- to individual borrowers and group borrowers in India,

- to specific industry or sectors, and

- towards unsecured guarantees and unsecured advances.

- advances against shares, debentures & bonds, and

- investments in shares, debentures & bonds.

2.1.1 The credit exposure ceiling should be fixed in relation to bank's capital funds and it should not exceed 25 percent of capital funds in the case of individual borrowers including public sector undertakings upto March 31, 2000 and 20% from April 1, 2000; such credit should not exceed 50 percent in the case of group borrowers. Internationally, exposure ceilings are computed in relation to total capital as defined under capital adequacy standards (Tier I and Tier II Capital). Taking into account the best international practices, it has been decided to adopt the concept of capital funds as defined under capital adequacy standards for determining exposure ceiling uniformly both by domestic and foreign banks, effective from March 31, 2002. The exposure ceiling limits applicable from April 1, 2002 would be based on the capital funds in India as computed above. As the concept of capital funds has been broadened to represent total capital (Tier I and Tier II), it has been decided to adjust the exposure ceiling for single borrower from the existing 20 per cent to 15 per cent of capital funds effective from March 31, 2002. Similarly, the group exposure limits will be adjusted effective from March 31, 3003, to 40 per cent of capital funds.

2.1.2 Credit exposure to borrowers belonging to a group may exceed the exposure norm of 50 percent of the bank’s capital funds by an additional 10 percent (i.e. upto 60 percent), provided the additional credit exposure is on account of extension of credit to infrastructure projects (i.e. power, telecommunication, roads and ports). Since the group exposure limits will be adjusted effective from March 31, 2002, to 40 per cent of capital funds, this limit will be extendable by another 10 per cent i.e. upto 50 per cent effective from that date.

2.1.3 Lending under Consortium Arrangements

The exposure limits will be applicable to lending under consortium arrangements, wherever formalised.

2.2.1 Rehabilitation of Sick/Weak Industrial Units

The above ceilings on single/group exposure limits would not be applicable to existing/additional credit facilities (including funding of interest and irregularities) granted to weak/sick industrial units under rehabilitation packages.

2.2.2 Food credit

Borrowers to whom limits are allocated directly by the Reserve Bank, for food credit, will be exempt from the ceiling.

2.3.1 Capital Funds

Capital funds for the purpose will comprise paid-up capital and free reserves as per the published accounts as on 31^st March of the previous year Reserves, if any, created by way of revaluation of fixed assets etc. may be excluded for the purpose. As already mentioned in para 2.1.1, Capital Funds in India would comprise of Tier I and Tier II capital as defined under capital adequacy standards with effect from March 31, 2002.

2.3.2 In the case of foreign banks, the components of capital funds are defined as under:

1. Tier I & II capital (excluding revaluation reserves) as on 31 March of the previous year. Average outstanding foreign currency loans granted to Indian companies by the foreign banks and their wholly owned subsidiaries at the end of each month during the previous year ended March.

(cf. para 2 & 3 of circular 9 at Appendix B).

2. Average monthly outstanding for the previous year ended 31st March under the lines of credit granted to banks in India under PCFC and other schemes approved by the RBI.
3. Average monthly outstandings for the previous year ended 31st March under the foreign currency line of credit granted by the Head Office/other offices of the bank to the Indian branch under PCFC and other schemes approved by the RBI.

With effect from March 31, 2002 capital funds in India would comprise of Tier I & II capital as defined under capital adequacy standards.

2.3.3 Exposure

Exposure shall include credit exposure (funded and non-funded credit limits) and investment exposure (underwriting and similar commitments) as well as certain types of investments in companies. The sanctioned limits or outstandings, whichever are higher, shall be reckoned for arriving at exposure limit. However, in respect of non-funded credit limits, only 50 percent of such limits or outstandings, whichever is higher, need be taken into account for the purpose.

1. In line with international best practices it has been decided that non-fund based exposures should also be reckoned at 100 per cent effective from April 1, 2003.
2. At present, derivative products such as Forward Rate Agreements (FRAs) and Interest Rate Swaps (IRSs) are also captured for computing exposure by applying the conversion factors to notional principal amounts as per the original exposure method prescribed in Annexure 1 and 2 of our circular MPD.BC. 187/07.01/279/1999-2000 dated July 7, 1999. It has been decided that, effective from April 1, 2003, banks should also include forward contracts in foreign exchange and other derivative products like currency swaps, options, etc. at their replacement cost value in determining individual/group borrower exposure. The methodology to be adopted by banks for arriving at the replacement cost value is being advised separately.

2.3.4 Credit exposure comprises of the following elements:

2.3.6 Loans and advances granted against the security of bank’s own term deposits may be excluded from the purview of the exposure ceiling.

2.3.7 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. Banks/financial institutions are generally aware of the basic constitution of their clientele for the purpose of regulating their exposure to risk assets. The group to which a particular borrowing unit belongs, may, therefore, be decided by them on the basis of the relevant information available with them, the guiding principle being commonality of management and effective control.

2.3.8 For identifying the group to which a company registered under Section 26(2) of MRTP Act, 1969 belongs, a reference may be made to the Industrial House-wise list of companies registered under the Act. The relative list is given in Annexure 2.

2.3.9 In respect of borrowers not covered by the MRTP Act, the group affiliation may be decided by banks on the basis of the principle explained above.

2.3.10 In the case of a split in the group, if the split is formalised, 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.

2.4.1 An annual review of the implementation of exposure management measures may be placed before the Board of Directors before the end of June and a copy each of such review may be furnished for information to the Chief General Manager, Department of Banking Operations and Development, Reserve Bank of India, World Trade Centre, Mumbai and to the concerned Regional Offices of DBOD.

3.1.1 Specific Sectors

Apart from limiting the exposures to individual or Group of borrowers, as indicated above, the banks may also consider fixing internal limits for aggregate commitments to specific sectors e.g. textiles, jute, tea, etc. so that the exposures are evenly spread over various sectors. These limits could be fixed by the banks having regard to the performance of different sectors and the risks perceived. The limits so fixed may be reviewed periodically and revised, as necessary.

3.1.2 Exposure to Real Estate

Banks should frame comprehensive prudential norms relating to the ceiling on the total amount of real estate loans, single/group exposure limits for such loans, margins, security, repayment schedule and availability of supplementary finance and the policy should be approved by the bank's Board.

3.1.3 While framing the bank's policy, the guidelines issued by the Reserve Bank should be taken into account. Banks should ensure that the bank credit is used for productive construction activity and not for activity connected with speculation in real estate.

3.2.1 Banks should maintain a balanced portfolio of equipment leasing, hire purchase and factoring services vis-à-vis the aggregate credit. Their exposure to each of these activities should not exceed 10 percent of total advances.

3.3 Exposure to Indian Joint Ventures/Wholly-owned Subsidiaries Abroad

3.3.1 Banks are allowed to extend credit/non-credit facilities (viz. letters of credit and guarantees) to Indian Joint Ventures/Wholly-owned Subsidiaries abroad. Banks are also permitted to provide at their discretion, buyer's credit/acceptance finance to overseas parties for facilitating export of goods & services from India.

3.3.2 The above exposure will, however, be subject to a limit of 5 percent of the unimpaired Tier I capital. Higher limits could be considered by the Reserve Bank on merits.

3.3.3 While extending such facilities, banks will have to, inter alia, comply with

Section 25 of the Banking Regulation Act, 1949, in terms of which the assets in India of every banking company at the close of business on the last Friday of every quarter shall not be less than 75 percent of its demand and time liabilities in India. In other words, aggregate assets outside India should not exceed 25 percent of the bank's demand and time liabilities in India.

3.3.4 The banks should also comply with all existing safeguards/prudential guidelines relating to capital adequacy, and exposure norms indicated in paragraph 2.1, ibid.

*[For detailed instructions please see Master Circular dated August 28, 1998 on Bank Finance against Shares and Debentures and Circular DBOD BP.BC. 119/21.04.137/2000-01 dated May 11, 2001 on Bank Financing of Equities and Investments in Shares – Revised Guidelines.]

3.4.1 Statutory Limit on Shareholding in Companies

In terms of Section 19(2) of the Banking Regulation Act, 1949, 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, except as provided in sub-section (1) of Section 19 of the Act. Shares held in demat form should also be included for the purpose of determining the exposure limit. This is an aggregate holding limit for each company.

3.4.2 While granting any advance against shares, underwriting an issue of shares, or acquiring any shares on investment account or even in lieu of debt of any company, these statutory provisions should be strictly observed.

3.4.3 Regulatory Limits

There is also a regulatory stipulation that bank’s aggregate investment in shares, convertible debentures, bonds, etc. should not exceed 5 per cent of their total outstanding advances (including Commercial Paper) as on March 31 of the previous year. This ceiling of 5 per cent prescribed for investment in shares will henceforth apply to total exposure including both fund based and non-fund based to capital market in all forms. Certain types of loans and advances against shares are also treated as banks’ investment in shares for the purpose of observing this ceiling. Therefore, loans and advances against shares for specified purposes are to be clubbed with banks’ investment in shares, convertible debentures, bonds, etc. and the ceiling stipulation of 5 per cent is to be complied with. The details are given in para 5 below.

Within the above overall ceiling of 5 per cent for total exposure to market, the total investment in shares, convertible bonds and debentures and units of equity-oriented mutual funds by a bank should not exceed 20 per cent of its net worth.

3.4.4 Advances against Shares to Individuals

Loans at all the offices of a bank, against the security of shares, debentures and PSU bonds to individuals, if held in physical form should not exceed the limit of Rs. 10 lakh per borrower (individual) with margin of 40%.

3.4.5 If the securities are held in demat form, the loans at all the offices of a bank, should not exceed the limit of Rs. 20 lakhs per borrower (individual) with margin of 40%.

Banks may now grant advances for subscribing to IPOs to individuals. The maximum amount of finance that can be granted to an individual against IPO should be Rs. 10 lakh. The corporates should not be extended finance for investment in other companies’ IPOs and NBFCs should not be provided finance for further lending to individuals for IPOs. Finance extended by a bank for IPOs should be reckoned as an exposure to capital market and hence included within 5% of the bank’s total outstanding advances (including Commercial Paper) as on March 31 of the previous year.

(cf. para 7 of Circular 1 at Appendix A)

3.4.6 Banks should formulate with the approval of their Boards the Lending Policy for grant of advances to individuals against shares, debentures, bonds keeping in view RBI guidelines. As a prudential measure, the banks may also consider laying down appropriate limits of such advances.

3.4.7 Advances against units of Mutual funds

Advances against units of mutual funds including units of Unit-64 scheme would attract the quantum and margin requirements as applicable to advances against shares and debentures wherever stipulated.

3.4.8 Bank finance to employees to buy shares of their own companies

Banks may provide finance to employees of companies to buy shares of their own companies. The advance may be granted upto 90 percent of the purchase price of the shares but not exceeding Rs. 50,000/- or six months' salary of the employees, whichever is less.

3.4.9 Advances against Shares to Stock Brokers and Market Makers

The banks are free to provide credit facilities to stockbrokers and market makers on the basis of their commercial judgment, within the policy framework approved by their Boards. However, in order to avoid any nexus emerging between inter-connected stock broking entities and banks, the Board of each bank should fix, within the overall ceiling of 5 per cent of their total outstanding advances (including Commercial Paper) as on March 31 of the previous year a sub-ceiling for total advances to –

3.5.1 Loans sanctioned to corporates against the security of shares (as far as possible demat shares) for meeting promoter’s contribution to the equity of new companies in anticipation of raising resources, should be treated as bank’s investments in shares which would thus come under the ceiling of 5 per cent of the banks’ total outstanding advances (including Commercial Paper) as on March 31 of the previous year prescribed for bank’s total exposure including both fund based and non-fund based to capital market in all forms.

(cf. para 2 of Circular 1 at Appendix A).

3.5.2 These loans will also be subject to individual/group of borrowers exposure norms detailed in paragraph 2.1.1, ibid.

3.5.3 These loans will also be subject to statutory limit on shareholding in companies detailed in paragraph 3.4.1 above.

3.5.4 Under the refinance scheme of Export Import Bank of India, the bank may sanction term loans on merits for eligible Indian promoters for acquisition of equity in overseas joint ventures/ wholly owned subsidiaries, provided the term loans have been approved by the EXIM Bank for refinance.

3.6 Bridge Loans

3.6.1 Banks have been permitted to sanction bridge loans to companies for a period not exceeding one year against expected equity flows/issues. Such loans should be included within the ceiling of 5 per cent of the banks’ total outstanding advances (including Commercial Paper) as on March 31 of the previous year prescribed for total exposure including both fund based and non-fund based to capital market in all forms.

3.6.2 Banks should formulate their own internal guidelines with the approval of their Board of Directors for grant of such loans, exercising due caution and attention to security for such loans.

3.6.3 Banks may also extend bridge loans against the expected proceeds of Non-Convertible Debentures, External Commercial Borrowings, Global Depository Receipts and/or funds in the nature of Foreign Direct Investments, provided the bank is satisfied that the borrowing company has already made firm arrangements for raising the aforesaid resources/funds.

4.1.1 Banks have to limit their commitment by way of unsecured guarantees in such a manner that 20 percent of the bank’s outstanding unsecured guarantees plus the total of outstanding unsecured advances do not exceed 15 percent of total outstanding advances. Guarantees counter-guaranteed by another bank need not be taken into account for the purpose of the norm.

4.1.2 For the purpose of conforming to the above norm, guarantees covered by counter-guarantees of the Central Government and the State Governments, public sector financial institutions and insurance companies will be regarded as secured guarantees.

4.1.3 However, deferred payment guarantees should be backed by adequate tangible security or by counter-guarantees of the Central Government or the State Governments or public sector financial institutions, or by counter-guarantees of insurance companies or other banks, provided the counter-guarantees of insurance companies or other banks are themselves backed by adequate tangible security. Where the counter-guarantees by commercial banks are backed by adequate tangible securities, then all guarantees, including deferred payment guarantees, will be treated as secured guarantees.

4.1.4 In exceptional cases, the banks may give deferred payment guarantees on an unsecured basis for modest amounts to first class customers who have entered into deferred payment arrangements in consonance with Government policy. But such unsecured guarantees should be accommodated within the maximum ceiling limits.

5.1.1 Banks are allowed to invest in the –

• Ordinary shares of corporate bodies including other banks,
• Shares of public sector undertakings, and
• Convertible debentures of corporate bodies including other banks,

subject to a ceiling of 5 per cent of the banks’ total outstanding advances (including Commercial Paper) as on March 31 of the previous year. Within the above overall ceiling banks investment in shares convertible bonds and debentures and units of equity-oriented mutual funds should not exceed 20 per cent of its net worth. The banks are required to adhere to the ceiling on an ongoing basis and should exercise care to see that the limit is not exceeded.

5.1.2 The investment ceiling includes –

5.1.3 The investment ceiling excludes investments in -

5.1.4 Investments in shares and debentures/bonds, included in the 5 percent ceiling on investments or excluded from the ceiling, are to be reckoned for the purpose of arriving at the prudential norm of credit exposure for single borrower and group of borrowers as stipulated in paragraph 2.1.1 above.

5.1.5 The investments will include the acquisition through -

5.1.6 Purchase of shares and debentures in the secondary market (other than inter-bank transactions) should be only through recognised stock exchanges and registered stock brokers.

5.1.7 For the purpose of calculation of exposure norm, investments made by the banks in bonds and debentures of corporates which are guaranteed by a PFI, as per list given in Annexure 1, will be treated as an exposure by the bank on the PFI and not on the corporate.

5.1.8 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.

5.1.9 The PFI before guaranteeing the bonds/debentures should, however, take into account the overall exposure of the guaranteed unit to the financial system.

5.1.10 As indicated in paragraph 3.4.1 above, bank's investments in shares inclusive of lendings against shares have also to be subjected to statutory provisions contained in Section 19(2) whereby the aggregate holding in a company should not exceed 30 percent of the company's paid-up capital or 30 percent of the bank's paid-up capital and reserves, whichever is less.

5.1.11 In order to encourage the flow of finance for venture capital, the bank’s investment in venture capital (including units of dedicated Venture Capital Funds meant for Information Technology) would be over and above the ceiling of 5 per cent of the banks’ total outstanding advances (including Commercial Paper) as on March 31 of the previous year. This would, however, be subject to the condition that the venture capital funds/ companies are registered with SEBI.

5.1.12 A high level of cross holding of subordinated debt instruments (issued by banks and financial institutions to raise Tier II capital) among banks and financial institutions, does not necessarily lead to accretion of capital to the financial system. As such, a bank's investment in Tier II bonds issued by other banks and financial institutions shall be permitted upto 10 percent of the investing bank's total capital. The total capital for this purpose will be same as that reckoned for the purpose of capital adequacy.

5.1.13 Investments by banks in the subordinated debts of other banks shall also be subject to the ceiling of 5 percent applicable to investments in shares and debentures of corporate bodies.

5.2.1 Generally, there are demands on the banks for underwriting the issues of shares and debentures. In order to ensure that there is no over exposure to underwriting commitments to earn fees, the Reserve Bank has laid down the following guidelines which the banks should strictly follow:

5.2.2 The statutory provision contained in Section 19(2) & (3) of the Banking Regulation Act, 1949 regarding holding of shares in any company as pledgee/mortgagee or absolute owner, should be strictly adhered to.

5.2.3 The banks have to ensure that the shares/debentures including PSU equities and shares of other banks, Mutual Funds (the corpus of which is not exclusively invested in corporate debt instruments), the units of UTI subscribed and/or devolving on them as a part of their underwriting obligations in any particular year do not exceed 5 per cent of the banks’ total outstanding advances (including Commercial Paper) as on March 31 of the previous year.

5.2.4 It may be noted that the limit placed is on the shares and debentures that may be held in the bank’s own portfolio as a result of devolvement and not on the amount of underwriting that the bank may engage in. Normally, the amount of underwriting is a multiple of the amount which devolves finally.

5.2.5 The banks are required to adhere to the ceiling of 5 per cent of the total outstanding advances (including Commercial Paper) as on March 31 of the previous year on an ongoing basis. Banks should exercise care to see that the limit is not exceeded.

5.2.6 The ceiling of 5 percent does not include investments in preference shares and non-convertible debentures/bonds of private corporate bodies. The ceiling excludes investment in venture capital including units of dedicated venture capital funds meant for Information Technology.

5.2.7 The ceiling excludes investments in units of Mutual Funds under schemes where the corpus is invested exclusively in debt instruments.

5.2.8 Investments including underwriting devolvements in equities/bonds issued by the All India Financial Institutions, mentioned in Annexure 1, would be outside the ceiling of 5 percent prescribed for investments in shares (including PSU equities) and debentures of corporate bodies.

5.2.9 The underwriting exposure to any company which will include other funded and non-funded credit limits should not exceed 20 percent of capital funds of the bank in the case of a single company and 50 percent (upto 60 percent, provided the additional credit exposure is on account of extention of credit to infrastructure project) in the case of group of companies. The non-funded limits may be taken at 50 percent of the limit or outstandings, whichever is higher.

5.2.10 While taking up underwriting commitments, banks or their subsidiaries, should ensure that the aggregate of such commitments are included in the exposure limits fixed by the Reserve Bank.

5.2.11 In the case of underwriting, the commitments under a single obligation should be fixed taking into account the owned funds of banks or their subsidiaries and the capacity to meet the commitments that may devolve and should not in any case exceed 15 percent of an issue.

5.2.12 Banks should consider sub-underwriting for every underwritten issue so as to minimise chances of devolution on their own account. This is not mandatory. The need for and extent of such sub-underwriting is a matter of the bank’s discretion.

5.2.13 As part of merchant banking activities, while taking up underwriting obligations, banks should carefully evaluate the proposals so as to ensure that the issues will have adequate public response and the prospect of devolution of such shares/debentures on the underwriting banks will be minimal.

5.2.14 Banks should ensure that the portfolio is diversified and that no unduly large underwriting obligations are taken up in the shares and debentures of a company or a group of companies. Banks should make enquiries regarding the other underwriters and their capacity to fulfil the obligations.

5.2.15 Banks should formulate within the above parameters, their own internal guidelines as approved by their Boards of Directors on investments in corporate shares/debentures of companies or group of companies including norms to ensure that excessive investment in any single company is avoided and that due attention is given to the maturity structure and quality of such investments.

5.3.1 Banks should not underwrite issue of Commercial Paper by any Company, Primary Dealer or Satellite Dealer.

5.3.2 Banks should not extend Revolving Underwriting Facility to short-term Floating Rate Notes/Bonds or debentures issued by corporate entities.

5.3.3 An annual review covering the underwriting operations taken up during the year, with company-wise details of such operations, the shares/debentures devolved on the banks, the loss (or expected loss) from unloading the devolved shares/debentures indicating the face-value and market value thereof, the commission earned, etc. may be placed before their Boards of Directors within 2 months of the close of the fiscal year.

5.4.1 Banks can play a useful role in relation to issue of bonds by public sector undertaking by underwriting a part of these issues.

5.4.2 However, it should be kept in view that the major responsibility of the banks is to meet the growing credit needs, especially of working capital of industrial, export and priority sectors. This should not be lost sight of by the banks while undertaking new activities.

5.4.3 Banks should subject the proposals for underwriting to proper scrutiny having regard to all the relevant factors and accept such commitments only on well reasoned commercial considerations with the approval of the appropriate authority.

5.4.4 With a view to enabling the banks to deploy their surplus funds more remuneratively, the banks will have the freedom to acquire PSU bonds including through underwriting devolvements without any ceiling.

5.4.5 However, the banks should formulate their own internal guidelines as approved by their Boards of Directors on investments in and underwriting of PSU bonds, including norms to ensure that excessive investment in any single PSU is avoided and that due attention is given to the maturity structure of such investments. Banks would also need to take into account that such investments are subject to risk weight and necessary depreciation has to be fully provided for.

5.4.6 Further, such investments in PSU bonds including shares and debentures and subscription to Commercial Papers of PSUs should be reckoned for the purpose of arriving at prudential norms of credit exposure for single borrower and group of borrowers.

5.4.7 Banks should undertake an annual review of the underwriting operations relating to bonds of the public sector undertakings, with PSU-wise details of such operations, bonds devolved on the banks, the loss (or expected loss) from unloading the devolved bonds indicating the face-value and market value thereof, the commission earned, etc. and place the same to their Boards of Directors within two months from the close of the fiscal year.

5.5.1 Reserve Bank has observed that some banks/their subsidiaries are providing buy-back facilities under the name of ‘Safety Net’ Schemes in respect of certain public issues as part of their merchant banking activities. Under such schemes, large exposures are assumed by way of commitments to buy the relative securities from the original investors at any time during a stipulated period at a price determined at the time of issue, irrespective of the prevailing market price.

5.5.2 In some cases, such schemes are being offered suo motto without any request from the company whose issues are supported under the schemes. Apparently, there is no undertaking in such cases from the issuers to buy the securities. There is also no income commensurate with the risk of loss built into these schemes, as the investor will take recourse to the facilities offered under the schemes only when the market value of the securities falls below the pre-determined price.

5.5.3 Banks/their subsidiaries should refrain from offering such ‘Safety Net’ facilities by whatever name called.

5.5.4 In some cases, the issuers provide buy-back facilities to original investors upto Rs. 40,000/- in respect of non-convertible debentures after a lock-in-period of one year to provide liquidity to debentures issued by them.

5.5.5 If, at the request of the issuers, the banks or their subsidiaries find it necessary to provide additional facilities to small investors subscribing to new issues, such buy-back arrangements should not entail commitments to buy the securities at pre-determined prices. Prices should be determined from time to time, keeping in view the prevailing stock market prices for the securities. Commitments should also be limited to a moderate proportion of the total issue in terms of the amount and should not exceed 20 percent of the owned funds of the banks/their subsidiaries. These commitments will also be subject to the overall exposure limits which have been or may be prescribed from time to time.