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Introduction
Credit exposure norms are prescribed by RBI for term
lending institutions to limit their exposures to an individual borrower and
group borrowers. 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.
Scope and
Applicability
The refinance portfolio of refinancing institutions is
not subject to exposure norms. However, they are advised to evolve their own
credit exposure limits, even in respect of their refinancing portfolio.
Principal and interest fully guaranteed by the Government
of India may be excluded While computing the extent of exposures.
These norms deal with individual/group exposures but not sector
/ industry exposures. The Financial Institutions (FIs) may, therefore, consider
fixing internal limits for aggregate commitments to specific sectors, so that
the exposures are evenly spread.
These stipulations shall apply to all borrowers. However,
in case of public sector undertakings, only single borrower exposure limit
would be applicable.
Various aspects of credit exposure norms are detailed in
the following paragraphs.
Definitions
'Capital Funds'
The total regulatory capital (i.e., Tier 1 + Tier 2
capital), would constitute the 'capital funds' for the purpose of exposure
norms.
'Infrastructure Projects' /
'Infrastructure Lending'
Infrastructure lending includes credit
facility provided to a company engaged developing, operating and maintaining any
infrastructure facility that is a project in any of the following sectors :
i) a road,
including toll road, a bridge or a rail system;
ii)
a 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, radio paging,
domestic satellite 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;
ix) Any other infrastructure facility
of similar nature.
'Group' Borrowers
The group to which a particular borrowing unit belongs
should be decided by the FIs on the basis of the relevant information available
with them, the guiding principle in this regard being commonality of management
and effective control.
Net Owned Funds in respect of NBFCs
Net owned Funds will consist of
(paid up equity capital+ free reserves+ balance in share
premium account + capital reserves from surplus arising out of sale of assets
but not its revaluation)
minus (accumulated loss balance + book
value of intangible assets ).
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 Funds. The NOF
should be computed on the basis of last audited Balance Sheet.
Exposure
Ceilings
For Single / Individual Borrowers
The credit exposure to single borrowers shall not exceed
15 per cent of capital funds of the FI. It may exceed by additional five
percent in case of infrastructure projects. FIs may, in exceptional
circumstances, consider 25 per cent of capital funds for infrastructure
projects and 20 percent for other projects.
For Group Borrowers
The credit exposure to a group shall not exceed 40 per
cent of capital funds of the FI. It may exceed by additional ten percentage
points in case of infrastructure projects 55 percent of capital funds for
infrastructure projects and 45 percent for other projects.
For
Bridge Loans / Interim Finance
FIs may grant bridge loan / interim
finance to companies other than NBFCs against public issue of equity in India
or abroad but not against Rights issue.
FIs may sanction bridge loans only
against their own commitment and not against loan commitment of any other FIs /
Banks except in cases where the lending institution faces temporary liquidity
constraint.
These restrictions are also applicable
to the subsidiaries of FIs for which FIs are required to issue suitable
instructions to their subsidiaries.
Working Capital Finance
FIs may extend working capital finance to borrowers
enjoying credit limits with banks, when the banks are not in a position to meet
the credit requirements of the borrowers on account of temporary liquidity
constraints. 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.
Revolving Underwriting Facility
FIs should not extend Revolving Underwriting Facility to
Short Term Floating Rate Notes / Bonds or Debentures issued by corporate
entities.
Lending
to Non Banking Financial Companies (NBFCs)
There are no limits in respect of lending
by FIs to Equipment Leasing & Hire Purchase Companies, equipment and hire
purchase NBFCs and Loan & Investment Companies which have complied with RBI's
requirement of registration, credit rating and prudential norms and have been
certified as such by RBI. However such lending would be subject to compliance
with single and group borrower exposure norms.
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 can be obtained from the master
circular.
Fls are also
advised not to provide finance to NBFCs for the following activities:
a) Bills discounted
/ rediscounted except those arising from sale of commercial vehicles including
light commercial vehicles;
c)
Investments/ advances to subsidiaries, group
companies or other entities;
d)
Investments / inter-corporate loans &
deposits in other companies.
Fls should not sanction bridge loans to NBFCs (Including
RNBCs).
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
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':
(i) Security
Receipts (SRs) issued by Securitisation Companies / Reconstruction Companies
registered with RBI under SARFAESI Act; and
(ii)
Asset Backed Securities (ABS) and Mortgage
Backed Securities (MBS) which are rated at or above the minimum investment
grade.
Investment in Venture Capital Funds
(VCF)
FIs are
advised to comply with the prudential requirements relating to financing of
venture capital funds.
Cross Holding of Capital among Banks /
Financial Institutions
(i) Investment
in the following instruments, which are issued by other banks / FIs and are
eligible for capital status for the investee, should not exceed 10% of the
investing FI's capital funds (Tier I plus Tier II) :
a. Equity
shares;
b. Preference
shares eligible for capital status;
c. Subordinated
debt instruments;
d. Hybrid debt
capital instruments;
e. Any other
instrument approved as in the nature of capital.
FIs should not acquire any fresh stake,
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 listed above, which
are not deducted from Tier I capital, will attract 100 percent risk weight for
credit risk for capital adequacy purposes.
Level of
Exposure
The sanctioned limit or outstanding,
whichever is higher, shall be reckoned for arriving at the level of credit exposure
which 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.
In case of term loans, exposure should
be the actual outstanding plus undisbursed or undrawn commitments. However, where
disbursements are yet to commence, the level of exposure should be the
sanctioned limit or the extent of the FI’s commitment with the borrowing
companies.
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 :
- where it is issued as part of the
proposal for project finance and the tenor is for three years and above
-
The FI has a significant stake (i.e., 10% or
more) in the issue and
-
The issue is a part of private placement.
(ii)
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 above.
(iii)
Deposits : The deposits
placed by the FIs with the corporate sector.
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.
Prudential
Norms for Off-balance Sheet Exposures of FIs
FIs are advised to comply with the
prudential requirements relating to Off-balance Sheet Exposures of FIs.
Measurement
of Exposure in Derivative Products
There are
two methods for measuring the credit risk exposure inherent in derivatives, as
described below.
A. The Original Exposure Method
The credit risk exposure of a derivative product is
calculated by multiplying the notional principal amount with the prescribed
credit conversion factors. FI should apply the following credit conversion
factors to the notional principal amounts of each instrument as under:
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
|
1.0%
|
5.0% (2% + 3%)
|
|
than two years
|
|||
For each additional
|
1.0%
|
3.0%
|
|
year
|
|||
B. The Current Exposure 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. The credit equivalent of the off-balance sheet interest
rate and exchange rate instruments would be the sum of the following two
components:
(a)
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
(b)
an amount for 'potential future exposure'
- calculated by multiplying the total notional principal amount of the contract
by the following credit conversion factors:
Residual
Maturity
|
Conversion Factor to be
|
|
applied on Notional
Principal
|
||
Amount
|
||
Interest Rate
|
Exchange Rate
|
|
Contract
|
Contract
|
|
Less than one year
|
Nil
|
1.0%
|
One year and over
|
0.5%
|
5.0%
|
FIs should follow their internal methods and mark to
market the derivative products at least on a monthly basis. However, the FIs
would not be required to calculate potential credit exposure for single
currency floating / floating interest rate swaps.
The FIs are encouraged to follow the Current Exposure
Method 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 but should subsequently move over to Current Exposure
Method in course of time.
·
The investments made in the bonds and
debentures of corporates which are guaranteed by FI, will be treated as an
exposure of the bank / FI on the FI and not on the corporate.
·
Guarantees issued by FI to the bonds of the
corporates will be treated as an exposure of the FI to the corporate.
·
the exposure of the bank / FI on the FI
guaranteeing the corporate bond will be to the extent of 100 per cent of the
bank's investment.
The FIs should consider the overall
exposure of the guaranteed unit to the financial system before guaranteeing the
bonds / debentures.
Treatment of Loans granted by the FIs against the
Guarantee of Banks / FIs
The banks / FIs may extend guarantees in
favour of other lending institutions in respect of infrastructure projects. The
bank should however take a funded share of at least five per cent of the
project cost. It should also undertake normal credit appraisal, monitoring and
follow up of the project. The entire loan transaction should be reckoned as an
exposure on the borrowing entity and not on the bank guaranteeing the loan. In
case the funded facility is a term loan, the level of exposure should be
reckoned as:
-
Before commencement of disbursement, the
exposure would be the sanctioned limit or the extent of commitment, as the case
may be;
-
After commencement of disbursement, it would
be the aggregate of the outstanding amount plus the undisbursed or undrawn
commitment.
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 to the RBI.
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:
Single borrower
|
15% of capital funds of the Group.
|
exposures at the
|
Up to 20% of capital funds of the
Group
|
group level
|
provided the additional exposure of
up to five
|
percentage points is for the purpose
of
|
|
financing infrastructure projects.
|
|
Group borrower
|
40% of capital funds of the Group.
|
exposures at the
|
Up to 50% of capital funds of the
Group
|
group level
|
provided the additional exposure of
up to 10
|
percentage points is for the purpose
of
|
|
financing infrastructure projects.
|
The 'capital funds' of the Group 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.
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.
Based on the Master Circular of 1/7/15. Please visit www.rbi.org.in if required…………… Poppy
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