Exposure norms in banks

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  • 1. EXPOSURE NORMSMade by:-Kumar Anurag - 11020241048Mohil Poojara -11020241051Pratik Chury - 11020241055
  • 2. INTRODUCTION 11/10/2012 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 ? 2
  • 3. 11/10/2012Better Risk Management andavoidance of concentration of Credit Risk 3
  • 4. IMPORTANT DEFINITIONS 11/10/2012 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 4
  • 5. IMPORTANT DEFINITIONS 11/10/2012 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 5
  • 6. IMPORTANT DEFINITIONS 11/10/2012 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 6
  • 7. IMPORTANT DEFINITIONS 11/10/2012 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. 7
  • 8. IMPORTANT DEFINITIONS 11/10/2012 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 8
  • 9. IMPORTANT DEFINITIONS 11/10/2012 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 9
  • 10. EXPOSURES TO INDIVIDUAL/GROUPBORROWERS Exposure Ceiling Limits 11/10/2012  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 10
  • 11. NBFCS 11/10/2012 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 11
  • 12. BILLS DISCOUNTED UNDER LC 11/10/2012 Discounting/purchasing/negotiating bank  Exposure to LC Issuing Bank LC Issuing Bank  Exposure to Borrower 12
  • 13. EXEMPTIONS 11/10/2012 Rehabilitation of Sick/Weak Industrial Units Food Credit Guarantee by GOI Loans against own Term Deposits Exposure on NABARD 13
  • 14. EXPOSURE TO INDUSTRY/CERTAIN SECTORS 11/10/2012 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 14
  • 15. EXPOSURE TO INDUSTRY/CERTAIN SECTORS 11/10/2012 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 15
  • 16. EXPOSURE TO INDUSTRY/CERTAIN SECTORS 11/10/2012 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 16
  • 17. EXPOSURE TO CAPITAL MARKETS 11/10/2012 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. 17
  • 18. EXPOSURE TO CAPITAL MARKETS 11/10/2012 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 18
  • 19. LIMITS ON EXPOSURE TO CAPITAL MARKETS 11/10/2012 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) 19
  • 20. LIMITS ON EXPOSURE TO CAPITAL MARKETS 11/10/2012 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 20
  • 21. ITEMS EXCLUDED FROM CAPITAL MARKETSEXPOSURE 11/10/2012 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; 21 Units of Mutual Funds under schemes where the corpus is invested exclusively in debt instruments;
  • 22. ITEMS EXCLUDED FROM CAPITAL MARKETSEXPOSURE 11/10/2012 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 22
  • 23. FINANCING OF EQUITIES AND INVESTMENT INSHARES 11/10/2012No. Nature of Capital Market Other Restriction/Norms Exposure1 Advances against shares to Physical Form: Not to exceed Rs. individuals (shares, convertible 10 Lakh bonds, convertible debentures and Demat Form : Not to exceed Rs. 20 units of equity oriented mutual Lakh funds)2 Financing of Initial Public Offerings Not exceed : Rs.10 lakh (for (IPOs) to individuals (shares, subscribing to IPOs) convertible bonds/ debentures, units of equity oriented mutual funds and PSU bonds3 Bank finance to assist employees To the extent of 90% of the to buy shares of their own purchase companies under Employees Stock price of the shares or Rs.20 lakh Option Plan (ESOP)/ reserved by whichever is lower. way of employees quota under IPO including Follow-on Public Offers 23 (FPOs)
  • 24. FINANCING OF EQUITIES AND INVESTMENT INSHARESNo. Nature of Capital Market Exposure Other Restriction/Norms 11/10/20124 Advances against shares to Stock Banks are free to provide credit facilities Brokers & Market Makers based on their commercial judgment, but do not extend credit facilities directly or indirectly for arbitrage operations5 Bank financing to individuals against Finance should not be to circumvent the shares to joint holders or third party limits placed on loans/advances against Beneficiaries shares and other securities specified above6 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; 24 *purpose oriented
  • 25. FINANCING OF EQUITIES AND INVESTMENT INSHARES 11/10/2012No. Nature of Capital Market Other Restriction/Norms Exposure7 Advances to other borrowers Can accept as collateral for against secured loans granted as shares/ debentures/ bonds working capital or for other productive purposes or margin for new projects or expansion of existing business8 Bank Loans for financing Individual : 15% of capital funds promoters’ Group : 40% of capital funds contribution And subject to the Statutory limit on share holding in companies (Sec. 19(2) of B.R. Act 1949 259 Bridge Loans Period not exceeding one year
  • 26. FINANCING OF EQUITIES AND INVESTMENT INSHARES 11/10/2012No. Nature of Capital Market Other Restriction/Norms Exposure10 Investments in Venture Capital It should not exceed 20% within the Funds capital market exposure norm of (VCFs) 40% of the net worth as on March 31st of previous year11 Margin on advances against Uniform margin of 50% of which shares / issue of guarantees on minimum cash margin of 25% behalf of stockbrokers and market makers12 Disinvestment Programme of Within the regulatory ceiling of 40% GOI 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/ 26 group exposure ceiling
  • 27. FINANCING OF EQUITIES AND INVESTMENT INSHARES 11/10/2012No. Nature of Capital Market Other Restriction/Norms Exposure13 Financing for acquisition of Statutory limit on share holding in equity in Overseas companies (Sec. 19(2) of B.R. Act companies 194914 Refinance Scheme of Export Approval of the EXIM Bank for Import Bank of India refinance15 Arbitrage Operations Banks prevented from undertaking arbitrage operations themselves and extending credit facilities for the purpose16 Margin Trading Minimum margin 50% and the shares should be in 27 dematerialized mode
  • 28. RISK MANAGEMENT AND INTERNAL CONTROLSYSTEMS 11/10/2012 Transparent policy Investment committee Suitable Risk Management Mechanism Suitable Audit committee Valuation and Disclosure 28
  • 29. CROSS HOLDING AMONG BANKS/FINANCIALINSTITUTIONS 11/10/2012 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 29
  • 30. MARGIN REQUIREMENTS 11/10/2012 Banks exposure to commodity markets Banks exposure in respect of currency derivative segment 30
  • 31. LIMITS ON EXPOSURE TO UNSECUREDGUARANTEES AND UNSECURED ADVANCE 11/10/2012 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. 31
  • 32. THANK YOU