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MUMBAI, April 7

THE Reserve Bank of India has permitted commercial banks to issue guarantees for loans given by other banks and financial institutions.

Earlier banks were prohibited from issuing guarantees favouring financial institutions, other banks and other lending agencies.

In a circular issued to the chiefs of all commercial banks, the apex bank has permitted them to issue such guarantees, subject to adherence of conditions laid down, such as ensuring the integrity and robustness of the bank's risk management systems and accordingly put in place a well-laid out policy.

According to RBI, the move is "in tune with liberalisation and deregulation of the banking sector and in view of the adoption of risk management systems in banks".

The RBI has said, that a policy in this regard, approved by the board of directors should address issues such as prudential limits linked to bank's Tier I capital, up to which guarantees favouring other banks, FIs, other lending agencies may be issued.

It should also take into account the nature and extent of security and margins, delegation of powers, put in place appropriate reporting systems and have periodical reviews.

The guarantee must be extended only in respect of borrower constituents, to enable them to avail of additional credit facility from other banks, FIs, lending agencies.

The guaranteeing bank should assume a funded exposure of at least 10 per cent of the exposure guaranteed.

Banks should not extend guarantees or letters of comfort in favour of overseas lenders including those assignable to overseas lenders, except for the relaxations permitted under FEMA.

The guarantee issued by the bank will be an exposure on the borrowing entity on whose behalf the guarantee has been issued and will attract appropriate risk weight as per the extant guidelines.

Banks should ensure compliance with the recommendations of the Ghosh Committee and other internal requirements relating to issue of guarantees to obviate the possibility of frauds in this area.

Banks extending credit facilities against guarantees issued by other banks and FIs, must ensure that the exposure assumed by the bank against the guarantee of another bank or FI will be deemed as an exposure on the guaranteeing bank or FI and will attract appropriate risk weight as per the extant guidelines.

Exposures assumed by way of credit facilities extended against the guarantees issued by other banks should be reckoned within the inter bank exposure limits prescribed by the Board of Directors.

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 market, foreign exchange market and securities market, the board of directors should fix an appropriate sub-limit for the longer-term exposures since these exposures attract greater risk.

Banks should 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 RBI for FIs.

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