RBI/2010-2011/40
DBOD. No. FID. FIC.4 /01.02.00/2010-11
01 July, 2010
10 Aashadha 1932 (Saka)
The CEOs of the all-India Term-lending and Refinancing Institutions
(Exim Bank, NABARD, NHB and SIDBI)
Dear Sir,
Master Circular - Exposure Norms for Financial Institutions
Please refer to the Master Circular DBOD.No.FID.FIC.4/01.02.00/2009-10 dated
July 01, 2009 on the captioned subject. The enclosed
Master Circular
consolidates and updates all the instructions/ guidelines on the subject up to
June 30, 2010. The Master Circular has also been placed on the RBI web-site
(http://www.rbi.org.in).
2. It may be noted that the instructions contained in the Annex 3 have been
consolidated in this master circular.
Yours faithfully,
(Vinay Baijal)
Chief General Manager
Encls : As above
Master Circular - Exposure Norms for Financial Institutions
Purpose
To provide a detailed guidance to all-India term-lending and refinancing
institutions in the matter of Exposure Norms.
Previous instructions
This master circular consolidates and updates the instructions on the above
subject contained in the circulars listed in the Annex 3.
Application
To all the all India Financial Institutions viz. Exim Bank, NABARD, NHB and
SIDBI..
Structure
1. Introduction
On a review of the credit exposures of the term lending institutions in 1997, it
was considered advisable to prescribe credit exposure limits for them in respect
of their lending to individual / group borrowers. Accordingly, as a prudential
measure, aimed at better risk management and avoidance of concentration of
credit risks, it was decided in June 1997 by Reserve Bank of India to limit a
term lending institution's exposures to an individual borrower and group
borrowers and credit exposure norms were prescribed for them. These norms are to
be considered as a part of prudent credit management system and not as a
substitute for efficient credit appraisal, monitoring and other safeguards. In
respect of existing credit facilities to borrowers which were in excess of the
ceilings initially prescribed, term lending institutions were required to take
necessary steps to rectify the excess and comply with the stipulations, within a
period of one year from June 28, 1997, the date of the first circular, and to
bring such cases to the notice of their Board of Directors.
2 Scope and Applicability
2.1 The exposure norms are also applicable to the refinancing institutions
(viz., NABARD, NHB and SIDBI) but in view of the refinance operations being the
core function of these institutions, their refinance portfolio is not subject to
these exposure norms. However, from the prudential perspective, the refinancing
institutions are well advised to evolve their own credit exposure limits, with
the approval of their Board of Directors, even in respect of their refinancing
portfolio. Such limits could, inter alia, be related to the capital funds /
regulatory capital of the institution. Any relaxation / deviation from such
limits, if permitted, should be only with the prior approval of the Board.
2.2 While computing the extent of exposures to a borrower/borrower group for
assessing compliance vis-a-vis the single borrower limit/group borrower limit,
exposures where principal and interest are fully guaranteed by the Government of
India may be excluded.
2.3 These norms deal with only the individual borrower and group borrower
exposures but not with the sector / industry exposures. The FIs may, therefore,
consider fixing internal limits for aggregate commitments to specific sectors
e.g., textiles, chemicals, engineering, etc., so that the exposures are evenly
spread. These limits should be fixed having regard to the performance of
different sectors and the perceived risks. The limits so fixed should be
reviewed periodically and revised, if necessary.
2.4 These stipulations shall apply to all borrowers. However, in so far as
public sector undertakings are concerned only single borrower exposure limit
would be applicable.
2.5 The norms have evolved over the years and various aspects of the credit
exposure norms applicable to FIs are detailed in the following paragraphs.
3 Definitions
3.1 ‘Capital Funds’ :
The total regulatory capital (i.e., Tier 1 + Tier 2 capital) of the FI,
determined as per the capital adequacy norms of RBI applicable to the FIs, as on
March 31 (June 30 in case of NHB) of the previous year, would constitute the
‘capital funds’ for the purpose of exposure norms.
(The aforesaid definition of ‘capital funds’ came into force from April 1, 2002.
From this date, the exposure ceilings were to be monitored with reference to the
revised definition of capital funds as obtaining on March 31, 2002. Prior to
that date, the ‘capital funds’ were defined as (paid up capital + free reserves)
as per the published accounts but the reserves created by way of revaluation of
fixed assets, etc., were to be excluded.)
3.2 ‘Infrastructure Projects’ / ‘Infrastructure Lending’:
Any credit facility in whatever form extended by the FIs to an infrastructure
facility as specified below falls within the definition of “infrastructure
lending”. In other words, it is 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:
- 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;
- Any other infrastructure facility of similar nature.
3.3 ‘Group’ Borrowers :
The concept of ';Group'; and the task of identification of the borrowers
belonging to specific industrial groups is to be based on the perception of the
FIs. FIs are, it is observed, 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 should, therefore, be decided by
them on the basis of the relevant information available with them, the guiding
principle in this regard being commonality of management and effective control.
3.4 Net Owned Funds in respect of NBFCs :
Net owned Fund will consist of paid up equity capital, free reserves, balance in
share premium account and capital reserves representing surplus arising out of
sale proceeds of assets but not reserves created by revaluation of assets. From
the aggregate of items will be deducted accumulated loss balance and book value
of intangible assets, if any, to arrive at owned funds. Investments in shares of
other NBFCs and in shares, debentures of subsidiaries and group companies in
excess of ten percent of the owned fund mentioned above will be deducted to
arrive at the Net Owned Fund. The NOF should be computed on the basis of last
audited Balance Sheet and any capital raised after the Balance Sheet date should
not be accounted for while computing NOF.
4. Exposure Ceilings
4.1 For single / individual borrowers:
The credit exposure to single borrowers shall not exceed 15 per cent of capital
funds of the FI. However, the exposure may exceed by additional five percentage
points (i.e., up to 20 per cent) provided the additional credit exposure is on
account of infrastructure projects. FIs 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 (i.e., 25 per cent of capital funds
for infrastructure projects and 20 percent for other projects).
4.2 For group borrowers
The credit exposure to the borrowers belonging to a group shall not exceed 40
per cent of capital funds of the FI. However, the exposure may exceed by
additional ten percentage points (i.e., up to 50 per cent) provided the
additional credit exposure is on account of infrastructure projects. FIs 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 (i.e. 55 per cent of capital funds for infrastructure projects and 45
percent for other projects).
[The exposure ceilings stipulated initially in 1997 were 25 per cent and 50 per
cent of the capital funds of the FIs for the individual and group borrowers,
respectively. In September 1997, an additional exposure of up to 10 percentage
points for the group borrowers (i.e., up to 60 per cent) was permitted provided
the additional credit exposure was on account of infrastructure projects (which
at that time were narrowly defined as only power, telecommunication, roads and
ports). In November 1999, with a view to moving closer to the international
standard of 15 per cent exposure ceiling, the individual borrower exposure
ceiling was reduced, with effect from April 1, 2000, from 25 per cent to 20 per
cent of capital funds. The FIs which had, as on October 31, 1999, exposures in
excess of the reduced limit of 20 per cent, were permitted to reduce their
exposures to the level of 20 per cent latest by October 31, 2001. In June 2001,
the exposure ceilings for the individual and group borrowers were reduced from
20 per cent and 50 per cent to 15 per cent and 40 per cent, respectively, with
effect from April1, 2002 , but the additional exposure in respect of group
borrowers, of up to 10 percentage points on account of infrastructure projects
was continued. In February 2003, an additional exposure of up to five percentage
points (i.e., up to 20 per cent) on account of infrastructure projects was
permitted in respect of individual borrowers also].
4.3 For bridge loans / Interim finance
4.3.1 With effect from January 23, 1998, the restriction on grant of bridge
loans by the FIs against expected equity flows / issues has been lifted.
Accordingly FIs may henceforth grant bridge loan / interim finance to companies
other than NBFCs against public issue of equity whether in India or abroad, for
which appropriate guidelines should be laid down by the Board of the Financial
Institution, as prescribed by RBI. However, FIs should not grant any advance
against Rights issue irrespective of the source of repayment of such advance.
4.3.2 FIs may sanction bridge loans to companies for commencing work on projects
pending completion of formalities only against their own commitment and not
against loan commitment of any other FIs/ Banks. However, FIs may consider
sanction of bridge loan / interim finance against commitment made by a financial
institution and / or another bank only in cases where the lending institution
faces temporary liquidity constraint, subject to certain conditions prescribed
by RBI.
4.3.3 These restrictions are also applicable to the subsidiaries of FIs for
which FIs are required to issue suitable instructions to their subsidiaries.
4.4 Working capital finance
There is no objection to FIs extending working capital finance on a very
selective basis to borrowers enjoying credit limits with banks, whether under a
consortium or under a multiple banking arrangement, when the banks are not in a
position to meet the credit requirements of the borrowers concerned on account
of temporary liquidity constraints. The FIs should take into account these
guidelines while granting short term loans to borrowers enjoying credit limits
with banks on a consortium basis. In case of borrowers whose working capital is
financed under a multiple banking arrangement, the FI should obtain an auditor's
certificate indicating the extent of funds already borrowed, before considering
the borrower for further working capital finance.
4.5 Revolving underwriting facility
FIs should not extend Revolving Underwriting Facility to Short Term Floating
Rate Notes/ Bonds or Debentures issued by corporate entities.
4.6 Lending to Non Banking Financial Companies (NBFCs)
4.6.1 With effect from May 21, 1997 the quantitative limits in the form of
multiples of Net Owned Funds have been removed in respect of aggregate lending
by all FIs taken together for Equipment Leasing & Hire Purchase Companies and
Loan & Investment
Companies which have complied with Reserve Bank's requirement of registration,
credit rating and prudential norms and have been so certified by the Reserve
Bank. The overall ceiling for borrowing (upto ten times of NOF) has also been
removed for requipment and hire purchase NBFCs which meet the aforesaid three
criteria and are also certified by the RBI. However such lending would be
subject to compliance with single and group borrower exposure norms.
4.6.2 For NBFCs which have not complied with the above requirements and the
Residuary Non Banking Companies (RNBCs), overall limit of aggregate credit from
all FIs taken together is furnished below:
| Sr No. |
Category of Financial Companies
|
Over all Ceiling on Borrowings from all the FIs taken together |
| A |
Equipment Leasing (EL) and Hire Purchase (HP) Finance Companies
|
|
| a) Registered EL/HP Companies complying with Credit Rating requirement and
prudential norms |
No ceiling except in respect of Inter Corporate Deposits (ICDs) subscribed to by
FIs which should not be more than 2 times the NOF |
| b) Registered EL/HP companies complying with either credit rating requirement or
the prudential norms |
Ten times the NOF with a sub-ceiling of 2 times of NOF for ICDs |
| c)Registered EL/HP companies complying with neither the credit rating nor the
prudential norms |
Seven times the NOF with a sub-ceiling of 2 times of NOF for ICDs |
d) All other EL/HP Companies
Loan and Investment Companies |
Five times the NOF with a sub-ceiling of 1 times of NOF for ICDs |
| B |
a) Registered Loan and investment Companies complying with Credit Rating
requirement and prudential norms |
Two times the NOF with a separate ceiling of 2 times the NOF for ICDs |
| b) Registered Loan and investment Companies complying with either Credit Rating
requirement or prudential norms |
Equal to NOF with a separate ceiling of 2 times the NOF for ICDs |
| c) Registered Loan and investment Companies complying with neither Credit Rating
requirement nor prudential norms |
40 % of NOF with a separate ceiling of 2 times the NOF for ICDs |
| d)All other Loan and Investment Companies |
40 % of NOF with a separate ceiling of equal to NOF for ICDs |
| C |
Residuary Non Banking Companies
|
Equal to NOF |
Fls are also advised that finance by them shall not be provided to NBFCs for the
following activities:
- Bills discounted/rediscounted by NBFCs except those arising from sale of
commercial vehicles including light commercial vehicles subject to normal
lending safeguards;
- Investments made by NBFCs in shares, debentures, etc., of a current nature
(i.e. stock-in-trade);
- Investments of NBFCs in and advances to subsidiaries, group companies or
other entities; and
- Investments of NBFCs in, and inter-corporate loans/deposits to/ in other
companies.
Further, it is advised that Fls should not sanction bridge loans and loans of a
bridging nature in any form to any category of NBFCs (Including RNBCs) including
against capital/ debenture issues.
4.7 Investment in Debt Securities
The total investment in the unlisted debt securities should not exceed 10 per
cent of the FIs’ total investment in debt securities as given in guidelines for
investment in debt securities (Annexure 1), as on March 31 (June 30 in case of
NHB), of the previous year. However, the investment in the following instruments
will not be reckoned as 'unlisted debt securities' for monitoring compliance
with the above prudential limits:
- Security Receipts (SRs) issued by Securitisation Companies / Reconstruction
Companies registered with RBI in terms of the provisions of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Securities Interest
(SARFAESI) Act, 2002; and
- Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS) which are
rated at or above the minimum investment grade.
4.8
Cross holding of capital among banks/financial institutions
(i) 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 percent of the investing FI's capital funds (Tier I plus
Tier II):
- a. 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.
FIs should not acquire any fresh stake in a bank's/FI’s equity shares, if by
such acquisition, the investing FI's holding exceeds 5 percent of the investee
bank's /FI’s equity capital.
(ii) 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 4.8(i)
above, which are not deducted from Tier I capital of the investing FI, will
attract 100 percent risk weight for credit risk for capital adequacy purposes.
4.9 Level of Exposure
4.9.1 The sanctioned limits or outstandings whichever is higher shall be
reckoned, in respect of the funded as well as non-funded facilities, for
arriving at the level of exposure. The “credit exposure” shall include funded
and non-funded credit limits, underwriting and other similar commitments. The
exposure on account of derivative products should also be reckoned for the
purpose.
4.9.2 In case of term loans, however the level of exposure should be reckoned on
the basis of actual outstandings plus undisbursed or undrawn commitments.
However, in cases where disbursements are yet to commence, the level of exposure
should be reckoned on the basis of the sanctioned limit or the extent up to
which the FI has entered into commitments with the borrowing companies in terms
of the agreement.
(Since the inception of the exposure norms, only 50 per cent of the non-funded
limits were required to be reckoned for arriving at the level of exposure.
However, with effect from April 1, 2003, in tune with the international
practice, the funded as well as non-funded exposures are required to be reckoned
at 100 per cent value.)
4.9.3 For the purpose of determining the level of exposure, the following
instruments should also be reckoned:
(i) Bonds and Debentures in the nature of advance : The bonds and debentures
should be treated in the nature of advance when :
- The debenture / bond is issued as part of the proposal for project finance and
the tenor of the bond / debenture is for three years and above
and
- The FI has a significant stake (i.e., 10% or more) in the issue
and
- The issue is a part of private placement i.e., the borrower has approached the
FI, and not part of a public issue where the FI has subscribed in response to an
invitation.
- Preference Shares in the nature of advance : The preference shares, other than
convertible preference shares, acquired as part of project financing and meeting
the criteria as at (i) above.
- Deposits : The deposits placed by the FIs with the corporate sector .
4.9.4 For computing the level of exposure in respect of the NBFCs, the FI’s
investment in the privately placed debentures should be included while those
acquired in the secondary market should be excluded.
4.9.5 Measurement of exposure in derivative products:
With effect from April 1, 2003, the FIs are required to include in the
non-funded credit limit, the forward contracts in foreign exchange and other
derivative products like currency swaps, options, etc at their replacement cost
in determining the individual / group borrower exposures, as per the following
guidelines.
4.9.5.1 Methodology for calculation of replacement cost
There are two methods for measuring the credit risk exposure inherent in
derivatives, as described below.
A. The original exposure method
Under this method, which is a simpler alternative, the credit risk exposure of a
derivative product is calculated at the beginning of the derivative transaction
by multiplying the notional principal amount with the prescribed credit
conversion factors. The method, however, does not take account of the ongoing
market value of a derivative contract, which may vary over time. In order to
arrive at the credit equivalent amount under this method, an FI should 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
|
Credit Conversion Factor to be applied to 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 % |
B. The current exposure method
Under this method, the credit risk exposure / credit equivalent amount of the
derivative products is computed periodically on the basis of the market value of
the product to arrive at its current replacement cost. Thus, the credit
equivalent of the off-balance sheet interest rate and exchange rate instruments
would be the sum of the following two components:
- the total 'replacement cost' - obtained by ';marking-to-market'; of all the
contracts with positive value (i.e. when the FI has to receive money from the
counterparty); and
- an amount for 'potential future exposure' - calculated by multiplying the total
notional principal amount of the contract by the following credit conversion
factors according to the residual maturity of the contract:
| 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 % |
Under the current exposure method, the FIs should mark to market the derivative
products at least on a monthly basis and they may follow their internal methods
for determining the marked-to-market value of the derivative products. However,
the FIs 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.
4.9.5.2 The FIs are encouraged to follow, with effect from April 1, 2003, the
Current Exposure Method, which is an accurate method of measuring credit
exposure in a derivative product, for determining individual / group borrower
exposures. In case an FI 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.
Note: Under the extant capital adequacy norms, the credit exposure of the FIs in
derivative products also gets reflected in the risk-weighted value of the
off-balance sheet items in the CRAR computation, for which the 'original
exposure method' has been prescribed under the capital adequacy norms. The FIs
are, however, encouraged to adopt, with effect from April 1, 2003, the Current
Exposure Method for computation of CRAR also.
4.10
Exposure in respect of bonds guaranteed by Public Financial Institutions
(PFIs)
4.10.1 The investments made by the banks in the bonds and debentures of corporates which are guaranteed by a PFI listed in the
Annex 2, will be treated
as an exposure of the bank on the PFI and not on the corporate. Guarantees
issued by a PFI to the bonds of the corporates will be treated as an exposure of
the PFI to the corporate whereas the exposure of the bank on the PFI
guaranteeing the corporate bond will be to the extent of 100 per cent of the
bank’s investment. Initially, such exposures of the PFI to the corporate were
required to be reckoned to the extent of 50 per cent of the value of such
guarantees, being non-funded exposure, but with effect from April 1, 2003, such
exposure are also required to be reckoned at 100 per cent of the value of such
guarantees.
4.10.2 The PFIs are also required to take into account the overall exposure of
the guaranteed unit to the financial system before guaranteeing the bonds /
debentures.
4.11
Treatment of loans granted by the FIs against the guarantee of banks
4.11.1 The banks have been permitted to extend guarantees in respect of
infrastructure projects in favour of other lending institutions provided the
bank issuing the guarantee takes a funded share in the infrastructure project at
least to the extent of five per cent of the project cost and undertakes normal
credit appraisal, monitoring and follow up of the project. For the purpose of
exposure norms, the entire loan transaction should be reckoned as an exposure on
the borrowing entity and not on the bank guaranteeing the loan, so as to
correctly reflect the degree of credit concentration. In case the funded
facility is by way of a term loan, the level of exposure should be reckoned, as
indicated below:
- Before commencement of disbursement, the exposure would be the sanctioned
limit or the extent up to which the FI has entered into commitment with the
borrowing entity in terms of the agreement, as the case may be;
- After commencement of disbursement, the exposure would be the aggregate of the
outstanding amount plus the undisbursed or undrawn commitment.
4.12 Reporting System
An annual review of the implementation of exposure management measures should be
placed before the Board of Directors before the end of June every year. A copy
of the review should be furnished for information to the Chief General Manager,
Department of Banking Supervision, Reserve Bank of India, Central Office, World
Trade Centre, Cuffe Parade, Colaba, MUMBAI – 400 005.
4.13 Consolidated Financial System
As a prudential measure aimed at better risk management and avoidance of
concentration of credit risks, in addition to prudential limits on exposure of
the solo entities, the FIs at the group-wide level should also adhere to the
following prudential limits, on an ongoing basis from the year beginning April
1, 2003 (July 1, 2003 in case of NHB):
| Single borrower exposures at the group level
|
15% of capital funds of the Group. |
| Upto 20% of capital funds of the Group provided the additional exposure of up to
five percentage points is for the purpose of financing infrastructure projects. |
| Group borrower exposures at the group level
|
40% of capital funds of the Group. |
| Upto 50% of capital funds of the Group provided the additional exposure of up to
10 percentage points is for the purpose of financing infrastructure projects. |
The 'capital funds' of the Group for the purpose of exposure norms would be the
same as reckoned for the purpose of group-wide capital adequacy. The measurement
of credit exposure at the group level should be done in the same manner as
prescribed for the FIs on a solo basis.
4.14 Disclosures
The FI should make appropriate disclosures in the ‘Notes on account’ to the
annual financial statements in respect of the exposures where the FI had
exceeded the prudential exposure limits during the year.
ANNEX -1
(Para 4.7)
Guidelines on Investments by the select All-India FIs
in Non-Government Debt Securities
1. Coverage
1.1 Investments covered
1.1.1 These guidelines apply to the FIs’ investments in
debt instruments, both
in the primary market (public issue as also private placement) as well as the
secondary market, in the following categories:
- debt instruments issued by companies, banks, FIs and State and Central
Government sponsored institutions, SPVs, etc.;
- debt instruments/ bond issued by Central or State Public Sector Undertakings,
with or without government guarantee;
- units of debt-oriented schemes of Mutual Funds i.e., the schemes whose major
part the corpus is invested in debt securities;
- Capital gains bonds and the bonds eligible for priority sector status.
1.2 Investments not covered
1.2.1 The guidelines, however, do not apply to the following categories of
investments of the FIs:
- government securities and the units of Gilt Funds;
- securities which are in the nature of advance under the extant prudential norms
of RBI;
- units of the equity oriented schemes of Mutual Funds, viz., the schemes wherein
a major part of their corpus is invested in equity shares;
- units of the “Balanced Funds”, which invest in debt as well as equities,
provided a major part of the corpus is invested in equity shares. In case of
predominance of investments in debt securities by the Fund, these guidelines
would be attracted;
- Units of venture capital funds and the money market mutual funds;
- Commercial Paper; and
- Certificates of Deposits.
2 Effective date and transition time
While these guidelines would come into force with effect from April 1, 2004,
considering the time required by the issuers of debt securities to get their
existing unlisted debt issues listed on the stock exchanges, the following
transition time is being provided:
- Investment in units of mutual fund schemes where the entire corpus is invested
in non-government debt securities would be outside the purview of the above
guidelines till December 31, 2004; thereafter, such investments would also
attract these guidelines.
- With effect from January 1, 2005, investment in units of such schemes of mutual
fund as have an exposure to unlisted debt securities of less than 10 per cent of
the corpus of the scheme would be treated on par with listed securities for the
purpose of the prudential limits prescribed at para 6 below. Thus, till December
31, 2004, investments in such units would attract the prudential limits.
- With effect from January 1, 2005 only those FIs would be eligible to make
fresh
investments (up to the prescribed prudential limits) in the unlisted securities
covered in these guidelines whose investments in such securities are within the
prudential limits prescribed.
3 Definitions
3.1 Rated security:
A security will be treated as rated if it is subjected to a detailed rating
exercise by an external rating agency in India which is registered with SEBI and
is carrying a current or valid rating. The rating relied upon will be deemed to
be current or valid if:
- The credit rating letter relied upon 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 are a part of the offer document.
- In the case of secondary market acquisition, the credit rating of the issue
should be in force and confirmed from the monthly bulletin published by the
respective rating agency.
3.2 Unrated security: Securities, which do not have a current or valid rating by
an external rating agency, would be deemed as unrated securities.
3.3 Listed debt security: It is a security, which is listed on a stock exchange.
If not so listed, it is an ‘unlisted’ debt security.
3.4 Non performing investment (NPI): For the limited purpose of these
guidelines, an NPI (similar to a non performing advance (NPA) is one where:
- In respect of fixed / predetermined income securities, interest / principal /
fixed dividend on preference shares (including maturity proceeds) is due and
remains unpaid for more than 180 days.
- The equity shares of a company have been valued at Re. 1/- per company, on
account of the non-availability of the latest balance sheet (as per the
instructions contained in para 26 of the Annexure to circular DBS.FID.
No.C-9/01.02.00/ 2000-01 dated November 9, 2000).
- If any credit facility availed by the issuer of the security is classified
as NPA in the books of the FI, investment in any of the securities issued by the
same issuer would also be treated as NPI.
4 Regulatory Requirements Internal Assessment and Prudential Limits
4.1 Regulatory requirements
4.1.1 The FIs must not invest in unrated debt securities but only in rated ones,
which carry a minimum investment grade rating from a credit rating agency
registered with SEBI.
4.1.2 The investment grade rating should have been awarded by an external rating
agency, operating in India, as identified by the IBA/ FIMMDA. The list of such
agencies would also be reviewed by IBA / FIMMDA at least once a year.
4.1.3 The FIs should not invest in debt securities of
original maturity of less
than one-year other than Commercial Paper and Certificates of Deposits, which
are covered under the RBI guidelines.
4.1.4 The FIs should undertake usual due diligence in respect of investments in
debt securities including the securities which do not attract these guidelines.
4.1.5 The FIs should ensure that all fresh investments in debt securities are
made only in listed debt securities of companies, which comply with the
requirements of the SEBI except to the extent indicated in paragraph 6 below.
4.1.6 The unlisted debt securities in which the FIs may invest up to the limits
specified in paragraph 6 below, should be rated and disclosure requirements as
prescribed by the SEBI for listed companies should be followed by the issuer
company.
4.2 Internal assessments
4.2.1 Since the debt securities are very often a credit substitute, the FIs
would be well advised to:
- subject all their investment proposals relating to debt securities to the same
standards of credit appraisal as for their credit proposals, irrespective of the
fact that the proposed investments may be in rated securities;
- make their own internal credit analysis and assign internal rating even in
respect of externally rated issues and not to rely solely on the ratings of
external rating agencies; and
- strengthen their internal rating systems which should also include building up
of a system of regular (quarterly or half-yearly) tracking of the financial
position of the issuer with a view to ensuring continuous monitoring of the
rating migration of the issuers / issues.
4.3. Prudential limits
4.3.1 The total investment in the unlisted debt securities should
not exceed 10
per cent of the FIs’ total investment in debt securities, which fall within the
ambit of these guidelines, as on March 31(June 30 in case of NHB), of the
previous year. However, the investment in the following instruments will not be
reckoned as 'unlisted debt securities' for monitoring compliance with the above
prudential limits:
- Security Receipts (SRs) issued by Securitisation Companies / Reconstruction
Companies registered with RBI in terms of the provisions of the Securitisation
and Reconstruction of Financial Assets and Enforcement of Securities Interest
(SARFAESI) Act, 2002; and
- Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS) which are
rated at or above the minimum investment grade.
4.3.2 The FIs which have exposure to investments in debt securities in excess of
the
prudential limit as on March 31, 2003 (June 30, 2003 in case of NHB) should not
make any fresh investment in such securities till they ensure compliance with
the above prudential limit.
4.3.3 As a matter of prudence, the FIs should stipulate, with the approval of
the Board, minimum ratings / quality standards and industry-wise, maturity-wise,
duration-wise, issuer-wise, etc., exposure limits, for acquiring exposure in
debt securities, which fall within the ambit of these guidelines, to address the
concentration risk and the risk of illiquidity.
5 Role of the Boards of Directors – Reporting requirement and Trading and
Settlement in debt securities
5.1 Role of Directors
5.1.1 The FIs should ensure that their investment policies, duly approved by the
Board of Directors, are formulated duly taking into account all the relevant
aspects specified in these guidelines. The FIs should put in place proper risk
management systems for capturing and analysing the risk in respect of investment
in debt securities and for taking timely remedial measures. The FIs should also
put in place appropriate systems to ensure that investment in privately placed
instruments is made in accordance with the systems and procedures prescribed
under the FI’s investment policy.
5.1.2 The Board should put in place a monitoring system to ensure that the
prudential limits prescribed in paragraphs 6 above are scrupulously complied
with, including the system for addressing the breaches, if any, due to rating
migration.
5.1.3 Boards of the FIs should review, twice a year, the following aspects of
investment in debt securities covered by these guidelines:
- Total turnover (investment and divestment) during the reporting period;
- Compliance with the RBI-mandated prudential limits as also those prescribed by
the Board for such investments;
- Rating migration of the issuers / securities held in the books of the FIs and
consequent diminution in the portfolio quality; and
- Extent of non-performing investments in the fixed income category.
5.2 Reporting requirements
5.2.1 In order to help in the creation of a central database on private
placement of debt, the investing FIs should file a copy of all offer documents
with the Credit Information Bureau (India) Ltd. (CIBIL). When the FIs themselves
raise debt through private placement, they should also file a copy of the offer
document with CIBIL.
5.2.2 Any default relating to payment of interest / repayment of instalment in
respect of any privately placed debt should also be reported to CIBIL by the
investing FIs along with a copy of the offer document.
5.2.3 The FIs should also report to the RBI such particulars in respect of their
investments in unlisted securities as may be prescribed by RBI from time to
time.
5.3 Trading and settlement in debt securities
As per the SEBI guidelines, all trades, with the exception of the spot
transactions, in a listed debt security, shall be executed only on the trading
platform of a stock exchange. In addition to complying with the SEBI guidelines,
the FIs should ensure that all spot transactions in listed and unlisted debt
securities are reported on the NDS and settled through the Clearing Corporation
of India Limited (CCIL) from a date to be notified by RBI.
Annex 2
(Cf. Para 4.10.1)
List of Public Financial Institutions
- IFCI Ltd.
- 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.
Annex 3
Part A : List of circulars consolidated by the Master Circular
| No. |
Circular No.
|
Date
|
Subject |
| 1 |
FIC No. 187/ 01.02.00 / 94-95
|
September 26, 1994
|
Bridge loan / Interim Finance |
| 2 |
FIC No. 191/ 01.02.00 / 94-95
|
September 28, 1994
|
Lending to Non- Banking Financial Companies. |
| 3 |
FIC. No. 685 / 01.02.00/ 94-95
|
April 21, 1995 |
Lending to Non Banking Financial Companies |
| 4 |
FIC. No. 684 / 01.02.00/ 94-95
|
April 21, 1995 |
Lending by Financial Institutions- Bridge Loan / Interim Finance |
| 5 |
FIC. No. 183 / 01.02.01/ 95-96
|
August 18, 1995 |
Lending by Financial Institutions- Bridge Loan / Interim Finance |
| 6 |
FIC. No. 235 / 01.02.00/ 95-96
|
September 13, 1995
|
Commitments in respect of Underwriting etc. Obligations |
| 7 |
FIC. No. 432 / 01.02.00/ 95-96
|
December 2, 1995
|
Lending by Financial Institutions- Bridge Loan / Interim Finance- Subsidiaries of FIs |
| 8 |
FIC. No. 851 / 01.02.00/ 95-96
|
June 26, 1996 |
Sanction of Working Capital Credit Facility by Financial Institutions. |
| 9 |
FIC. No. 11 / 01.02.00/ 96-97
|
April 4, 1997 |
Lending by Financial Institutions- Bridge Loan / Interim Finance |
| 10 |
FIC No. 13 /02.01.01/ 96-97
|
May 21, 1997 |
Lending to Non Banking Financial Companies |
| 11 |
DOS FID No. 17/ 01.02.00 /96-97
|
June 28, 1997 |
Limits on Credit Exposures of Term Lending Institutions to Individual / Group
borrowers |
| 12 |
DOS FID No. 18/ 01.02.00 /97-98
|
September 11, 1997
|
Limits on Credit Exposures of Term Lending Institutions to Individual / Group
borrowers |
| 13 |
DOS FID No. 20/ 01.02.00 /97-98
|
December 4, 1997
|
Limits on Credit Exposures of Term Lending Institutions to Individual / Group
borrowers |
| 14 |
DBS.FID No. 37/ 02.01.01/98-99
|
January 11, 1999
|
Lending to Non Banking Financial Companies |
| 15 |
DBS FID No. C-7/ 01.02.00 /99-2000
|
November 13, 1999
|
Credit Exposure Norms for Individual Borrowers |
| 16 |
DBS FID No. C-26/ 01.02.00 /2000-2001
|
une 20, 2001 |
Monetary and Credit Policy Measures 2001-2002 - Credit Exposure Norms |
| 17 |
DBS FID No. C-3/ 01.02.00 /2001-2002
|
August 27, 2001 |
Credit Exposure Norms - Applicability to Refinancing Institutions |
| 18 |
DBS FID No. C-12 /01.02.00/ 2002-03
|
January 20, 2003
|
Credit Exposure Norms - Measurement of Credit Exposure of Derivative Products -
Methodology for Measurement |
| 19 |
DBS. FID. No. C-11 / 01.02.00 /2003-04
|
January 8,2004 |
Final Guidelines on investment by the FIs in debt securities |
| 20 |
DBS. FID. No. C-1 / 01.02.00 /2004-05
|
July 26, 2004 |
Annual Policy Statement for the year 2004-05 - Prudential Credit Exposure Limits
by FIs |
| 21 |
DBOD.No.FID.FIC.4 /01.02.00/2007-08
|
July 02, 2007 |
Master Circular - Exposure Norms for Financial Institutions |
Part B : List of other circulars containing instructions related / relevant to
Exposure Norms incorporated in the Master Circular
| No. |
Circular No.
|
Date
|
Subject |
| 1 |
IECD.No.7/CMD.GA/Gen/ 91-92
|
July 29, 1991 |
Group Accounts |
| 2 |
FIC. No. 337 / 01.02.00/ 95-96
|
November 3, 1995
|
Lending by Financial Institutions- Bridge Loan / Interim Finance |
| 3 |
DBS.FID No. 24 / 02.01.00/ 97-98
|
January 23, 1998
|
Lending by Financial Institutions- Bridge Loan / Interim Loan |
| 4 |
DBS FID No. 35/ 01.02.00 /98-99
|
December 3, 1998
|
Strengthening of Prudential Norms |
| 5 |
DBS. FID. No. 507/ 01.02.00 /98-99
|
January 2, 1999 |
Strengthening of Prudential Norms - Risk Weight on Banks' Investments in Bonds /
Securities Issued by Financial Institutions. |
| 6 |
DBS FID No. C-6/ 01.02.00 /2001-2002
|
October 16, 2001
|
Guidelines for Classification and Valuation of Investments |
| 7 |
DBS.FID. No. C-5/ 01.02.00 / 2002-03
|
August 8, 2002 |
Capital Adequacy and Credit Exposure Norms - Treatment of Loans Granted by FIs
Against the Guarantee of Banks |
| 8 |
DBOD.No.BP.BC.67/ 21.04.048/2002-03
|
February 4, 2003
|
Guidelines on Infrastructure Financing |
| 9 |
DBS. FID. No. C-5 / 01.02.00/2003-04
|
August 1, 2003 |
Guidelines for Consolidated Accounting and Consolidated Supervision |
| 10 |
DBOD.BP.BC.No.3/21.01.002/2004-05
|
July 6, 2004 |
Cross holding of capital among banks / financial institutions |