Wednesday, 14 August 2019

Exposure norms : CCP AND CAIIB

     Exposure Norms are applicable to all scheduled commercial banks, excluding Regional Rural

Banks. These have been prescribed as a prudential measure aimed at better risk management and avoidance of

concentration of credit risks. Exposure Norms have been provided as ceiling on exposure to individuals or Groups;

capital market exposures; unsecured exposure and other related items details of which are given below:



2. Credit Exposures to Individual/Group Borrowers:

a) Ceiling (i) The exposure ceiling limits would be 15 percent of capital funds in case of a single borrower and 40

percent of capital funds in the case of a borrower group. (ii) Credit exposure to a single borrower may exceed the

exposure norm of 15 percent of the bank's capital funds by an additional 5 percent (i.e. up to 20 percent) and credit

exposure to borrowers belonging to a group may exceed the exposure norm of 40 percent of the bank's capital

funds by an additional 10 percent (i.e., up to 50 percent), provided the additional credit exposures are on account of

extension of credit to infrastructure projects. (iii) In addition to the exposure permitted above, banks may, in

exceptional circumstances, with the approval of their Boards, consider enhancement of the exposure to a borrower

(single as well as group) up to a further 5 percent of capital funds subject to the borrower consenting- to the banks

making appropriate disclosures in their Annual Reports. (iv) With effect from May 29, 2008, the exposure limit in

respect of single borrower has been raised to twenty five percent of the capital funds, only in respect of Oil

Companies who have been issued Oil Bonds (which do not have SLR status) by Government of India. In addition to

this, banks may in exceptional circumstances, consider enhancement of the exposure to the Oil Companies up to a

further 5 percent of capital funds. (v) The bank should make appropriate disclosures in the 'Notes on account' to the

annual financial statements in respect of the exposures where the bank had exceeded the prudential exposure

limits during the year pi) The exposure limits will also be applicable to lending under consortium arrangements (vii)

Bills purchased / discounted I negotiated under LC (where the payment to the beneficiary is not made 'under

reserve') will be treated as an exposure on the LC issuing bank and not on the borrower. In the case of negotiations

' under reserve' the exposure should be treated as on the borrower.

(b) Exposures to NBFCs : The exposure (both lending and investment, including off balance sheet exposures) of

a bank to a single NBFC / NBFC-AFC (Asset Financing Companies) should not exceed 10% / 15% respectively, of

the bank's capital funds as per its last audited balance sheet. Banks may, however, assume exposures on a single

NBFC / NBFC-AFC up to 15%120%respectively, of their capital funds provided the exposure in excess of 10%/15%

respectively, is on account of funds on-lent by the NBFC / NBFC-AFC to the infrastructure sector. Further, banksmay

also consider fixing internal limits for their aggregate exposure to all NBFCs put together. Infusion of capital funds

after the published balance sheet date may-also be taken into account for the purpose of reckoning capital funds.

Banks should obtain an external auditor's certificate on completion of the augmentation of capital and submit the

same to the Reserve Bank of India (Department of Banking Supervision) before reckoning the additions to capital

funds.

(c) Exemptions: Following types of credit will not be reckoned for exposure norms: (i) Existing/additional credit

facilities (including funding of interest and irregularities) granted to weak/sick industrial units under rehabilitation

packages. (ii) Food credit: Borrowers, to whom limits are allocated directly by the Reserve Bank for food credit, will

be exempt from the ceiling. (iii) Where principal and interest are fully guaranteed by the Government of India (iv)

Loans and advances (both funded and non-funded facilities) granted against the security of a bank's own term

deposits to the extent that the bank has a specific lien on such deposits. (v) Exposure on NABARD; However, there

is no exemption from the prohibitions relating to investments in unrated non-SLR securities. Definitions: For the

purpose of exposure norms, exposure, capital fund, Group and Infrastructure have been defined as under:

(d) Exposure: (a) Exposure shall include credit exposure (funded and non-funded credit limits) and investment

exposure (including underwriting and similar commitments). The sanctioned limits or outstandings, whichever are

higher, shall be reckoned for arriving at the exposure limit. However, in the case of fully drawn term loans, where there

is no scope for re-drawal of any portion of the sanctioned limit, banks may reckon the outstanding as the exposure. (b)

Credit exposure comprises of the following elements (i) all types of funded and non-funded credit limits. (ii) facilities

extended by way of equipment leasing, hire purchase finance and factoring services. (c) Investment exposure

comprises of the following elements: (i)investments in shares and debentures of companies (ii)investment in PSU

bonds (c)investments in Commercial Papers (CPs). (d) Banks' I Fls' investments in debentures/ bonds / security

receipts / pass-through certificates (PTCs) issued by a SC / RC as compensation consequent upon sale of financial

assets will constitute exposure on the SC I RC. In view of the extraordinary nature of the event, banks / Fls will be

allowed, in the initial years, to exceed the prudential exposure ceiling on a case-to-case basis. (e) The investment

made by the banks in bonds and debentures of corporates which are guaranteed by a Public Financial Institutions

(PFI) (as per list given by RBI) will be treated as an exposure by the bank on the PFI and not on the corporate. (f)

Guarantees issued by the PFI to the bonds of corporates will be treated as an exposure by the PFI to the corporates to

the extent of 50 percent, being a non-fund facility, whereas the exposure of the bank on the PFI guaranteeing the

corporate bond will be 100 percent. The PFI before guaranteeing the bonds/debentures should, however, take

into account the overall exposure of the guaranteed unit to the financial system.

(e) Capital Funds: Capital funds for the purpose will comprise of Tier I and Tier II capital as defined under

capital adequacy standards and as per the published accounts as on March 31 of the previous year.

However, the 'infusion of capital under Tier I and Tier II, either through domestic or overseas issue (in the

case of branches of foreign banks operating in India, capital funds received by them from their Head

Office), after the published balance sheet date will also be taken into account for determining the exposure

ceiling. Other accretions to capital funds by way of quarterly profits etc. would not be eligible to be reckoned

for determining the exposure ceiling. Banks are also prohibited from taking exposure in excess of the ceiling

in anticipation of infusion of capital at a future date.

(p Group: (a) The concept of 'Group' and the task of identification of the borrowers belonging to specific

industrial groups is left to the perception of the banks/financial institutions. However, the guiding principle

will be commonality of management and effective control. In so far as public sector undertakings are

concerned, only single borrower exposure limit would be applicable. (b) In the case of a split in the group, if

the split is formalized, the splinter groups will be regarded as separate groups. If banks and financial

institutions have doubts about the bona fides of the split, a reference may be made to RBI for its final view

in the matter to preclude the possibility of a split being engineered in order to prevent coverage under the

Group Approach.

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