RBI / 2005-2006 / 122

Ref: DBOD. No. FID. FIC.2 /01.02.00/2005-06

August 13, 2005

(Exim Bank, IDFC Ltd., IFCI Ltd., IIBI Ltd., NABARD, NHB, SIDBI and TFCI Ltd.)

Dear Sir,

2. This Master Circular is a compilation of all the instructions contained in the circulars issued by RBI on the above subject, which are operational as on the date of this circular.

Yours faithfully,

(K. Prasad)

Chief General Manager

F. Restructured Accounts The total amount of loan assets as also of the sub standard assets/ doubtful assets separately, which have been subjected to restructuring, etc should be disclosed. G.Assets Sold to Securitisation Company/ Reconstruction Company FIs which sell their financial assets to an SC/ RC, shall be required to make the following diclosures : a) Number of Accounts b) Aggregate value (net of provisions) of accounts sold to SC /RC c) Aggregate consideration d) Additional consideration realised in respect of accounts transferred in earlier years e) Aggregate gain / loss over net book value.

H. Forward Rate Agreements and Interest Rate Swaps

The FIs dealing in interest rate derivatives on exchanges may disclose as a part of the 'notes on accounts' to balance sheets the following details:

The FIs should disclose the details of the issuer composition of investments made through private placement and the non-performing investments in the ‘Notes on Accounts’ of the balance sheet, with effect from the year ending March 31, 2004 (June 30, 2004 in case of NHB) in the format furnished in the Annex I.

K. Consolidated Financial Statements

Extent of consolidation:

A parent, presenting the CFS, should consolidate the financial statements of all subsidiaries – domestic as well as foreign, except those specifically permitted to be excluded under the AS-21 the ICAI. The reasons for not consolidating a subsidiary should be disclosed in the CFS. The responsibility of determining whether a particular entity should be included or not for consolidation would be that of the Management of the parent entity. In case, its Statutory Auditors are of the opinion that an entity, which ought to have been consolidated, has been omitted, they should incorporate their comments in this regard in the 'Notes to Account'.

CFS should be prepared using uniform accounting policies for like transactions and other events in similar circumstances. (For the purpose, the FIs may rely on a Statement of Adjustments for non-uniform accounting policies furnished by the statutory auditors of the subsidiaries.) If it is not practicable to do so, that fact should be disclosed together with the proportions of the items in the consolidated financial statements to which the different accounting policies have been applied.

Best international practices require meaningful and appropriate disclosures of FIs' exposures to risk and their strategy towards managing the risk. FIs should make meaningful disclosures of their derivatives portfolio. A minimum framework for disclosures by FIs on their risk exposures in derivatives is furnished in Annex II. The disclosure format includes both qualitative and quantitative aspects and has been devised to provide a clear picture of the exposure to risks in derivatives, risk management systems, objectives and policies. FIs should make these disclosures as a part of the 'Notes on Accounts' to the Balance Sheet with effect from March 31, 2005 (June 30, 2005 in the case of National Housing Bank).

Notes:

1. The CRAR and other related parameters, determined as per the extant capital adequacy norms for the FIs, may be disclosed.
2. For the purpose of asset quality and credit concentration, the following should also be reckoned for determining the amount of loans and advances and the NPAs and included in the disclosures at B above :
(i) Bonds and Debentures : The bonds and debentures should be treated in the nature of advance when :

3. The "credit exposure" shall include funded and non-funded credit limits, underwriting and other similar commitments. The sanctioned limits or outstandings whichever is higher shall be reckoned for arriving at exposure limit. In case of term loans, however the exposure limit may be reckoned on the basis of actual outstandings plus undisbursed or undrawn commitments.

However, in cases where disbursements are yet to commence, exposure limit should be reckoned on the basis of the sanctioned limit or the extent upto which the FI has entered into commitments with the borrowing companies in terms of the agreement.

FIs should include in the non-funded credit limit, the forward contracts in foreign exchange and other derivative products like currency swaps, options, etc as per the extant exposure norms.

4. Capital funds for the purpose of credit concentration, would be the total regulatory capital as defined under capital adequacy standards ( i.e.Tier I and Tier II Capital ).

5. The definition of ' borrower group' would be the same as applied by the FIs in complying with group exposure norms.

6. For the maturity pattern of assets and liabilities, the bucketing of various items of assets and liabilities in the specified time buckets should be done in accordance with the RBI Guidelines on Asset Liability Management System, issued to FIs.
7. For operating results, the working funds and total assets may be taken as the average of the figures as at the end of the previous accounting year, the end of the succeeding half year and the end of the accounting year under report. (The "working funds" refer to the total assets of the FI.)
8. All permanent, full-time employees in all cadres should be reckoned for computing per employee net profit.

(As on the date of the balance sheet)

FIs shall discuss their risk management policies pertaining to derivatives with particular reference to the extent to which derivatives are used, the associated risks and business purposes served. The discussion shall also include:

the structure and organization for management of risk in derivatives trading,

the scope and nature of risk measurement , risk reporting and risk monitoring systems,

policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants, and

accounting policy for recording hedge and non-hedge transactions; recognition of income, premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit risk mitigation.

1. The net position may be shown either under asset or liability, as the case may be, for each type of derivatives.

2. FIs may adopt the Current Exposure Method prescribed vide Circular DBS.FID.No.C-12/01.02.00/2002-03 dated January 20,2003 on Measurement of Credit Exposure of Derivative Products. In brief the method to be adopted is as follows:

In order to calculate the credit exposure equivalent of off-balance sheet interest rate and exchange rate instruments under current exposure method, a FI would sum: