Author - Bushra Quasmi

1. Bank’s POLICY
REGARDING
UNSECURED EXPOSURE
PRESENTED BY: BUSHRA QUASMI

2. What is Unsecured Exposure?
Exposure means the risk a bank have taken upon a customer. It can be in
shape of any banking facility whether funded or non-funded.
Unsecured Exposure is defined as an exposure where the realisable 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.
Alternatively, a loan not backed by realisable asset is called an unsecured
debt. The risk that bank undertakes is called unsecured exposure.

3. Exposure’ shall include all funded and non-funded exposures
(including underwriting and similar commitments). ‘Security’ will
mean tangible security properly charged to the bank and will not
include intangible securities like guarantees, comfort letters etc.
Advances for which intangible collaterals such as rights, licenses,
authority, etc. are charged in favour of the Bank in respect of
projects financed by the Bank, are reckoned as unsecured advances
in line with extant RBI guidelines.

4. Prudential Norms for Unsecured
Exposure
During the period between 1967 and 1994, private banks were
required to limit their commitments by way
of unsecured guarantees in 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.
On June 17, 2004, RBI via its Annual Policy statement for year 2004-
2005 while considering the demands of higher flexibility by the
banks deregulated its policy regarding unsecured exposures.

5. Bank’s Policy regarding Unsecured
Exposure
In between the period from 2004 till present date, bank boards have had the
freedom to chalk out their own policy on unsecured exposure limits within
the restriction placed in 2004 i.e. the banks were required to make an
unconditional provision of 10 per cent in the substandard category to
cover their expected loss.
The banks in formulating their unsecured exposure norms are guided by
their investment policy and inter-alia fix a ceiling for all investments they make
in respect of derivative contracts, banks evaluate credit exposure arising
therefrom in line with the RBI guidelines.

6. Unsecured exposure has been restricted to 35% of the bank’s outstanding total
exposure.
The general trend followed by private sector banks while formulating their
policy regarding unsecured exposure is as follows:
Highest priority is given to stock brokers and guarantees and loans given to
corporates.
Lowest Priority is given to venture Capital funds.
There is a concentration of advances. The Annual General Reports of banks
show that the largest percentage of advances are given to large borrowers.

7. This shows the trend that private bank invest mostly in financial organisations
as opposed to businesses.
Retail banking exposure is classified by taking into account the status of the
borrowers, nature of the product, granularity of the exposure and the quantum
thereof.
Unsecured Exposure in respect of infrastructure loan accounts where certain
safeguards such as escrow accounts are available is kept around 20% by SBI and
Credit exposures are managed through target market identification, appropriate
credit approval processes, post disbursement monitoring and remedial
management procedures.

8. Trends of Public Sector Bank
A major chunk of investment in venture capital funds and real economy and
businesses.
As opposed to private sector banks, advances to stock brokers are marginal. For
eg. SBI out of total advances of Rs. 8,031.87 Cr. Allocated rs.20-47 cr.
Underwriting commitments by both SBI and HDFC remained at nil.
Loan sanctioned to corporates by SBI was at 420.77 cr. While it was at Rs.
4994.17 out of total advances of Rs.9015.56 cr.

9. Advances pie chart for SBI
advances
stock broker corporate underwriting venture capital other

10. Advances Pie chart of HDFC bank
advances
stock brokers corporate underwriting venture capital others

11. Thank You.