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Inter-bank guarantees allowed

Mumbai, April 7: The Reserve Bank of India (RBI) today permitted banks and financial institutions (FIs) to issue guarantees favouring their peers — other banks — provided they meet an elaborate set of conditions.

In a circular issued to chief executives of all scheduled commercial banks, the central bank said the measure has been implemented in tune with the liberalisation and deregulation of banking sector and in view of the adoption of new risk-management systems.

Before they start extending guarantees, the board of directors has been told to assess the integrity/ robustness of the bank’s risk management systems and accordingly put in place a well-laid out policy on this count.

The surety policy, approved by the board, should, among things, address issues that covers prudential limits, nature and extent of security and margins, delegation of powers, reporting system and periodical reviews.

The central bank pointed out that the guarantee shall be extended only in respect of borrower constituents and to enable them to avail of additional credit facility from other banks/FIs/lending agencies. The guaranteeing bank shall assume a funded exposure of at least 10 per cent of the loan amount guaranteed.

RBI has also asked banks not to extend guarantees or letters of comfort in favour of overseas lenders, including those assigned to them, except relaxation granted under the Foreign Exchange Management Act.

The guarantee issued will be an exposure on the borrowing entity on whose behalf the guarantee has been issued; it will have to carry appropriate risk weights.

Moreover, banks extending credit facilities against the guarantees issued by other banks/financial institutions should ensure strict compliance with various conditions. The exposure assumed by the bank against the guarantee of another bank/FI will be deemed as an exposure on the guaranteeing bank/institution.

Credit facilities extended against guarantees issued by other banks should be reckoned within the inter-bank exposure limits prescribed by the board of directors, the RBI said.

“Since the exposure assumed by the bank against the guarantee of another bank/FI will be for a fairly longer term than those assumed on account of inter bank dealings in the money, foreign exchange and securities markets, the board of directors should fix an appropriate sub-limit for long-term exposures since these exposures attract greater risk,” the central bank said.

Banks have also been told to monitor the exposure assumed on the guaranteeing bank/FI on a continuous basis and ensure strict compliance with the prudential limits/sub limits prescribed by the board for banks and the prudential single borrower limits prescribed by the RBI for FIs.

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