EXPOSURES NORMS
Exposure
Ceilings
Exemptions from Ceiling norms
Banks’ exposure in the following category is exempted from compliance of the exposure norms:-
Measurement of Credit Exposure of Derivative Products
Credit exposures, arising on account of the interest rate & foreign exchange derivative transactions and gold, are computed using the 'Current Exposure Method', (dealt separately). While computing the credit exposure banks may exclude 'sold options', provided the entire premium / fee or any other form of income is received / realized.
Current Exposure Method
Group
The concept of 'Group' and the task of identification of the borrowers belonging to specific industrial group is left to the perception of the banks/financial institutions, the guiding principle being commonality of management and effective control. In the case of a split in the group, if the split is formalized the splinter groups will be regarded as separate groups. In so far as public sector undertakings are concerned, only single borrower exposure limit would be applicable.
Credit Exposure to Industry and certain Sectors
Internal Exposure Limits
Exposure to Real Estate
Exposure to Leasing, Hire Purchase and Factoring Services
Banks exposure to leasing, hire purchase and factoring activities should not exceed 10 percent of total advances.
Exposure to Indian JVs/ Wholly owned Subsidiaries Abroad and Overseas Step-down Subsidiaries of Indian Corporate
Banks exposure by way of credit/non-credit (LC/Guarantees) as also buyer's credit/acceptance finance to overseas parties for facilitating export of goods & services from India should not exceed 20 percent of banks’ unimpaired capital funds (Tier I and Tier II capital), subject to the conditions including the holding of Indian company is more than 51%, compliance of Sec. 25 of B.R. 1949, the resource base should be funds held in foreign currency accounts such as FCNR(B), EEFC, RFC, etc.
Banks’ Exposure to Capital Markets – Rationalization of norms
The revised guidelines on banks’ exposure to capital markets which came into effect from April 1, 2007. Banks’ capital market exposure includes both direct and indirect exposures on the various components of capital market such as direct investment in equity shares, convertible debentures, advances against shares/bonds/debentures, etc. and secured and unsecured advances to stock brokers and guarantees issued on behalf of them, etc.
Irrevocable Payment Commitments (IPCs)
Banks issue Irrevocable Payment Commitments (IPCs) in favour of stock exchanges on behalf of domestic mutual funds/FIIs to facilitate the transactions done by these clients. In order to protect the banks from the adverse movements in the equity prices and the possibility of default by the clients, various risk mitigation measures have been prescribed. The IPC will be treated as a financial guarantee.
Limits on Banks’ Exposure to Capital Markets
Statutory limit on shareholding
No banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30% of the paid-up share capital of that company or 30% of its own paid-up share capital and reserves, whichever is less (Section 19(2) of the B.R. Act, 1949)
Regulatory Limit (Solo/Consolidated Basis)
The aggregate exposure of a bank/consolidated bank to the capital markets in all forms (both fund based and non-fund based) should not exceed 40 per cent of its net worth/consolidated net worth as on March 31 of the previous year. Within this overall ceiling, the bank’s direct investment/aggregate direct exposure by way of consolidated investment in shares, convertible bonds / debentures, units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) [both registered and unregistered] should not exceed 20 per cent of its net worth/consolidated net worth.
Net Worth
Net worth would comprise Paid-up capital plus Free Reserves including Share Premium ( but excluding Revaluation Reserves), plus Investment Fluctuation Reserve and credit balance in Profit & Loss account, less debit balance in Profit and Loss account, Accumulated Losses and Intangible Assets.
Enhancement in limits
Banks having sound internal controls and robust risk management systems can approach the Reserve Bank for higher limits together with details thereof.
Items excluded from Capital Market Exposure
The following investments in capital markets are exempted from the reckoning of capital market exposure of banks looking to the nature of their activities viz.:-
Financing of equities and investments in shares
The capital market exposure of banks on solo/consolidated basis should not exceed 40% of its net worth/consolidated net worth as on March 31st of the previous year. Besides this, the certain capital exposure is subject to other restrictions/norms as under:-
No. |
Nature of capital market exposure |
Other restrictions/norms |
01 |
Advances against shares to individuals (shares, convertible bonds, convertible debentures and units of equity oriented mutual funds) |
Physical Form: Not to exceed Rs. 10 Lakh Demat Form : Not to exceed Rs. 20 Lakh |
02 |
Financing of Initial Public Offerings (IPOs) to individuals (shares, convertible bonds/ debentures, units of equity oriented mutual funds and PSU bonds |
Not exceed : Rs.10 lakh (for subscribing to IPOs) |
03 |
Bank finance to assist employees to buy shares of their own companies under Employees Stock Option Plan (ESOP)/ reserved by way of employees' quota under IPO including Follow-on Public Offers (FPOs) |
To the extent of 90% of the purchase price of the shares or Rs.20 lakh whichever is lower. |
04 |
Advances against shares to Stock Brokers & Market Makers |
Banks are free to provide credit facilities based on their commercial judgment (within overall 40%). However, banks do not extend credit facilities directly or indirectly for arbitrage operations in Stock Exchanges. |
05 |
Bank financing to individuals against shares to joint holders or third party beneficiaries |
Finance should not be to ircumvent the limits placed on loans/advances against shares and other securities specified above. |
06 |
Advances against units of Mutual Funds |
Subject to:- *units listed in the Stock Exchange *completed the minimum lock-inperiod (relevant scheme) *linked to Net Asset Value (NAV)/repurchase price or the market value whichever is less; *attract the quantum and margin requirements; *purpose oriented |
07 |
Advances to other borrowers against shares/ debentures/ bonds |
Can accept as collateral for secured loans granted as working capital or for other productive purposes or margin for new projects or expansion of existing business |
08 |
Bank Loans for financing promoters’ Contribution |
Individual : 15% of capital funds Group : 40% of capital funds And subject to the Statutory limit on share holding in companies (Sec. 19(2) of B.R. Act 1949 and within 40% of net worth. |
09 |
Bridge Loans |
Period not exceeding one year, but, within 40% of networth. |
10 |
Investments in Venture Capital Funds (VCFs) |
It should not exceed 20% within the capital market exposure norm of 40% of the net worth as on March 31st of previous year. |
11 |
Margin on advances against shares / issue of guarantees on behalf of stockbrokers and market makers |
Uniform margin of 50% of which minimum cash margin of 25% (within 50%) to be maintained for issuance of guarantees for capital market operations. |
12 |
Disinvestment Programme of GOI |
Within the regulatory ceiling of 40% of net worth. Relaxation, on case to case basis, is permitted to banks in such a manner that the total capital exposure, net of exposure under the disinvestment programme, is within the regulatory/ prudential individual/ group exposure ceiling |
13 |
Financing for acquisition of equity in Overseas companies |
Statutory limit on share holding in companies (Sec. 19(2) of B.R. Act) |
14 |
Refinance Scheme of Export Import Bank of India |
Approval of the EXIM Bank for refinance. |
15 |
Arbitrage Operations |
Banks prevented from undertaking arbitrage operations themselves and extending credit facilities for the purpose. |
16 |
Margin Trading |
Minimum margin 50% and the shares should be in dematerialized mode. |
Risk Management and Internal Control System
Banks desirous of making investment in equity shares/ debentures, financing of equities and issue of guarantees etc., within the above ceiling, are required to observe the following guidelines:
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 - are required to be marked to market preferably on a daily basis, but at least on weekly basis. Banks are required to 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.
Cross holding of capital among banks / financial institutions
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% of the investing bank'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; and
e. Any other instrument approved as in the nature of capital.
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% of the investee bank's equity capital. Bank’s/FI’s equity holdings in another bank held under provisions of a Statute will be outside the purview of the ceiling prescribed above.
Margin Requirements
Banks' Exposure to Commodity Markets
Like in case of stock brokers, Banks issue guarantees on behalf of commodity brokers in favour of national level commodity exchanges viz. NCDEX , MCX, NMCEIL, in lieu of margin money at a minimum margin of 50% and minimum cash margin of 25% (within the above margin of 50%) as per the Commodity Exchange Regulations
Banks’ exposure in respect of Currency Derivatives segment
The exposure under the currency derivatives segment is treated outside capital market exposure norms including margin requirements as well as intra-day monitoring are not applicable to banks’ exposure to brokers.
Limits on exposure to unsecured guarantees and unsecured advance
The banks are required to formulate their own policies on the extent of unsecured exposures Unsecured exposure’ is defined as an exposure where the realizable 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.
The rights, licenses, authorizations, etc., charged to the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be reckoned as tangible security for the purpose of determining the amount of unsecured advances. Annuities under build-operate-transfer (BOT) model in respect of road/highway projects and toll collection rights where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities, subject to the condition that banks’ right to receive annuities and toll collection rights is legally enforceable and irrevocable.
Buy back of securities
At the request of the issuers, additional facilities granted to small investors subscribing to new issues should not exceed 20% of the owned funds of the banks/their subsidiaries and the exposure should be within the overall exposure limits which have been or may be prescribed from time to time.
Source: RBI M. Circular dt. 1.7.13