RBI/2004-05/60 DBOD
No. Dir. BC. 14 /13.03.00/2004-05July
21, 2004Chief Executives of all Scheduled Commercial
Banks(Excluding RRBs)Dear
Sir,Master Circular – Exposure Norms
Please
refer to the Master Circular DBOD.
No. Dir .BC. 17/13.03.00/2003-04 dated August 22, 2003 consolidating the instructions/guidelines
issued to banks till June 30, 2003 relating to Exposure Norms. The Master Circular
has been suitably updated by incorporating the instructions issued up to June
30, 2004 and has been placed on the RBI website (http://www.rbi.org.in). 2.
This Master Circular is a compilation of the instructions contained in the circulars
issued by RBI on the above subject, which are operational as on the date of this
circular. Yours
faithfully, (Prashant
Saran) |Chief General Manager
CONTENTS
Master
Circular on Exposure Norms1. General
As a prudential measure aimed at better risk
management and avoidance of concentration of credit risks, the Reserve Bank of
India has advised the banks to fix limits on their exposure to specific industry
or sectors and has prescribed regulatory limits on banks’ exposure to
individual and group borrowers
in India. In addition, banks are also required to observe certain statutory and
regulatory exposure limits in respect of advances against / investments
in shares, debentures and bonds. 2.
Credit Exposures to Individual/Group Borrowers 2.1 Ceilings
2.1.1 The exposure ceiling
should be fixed in relation to bank's capital funds. Internationally, exposure
ceilings are computed in relation to total capital as defined under capital adequacy
standards (Tier I and Tier II Capital). Taking into account the best international
practices, it has been decided to adopt the concept of capital funds as defined
under capital adequacy standards for determining exposure ceiling uniformly both
by domestic and foreign banks, effective from 31 March 2002. The exposure ceiling
limits applicable from April 1, 2002, which is based on the capital funds in India
as computed above would be 15 per cent of capital funds in case of single borrower
and 40 percent in the case of a borrower group.
2.1.2
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. The definition of infrastructure lending and the
list of the items included under infrastructure sector are furnished in the Annexure
1.
2.1.3.
In addition to the exposure permitted under paragraphs 2.1.1 and 2.1.2 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. 2.1.4 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. 2.1.5 Banks should phase out
by March 31, 2005 exposures in excess of single/group borrower limits not in conformity
with above, either by increasing capital funds or reducing exposures. 2.1.6
Lending under Consortium Arrangements
The exposure limits will be applicable even in case
of lending under consortium arrangements, wherever formalised. 2.2 EXEMPTIONS 2.2.1
Rehabilitation of Sick/Weak Industrial Units
The ceilings
on single/group exposure limits would not be applicable to existing/additional
credit facilities (including funding of interest and irregularities) granted to
weak/sick industrial units under rehabilitation packages. 2.2.2
Food credit
Borrowers
to whom limits are allocated directly by the Reserve Bank, for food credit, will
be exempt from the ceiling.
2.2.3
Guarantee by the Government of India
The ceilings on
single /group exposure limit would not be applicable where principal and interest
are fully guaranteed by the Government of India. 2.2.4
Loans against own Term Deposits Loans
and advances granted against the security of bank’s own term deposits may be excluded
from the purview of the exposure ceiling.
2.3
DEFINITIONS. 2.3.1
Exposure
Exposure shall
include credit exposure (funded and non-funded credit limits) and
investment exposure (including underwriting and similar commitments)
as well as certain types of investments in companies. The sanctioned limits or
outstandings, whichever are higher, shall be reckoned for arriving at exposure
limit. In line with international best practices, it has been decided that effective
from April 1, 2003, non-fund based exposures should also be reckoned at 100 per
cent of the limit or outstandings, whichever is higher.
2.3.2 Measurement of Credit Exposure of Derivative Products
At present, derivative products such as Forward Rate Agreements (FRAs)
and Interest Rate Swaps (IRSs) are also captured for computing exposure by applying
the conversion factors to notional principal amounts as per the original exposure
method prescribed in Annexures 1 and 2 of our circular MPD.BC. 187/07.01/279/1999-2000
dated July 7, 1999. It has been decided that, effective from April 1, 2003, banks
should also include forward contracts in foreign exchange and other derivative
products like currency swaps, options, etc. at their replacement cost value in
determining individual/group borrower exposure. The methodology to be adopted
by banks for arriving at the replacement cost value is given below. Banks
may adopt, effective from April 1, 2003, either of the two methods viz. (i) Original
Exposure Method, and (ii) Current Exposure Method consistently for all derivative
products, in determining individual / group borrower exposure. Under
the Original Exposure Method, credit exposure is calculated at the beginning of
the derivative transaction by multiplying the notional principal amount with a
conversion factor. In order to arrive at the credit equivalent amount using the
Original Exposure Method, a bank would apply the following credit conversion factors
to the notional principal amounts of each instrument according to the nature of
the instrument and its original maturity:
Original Maturity |
Conversion factor to be applied on
Notional Principal Amount | |
Interest Rate Contract |
Exchange Rate Contract |
Less than one
year | 0.5% |
2.0% |
One year and less than two years |
1.0% |
5.0% (2% +3%) |
For each additional year |
1.0% |
3.0% |
The other method (Current
Exposure Method) to assess the exposure on account of credit risk on interest
rate and exchange rate derivative contracts is to calculate periodically the current
replacement cost by marking these contracts
to market, thus capturing the current exposure without any need for estimation
and then adding a factor ("add-on") to reflect the potential future
exposure over the remaining life of the contract. Therefore, in order to calculate
the credit exposure equivalent of off-balance sheet interest rate and exchange
rate instruments under Current Exposure Method, a bank would sum:
(i) the total of replacement cost
(obtained by "marking to market") of all its contracts with positive
value (i.e. when the bank has to receive money from the counter party), and
(ii)
an amount for potential future changes in credit exposure calculated on the
basis of the total notional principal amount of the contract multiplied by the
following credit of conversion factors according to the residual maturity:
Residual
Maturity | Conversion
factor to be applied on Notional Principal amount | |
Interest Rate Contract |
Exchange Rate Contract |
Less
than one year | Nil |
1.0% |
One year and over |
0.5% |
5.0% | Banks
should mark to market the derivative products at least on a monthly basis and
they may follow their internal methods of determining the marked to market value
of the derivative products.
Banks would
not be required to calculate potential credit exposure for single currency floating
/ floating interest rate swaps. The credit exposure on these contracts would be
evaluated solely on the basis of their mark-to-market value. Banks
are encouraged to follow the Current Exposure Method, which is an accurate method
of measuring credit exposure in a derivative product. In case a bank is not in
a position to adopt the Current Exposure method, it may follow the Original Exposure
Method. However, its endeavour should be to move over to Current Exposure Method
in course of time.
2.3.3
Credit exposure
Credit
exposure comprises of the following elements:
- all types of funded and non-funded credit
limits.
- facilities extended by way of equipment
leasing, hire purchase finance and factoring services.
- advances
against shares, debentures, bonds, units of mutual funds, etc. to stock brokers,
market makers.
- bank loan for financing promoters
contributions.
- bridge loans against equity flows/issues.
- financing
of Initial Public Offerings (IPOs)/Employee Stock Options(ESOPs).
2.3.4 Investment
exposure
Investment
exposure comprises of the following elements: - investments
in shares and debentures of companies acquired through direct subscription, devolvement
arising out of underwriting obligations or purchased from secondary markets or
on conversion of debt into equity.
- investment in PSU bonds through direct
subscription, devolvement arising out of underwriting obligations or purchase
made in the secondary market.
- investments in Commercial Papers (CPs) issued
by Corporate Bodies/PSUs.
- the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002, provides, among others, sale of financial assets by banks / FIs to Securitisation
Company (SC)/ Reconstruction Company(RC). Banks’ / FIs’ investments in debentures/
bonds / security receipts / pass-through certificates (PTCs) issued by a SC /
RC as compensation consequent upon sale of financial assets will constitute exposure
on the SC / RC. As only a few SC/RC are being set up now, banks’ / FIs’ exposure
on SC / RC through their investments in debentures / bonds / security receipts
/ (PTCs) issued by the SC / RC may go beyond their prudential exposure ceiling.
In view of the extra ordinary nature of event, banks / FIs will be allowed, in
the initial years, to exceed prudential exposure ceiling on a case-to-case basis.
The
investment made by the banks in bonds and debentures of corporates which are guaranteed
by a PFIÄ (as per list given in Annexure 2) will be treated as an exposure
by the bank on the PFI and not on the corporate. 2.3.5 Capital
Funds
Capital
funds for the purpose will comprise of Tier I and Tier II capital as defined under
capital adequacy standards. 2.3.6 Group
The concept of 'Group' and the task
of identification of the borrowers belonging to specific industrial groups is
left to the perception of the banks/financial institutions. Banks/financial institutions
are generally aware of the basic constitution of their clientele for the purpose
of regulating their exposure to risk assets. The group to which a particular borrowing
unit belongs, may, therefore, be decided by them on the basis of the relevant
information available with them, the guiding principle being commonality of management
and effective control. 2.3.7 In
the case of a split in the group, if the split is formalised, the splinter groups
will be regarded as separate groups. If banks and financial institutions have
doubts about the bona fides of the split, a reference may be made to RBI
for its final view in the matter to preclude the possibility of a split being
engineered in order to prevent coverage under the Group Approach.
2.4
Review An
annual review of the implementation of exposure management measures may be placed
before the Board of Directors before the end of June and a copy each of such review
may be furnished for information to the Chief General Manager-in-Charge, Department
of Banking Operations and Development, Central Office, Reserve Bank of India,
World Trade Centre, Mumbai and to the concerned Regional Offices of the
Department of Banking Supervision.
3.
Credit Exposure to Industry and Certain Sectors 3.1
Internal Exposure Limits 3.1.1 Fixing
of sectoral limits
Apart from
limiting the exposures to individual or Group of borrowers, as indicated above,
the banks may also consider fixing internal limits for aggregate commitments to
specific sectors e.g. textiles, jute, tea, etc. so that the exposures are evenly
spread over various sectors. These limits could be fixed by the banks having regard
to the performance of different sectors and the risks perceived. The limits so
fixed may be reviewed periodically and revised, as necessary. 3.1.2
Unhedged Foreign Currency Exposure of Corporates To
ensure a policy by each bank that explicitly recognizes and takes account of risks
arising out of foreign exchange exposure of their clients, foreign currency loans
above US $ 10 million, or such lower limits as may be deemed appropriate vis-à-vis
the banks’ portfolios of such exposures, should be extended by banks only on the
basis of a well laid out policy of their Boards with regard to hedging of such
foreign currency loans. Further, the policy for hedging, to be framed by their
boards, may consider, as appropriate for convenience, excluding the following : - Where forex loans are extended to
finance exports, banks may not insist on hedging but assure themselves that such
customers have uncovered receivables to cover the loan amount.
- Where
the forex loans are extended for meeting forex expenditur
3.1.3 Exposure
to Real Estate
Banks should
frame comprehensive prudential norms relating to he ceiling on the total amount
of real estate loans, single/group exposure limits for such loans, margins, security,
repayment schedule and availability of supplementary finance and the policy should
be approved by the bank's Board. 3.1.4
While framing the bank's policy, the guidelines issued by the Reserve Bank
should be taken into account. Banks should ensure that the bank credit is used
for productive construction activity and not for activity connected with speculation
in real estate.
3.2
Exposure to Leasing, Hire Purchase and Factoring Service.
3.2.1 Banks should
maintain a balanced portfolio of equipment leasing, hire purchase and factoring
services vis-à-vis the aggregate credit. Their exposure to each of these
activities should not exceed 10 percent of total advances.
3.3
Exposure to Indian Joint Ventures/Wholly-owned Subsidiaries Abroad 3.3.1
Banks are allowed to extend credit/non-credit facilities (viz. letters of credit
and guarantees) to Indian Joint Ventures/Wholly-owned Subsidiaries abroad. Banks
are also permitted to provide at their discretion, buyer's credit/acceptance finance
to overseas parties for facilitating export of goods & services from India. 3.3.2
The above exposure will, however, be subject to a limit of 10 per cent of banks’
unimpaired capital funds (Tier I and Tier II capital), subject to the following
conditions:-
i. Loan will
be granted only to those joint ventures where the holding by the Indian company
is more than 51%.
ii. Proper systems for management
of credit and interest rate risks arising out of such cross border lending are
in place.
iii. while extending such facilities, banks will have
to comply with Section 25 of the Banking Regulation Act, 1949, in terms of which
the assets in India of every banking company at the close of business on the last
Friday of every quarter shall not be less than 75 percent of its demand and time
liabilities in India. In other words, aggregate assets outside India should not
exceed 25 percent of the bank's demand and time liabilities in India.
iv.
The resource base for such lending should be funds held in foreign currency accounts
such as FCNR (B), EEFC, RFC etc. in respect of which banks have to manage exchange
risk.
vi. Maturity mismatches arising out of such transactions are
within the overall gap limits approved by RBI.
vii. All existing safeguards
/ prudential guidelines relating to capital adequacy, exposure norms etc. applicable
to domestic credit / non-credit exposures are adhered to.
Further,
the loan policy for such credit / non-credit facility should be, inter alia, in
keeping with the following;
- Grant
of such loans is based on proper appraisal and commercial viability of the projects
and not merely on the reputation of the promoters backing the project. Non-fund
based facilities should be subjected to the same rigorous scrutiny as fund based
limits.
- The countries where the joint
ventures / wholly owned subsidiaries are located should have no restrictions applicable
to these companies in regard to obtaining foreign currency loans or for repatriation
etc. and should permit non-resident banks to have legal charge on securities /
assets abroad and the right of disposal in case of need.
3.3.3
The banks should also comply with all existing safeguards/prudential guidelines
relating to capital adequacy, and exposure norms indicated in paragraph 2.1, ibid.
3.4
Banks’ exposure to the Capital Markets The
detailed instructions on Bank Finance against Shares and Debentures are given
separately in the circular DBOD. No. DIR. BC. 90/13.07.05/98 dated 28 August 1998
on Bank Finance against shares and debentures -- Master Circular read with Circular
DBOD. No. BP. BC. 119/21.04.037/2000-01 dated 11 May 2001. The salient features
are given below for ready reference. 3.4.1
Statutory Limit on Shareholding in Companies
In terms of
Section 19(2) of the Banking Regulation Act, 1949, no banking company shall hold
shares in any company, 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, except
as provided in sub-section (1) of Section 19 of the Act. Shares held in demat
form should also be included for the purpose of determining the exposure limit.
This is an aggregate holding limit for each company. While granting any advance
against shares, underwriting an issue of shares, or acquiring any shares on investment
account or even in lieu of debt of any company, these statutory provisions should
be strictly observed. 3.4.2 Regulatory
Limits
The bank’s
aggregate exposure to the capital markets covering direct investment by a bank
in equity shares, convertible bonds and debentures and units of equity oriented
mutual funds; advances against shares to individuals for investment in equity
shares (including IPOs/ESOPs ), bonds and debentures, units of equity-oriented
mutual funds etc and secured and unsecured advances to stockbrokers and guarantees
issued on behalf of stockbrokers and market makers; should not exceed 5 per cent
of their total outstanding advances (including Commercial Paper) as on March 31
of the previous year. This ceiling of 5 per cent prescribed for investment in
shares would apply to total exposure including both fund based and non-fund based
to capital market in all forms. Within this overall ceiling, banks investment
in shares, convertible bonds and debentures and units of equity oriented mutual
funds should not exceed 20 percent of its networth. The banks are required to
adhere to this ceiling on an ongoing basis. 3.4.3 Advances
against Shares to Individuals
Loans at all
the offices of a bank, against the security of shares, debentures and PSU bonds
to individuals, if held in physical form should not exceed the limit of Rs. 10
lakh per individual borrower (Rs 20 lakhs per individual borrower, if the securities
are held in demat form). The maximum amount of finance that can be granted to
an individual for financing his subscription to an Initial Public Offering (IPO)/Employee
Stock Options (ESOPs) is Rs. 10 lakh. Finance extended by a bank for IPOs/ESOPs
is also reckoned as an exposure to capital market and reckoned within 5% ceiling
indicated in para 3.4.2 above . Advances against units of mutual funds including
units of Unit-64 scheme would attract the quantum and margin requirements as applicable
to advances against shares and debentures wherever stipulated. 3.4.4
Banks should formulate with the approval of their Boards the Lending Policy
for grant of advances to individuals against shares, debentures, bonds keeping
in view RBI guidelines. As a prudential measure, the banks may also consider laying
down appropriate aggregate sub limits of such advances. 3.4.5 Advances
against Shares to Stock Brokers and Market Makers
Banks are
free to provide credit facilities to stockbrokers and market makers on the basis
of their commercial judgment, within the policy framework approved by their Boards.
However, in order to avoid any nexus emerging between inter-connected stock broking
entities and banks, the Board of each bank should fix, within the overall ceiling
of 5 per cent of their total outstanding advances (including Commercial Paper)
as on March 31 of the previous year a sub-ceiling for total advances to – i
all the stock brokers and market makers (both fund based and non-fund
based, i.e. guarantees); and ii.
to any single stock broking entity, including its associates/ inter-connected
companies. 3.4.6 Margins
on advances against shares / issue of guarantees
A uniform margin
of 40 per cent shall be applied on all advances / financing of IPOs/ESOPs/issue
of guarantees. A minimum cash margin of 20 per cent (within the margin of 40%)
shall be maintained in respect of guarantees issued by banks for capital market
operations. 3.4.7 Arbitrage
operations
Banks should not
undertake arbitrage operations themselves or extend credit facilities directly
or indirectly to stockbrokers for arbitrage operations in Stock Exchanges. While
banks are permitted to acquire shares from the secondary market, they should ensure
that no sale transaction is undertaken without actually holding the shares in
its investment account. 3.4.8 Margin
Trading Banks may extend finance to
stockbrokers for margin trading in actively traded scrips forming part of the
NSE Nifty and the BSE Sensex, within the overall ceiling of 5% prescribed for
exposure of banks to capital market.
3.5 Bank
Loans for Financing Promoter’s Contributions
3.5.1 Loans sanctioned to corporates against the security of shares
(as far as possible demat shares) for meeting promoter’s contribution to the equity
of new companies in anticipation of raising resources, should be treated as bank’s
investments in shares which would thus come under the ceiling of 5 per cent of
the bank's total outstanding advances (including Commercial Paper) as on March
31 of the previous year prescribed for bank’s total exposure including both fund
based and non-fund based to capital market in all forms. 3.5.2
These loans will also be subject to individual/group of borrowers exposure
norms as well as the statutory limit on shareholding in companies detailed
above. 3.5.3 In the context of
Government of India’s programme of disinvestments of its holdings in some public
sector undertakings (PSUs), it has been clarified to banks that they can extend
finance to the successful bidders for acquisition of shares of these PSUs, subject
to certain conditions. If on account of banks’ financing acquisition of PSU shares
under the Government of India’s disinvestment programmes, any bank is likely to
exceed the regulatory ceiling of 5 per cent on capital market exposure in relation
to its total outstanding advances as on March 31 of the previous year, such requests
for relaxation of the ceiling would be considered by RBI on a case by case basis,
subject to adequate safeguards regarding margin, bank’s exposure to capital market,
internal control and risk management systems, etc. The relaxation would be considered
in such a manner that the bank’s exposure to capital market, in all forms, net
of its advances for financing of acquisition of PSU shares shall be within the
regulatory ceiling of 5 per cent. RBI
would also consider relaxation on specific requests from banks in the individual
/ group credit exposure norms on a case by case basis ( in the format prescribed
in terms of circular DBOD No. BP. 2724/21.03.054/2000-01 dated 28 May 2001), provided
that the bank’s total exposure to the borrower, net of its exposure due to acquisition
of PSU shares under the Government of India disinvestments programme, should be
within the prudential individual / group borrower exposure ceiling prescribed
by RBI. 3.5.4 Under the refinance
scheme of Export Import Bank of India, (EXIM Bank) the banks may sanction term
loans on merits for eligible Indian promoters for acquisition of equity in overseas
joint ventures/ wholly owned subsidiaries, provided the term loans have been approved
by the EXIM Bank for refinance.
3.6
Risk Management and Internal Control System
Banks desirous of making
investment in equity shares / debentures, financing of equities and issue of guarantees
within the above ceiling, should observe the following guidelines: a)
Investment policy
(i)
Formulate a transparent policy and procedure for investment in shares, etc., with
the approval of the Board. (ii) The
banks should build up adequate expertise in equity research by establishing a
dedicated equity research department, wherever warranted by their scale of operations.
b)
Investment Committee
The
decision in regard to direct investment in shares, convertible bonds and debentures
should be taken by an Investment Committee set up by the bank’s Board. The Investment
Committee should be held accountable for the investments made by the bank. c)
Risk Management
(i) Banks
should ensure that their exposure to stockbrokers is well diversified in terms
of number of broker clients, individual inter-connected broking entities;
(ii) While sanctioning advances to stockbrokers,
the banks should take into account the track record and credit worthiness of the
broker, financial position of the broker, operations on his own account and on
behalf of clients, average turn over period of stocks and shares, the extent to
which broker’s funds are required to be involved in his business operations, etc; (iii) While
processing proposals for loans to stockbrokers, banks are also advised to obtain
details of facilities enjoyed by the broker and all his connected companies from
other banks; (iv) While
granting advances against shares and debentures to other borrowers, banks should
obtain details of credit facilities availed by them or their associates/inter-connected
companies from other banks for the same purpose (i.e. investment in shares etc.)
in order to ensure that high leverage is not built up by the borrower or his associate
or inter-connected companies with bank finance.
3.6.1
Audit committee
(i) The
surveillance and monitoring of investment in shares / advances against shares
shall be done by the Audit Committee of the Board, which shall review in each
of its meetings, the total exposure of the bank to capital market both fund based
and non-fund based, in different forms and ensure that the guidelines issued by
RBI are complied with and adequate risk management and internal control systems
are in place; (ii) The Audit Committee
shall keep the Board informed about the overall exposure to capital market, the
compliance with the RBI and Board guidelines, adequacy of risk management and
internal control systems; (iii) In
order to avoid any possible conflict of interest, it should be ensured that the
stockbrokers as directors on the Boards of banks or in any other capacity, do
not involve themselves in any manner with the Investment Committee or in the decisions
in regard to making investments in shares, etc., or advances against shares. 3.6.2
Valuation and Disclosure
Equity
shares in a bank’s portfolio - as primary security or as collateral for advances
or for issue of guarantees and as an investment- should be marked to market preferably
on a daily basis, but at least on weekly basis. Banks should disclose the total
investments made in equity shares, convertible bonds and debentures and units
of equity oriented mutual funds as also aggregate advances against shares in the
‘Notes on Account’ to their balance sheets.
3.7
Bridge Loans 3.7.1
Banks have been permitted to sanction bridge loans to companies for a period
not exceeding one year against expected equity flows/issues. Such loans should
be included within the ceiling of 5 per cent of the banks’ total outstanding advances
(including Commercial Paper) as on March 31 of the previous year prescribed for
total exposure including both fund based and non-fund based to capital market
in all forms. 3.7.2 Banks should
formulate their own internal guidelines with the approval of their Board of Directors
for grant of such loans, exercising due caution and attention to security for
such loans. 3.7.3 Banks may
also extend bridge loans against the expected proceeds of Non-Convertible Debentures,
External Commercial Borrowings, Global Depository Receipts and/or funds in the
nature of Foreign Direct Investments, provided the banks are satisfied that the
borrowing company has already made firm arrangements for raising the aforesaid
resources/funds.
3.8
Bank finance to employees to buy shares of their own companies
The
restriction that banks could provide finance up to Rs.50,000/- or six months’
salary, whichever is less, to assist employees to buy shares of their own companies
has been reviewed in view of more companies offering Employee Stock Options (ESOPs)
and employee quota in their IPOs as also introduction of robust system of assessing
risks in many banks. Banks have been advised that while extending finance to employees
for purchasing shares of their own companies either under ESOP or IPO, they may
take their own decision subject to extant regulations including margin requirement
on IPO financing. However, all such financing should be treated as part of the
banks’ exposure to capital market within the overall ceiling of 5 per cent of
banks’ total outstanding advances, as on March 31 of the previous year. These
instructions, however, will not be applicable to banks’ extending financial assistance
to their own employees for acquisition of shares under ESOP/ IPO.
4.
Exposure norms for investments 4.1 Ceiling
on overall exposure to capital market
Banks
exposure to capital market as detailed in paragraph 3.4.2 above should be within
the overall ceiling of 5 per cent of the banks total outstanding advances (including
Commercial Paper) as on March 31 of the previous year. Within this overall ceiling,
banks investment in shares, convertible bonds and debentures and units of equity-oriented
mutual funds should not exceed 20 per cent of its net worth. The banks are required
to adhere to the ceiling on an ongoing basis and should exercise care to see that
the limit is not exceeded. 4.1.1
For the purpose of reckoning compliance with the ceiling for investments prescribed
above, the following items are to be included – i.
direct investment by a bank in equity shares, convertible bonds and debentures
and units of equity oriented mutual funds the corpus of which is not exclusively
invested in corporate debt. ii.
bank finance for financing promoter’s contribution towards equity capital of new
companies. iii. bridge loans to
companies.
4.1.2
The investment ceiling exclude investment in - i.
the subordinated debts of other banks. ii.
preference shares, iii. non-convertible
debentures/bonds of private corporate bodies, iv.
equities/bonds of All-India Financial Institutions (as
per list given in Annexure 3), v.
bonds issued by Public Sector Undertakings, vi.
units of Mutual Funds under schemes where corpus is invested exclusively in debt
instruments, vii. venture capital
including units of dedicated venture capital funds meant for Information Technology,
and vii. investments in Certificate
of Deposits (CDs) of other banks/ financial institutions.
4.1.3
However, all these categories of investments are to be taken into
consideration for the purpose of arriving at the prudential norm of credit exposure
for single borrower and group of borrowers as stipulated in paragraph 2.1 above. 4.1.4
Banks Investment in the Bonds of a Corporate
For the purpose
of calculation of exposure norm, investments made by the banks in bonds and debentures
of corporates, which are guaranteed by a PFIÄ
, as per list given in Annexure 2, will be treated as an exposure by the
bank on the PFI and not on the corporate. 4.1.5
Guarantees issued by the PFI to the bonds of corporates will be treated
as an exposure by the PFI to the corporates to the extent of 50 percent being
a non-fund facility, whereas the exposure of the bank on the PFI guaranteeing
the corporate bond will be 100 percent. The PFI before guaranteeing the bonds/debentures
should, however, take into account the overall exposure of the guaranteed unit
to the financial system. 4.1.6 Cross holding of capital among banks / financial institutions 1.
Banks' / FIs' investment in the following instruments, which are issued by other
banks / FIs and are eligible for capital status for the investee bank / FI, should
not exceed 10 per cent of the investing bank's capital funds (Tier I plus Tier
II)
- Equity
shares;
- Preference shares eligible for capital status;
- Subordinated
debt instruments;
- Hybrid debt capital instruments; and
- Any other
instrument approved as in the nature of capital.
2.
Banks / FIs should not acquire any fresh stake in a bank's equity shares, if by
such acquisition, the investing bank's / FI's holding exceeds 5 per cent of the
investee bank's equity capital.
3. Banks’ / FIs’
investments in the equity capital of subsidiaries are at present deducted from
their Tier I capital for capital adequacy purposes. Investments in the instruments
issued by banks / FIs which are listed at paragraph 4.1.6 (i) above, which are
not deducted from Tier I capital of the investing bank/ FI, will attract 100 per
cent risk weight for credit risk for capital adequacy purposes.
4.
Banks/ FIs which currently exceed the limits specified
at (i) and (ii) of paragraph 4.1.6 above, may apply to the Reserve Bank upto August
20, 2004 along with a definite roadmap for reduction of the exposure within prudential
limits.
4.1.7
Banks’ Investment in Venture Capital
In
order to encourage the flow of finance for venture capital, the banks investment
in venture capital (including units of dedicated Venture Capital Funds meant for
Information Technology) would be over and above the ceiling of 5 per cent of the
banks total outstanding advances (including Commercial Paper) as on March 31 of
the previous year. This would, however, be subject to the condition that the venture
capital funds/ companies are registered with SEBI.
4.2
Underwriting of Corporate Shares and Debentures
Generally, there are demands
on the banks for underwriting the issues of shares and debentures. In order to
ensure that there is no over exposure to underwriting commitments to earn fees,
the guidelines detailed below should be strictly adhered to: i.
The statutory provision contained in Section 19(2) & (3) of the Banking Regulation
Act, 1949 regarding holding of shares in any company as pledgee / mortgagee or
absolute owner, should be strictly adhered to; ii.
The banks have to ensure that the shares/debentures including PSU equities and
shares of other banks, Mutual Funds (the corpus of which is not exclusively invested
in corporate debt instruments), the units of UTI subscribed and/or devolving on
them as a part of their underwriting obligations in any particular year comply
with the ceiling prescribed for the banks’ exposure to the capital markets. iii.
It may be noted that the limit placed is on the shares and debentures, that may
be held in the banks own portfolio as a result of devolvement and not on the amount
of underwriting that the banks may engage in. Normally, the amount of underwriting
is a multiple of the amount which devolves finally. iv.
The underwriting exposure will be a part of the overall exposure and subject to
limit laid down in paragraphs 2.1 above. While taking up underwriting commitments,
banks or their subsidiaries, should ensure that the aggregate of such commitments
are included in the exposure limits fixed by the Reserve Bank. v.
In the case of underwriting, the commitments under a single obligation should
be fixed taking into account the owned funds of banks and the capacity to meet
the commitments that may devolve and should not in any case exceed 15 percent
of an issue.
4.3
Other matters on Underwriting Operations Regarding
all other matters concerning underwriting, banks may be guided by our Master Circular
on Para Banking Activities. 4.4
'Safety Net' Schemes for Public Issues of Shares, Debentures, etc.
4.4.1
'Safety Net' Schemes Reserve
Bank had observed that some banks/their subsidiaries were providing buy-back facilities
under the name of ‘Safety Net’ Schemes in respect of certain public issues as
part of their merchant banking activities. Under such schemes, large exposures
are assumed by way of commitments to buy the relative securities from the original
investors at any time during a stipulated period at a price determined at the
time of issue, irrespective of the prevailing market price. In some cases, such
schemes were offered suo motto without any request from the company whose
issues are supported under the schemes. Apparently, there was no undertaking in
such cases from the issuers to buy the securities. There is also no income commensurate
with the risk of loss built into these schemes, as the investor will take recourse
to the facilities offered under the schemes only when the market value of the
securities falls below the pre-determined price. Banks/their
subsidiaries have therefore been advised that they should refrain from offering
such ‘Safety Net’ facilities by whatever name called. 4.4.2
Provision of buy back facilities
In some cases,
the issuers provide buy-back facilities to original investors upto Rs. 40,000/-
in respect of non-convertible debentures after a lock-in-period of one year to
provide liquidity to debentures issued by them. If, at the request of the issuers,
the banks or their subsidiaries find it necessary to provide additional facilities
to small investors subscribing to new issues, such buy-back arrangements should
not entail commitments to buy the securities at pre-determined prices. Prices
should be determined from time to time, keeping in view the prevailing stock market
prices for the securities. Commitments should also be limited to a moderate proportion
of the total issue in terms of the amount and should not exceed 20 percent of
the owned funds of the banks/their subsidiaries. These commitments will also be
subject to the overall exposure limits which have been or may be prescribed from
time to time.
5.
Limits on exposure to unsecured guarantees and unsecured advances The
instruction that banks have to limit their commitment by way of unsecured guarantees
in such a manner that 20 percent of the bank’s outstanding unsecured guarantees
plus the total of outstanding unsecured advances do not exceed 15 percent of total
outstanding advances has been withdrawn to
enable banks’ Boards to formulate their own policies on unsecured exposures. Simultaneously,
all exemptions allowed for computation of unsecured exposures also stand withdrawn.
With a view to ensuring uniformity in approach and implementation,
‘unsecured exposure’ is defined as an exposure where the realisable value of the
security, as assessed by the bank /approved valuers / Reserve Bank’s inspecting
officers, is not more than 10 percent, ab-initio, of the outstanding exposure.
‘Exposure’ shall include all funded and non-funded exposures (including underwriting
and similar commitments). ‘Security’ will mean tangible security properly charged
to the bank and will not include intangible securities like guarantees, comfort
letters etc. 6.
Application of prudential norms at group / on consolidated position
In
terms of guidelines for consolidated accounting and other quantitative methods
to facilitate consolidated supervision, banks have inter-alia been advised that
as prudential measure aimed at better risk management and avoidance of concentration
of credit risks, in addition to adherence to
prudential limits on exposures assumed by banks,
consolidated banks should
also adhere to the following prudential limits on:
i) Single and Group
borrower exposures: as indicated in paragraph 2.1 above.
ii)
Capital market exposures
: The consolidated bank’s
aggregate exposure to capital markets should
not exceed 2 per cent of its
total on-balance-sheet assets
(excluding intangible assets and accumulated losses) as on March 31 of the previous
year. This ceiling will apply to the consolidated bank’s
exposure to capital market in all forms, including
both fund based and non-fund based, similar to the computation for the parent
bank. Within the total limit, investment in shares, convertible bonds and debentures
and units of equity-oriented mutual funds should not exceed 10 percent of consolidated
bank’s net
worth. iii) Exposures
by way of unsecured guarantees and unsecured advances : The norms relating
to unsecured guarantees and unsecured funded exposures as formulated by the Board
of the bank should also be extended to the consolidated bank. Note
: For the purpose of application of prudential norms on a group wise basis,
a 'consolidated bank' is defined as a group of entities, which include a licensed
bank, which may or may not have subsidiaries.
Annexure
1 The
definition of infrastructure lending and the list of the items included under
infrastructure sector 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 :
- a road, including toll road, a bridge
or a rail system;
- a highway project
including other activities being an integral part of the highway project;
- a
port, airport, inland waterway or inland port;
- a
water supply project, irrigation project, water treatment
system, sanitation and sewerage system or solid waste management
system;
- 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;
- an industrial park or special economic zone
;
- generation or generation and distribution
of power
- transmission or distribution
of power by laying a network of new transmission or distribution lines.
- construction
relating to projects involving agro-processing and supply of inputs to agriculture;
- construction for preservation and
storage of processed agro-products, perishable goods such as fruits, vegetables
and flowers including testing facilities for quality;
- construction
of educational institutions and hospitals.
xii. any other infrastructure facility of similar nature
Annexure 2
List of All-India Financial Institutions (Counter
party exposure - List of institutions guaranteeing bonds
of corporates ) [Vide paragraph 2.3.4 & 4.1.4] - Industrial
Finance Corporation of India Ltd.
- Industrial
Development Bank of India
- Industrial Investment
Bank of India Ltd.
- Tourism Finance Corporation
of India Ltd.
- Risk Capital and Technology Finance
Corporation Ltd.
- Technology Development and
Information Company of India Ltd.
- Power Finance
Corporation Ltd.
- National Housing Bank
- Small
Industries Development Bank of India
- Rural Electrification
Corporation Ltd.
- Indian Railways Finance Corporation
Ltd.
- National Bank for Agriculture and Rural
Development
- Export Import Bank of India
- Infrastructure
Development Finance Company Ltd.
- Housing and
Urban Development Corporation Ltd.
- Indian Renewable
Energy Development Agency Ltd.
Annexure
3 List of All-India
Financial Institutions (Investment in equity/bonds
by banks- List of FIs whose instruments are exempted from the 5 % ceiling) (Vide
paragraph 4.1.2) - Industrial Finance Corporation
of India Ltd. (IFCI)
- Industrial Development
Bank of India (IDBI)
- Tourism Finance Corporation
of India Ltd. (TFCI)
- Risk Capital and Technology
Finance Corporation Ltd. (RCTC)
- Technology Development
and Information Company of India Ltd. (TDICI)
- National
Housing Bank (NHB)
- Small Industries Development
Bank of India (SIDBI)
- National Bank for Agriculture
and Rural Development (NABARD)
- Export Import
Bank of India (EXIM Bank)
- Industrial Investment
Bank of India (IIBI)
- Discount and Finance House
of India Ltd. (DFHI)
- Unit Trust of India (UTI)
- Life
Insurance Corporation of India (LIC)
- General
Insurance Corporation of India (GIC)
- Securities
Trading Corporation of India Ltd. (STCI)
- Infrastructure
Development Finance Company Ltd. (IDFC)
Appendix Master
Circular Exposure Norms List
of Circulars consolidated by the Master Circular
1. |
DBOD No. Dir. BC. | 17/13.03.00/2003-04 |
dated 22.08.2003 |
2. | DBOD.
BP. BC. | 51/21.04.103/2003-04 |
dated 5.12.2003 |
3. | DBOD
No. Dir. BC. | 61/13.07.05/2003-04 |
dated 03.01.2004 |
4. | DBOD
No. Dir. BC. | 67/13.07.05/2003-04 |
dated 06.02.2004 |
5. | DBOD
No. Dir. BC. | 86/13.07.05/2003-04 |
dated 18.05.2004 |
6. | DBOD
No. BP.BC. | 92/21.04.048/2003-04 |
dated 16.06.2004 |
7. | DBOD
No. BP.BC. | 97/21.04.141/2003-04 |
dated 17.06.2004 |
8. | DBOD
No. BP.BC. | 100/21.03.054/2003-04 |
dated 21.06.2004 |
9. | DBOD
No. BP.BC. | 3/21..01..002/2004-05 |
dated 06.07.2004 | |