Banks Allowed To Issue Guarantees On Loans To Fis, Lenders

The Reserve Bank of India (RBI) has allowed banks to issue guarantees favouring other banks/financial institutions (FIs)/lending agencies for loans extended by banks.

This is in line with the liberalisation and deregulation of the banking sector and in view of adopting risk management systems in banks. Hitherto, banks were prevented from issuing guarantees favouring financial institutions, other banks and lending agencies.

As per a new notification on guarantees and co-acceptances, the RBI said that the guaranteeing bank shall assume a funded exposure of at least 10 per cent of the exposure guaranteed.

The guarantee issued by the bank will be an exposure on the borrowing entity on whose behalf the guarantee has been issued and will attract appropriate risk weight as per the existing guidelines.

 

Banks should not extend guarantees or letters of comfort in favour of overseas lenders including those assignable to overseas lenders, except for the relaxations permitted under the Foreign Exchange Management Act.

The board-approved policy should, among others, address issues such as prudential limits, linked to bank's Tier-I capital, up to which guarantees favouring other banks/FIs/other lending agencies may be issued; nature and extent of security and margins; delegation of powers; reporting system; and periodical reviews, the notification said.

The guarantee shall be extended only in respect of borrower constituents and to enable them to avail of additional credit facility from other banks/FIs/lending agencies.

The board of directors should reckon the integrity/robustness of the bank's risk management systems and accordingly put in place a well-laid out policy in this regard.

The exposure assumed by a lending bank against the guarantee of another bank/FI will be deemed as an exposure on the guaranteeing bank/FI and will attract appropriate risk weight as per the existing guidelines.

Exposures assumed by way of credit facilities extended against the guarantees issued by other banks should be reckoned within the inter-bank exposure limits prescribed by the board of directors.

The board of directors should fix an appropriate sub-limit for the longer term exposures since these exposures attract greater risk.