Mumbai, Feb. 20: The Reserve Bank (RBI) today announced guidelines for banks on country risk management (CRM). Local banks have been told to make provisions with effect from the year ending March 2003 on the net-funded country exposures on a graded scale ranging from 0.25 per cent to 100 per cent, according to seven risk categories.

At present, banks are required to make provisions for dealing with a country’s risk exposure only if its net-funded exposure in that country is 2 per cent or more of its total assets. The seven categories include insignificant (0.25 per cent provisioning requirement), low (0.25 per cent), moderate (5 per cent), high (20 per cent), very high (25 per cent), restricted and off-credit (100 per cent each).

According to the RBI, a CRM policy should address the issues of identifying, measuring, monitoring and controlling country risk exposure. Banks may put in place appropriate systems to move over to internal assessment of country risk whereby the system should be able to identify the full dimensions of it as well as incorporate features that acknowledge the links between credit and market risk. Banks should reckon both funded and non-funded exposures from their domestic as well as foreign branches while identifying, measuring, monitoring and controlling country risks.

They should also take into account indirect country risk. Thus, exposure to a domestic commercial borrower with a large economic dependence on a certain country may be considered as subject to indirect country risk. Indirect exposures may be reckoned at 50 per cent of the exposure.

“Banks should not rely solely on rating agencies or other external sources as their only country risk-monitoring tool,” the RBI added.

The RBI has stated that periodic reviews of country risk ratings should be done at least once a year with a provision to review the rating of specific country based on any major events, where bank exposure is high, even before the next periodical review of the ratings is due.