RBI eases rules on banks' unsecured exposure

The Reserve Bank of India (RBI) today liberalised the norms on unsecured exposure of banks.

The move enables bank boards to set the limits on such exposure themselves.

Till now, banks were required to limit their commitments by way of unsecured exposure in such a manner that 20 per cent of a bank's outstanding unsecured guarantees plus the total of its outstanding unsecured advances should not exceed 15 per cent of its total outstanding advances.

The notification follows an announcement at the central bank's annual monetary policy statement last month.

Banks had asked for flexibility in the rules because of an emerging trend of financing borrowers based on their estimated cash flows rather than on collateral.

Moreover, banks have been extending funds not only by way of loans, but also by investing in corporate debt.

Banks would be required to make an additional provision of 10 per cent, i.e., a total provision of 20 per cent of the total outstanding advances in the substandard category to cover expected loss on unsecured exposures.

Provision at the level of 100 per cent for unsecured exposures in doubtful and loss categories will continue as earlier.