Exposure norms in banks
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Transcript of Exposure norms in banks
EXPOSURE NORMSMade by:-
Kumar Anurag - 11020241048
Mohil Poojara -11020241051
Pratik Chury - 11020241055
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INTRODUCTION
RBI has advised banks to limit their exposure to specific
industry or sectors Prescribed regulatory limit on banks’ exposure to
individual and group borrowers Certain statutory and regulatory exposure limits
in respect of advances against/investments in shares, convertible debentures/bonds, units of equity-oriented mutual funds, and all exposures to venture capital firms
Reason ?
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Better Risk Management and avoidance of
concentration of Credit Risk
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IMPORTANT DEFINITIONS
Exposure: Credit exposure(funded and non funded),
investment exposure Higher of sanctioned limit or outstandings will be
taken for exposure limit Credit Exposure:
All types of funded or non funded credit limit Facilities extended by ways of leasing, hire
purchase finance, and factoring services
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IMPORTANT DEFINITIONS
Investment Exposure: Investment in shares and debentures of
companies, PSU bonds, Commercial Papers Investment in corporate bonds, guaranteed by
PFI, will be treated as exposure to the PFI For PFI – exposure of 50% on corporate as its a
non fund facility For Banks – exposure of 100% on PFIs Investments issued by SC/RC as compensation
consequent upon sale of financial assets will constitute exposure on the SC/RC
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IMPORTANT DEFINITIONS
Capital Funds Tier I and Tier II capital as defined under Capital
Adequacy Standards Infusion of capital after published balance sheet
date will also be considered for determining exposure ceiling
Other accretion by way of quarterly profit etc. not allowed
Prohibition in taking exposure exceeding ceiling in anticipation of infusion of capital
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IMPORTANT DEFINITIONS
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.
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IMPORTANT DEFINITIONS
Group Left to perception of banks Guiding principle: commonality of management
and effective control Split in group: treated as 2 different groups,
prudence to be administered to check whether split is engineered to get more exposure
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IMPORTANT DEFINITIONS
Measurement of Credit Exposure to Derivative Products Current Exposure Method
The current exposure method is the sum of current credit exposure and potential future credit exposure. 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 credit exposure is defined as the sum of the positive mark-to-market value of these contracts. The Current Exposure Method requires periodical calculation of the current credit exposure by marking these contracts to market, thus capturing the current credit exposure.
Potential future credit exposure is determined by multiplying the notional principal amount of each of these contracts irrespective of whether the contract has a zero, positive or negative mark-to-market value by the relevant add-on factor according to the nature and residual maturity of the instrument as detailed by the RBI in its Circular dt. 02.07.12
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EXPOSURES TO INDIVIDUAL/GROUP BORROWERS Exposure Ceiling Limits
15% of Capital Funds for Individual borrowers 40% of Capital Funds for Group borrowers
Extension of Ceiling Limits 5% for Individual and 10% for Group
Condition: Additional credit exposure is on account of extension of credit to infrastructure projects
5% for Individuals and Group Condition: Exceptional circumstances, approval of board,
disclosures in Annual Report 25% + 5%
Condition: Oil companies with GOI Oil Bonds
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NBFCS
Exposure Ceiling Limits NBFC – 10% NBFC – AFC – 15% Infrastructure Finance Companies – 15%
Extensions Additional 15% - NBFC, Additional 20% - NBFC
(AFC), Up to 20% - IFCs Condition: Lent to infrastructure sector
Banks should set internal credit limits for all NBFCs
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BILLS DISCOUNTED UNDER LC
Discounting/purchasing/negotiating bank Exposure to LC Issuing Bank
LC Issuing Bank Exposure to Borrower
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EXEMPTIONS
Rehabilitation of Sick/Weak Industrial Units Food Credit Guarantee by GOI Loans against own Term Deposits Exposure on NABARD
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EXPOSURE TO INDUSTRY/CERTAIN SECTORS
Internal Exposure Limits Fixing of Sectoral Limits Foreign Currency Exposure
Foreign currency loans > USD 10 mio, policy for approptiate limits to be set
Exporter SMEs Monthly review and monitoring unhedged portion of
exposure > USD 25 mio
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EXPOSURE TO INDUSTRY/CERTAIN SECTORS
Exposure to Real Estate Frame comprehensive prudential norms Exposure to SEZs or for acquisition of units ins
SEZs which includes real estate will be treated as exposure to commercial real estate sector for the purpose of risk weight and capital adequacy
Exposure to Leasing, Hire Purchase and Factoring Services Should not exceed 10 % of total advances
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EXPOSURE TO INDUSTRY/CERTAIN SECTORS
Exposure to Indian JVs/Wholly owned subsidiaries Abroad and Overseas Step-down Subsidiaries of Indian Corporates Exposure by way of credit and non credit finance
for facilitating exports should not exceed 20% of banks’ unimpaired capital funds
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EXPOSURE TO CAPITAL MARKETS
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, and etc. secured and unsecured advances to stock brokers and guarantees issued on behalf of them, etc.
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EXPOSURE TO CAPITAL MARKETS
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
It is a financial guarantee
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LIMITS ON EXPOSURE TO CAPITAL MARKETS
Statutory Limits No banking company shall hold shares in any
company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30 percent of the paid-up share capital of that company or 30 percent of its own paid-up share capital and reserves, whichever is less (Section 19(2) of the B.R. Act, 1949)
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LIMITS ON EXPOSURE TO CAPITAL MARKETS
Regulatory Limit (Solo/Consolidated Basis) The aggregate exposure of a bank/consolidated
bank to the capital markets 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
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ITEMS EXCLUDED FROM CAPITAL MARKETS EXPOSURE Banks’ investments in own subsidiaries, joint ventures,
sponsored Regional Rural Banks (RRBs) and investments in shares and convertible debentures, convertible bonds issued by institutions forming crucial financial infrastructure as listed out in the RBI Circular.
Tier I and Tier II debt instruments issued by other banks;
Investment in Certificate of Deposits (CDs) of other banks;
Preference Shares, Non-convertible debentures and non-convertible bonds;
Units of Mutual Funds under schemes where the corpus is invested exclusively in debt instruments;
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ITEMS EXCLUDED FROM CAPITAL MARKETS EXPOSURE
Shares acquired by banks as a result of conversion of debt/overdue interest into equity under Corporate Debt Restructuring (CDR) mechanism;
Term loans sanctioned to Indian promoters for acquisition of equity in overseas joint ventures / wholly owned subsidiaries under the refinance scheme of Export Import Bank of India (EXIM Bank).
Own underwriting commitments, as also the underwriting commitments of their subsidiaries, through the book running process
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FINANCING OF EQUITIES AND INVESTMENT IN SHARESNo. Nature of Capital Market
Exposure Other Restriction/Norms
1 Advances against shares to individuals (shares, convertible bonds, convertible debentures and units of equity oriented mutual funds)
Physical Form: Not to exceed Rs. 10 LakhDemat Form : Not to exceed Rs. 20 Lakh
2 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)
3 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 purchaseprice of the shares or Rs.20 lakhwhichever is lower.
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FINANCING OF EQUITIES AND INVESTMENT IN SHARESNo. Nature of Capital Market
Exposure Other Restriction/Norms
4 Advances against shares to Stock Brokers & Market Makers
Banks are free to provide credit facilities based on their commercial judgment, but do not extend credit facilities directly or indirectly for arbitrage operations
5 Bank financing to individuals againstshares to joint holders or third partyBeneficiaries
Finance should not be to circumvent the limits placed on loans/advances against shares and other securities specified above
6 Advances against units of Mutual Funds
Subject to:-*units listed in the Stock Exchange*completed the minimum lock-in period (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
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FINANCING OF EQUITIES AND INVESTMENT IN SHARES
No. Nature of Capital Market Exposure
Other Restriction/Norms
7 Advances to other borrowers againstshares/ 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
8 Bank Loans for financing promoters’contribution
Individual : 15% of capital fundsGroup : 40% of capital funds And subject to the Statutory limit on share holding in companies (Sec. 19(2) of B.R. Act 1949
9 Bridge Loans Period not exceeding one year
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FINANCING OF EQUITIES AND INVESTMENT IN SHARESNo. Nature of Capital Market
Exposure Other Restriction/Norms
10 Investments in Venture Capital Funds(VCFs)
It should not exceed 20% within thecapital market exposure norm of40% of the net worth as on March31st of previous year
11 Margin on advances against shares / issue of guarantees on behalf of stockbrokers and market makers
Uniform margin of 50% of whichminimum cash margin of 25%
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
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FINANCING OF EQUITIES AND INVESTMENT IN SHARESNo. Nature of Capital
Market Exposure Other Restriction/Norms
13 Financing for acquisition of equity in Overseas companies
Statutory limit on share holding incompanies (Sec. 19(2) of B.R. Act1949
14 Refinance Scheme of Export Import Bank of India
Approval of the EXIM Bank forrefinance
15 Arbitrage Operations Banks prevented from undertakingarbitrage operations themselves andextending credit facilities for thepurpose
16 Margin Trading Minimum margin 50% and theshares should be in dematerializedmode
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RISK MANAGEMENT AND INTERNAL CONTROL SYSTEMS
Transparent policy Investment committee Suitable Risk Management Mechanism Suitable Audit committee Valuation and Disclosure
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CROSS HOLDING AMONG BANKS/FINANCIAL INSTITUTIONS
Capital Status(should not exceed 10% of investing bank’s capital funds) Equity shares; Preference shares eligible for capital status; Subordinated debt instruments; Hybrid debt capital instruments; and Any other instrument approved as in the nature
of capital Subject to 5% of investee banks equity
capital Outside the purview of ceiling prescribed
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MARGIN REQUIREMENTS
Banks exposure to commodity markets Banks exposure in respect of currency
derivative segment
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LIMITS ON EXPOSURE TO UNSECURED GUARANTEES AND UNSECURED ADVANCE
Formulate own policies 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.
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