decide on the margin and rates of interest
thereon. 3.13 Gold (Metal) Loans 3.13.1
Banks nominated to import gold (list of banks as per Annex
4) as per extant instructions may extend Gold (Metal) Loans to domestic
jewellery manufacturers, who are not exporters of jewellery, subject to the condition
that any gold loan borrowing or other non-funded commitments taken by them for
the purpose of providing gold loans to domestic jewellery manufacturers will be
taken into account for the purpose of the overall ceiling (presently 25 % of Tier
I capital) in respect of aggregate borrowing for non-export purposes. The Gold
Loans extended to exporters of jewellery would continue to be out of the 25% ceiling.
The Gold (Metal) Loans provided by banks will be subject to the following conditions: (i)
The tenor of the Gold (Metal) Loans, which nominated banks are permitted to extend
to domestic jewellery manufacturers who are not exporters of jewellery, may be
decided by the nominated banks themselves provided the tenor does not exceed 180
days and the banks’ policy with regard to tenor and monitoring of end use of gold
loan is documented in the banks’ loan policy and strictly adhered to by the banks.
The above guidelines will be reviewed in the light of experience gained, and the
performance of the banks in regard to monitoring the end-use of gold loans will
be an important factor in deciding upon their future requests for annual renewal
of authorization to import gold / silver. (ii) Interest
charged to the borrowers should be linked to the international gold interest rate. (iii)
The gold borrowings will be subject to normal reserve requirements. (iv) The
loan will be subject to capital adequacy and other prudential requirements. (v)
Banks should ensure end-use of gold loans to jewellery manufacturers and adhere
to KYC guidelines. (vi) Any mismatch arising out of the gold borrowings and
lendings should be within the prudential risk limits approved by the nominated
bank’s Board. (vii) The banks should carefully assess the overall risks on
granting gold loans and lay down a detailed lending policy with the approval of
the Board. 3.13.2 Presently, nominated
banks can extend Gold (Metal) Loans to exporters of jewellery who are customers
of other scheduled commercial banks, by accepting stand-by letter of credit or
bank guarantee issued by their bankers in favour of the nominated banks subject
to authorised banks' own norms for lending and other conditions stipulated by
RBI. Banks may also extend the facility to domestic jewellery manufacturers, subject
to the following conditions: (i)
The stand-by LC / BG shall be extended only on behalf of domestic jewellery manufacturers
and shall cover at all times the full value of the quantity of gold borrowed by
these entities. The stand-by LC / BG shall be issued by scheduled commercial banks
in favour of a nominated bank (list appended) only and not to any other entity
which may otherwise be having permission to import gold.
(ii) The bank issuing the stand-by LC / BG (only inland letter
of credit / bank guarantee) should do so only after carrying out proper credit
appraisal. The bank should ensure that adequate margin is available to it at all
times consistent with the volatility of the gold prices. (iii)
The stand-by LC / BG facilities will be denominated in Indian Rupees and not in
foreign currency. (iv) Stand-by LC / BG issued by the non-nominated
banks will be subject to extant capital adequacy and prudential norms. (v)
The banks issuing stand-by LC / BG should also carefully assess the overall risks
on granting these facilities and lay down a detailed lending policy with the approval
of their Board. The nominated banks
may continue to extend Gold (Metal) Loans to jewellery exporters subject to the
following conditions: The exposure assumed by the nominated
bank extending the Gold (Metal) Loan against the stand-by LC / BG of another bank
will be deemed as an exposure on the guaranteeing bank and attract appropriate
risk weight as per the extant guidelines. The transaction
should be purely on back-to-back basis i.e. the nominated banks should extend
Gold (Metal) Loan directly to the customer of a non-nominated bank, against the
stand-by LC / BG issued by the latter. Gold (Metal) Loans
should not involve any direct or indirect liability of the borrowing entity towards
foreign suppliers of gold. The banks may calculate their
exposure and compliance with prudential norms daily by converting into Rupee the
gold quantity by crossing London AM fixing for Gold / US Dollar rate with the
rupee-dollar reference rate announced by RBI. 3.13.4
There will be no change in the existing policy on lending against bullion. Banks
should recognise the overall risks in extending Gold (Metal) Loans as also in
extending SBLC / BG. Banks should lay down an appropriate risk management / lending
policy in this regard and comply with the recommendations of the Ghosh Committee
and other internal requirements relating to acceptance of guarantees of other
banks to obviate the possibility of frauds in this area. 3.13.5
Nominated banks are not permitted to enter into any tie up arrangements for retailing
of gold / gold coins with any other entity including non-banking financial companies
/ co-operative banks / non-nominated banks. 3.14
Loans and advances to Real Estate Sector While appraising
loan proposals involving real estate, banks should ensure that the borrowers have
obtained prior permission from government / local governments / other statutory
authorities for the project, wherever required. In order that the loan approval
process is not hampered on account of this, while the proposals could be sanctioned
in normal course, the disbursements should be made only after the borrower has
obtained requisite clearances from the government authorities. 3.15
Loans and advances to Small Scale Industries SSI
units having working capital limits of up to Rs. 5 crore from the banking system
are to be provided working capital finance computed on the basis of 20 percent
of their projected annual turnover. The banks should adopt the simplified procedure
in respect of all SSI units (new as well as existing). 3.16
Loan system for delivery of bank credit
(a) In the case of borrowers enjoying working capital credit limits of Rs. 10
crore and above from the banking system, the loan component should normally be
80 percent. Banks, however, have the freedom to change the composition of working
capital by increasing the cash credit component beyond 20 percent or to increase
the ‘Loan Component’ beyond 80 percent, as the case may be, if they so desire.
Banks are expected to appropriately price each of the two components of working
capital finance, taking into account the impact of such decisions on their cash
and liquidity management. (b) In
the case of borrowers enjoying working capital credit limit of less than Rs. 10
crore, banks may persuade them to go in for the ‘Loan System’ by offering an incentive
in the form of lower rate of interest on the loan component, as compared to the
cash credit component. The actual percentage of ‘loan component’ in these cases
may be settled by the bank with its borrower clients. (c)
In respect of certain business activities, which are cyclical and seasonal in
nature or have inherent volatility, the strict application of loan system may
create difficulties for the borrowers. Banks may, with the approval of their respective
Boards, identify such business activities, which may be exempted from the loan
system of delivery. 3.17
Working Capital Finance to Information Technology and
Software Industry Following the
recommendations of the "National Task force on Information Technology and
Software development", Reserve Bank has framed guidelines for extending working
capital to the said industry. Banks are however free to modify the guidelines
based on their own experience without reference to the Reserve Bank of India to
achieve the purpose of the guidelines in letter and spirit. The salient features
of these guidelines are set forth below: (i)
Banks may consider sanction of working capital limits based on the track record
of the promoters group affiliation, composition of the management team and their
work experience as well as the infrastructure. (ii) In the
case of the borrowers with working capital limits of up to Rs 2 crore, assessment
may be made at 20 percent of the projected turnover. However, in other cases,
the banks may consider assessment of MPBF on the basis of the monthly cash budget
system. For the borrowers enjoying working capital limits of Rs 10 crore and above
from the banking system the guidelines regarding the loan system would be applicable. (iii)
Banks can stipulate reasonable amount as promoters’ contribution towards margin. (iv)
Banks may obtain collateral security wherever available. First/ second charge
on current assets, if available, may be obtained. (v) The
rate of interest as prescribed for general category of borrowers may be levied.
Concessional rate of interest as applicable to pre-shipment/post-shipment credit
may be levied. (vi) Banks may evolve tailor-made follow
up system for such advances. The banks could obtain quarterly statements of cash
flows to monitor the operations. In case the sanction was not made on the basis
of the cash budgets, they can devise a reporting system, as they deem fit. 3.18
Guidelines for bank finance for PSU disinvestments of Government of India In
terms of RBI circular DBOD No. Dir. BC .90/13.07.05/98 dated August 28, 1998,
banks have been advised that the promoters’ contribution towards the equity capital
of a company should come from their own resources and the bank should not normally
grant advances to take up shares of other companies. Banks were also advised to
ensure that advances against shares were not used to enable the borrower to acquire
or retain a controlling interest in the company/companies or to facilitate or
retain inter-corporate investment. It is clarified that the aforesaid instructions
of the 1998 circular would not apply in the case of bank finance to the successful
bidders under the PSU disinvestment programme of the Government, subject to the
following: Banks’ proposals for financing the successful
bidders in the PSU disinvestment programme should be approved by their Board of
Directors. Bank finance should be for acquisition of shares
of PSU under a disinvestment programme approved by Government of India, including
the secondary stage mandatory open offer, wherever applicable and not for subsequent
acquisition of the PSU shares. Bank finance should be made available only for
prospective disinvestments by Government of India. The companies,
including the promoters, to which bank finance is to be extended should have adequate
net worth and an excellent track record of servicing loans availed from the banking
system. The amount of bank finance thus provided should
be reasonable with reference to the banks' size, its net worth and business and
risk profile. In case the advances
against the PSU disinvestment is secured by the shares of the disinvested PSUs
or any other shares, banks should follow RBI's extant guidelines on capital market
exposures on margin, ceiling on overall exposure to the capital market, risk management
and internal control systems, surveillance and monitoring by the Audit Committee
of the Board, valuation and disclosure, etc. (cf. RBI circular No. DBOD.BP.BC.119/
21.04.137 /2000-01 dated May 11, 2001). 3.18.1 Stipulation
of lock-in period for shares i) Banks should, while
deciding to extend finance to the borrowers who participate in the
PSU disinvestment programme, advise such borrowers to execute an agreement whereby
they undertake to: (a) Produce the letter of waiver by the
Government for disposal of shares acquired under PSU disinvestment programme during
the lock-in period, or (b) Include a specific provision
in the documentation with the Government permitting the pledgee to liquidate the
shares during the lock-in period, in case of shortfall in margin requirement or
default by the borrower. (ii) Banks may extend finance to
the successful bidders even though the shares of the disinvested company
acquired/ to be acquired by the successful bidder are subjected to a lock-in period/
other such restrictions which affect their liquidity, subject to fulfillment of
following conditions: (a) The documentation between the
Government of India and the successful bidder should contain a specific provision
permitting the pledgee to liquidate the shares even during lock-in period that
may be prescribed in respect of such disinvestments, in case of shortfall in margin
requirements or default by the borrower. (b)
If the documentation does not contain such a specific provision, the borrower
(successful bidder) should obtain waiver from the Government for disposal of shares
acquired under PSU disinvestment programme during the lock-in period. As
per the terms and conditions of the PSU disinvestments by the Government of India,
the pledgee bank will not be allowed to invoke the pledge during the first year
of the lock-in period. During the second and third year of the lock-in period,
in case of inability of the borrower to restore the margin prescribed for the
purpose by way of additional security or non-performance of the payment obligations
as per the repayment schedule agreed upon between the bank and the borrower, the
bank would have the right to invoke the pledge. The pledgee bank’s right to invoke
the pledge during the second and third years of the lock-in period, would be subject
to the terms and conditions of the documentation between Government and the successful
bidder, which might also cast certain responsibilities on the pledgee banks. It
is clarified that the concerned bank must make a proper appraisal and exercise
due caution about creditworthiness of the borrower and the financial viability
of the proposal. The bank must also satisfy itself that the proposed documentation,
relating to the disposal of shares pledged with the bank, are fully acceptable
to the bank and do not involve unacceptable risks on the part of the bank. In
terms of IECD Circular No. 10/ 08.12.01/ 2000- 2001 dated 8 January 2001, banks
are precluded from financing investments of NBFCs in other companies and inter-corporate
loans / deposits to/ in other companies. The position has been reviewed and banks
are advised that SPVs which comply with the following conditions would not be
treated as investment companies and therefore would not be considered as NBFCs:
a. They function as holding companies,
special purpose vehicles, etc. with not less than 90 per cent of their total assets
as investment in securities held for the purpose of holding ownership stake, b.
They do not trade in these securities except for block sale, c. They do not
undertake any other financial activities, and d. They do not hold/accept public
deposits SPVs, which satisfy the above conditions, would be eligible for
bank finance for PSU disinvestments of Government of India. In
this context, it may be mentioned that Government of India, Ministry of Finance
(DEA), Investment Division, vide its press note dated July 8, 2002, on guidelines
for Euro issues, has permitted an Indian company utilizing ADR/GDR/ECB proceeds
for financing disinvestment programme of the Government of India, including the
subsequent open offer. Banks may, therefore, take into account proceeds from such
ADR/GDR/ECB issues, for extending bank finance to successful bidders of the PSU
disinvestment programme. 3.19
Grant of Loans for acquisition of Kisan Vikas Patras (KVPs) (i)
Certain instances have come to notice where banks have sanctioned loans to individuals
(mostly High Networth Individuals-HNIs) for acquisition of Kisan Vikas Patras
(KVPs). The HNIs were first required to bring in 10% of the total face value of
the proposed investment in the KVPs as margin and the remaining 90% of the investment
was treated as loan and funded by the bank for acquisition of the KVPs. Once the
KVPs were acquired in the borrower’s name, the same were pledged thereafter to
the bank. (ii) The sanction of loans
as described above is not in conformity with the objectives of small savings schemes.
The basic objective of small savings schemes is to provide a secure avenue of
savings for small savers and promote savings, as well as to inculcate the habit
of thrift among the people. The grant of loans for acquiring/investing in KVPs
does not promote fresh savings and, rather, channelises the existing savings in
the form of bank deposits to small savings instruments and thereby defeats the
very purpose of such schemes. Banks should therefore ensure that no loans are
sanctioned for acquisition of/investing in Small Savings Instruments including
Kisan Vikas Patras.
Annex
1 Master Circular on Loans and Advances – Statutory and
Other Restrictions List of Controlled Substances (Vide
paragraph 2.3.1)
Group |
Substance |
Ozone Depleting Potential * |
Group
I |
CFCl3 |
(CFC-11) |
1.0 |
CF2Cl2 |
(CFC-12) |
1.0 |
C2F3Cl3 |
(CFC-113) |
0.8 |
C2F4Cl2 |
(CFC-114) |
1.0 |
Cl |
(CFC-115) |
0.6 |
Group II |
CF2BrCl |
(halon-1211) |
3.0 |
CF3Br |
(halon-1301) |
10.0 |
C2F4Br2 |
(halon-2402) |
6.0 |
* These ozone depleting potentials are estimated
based on existing knowledge and will be reviewed and revised periodically. |
Annex
2 Master Circular on Loans and Advances – Statutory and
Other Restrictions List of Controlled Substances (Vide
paragraph 2.3.1)
Group |
Substance |
Ozone Depleting Potential |
Group
I |
CF3Cl |
(CFC-13) |
1.0 |
CF2Cl5 |
(CFC-111) |
1.0 |
C2F2Cl4 |
(CFC-112) |
1.0 |
C2FCl7 |
(CFC-211) |
1.0 |
C2F2Cl6 |
(CFC-212) |
1.0 |
C3F3Cl5 |
(CFC-213) |
1.0 |
C3F4Cl4 |
(CFC-214) |
1.0 |
C3F5Cl3 |
(CFC-215) |
1.0 |
C3F6Cl2 |
(CFC-216) |
1.0 |
C3F7Cl |
(CFC-217) |
1.0 |
Group II |
CCl4 |
Carbon Tetrachloride |
1.1 |
Group III |
C2H3Cl3 * |
1,1,1 - trichloroethane (methyl chloroform) |
0.1 |
* This formula does not refer to 1,1,2 - trichloroethane. |
Annex
3 Master Circular on Loans and Advances – Statutory and
Other Restrictions Selective Credit Control Other
Operational Stipulations [Vide paragraph 2.4.4
(iv)] Banks should not allow the customers dealing in
Selective Credit Control commodities any credit facilities which would directly
or indirectly defeat the purpose of the directive. Advances against book debts/receivables
and collateral securities like LIC policies, shares and stocks and real estate
should not be considered in favour of such borrowers. Although
advances against security of or by way of purchase of demand documentary bills
drawn in connection with the movement of the Selective Credit Control commodities
are exempted, the bank should ensure that the bills offered have arisen out of
actual movement of goods by verifying the relative invoices as also the receipts
issued by transport operators, etc. Usance bills arising
out of sale of Selective Credit Control commodities should not be discounted except
to the extent specifically permitted in the directives issued. Clean
Telegraphic Transfer Purchase facility may be allowed to a reasonable extent on
certain conditions specified in the directives. Priority
sector advances are also covered by/under Selective Credit Control directives. Where
credit limits have been sanctioned against the security of more than one commodity
and/or any other type of security, the credit limits against each commodity should
be segregated and the restrictions contained in the directives made applicable
to each of such segregated limit. Banks are free to determine
the rate of interest in respect of advances covered under Selective Credit Control
directives. Banks could grant loans to borrowers dealing
in Selective Credit Control commodities, provided the term loans are used for
the purpose of acquiring block assets like plant & machinery and normal appraisal
and other criteria are followed by the banks. Reserve Bank
of India authorises limits to the Food Corporation of India and State Governments
for procurement of foodgrains; at prices fixed by the Government of India, for
the Central Pool and for the distribution of the same under the Public Distribution
System (PDS). As the limits are authorised without margin, credit cannot be drawn
against credit sales, book debts, Government subsidies, etc. Banks
should refer to the directives on Selective Credit Control measures issued by
RBI from time to time.
Annex 4 List
of banks nominated to import Gold (vide paragraph 3.13.1)
1. |
Allahabad Bank |
2. |
Bank of Nova Scotia |
3. |
Bank of India |
4. |
Canara Bank |
5. |
Corporation Bank |
6. |
Dena Bank |
7. |
HDFC Bank Ltd. |
8. |
ICICI Bank Ltd. |
9. |
Indian Overseas Bank |
10. |
IndusInd Bank Ltd. |
11. |
Oriental Bank of Commerce |
12. |
Punjab National Bank |
13. |
State Bank of India |
14. |
Union Bank of India |
15. |
UTI Bank Ltd. |
16. |
Indian Bank |
17. |
Kotak Mahindra Bank Ltd. |
18. |
Syndicate Bank |
19. |
Federal Bank Ltd. |
Annex
5 List of Circulars consolidated by the Master
Circular on 'Loans and Advances - Statutory and other Restrictions'
|