RBI/2004/ 107
Ref: DBS.FID. No. C- 4 /01.02.00/2004-05

August 9, 2004

Dear Sir,

Please refer to the Master Circular No. DBS.FID.No. C- 7 /01.02.00/2003-04 dated August 7, 2003 consolidating instructions/ guidelines issued to FIs till 30 June 2003 on matters relating to Exposure norms in the published annual reports.. The Master Circular has been suitably updated by incorporating instructions issued till date and has also been placed on the RBI web-site (http://www.rbi.org.in).

2. It may be noted that the instructions contained in circulars listed in Part A, as well as the relevant paragraphs indicated in column 5 of Part B of the Appendix have been consolidated in this master circular.

Yours faithfully,

(S.S. Gangopadhyay)
Chief General Manager

Master Circular – Exposure Norms for the Financial Institutions

1. Introduction

On a review of the credit exposures of the term lending institutions in 1997, it was considered advisable to prescribe credit exposure limits for them in respect of their lending to individual / group borrowers. Accordingly, as a prudential measure, aimed at better risk management and avoidance of concentration of credit risks, it was decided in June 1997 by Reserve Bank of India to limit a term lending institution's exposures to an individual borrower and group borrowers and credit exposure norms were prescribed for them. These norms are to be considered as a part of prudent credit management system and not as a substitute for efficient credit appraisal, monitoring and other safeguards. In respect of existing credit facilities to borrowers which were in excess of the ceilings initially prescribed, term lending institutions were required to take necessary steps to rectify the excess and comply with the stipulations, within a period of one year from June 28, 1997, the date of the first circular, and to bring such cases to the notice of their Board of Directors.

2. Scope and applicability

2.1 The exposure norms are also applicable to the refinancing institutions (viz., NABARD, NHB and SIDBI) but in view of the refinance operations being the core function of these institutions, their refinance portfolio is not subject to these exposure norms. However, from the prudential perspective, the refinancing institutions are well advised to evolve their own credit exposure limits, with the approval of their Board of Directors, even in respect of their refinancing portfolio. Such limits could, inter alia, be related to the capital funds / regulatory capital of the institution. Any relaxation / deviation from such limits, if permitted, should be only with the prior approval of the Board.

2.2 These norms deal with only the individual borrower and group borrower exposures but not with the sector / industry exposures. The FIs may, therefore, consider fixing internal limits for aggregate commitments to specific sectors e.g., textiles, chemicals, engineering, etc., so that the exposures are evenly spread. These limits should be fixed having regard to the performance of different sectors and the perceived risks. The limits so fixed may be reviewed periodically and revised, if necessary.

2.3 These stipulations shall apply to all borrowers. However, in so far as public sector undertakings are concerned only single borrower exposure limit would be applicable.

2.4 The norms have evolved over the years and various aspects of the credit exposure norms applicable to FIs are detailed in the following paragraphs.

3. Definitions

3.1 ‘Capital Funds’ : The total regulatory capital (i.e., Tier 1 + Tier 2 capital) of the FI, determined as per the capital adequacy norms of RBI applicable to the FIs, as on March 31 (June 30 in case of NHB) of the previous year, would constitute the ‘capital funds’ for the purpose of exposure norms. (The aforesaid definition of ‘capital funds’ came into force from April 1, 2002. From this date, the exposure ceilings were to be monitored with reference to the revised definition of capital funds as obtaining on March 31, 2002. Prior to that date, the ‘capital funds’ were defined as (paid up capital + free reserves) as per the published accounts but the reserves created by way of revaluation of fixed assets, etc., were to be excluded.)

3.2 ‘Infrastructure Projects’ / ‘Infrastructure Lending’: Any credit facility in whatever form extended by the FIs to an infrastructure facility as specified below falls within the definition of "infrastructure lending". In other words, it is a credit facility provided to a borrower company engaged in:

• developing or
• operating and maintaining, or
• developing, operating and maintaining

any infrastructure facility that is a project in any of the following sectors:

3.3 ‘Group’ Borrowers : The concept of 'Group' and the task of identification of the borrowers belonging to specific industrial groups is to be based on the perception of the FIs. FIs are, it is observed, 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 in this regard being commonality of management and effective control.

3.4 Net Owned Funds in respect of NBFCs : Net owned Fund will consist of paid up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets. From the aggregate of items will be deducted accumulated loss balance and book value of intangible assets, if any, to arrive at owned funds. Investments in shares of other NBFCs and in shares, debentures of subsidiaries and group companies in excess of ten percent of the owned fund mentioned above will be deducted to arrive at the Net Owned Fund. The NOF should be computed on the basis of last audited Balance Sheet and any capital raised after the Balance Sheet date should not be accounted for while computing NOF.

4. Prudential Norms

4.1 Exposure Ceilings

4.1.1 For single / individual borrowers:

i. The credit exposure to single borrowers shall not exceed 15 per cent of capital funds of the FI. However, the exposure may exceed by additional five percentage points (i.e., up to 20 per cent) provided the additional credit exposure is on account of infrastructure projects. FIs may, in exceptional circumstances, with the approval of their Boards, consider enhancement of the exposure to a borrower up to a further 5 per cent of capital funds (i.e. 25 per cent of capital funds for infrastructure projects and 20 percent for other projects)

ii. The credit exposure to the borrowers belonging to a group shall not exceed 40 per cent of capital funds of the FI. However, the exposure may exceed by additional ten percentage points (i.e., up to 50 per cent) provided the additional credit exposure is on account of infrastructure projects. FIs may, in exceptional circumstances, with the approval of their Boards, consider enhancement of the exposure to a borrower up to a further 5 per cent of capital funds (i.e. 55 per cent of capital funds for infrastructure projects and 45 percent for other projects)

[The exposure ceilings stipulated initially in 1997 were 25 per cent and 50 per cent of the capital funds of the FIs for the individual and group borrowers, respectively. In September 1997, an additional exposure of up to 10 percentage points for the group borrowers (i.e., up to 60 per cent) was permitted provided the additional credit exposure was on account of infrastructure projects (which at that time were narrowly defined as only power, telecommunication, roads and ports). In November 1999, with a view to moving closer to the international standard of 15 per cent exposure ceiling, the individual borrower exposure ceiling was reduced, with effect from April 1, 2000, from 25 per cent to 20 per cent of capital funds. The FIs which had, as on October 31, 1999, exposures in excess of the reduced limit of 20 per cent, were permitted to reduce their exposures to the level of 20 per cent latest by October 31, 2001. In June 2001, the exposure ceilings for the individual and group borrowers were reduced from 20 per cent and 50 per cent to 15 per cent and 40 per cent, respectively, with effect from April1, 2002 , but the additional exposure in respect of group borrowers, of up to 10 percentage points on account of infrastructure projects was continued. In February 2003, an additional exposure of up to five percentage points (i.e., up to 20 per cent) on account of infrastructure projects was permitted in respect of individual borrowers also.

4.1.3 For bridge loans / Interim finance

With effect from January 23, 1998, the restriction on grant of bridge loans by the FIs against expected equity flows / issues has been lifted. Accordingly FIs may henceforth grant bridge loan / interim finance to companies other than NBFCs against public issue of equity whether in India or abroad, for which appropriate guidelines should be laid down by the Board of the Financial Institution, as prescribed by RBI. However, FIs should not grant any advance against Rights issue irrespective of the source of repayment of such advance.

FIs may sanction bridge loans to companies for commencing work on projects pending completion of formalities only against their own commitment and not against loan commitment of any other FIs/ Banks. However, FIs may consider sanction of bridge loan / interim finance against commitment made by a financial institution and / or another bank only in cases where the lending institution faces temporary liquidity constraint, subject to certain conditions prescribed by RBI.

These restrictions are also applicable to the subsidiaries of FIs for which FIs are required to issue suitable instructions to their subsidiaries.

4.1.4 Working capital finance

There is no objection to FIs extending working capital finance on a very selective basis to borrowers enjoying credit limits with banks, whether under a consortium or under a multiple banking arrangement, when the banks are not in a position to meet the credit requirements of the borrowers concerned on account of temporary liquidity constraints. The FIs should take into account these guidelines while granting short term loans to borrowers enjoying credit limits with banks on a consortium basis. In case of borrowers whose working capital is financed under a multiple banking arrangement, the FI should obtain an auditor's certificate indicating the extent of funds already borrowed, before considering the borrower for further working capital finance.

4.1.5 Revolving underwriting facility

FIs should not extend Revolving Underwriting Facility to Short Term Floating Rate Notes/ Bonds or Debentures issued by corporate entities.

4.1.6 Lending to Non Banking Financial Companies (NBFCs)

With effect from May 21, 1997 the quantitative limits in the form of multiples of Net Owned Funds have been removed in respect of aggregate lending by all FIs taken together for Equipment Leasing & Hire Purchase Companies and Loan & Investment Companies which have complied with Reserve Bank's requirement of registration, credit rating and prudential norms and have been so certified by the Reserve Bank. The overall ceiling for borrowing (upto ten times of NOF) has also been removed for equipment and hire purchase NBFCs which meet the aforesaid three criteria and are also certified by the RBI. However such lending would be subject to compliance with single and group borrower exposure norms. For NBFCs which have not complied with the above requirements and the Residuary Non Banking Companies (RNBCs), overall limit of aggregate credit from all FIs taken together is furnished below:

Sr No.

A

B

C

Fls are also advised that finance by them shall not be provided to NBFCs for the following activities:

a. Bills discounted/rediscounted by NBFCs except those arising from sale of commercial vehicles including light commercial vehicles subject to normal lending safeguards.
b. Investments made by NBFCs in shares, debentures, etc., of a current nature (i.e. stock-in-trade);
c. Investments of NBFCs in and advances to subsidiaries, group companies or other entities, and
d. Investments of NBFCs in, and inter-corporate loans/deposits to/ in other companies.

Further, it is advised that Fls should not sanction bridge loans and loans of a bridging nature in any form to any category of NBFCs (Including RNBCs) including against capital/ debenture issues.

4.1.7 Investment in Debt Securities 

1. Security Receipts (SRs) issued by Securitisation Companies / Reconstruction Companies registered with RBI in terms of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002; and
2. Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS) which are rated at or above the minimum investment grade.

4.2	Level of Exposure

4.2.1 The sanctioned limits or outstandings whichever is higher shall be reckoned, in respect of the funded as well as non-funded facilities, for arriving at the level of exposure. The "credit exposure" shall include funded and non-funded credit limits, underwriting and other similar commitments. The exposure on account of derivative products should also be reckoned for the purpose.

4.2.3 For the purpose of determining the level of exposure, the following instruments should also be reckoned:

(i) Bonds and Debentures in the nature of advance : The bonds and debentures should be treated in the nature of advance when :

• The debenture / bond is issued as part of the proposal for project finance and the tenor of the bond / debenture is for three years and above.
  and
• The FI has a significant stake (i.e. 10% or more) in the issue
  and
• The issue is a part of private placement i.e. the borrower has approached the FI, and not part of a public issue where the FI has subscribed in response to an invitation.
  

(ii) Preference Shares in the nature of advance : The preference shares, other than convertible preference shares , acquired as part of project financing and meeting the criteria as at (i) above.

(iii) Deposits : The deposits placed by the FIs with the corporate sector .

4.2.5.1 Methodology for calculation of replacement cost

5. Exposure in respect of bonds guaranteed by Public Financial Institutions (PFIs)

The investments made by the banks in the bonds and debentures of corporates which are guaranteed by a PFI listed in the Annexure 2, will be treated as an exposure of the bank on the PFI and not on the corporate. Guarantees issued by a PFI to the bonds of the corporates will be treated as an exposure of the PFI to the corporate whereas the exposure of the bank on the PFI guaranteeing the corporate bond will be to the extent of 100 per cent of the bank’s investment. Initially, such exposures of the PFI to the corporate were required to be reckoned to the extent of 50 per cent of the value of such guarantees, being non-funded exposure, but with effect from April 1, 2003, such exposure are also required to be reckoned at 100 per cent of the value of such guarantees.

The PFIs are also required to take into account the overall exposure of the guaranteed unit to the financial system before guaranteeing the bonds / debentures.

In terms of RBI instructions vide Circular IECD.No./08.12.01/ 2001-02 dated February 20, 2002, banks have been permitted to extend guarantees in respect of infrastructure projects in favour of other lending institutions provided the bank issuing the guarantee takes a funded share in the infrastructure project at least to the extent of five per cent of the project cost and undertakes normal credit appraisal, monitoring and follow up of the project. For the purpose of exposure norms, the entire loan transaction should be reckoned as an exposure on the borrowing entity and not on the bank guaranteeing the loan, so as to correctly reflect the degree of credit concentration. In case the funded facility is by way of a term loan, the level of exposure should be reckoned, as indicated below:

• Before commencement of disbursement, the exposure would be the sanctioned limit or the extent up to which the FI has entered into commitment with the borrowing entity in terms of the agreement, as the case may be;

• After commencement of disbursement, the exposure would be the aggregate of the outstanding amount plus the undisbursed or undrawn commitment.

An annual review of the implementation of exposure management measures may be placed before the Board of Directors before the end of June every year. A copy of the review may be furnished for information to the Chief General Manager, Financial Institutions Division, department of banking Supervision, Reserve Bank of India, Central Office, "The Arcade", World Trade Centre, Cuffe Parade, Colaba, MUMBAI – 400 005.

As a prudential measure aimed at better risk management and avoidance of concentration of credit risks, in addition to prudential limits on exposure of the solo entities, the FIs at the group-wide level should also adhere to the following prudential limits, on an ongoing basis from the year beginning April 1, 2003 (July 1, 2003 in case of NHB):

The 'capital funds' of the Group for the purpose of exposure norms would be the same as reckoned for the purpose of group-wide capital adequacy. The measurement of credit exposure at the group level should be done in the same manner as prescribed for the FIs on a solo basis.

1.1 These guidelines apply to the FIs’ investments in debt instruments, both in the primary market (public issue as also private placement) as well as the secondary market, in the following categories:

1. debt instruments issued by companies, banks, FIs and State and Central Government sponsored institutions, SPVs, etc.;
2. debt instruments/ bond issued by Central or State Public Sector Undertakings, with or without government guarantee;
3. units of debt-oriented schemes of Mutual Funds i.e., the schemes whose major part the corpus is invested in debt securities;
4. Capital gains bonds and the bonds eligible for priority sector status;

1.2 The guidelines, however, do not apply to the following categories of investments of the FIs:

1. government securities and the units of Gilt Funds;
2. securities which are in the nature of advance under the extant prudential norms of RBI;
3. units of the equity oriented schemes of Mutual Funds, viz., the schemes wherein a major part of their corpus is invested in equity shares;
4. units of the "Balanced Funds", which invest in debt as well as equities, provided a major part of the corpus is invested in equity shares. In case of predominance of investments in debt securities by the Fund, these guidelines would be attracted.
5. Units of venture capital funds and the money market mutual funds;
6. Commercial Paper; and
7. Certificates of Deposits

While these guidelines would come into force with effect from April 1, 2004, considering the time required by the issuers of debt securities to get their existing unlisted debt issues listed on the stock exchanges, the following transition time is being provided:

1. Investment in units of mutual fund schemes where the entire corpus is invested in non-government debt securities would be outside the purview of the above guidelines till December 31, 2004; thereafter, such investments would also attract these guidelines.
2. With effect from January 1, 2005, investment in units of such schemes of mutual fund as have an exposure to unlisted debt securities of less than 10 per cent of the corpus of the scheme would be treated on par with listed securities for the purpose of the prudential limits prescribed at para 6 below. Thus, till December 31, 2004, investments in such units would attract the prudential limits.
3. The FIs may invest until March 31, 2004 in the existing unlisted securities, which were issued on or before November 30, 2003. In case, the issuers have applied to the stock exchange(s) for listing of such unlisted securities and the security is rated as minimum investment grade, the FIs may continue to invest in such unlisted securities even after March 31, 2004 but only until December 31, 2004.
4. As regards the unlisted securities issued after November 30, 2003, the FIs may invest, till December 31, 2004, up to 10 per cent of the incremental investments in the categories covered under these guidelines over the corresponding figure of outstanding investments as on November 30, 2003.
5. With effect from January 1, 2005 only those FIs would be eligible to make fresh investments (up to the prescribed prudential limits) in the unlisted securities covered in these guidelines whose investments in such securities are within the prudential limits prescribed.

3.1 Rated security: A security will be treated as rated if it is subjected to a detailed rating exercise by an external rating agency in India which is registered with SEBI and is carrying a current or valid rating. The rating relied upon will be deemed to be current or valid if:

1. The credit rating letter relied upon is not more than one month old on the date of opening of the issue, and
2. The rating rationale from the rating agency is not more than one year old on the date of opening of the issue, and
3. The rating letter and the rating rationale are a part of the offer document.
4. In the case of secondary market acquisition, the credit rating of the issue should be in force and confirmed from the monthly bulletin published by the respective rating agency.

3.2 Unrated security: Securities, which do not have a current or valid rating by an external rating agency, would be deemed as unrated securities.

3.3 Listed debt security: It is a security, which is listed on a stock exchange. If not so listed, it is an ‘unlisted’ debt security.

3.4 Non performing investment (NPI): For the limited purpose of these guidelines, an NPI (similar to a non performing advance (NPA) is one where:

i) In respect of fixed / predetermined income securities, interest / principal / fixed dividend on preference shares (including maturity proceeds) is due and remains unpaid for more than 180 days.

ii) The equity shares of a company have been valued at Re. 1/- per company, on account of the non-availability of the latest balance sheet (as per the instructions contained in para 26 of the Annexure to circular DBS.FID. No.C-9/01.02.00/ 2000-01 dated November 9, 2000)

iii) If any credit facility availed by the issuer of the security is classified as NPA in the books of the FI, investment in any of the securities issued by the same issuer would also be treated as NPI.

4.1 The FIs must not invest in unrated debt securities but only in rated ones, which carry a minimum investment grade rating from a credit rating agency registered with SEBI.

4.2 The investment grade rating should have been awarded by an external rating agency, operating in India, as identified by the IBA/ FIMMDA. The list of such agencies would also be reviewed by IBA / FIMMDA at least once a year.

4.3 The FIs should not invest in debt securities of original maturity of less than one-year other than Commercial Paper and Certificates of Deposits, which are covered under the RBI guidelines.

4.4 The FIs should undertake usual due diligence in respect of investments in debt securities including the securities which do not attract these guidelines.

4.5 The FIs should ensure that all fresh investments in debt securities are made only in listed debt securities of companies, which comply with the requirements of the SEBI circular No. SEBI/MRD/SE/AT/36/2003/30/9 dated September 30, 2003, except to the extent indicated in paragraph 3.5 below.

4.6 The unlisted debt securities in which the FIs may invest up to the limits specified in paragraph 6 below, should be rated and disclosure requirements as prescribed by the SEBI for listed companies should be followed by the issuer company.

Since the debt securities are very often a credit substitute, the FIs would be well advised to:

1. subject all their investment proposals relating to debt securities to the same standards of credit appraisal as for their credit proposals, irrespective of the fact that the proposed investments may be in rated securities;
2. make their own internal credit analysis and assign internal rating even in respect of externally rated issues and not to rely solely on the ratings of external rating agencies; and
3. strengthen their internal rating systems which should also include building up of a system of regular (quarterly or half-yearly) tracking of the financial position of the issuer with a view to ensuring continuous monitoring of the rating migration of the issuers / issues.

The total investment in the unlisted debt securities should not exceed 10 per cent of the FIs’ total investment in debt securities, which fall within the ambit of these guidelines, as on March 31(June 30 in case of NHB), of the previous year. However, the investment in the following instruments will not be reckoned as 'unlisted debt securities' for monitoring compliance with the above prudential limits:

iii. Security Receipts (SRs) issued by Securitisation Companies / Reconstruction Companies registered with RBI in terms of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002; and

iv. Asset Backed Securities (ABS) and Mortgage Backed Securities (MBS) which are rated at or above the minimum investment grade.

6.2 The FIs which have exposure to investments in debt securities in excess of the prudential limit prescribed at para 6.1 above as on March 31, 2003 (June 30, 2003 in case of NHB) should not make any fresh investment in such securities till they ensure compliance with the above prudential limit.

6.3 As a matter of prudence, the FIs should stipulate, with the approval of the Board, minimum ratings / quality standards and industry-wise, maturity-wise, duration-wise, issuer-wise, etc., exposure limits, for acquiring exposure in debt securities, which fall within the ambit of these guidelines, to address the concentration risk and the risk of illiquidity.

7.1 The FIs should ensure that their investment policies, duly approved by the Board of Directors, are formulated duly taking into account all the relevant aspects specified in these guidelines. The FIs should put in place proper risk management systems for capturing and analysing the risk in respect of investment in debt securities and for taking timely remedial measures. The FIs should also put in place appropriate systems to ensure that investment in privately placed instruments is made in accordance with the systems and procedures prescribed under the FI’s investment policy.

7.2 The Board should put in place a monitoring system to ensure that the prudential limits prescribed in paragraphs 6 above are scrupulously complied with, including the system for addressing the breaches, if any, due to rating migration.

7.3 Boards of the FIs should review, twice a year, the following aspects of investment in debt securities covered by these guidelines:

• Total turnover (investment and divestment) during the reporting period;
• Compliance with the RBI-mandated prudential limits as also those prescribed by the Board for such investments;
• Rating migration of the issuers / securities held in the books of the FIs and consequent diminution in the portfolio quality; and
• Extent of non-performing investments in the fixed income category.

8.1 In order to help in the creation of a central database on private placement of debt, the investing FIs should file a copy of all offer documents with the Credit Information Bureau (India) Ltd. (CIBIL). When the FIs themselves raise debt through private placement, they should also file a copy of the offer document with CIBIL.

8.2 Any default relating to payment of interest / repayment of instalment in respect of any privately placed debt should also be reported to CIBIL by the investing FIs along with a copy of the offer document.

8.3 The FIs should also report to the RBI such particulars in respect of their investments in unlisted securities as may be prescribed by RBI from time to time.

As per the SEBI guidelines, all trades, with the exception of the spot transactions, in a listed debt security, shall be executed only on the trading platform of a stock exchange. In addition to complying with the SEBI guidelines, the FIs should ensure that all spot transactions in listed and unlisted debt securities are reported on the NDS and settled through the Clearing Corporation of India Limited (CCIL) from a date to be notified by RBI.

(Cf. Para 5)

1. Industrial Credit and Investment Corporation of India Ltd.(Since merged with the ICICI Bank limited)
2. Industrial Finance Corporation of India Ltd.
3. Industrial Development Bank of India
4. Industrial Investment Bank of India Ltd.
5. Tourism Finance Corporation of India Ltd.
6. Risk Capital and Technology Finance Corporation Ltd.
7. Technology Development and Information Company of India Ltd.
8. Power Finance Corporation Ltd.
9. National Housing Bank.
10. Small Industries Development Bank of India
11. Rural Electrification Corporation Ltd.
12. Indian Railways Finance Corporation Ltd.
13. National Bank for Agriculture and Rural Development.
14. Export import Bank of India.
15. Infrastructure Development Finance Company Ltd.
16. Housing and Urban Development Corporation Ltd.

 Part B: 	
List of other circulars containing instructions related / relevant to Exposure Norms incorporated in the Master Circular