Statutory Other Restrictions

7/23/2019 Statutory Other Restrictions

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MC on Loans & Advances Statutory & Other Restrictions


1. INTRODUCTION

This Master Circular provides a framework of the rulesre!ulationsinstructions issued to

Scheduled Commercial "anks on statutory and other restrictions on loans and advances#"anks should implement these instructions and adopt ade$uate safe!uards in order toensure that the %ankin! activities undertaken %y them are run on sound prudent andprofita%le lines#

. !UID"LIN"S

.1 Statutory Restrictions

.1.1 Advances a#ainst $an%s o'n shares

'n terms of Section ()*+, of the "ankin! Re!ulation Act +-.- a %ank cannot !rant anyloans and advances on the security of its own shares#

.1. Advances to $an%s Directors

(#+#(#+ Section ()*+, of the "ankin! Re!ulation Act +-.- also lays down the restrictions onloans and advances to the directors and the firms in which they hold su%stantial interest#/urchase of or discount of %ills from directors and their concerns which is in the nature ofclean accommodation is reckoned as 0loans and advances1 for the purpose of Section () ofthe "ankin! Re!ulation Act +-.-#2A3s re!ardin! applica%ility of Section () of "R Act +-.-is !iven in 0Anne( ).

(#+#(#( "anks are prohi%ited from enterin! into any commitment for !rantin! any loans oradvances to or on %ehalf of any of its directors or any firm in which any of its directors isinterested as partner mana!er employee or !uarantor or any company 4not %ein! asu%sidiary of the %ankin! company or a company re!istered under Section 5 of the

Companies Act ()+6 or a 7overnment company8 of which or the su%sidiary or the holdin!company of which any of the directors of the %ank is a director mana!in! a!ent mana!eremployee or !uarantor or in which he holds su%stantial interest or any individual in respectof whom any of its directors is a partner or !uarantor#

(#+#(#6 2or the a%ove purpose the term 9loans and advances9 shall not include the followin!:

*a, loans or advances a!ainst 7overnment securities life insurance policies or fi;ed deposit/ %asis, purchase of che$ues other non?fund %asedfacilities like acceptanceco?acceptance of %ills openin! of LCs and issue of !uaranteespurchase of de%entures from third parties etc#epletin! Su%stances *O>S,# @o financial assistance should %e e;tended tosmallmedium scale units en!a!ed in the manufacture of the aerosol units usin!chlorofluorocar%ons *C2C, and no refinance would %e e;tended to any proDect assisted inthis sector#

../ Restrictions on Advances a#ainst Sensitive Co--odities

under Se,ective Credit Contro, 7SCC8

Bith a view to preventin! speculative holdin! of essential commodities with the help of %ankcredit and the resultant rise in their prices in e;ercise of powers conferred %y Section (+ &6A of the "ankin! Re!ulation Act +-.- the Reserve "ank of 'ndia %ein! satisfied that it is


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necessary and e;pedient in the pu%lic interest to do so issues from time to time directivesto all commercial %anks stipulatin! specific restrictions on %ank advances a!ainst specifiedsensitive commodities# The commodities !enerally treated as sensitive commodities are thefollowin!:

*a, food !rains i#e# cereals and pulses

*%, selected maDor oil seeds indi!enously !rown viK# !roundnut rapeseedmustardcottonseed linseed and castor seed oils thereof vanaspati and all imported oils andve!eta%le oils

*c, raw cotton and kapas

*d, su!ar!urkhandsari

*e, Cotton te;tiles which include cotton yarn man?made fi%res and yarn and fa%rics madeout of man?made fi%res and partly out of cotton yarn and partly out of man?made fi%res"anksare free to fi; prudential mar!ins on advances a!ainst these sensitive commodities#However in case of advance a!ainst Levy Su!ar a minimum mar!in of +) will apply#

*ii, Ealuation of su!ar stocks

*a, The unreleased stocks of the levy su!ar char!ed to %anks as security %y the su!ar millsshall %e valued at levy price fi;ed %y 7overnment#

*%, The unreleased stocks of free sale su!ar includin! %uffer stocks of su!ar char!ed to the%ank as security %y su!ar mills shall %e valued at the avera!e of the price realised in theprecedin! three months *movin! avera!e, or the current market price whichever is lowerE/ transactions undertaken on %ehalfof institutional clients viK# 2's 2lls mutual funds and %anks the duration of such a facility will%e short and would %e %ased on an assessment of the financin! re$uirements keepin! inview the cash flow !aps the %roker9s funds re$uired to %e deployed for the transaction andthe overall financial position of the %roker# The utilisation will %e monitored on the %asis ofindividual transactions# "anks may institute ade$uate safe!uards and monitorin!mechanisms#

*v, A uniform mar!in of ) per cent shall %e applied on all advances financin! of '/Os issue of !uarantees on %ehalf of share and stock%rokers# A minimum cash mar!in of ( percent *within the mar!in of ), shall %e maintained in respect of !uarantees issued %y

%anks for capital market operations# The a%ove minimum mar!in will also apply to!uarantees issued %y %anks on %ehalf of commodity %rokers in favour of commoditye;chan!es viK# @ational Commodity & >erivatives =;chan!e *@C>=, Multi Commodity=;chan!e of 'ndia Ltd# *MC, and @ational Multi Commodity =;chan!e of 'ndia Ltd#


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*@MC='L, in lieu of mar!in re$uirements as per the commodity e;chan!e re!ulations#These mar!in re$uirements will also %e applica%le in respect of %ank finance to stock%rokers %y way of temporary overdrafts for >E/ transactions#

*vi, "anks may issue !uarantees on %ehalf of share and stock %rokerscommodity %rokers infavour of stock e;chan!es in lieu of security deposit to the e;tent it is accepta%le in the formof %ank !uarantee as laid down %y stock e;chan!es# "anks may also issue !uarantees in

lieu of mar!in re$uirements as per stock e;chan!e re!ulations# The %ank should assess there$uirement of each applicant %orrower< o%serve usual and necessary safe!uards includin!the e;posure ceilin!s#

*vii, The re$uirement relatin! to transfer of shares in %ank9s name in respect of shares heldin physical form mentioned at Sl# @o# *i;, of para!raph (#6#+#+. shall not apply in respect ofadvances !ranted to share and stock %rokers provided such shares are held as security for aperiod not e;ceedin! nine months# 'n the case of dematerialised shares the depositorysystem provides a facility for pled!in! and %anks may avail themselves of this facility and insuch cases there will not %e need to transfer the shares in the name of the %ank irrespectiveof the period of holdin!# The share and stock %rokers are free to su%stitute the sharespled!ed %y them as and when necessary# 'n case of a default in the account the %ank

should e;ercise the option to !et the shares transferred in its name#

*viii, "anks shall !rant advances only to share and stock %rokers re!istered with S="' andwho comply with capital ade$uacy norms prescri%ed %y S="' Stock =;chan!es#

(#6#+#6 an% 3inance 0or Mar%et Ma%ers

"anks may provide need %ased finance to meet the !enuine credit re$uirements of approvedMarket Makers# 2or this purpose they should lay down appropriate norms for financin! themincludin! e;posure limits method of valuation etc# They should also follow the !uidelines!iven %elow:

a, Market Makers approved %y stock e;chan!e would %e eli!i%le for !rant of advances %yscheduled commercial %anks#

%, Market Makin! may not only %e for e$uity %ut also for de%t securities includin! State andCentral 7overnment securities#

c, "anks should e;ercise their commercial Dud!ement in determinin! the need %asedworkin! capital re$uirements of Market Markers %y takin! into account the Market Makin!operations#

d, A uniform mar!in of ) per cent shall %e applied on all advances financin! of '/Os issue of !uarantees on %ehalf of market makers# A minimum cash mar!in of ( per cent*within the mar!in of ), shall %e maintained in respect of !uarantees issued %y %anks forcapital market operations#

e, "anks may accept as collateral for the advances to the Market Makers scrips other than

the scrips in which the market makin! operations are undertaken#

f, "anks should ensure that advances provided for Market Makin! are not diverted forinvestment in shares other than the scrip earmarked for Market Makin! purpose# 2or thispurpose a suita%le follow?up and monitorin! mechanism must %e evolved#

!, The ceilin! of Rupees ten lakhs Rupees twenty lakhs for advances a!ainstsharesde%entures to individuals will not %e applica%le in the case of Market Makers#

(#6#+#. =ach %ank should lay down a detailed loan policy for !rantin! advances to Stock"rokers and Market Makers and also a policy for !rant of !uarantees on %ehalf of %rokerswhich should keep in view the !eneral !uidelines !iven in para (#6#+#+. and include interalia the followin!:

/urpose and use of such advances !uarantees

/ricin! of such advances


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Control features that specifically reco!nise the uni$ue characteristics and risks of suchfinancin!

Method of valuation of collateral

2re$uency of valuation of shares and other securities taken as collateral# 2re$uency ofvaluation of shares may at least %e once in a $uarter#

7uidelines for transfer of shares in %ank1s name

Ma;imum e;posure for individual credits *within the R"' prescri%ed prudential Sin!le"orrower Limit,# The "oard may also consider layin! down a limit on the a!!re!ate e;posureof the %ank to this sector#

The a!!re!ate portfolio its $uality and performance should %e reviewed and put up at leaston a half?yearly %asis to the "oard#

(#6#+# Advances to Individua,s a#ainst shares to


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the %anks o%tainin! collateral security of shares and de%entures %y way of mar!in# Sucharran!ements would %e of a temporary nature and may not %e continued %eyond a period ofone year# "anks have to satisfy themselves re!ardin! the capacity of the %orrower to raisethe re$uired funds and to repay the advance within the stipulated period#

G /rimary security ? the asset created out of the credit facility e;tended to the %orrower#

(#6#+#- an% Loans 0or 3inancin# 4ro-oters Contri$utionThe promoters1 contri%ution towards the e$uity capital of a company should come from theirown resources and the %ank should not normally !rant advances to take up shares of othercompanies# However %anks are permitted to e;tend loans to corporates a!ainst the securityof shares *as far as possi%le in dematerialised form, held %y them to meet the promoters1contri%ution to the e$uity of new companies in anticipation of raisin! resources su%Dect to thefollowin! terms and conditions in addition to the !eneral !uidelines !iven in para (#6#+#+.:

i# The mar!in and period of repayment of the loans may %e determined %y the %anks#

ii# Loans sanctioned to corporates a!ainst the security of shares *as far as possi%le dematshares, for meetin! promoters9 contri%ution to the e$uity of new companies in anticipation ofraisin! resources should %e treated as a %ank1s investments in shares which would thuscome under the ceilin! of .) percent of the %ank9s net worth as on March 6+ of the previousyear prescri%ed for the %ank1s total e;posure includin! %oth fund %ased and non?fund %asedto capital market in all forms# These loans will also %e su%Dect to individual!roup of%orrowers e;posure norms as well as the statutory limit on shareholdin! in companies asdetailed in the Master Circular on =;posure @orms dated Nuly + ()+#

iii# "anks may e;tend financial assistance to 'ndian companies for ac$uisition of e$uity inoverseas Doint ventures wholly owned su%sidiaries or in other overseas companies new ore;istin! as strate!ic investment in terms of a "oard approved policy duly incorporated inthe loan policy of the %anks# Such policy should include overall limit on such financin! termsand conditions of eli!i%ility of %orrowers security mar!in etc# Bhile the "oard may frame itsown !uidelines and safe!uards for such lendin! such ac$uisition*s, should %e %eneficial to

the company and the country# The finance would %e su%Dect to compliance with the statutoryre$uirements under Section +-*(, of the "ankin! Re!ulation Act +-.-#

iv# Fnder the refinance scheme of =;port?'mport "ank of 'ndia the %anks may sanction termloans on merits to eli!i%le 'ndian promoters for ac$uisition of e$uity in overseas Dointventures wholly owned su%sidiaries provided the term loans have %een approved %y the='M "ank for refinance#

v# The restriction on !rant of %ank advances for financin! promoters9 contri%ution towardse$uity capital would also e;tend to %ank finance to activities related to such ac$uisitions likepayment of non compete fee etc# 2urther these restrictions would also %e applica%le to%ank finance to such activities %y overseas %ranches su%sidiaries of 'ndian %anks#

vi# Bith the approval of the "oard of >irectors the %anks should formulate internal!uidelines with appropriate safe!uards for this purpose#

(#6#+#+) Advances a#ainst Units o0 Mutua, 3unds

Bhile !rantin! advances a!ainst Fnits of mutual funds the %anks should adhere to thefollowin! !uidelines:

i, The Fnits should %e listed in the Stock =;chan!es or repurchase facility for the Fnits ofmutual fund should %e availa%le at the time of lendin!#

ii, The Fnits should have completed the minimum lock?in?period stipulated in the relevantscheme#

iii, The amount of advances should %e linked to the @et Asset Ealue *@AE, repurchaseprice or the market value whichever is less and not to the face value#


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iv, Advance a!ainst units of mutual funds *e;cept units of e;clusively de%t oriented funds,would attract the $uantum and mar!in re$uirements as applica%le to advance a!ainst sharesand de%entures# However the $uantum and mar!in re$uirement for loans advances toindividuals a!ainst units of e;clusively de%t?oriented mutual funds may %e decided %yindividual %anks themselves in accordance with their loan policy#

v, The advances should %e purpose oriented takin! into account the credit re$uirement of

the investor# Advances should not %e !ranted for su%scri%in! to or %oostin! up the sales ofanother scheme of the mutual funds or for the purchase of shares de%entures %onds etc#

(#6#+#++ Mar#in Tradin#

*i, "anks may e;tend finance to stock%rokers for mar!in tradin!# The "oard of each %ankshould formulate detailed !uidelines for lendin! for mar!in tradin! su%Dect to the followin!parameters:

*a, The finance e;tended for mar!in tradin! should %e within the overall ceilin! of .) of networth prescri%ed for e;posure to capital market#

*%, A minimum mar!in of ) per cent should %e maintained on the funds lent for mar!intradin!#

*c, The shares purchased with mar!in tradin! should %e in dematerialised mode underpled!e to the lendin! %ank# The %ank should put in place an appropriate system formonitorin! and maintainin! the mar!in of ) on an on!oin! %asis#

*d, The %ank9s "oard should prescri%e necessary safe!uards to ensure that no ne;usdevelops %etween inter?connected stock %rokin! entities stock%rokers and the %ank inrespect of mar!in tradin!# Mar!in tradin! should %e spread out %y the %ank amon! areasona%le num%er of stock%rokers and stock %rokin! entities#

*ii, The Audit Committee of the "oard should monitor periodically the %ank9s e;posure %yway of financin! for mar!in tradin! and ensure that the !uidelines formulated %y the %ank9s"oard su%Dect to the a%ove parameters are complied with# "anks should disclose the total

finance e;tended for mar!in tradin! in the @otes on Account to their "alance Sheet#

(#6#+#+( 7a8 3inancin# 0or Ac=uisition o0 "=uity in Overseas Co-anies

"anks may e;tend financial assistance to 'ndian companies for ac$uisition of e$uity inoverseas Doint ventures wholly owned su%sidiaries or in other overseas companies new ore;istin! as strate!ic investment in terms of a "oard approved policy duly incorporated inthe loan policy of the %anks# Such policy should include overall limit on such financin! termsand conditions of eli!i%ility of %orrowers security mar!in etc# Bhile the "oard may frame itsown !uidelines and safe!uards for such lendin! such ac$uisition*s, should %e %eneficial tothe company and the country# The finance would %e su%Dect to compliance with the statutory

re$uirements under Section +-*(, of the "ankin! Re!ulation Act +-.-#7$8 Re0inance Sche-e o0 "(ort I-ort an% o0 India

Fnder the refinance scheme of =;port 'mport "ank of 'ndia *='M "ank, the

%anks may sanction term loans on merits to eli!i%le 'ndian promoters for

ac$uisition of e$uity in overseas Doint ventures wholly owned su%sidiaries

provided that the term loans have %een approved %y the ='M "ank for

refinance#

(#6#+#+6 Ar$itra#e Oerations

"anks should not undertake ar%itra!e operations themselves or e;tend credit facilitiesdirectly or indirectly to stock%rokers for ar%itra!e operations in Stock =;chan!es# Bhile%anks are permitted to ac$uire shares from the secondary market they should ensure that


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no sale transaction is undertaken without actually holdin! the shares in their investmentaccounts#

(#6#+#+. !enera, #uide,ines a,ica$,e to advances a#ainst shares 5 de$entures 5$onds

*i, Statutory provisions re!ardin! the !rant of advances a!ainst shares contained in Sections

+-*(, and *6, and ()*+, *a, of the "ankin! Re!ulation Act +-.- should %e strictly o%served#Shares held in dematerialised form should also %e included for the purpose of determinin!the limits under Section +-*(, and +-*6, i%id#

*ii, "anks should %e concerned with what the advances are for rather than what theadvances are a!ainst# Bhile considerin! !rant of advances a!ainst shares de%entures%anks must follow the normal procedures for the sanction appraisal and post sanctionfollow?up#

*iii, Advances a!ainst the primary security of shares de%entures %onds should %e keptdistinct and separate and not com%ined with any other advance#

*iv, "anks should satisfy themselves a%out the marketa%ility of the shares de%entures andthe networth and workin! of the company whose shares de%entures %onds are offered assecurity#

*v, Shares de%entures %onds should %e valued at prevailin! market prices when they arelod!ed as security for advances#

*vi, "anks should e;ercise particular care when advances are sou!ht a!ainst lar!e %locks ofshares %y a %orrower or a !roup of %orrowers# 't should %e ensured that advances a!ainstshares are not used to ena%le the %orrower to ac$uire or retain a controllin! interest in thecompany companies or to facilitate or retain inter?corporate investments#

*vii, @o advance a!ainst partly paid shares shall %e !ranted#

*viii, @o loans to %e !ranted to partnership proprietorship concerns a!ainst the primarysecurity of shares and de%entures#

*i;, Bhenever the limitlimits of advances !ranted to a %orrower e;ceeds Rupees ten lakhsit should %e ensured that the said shares de%entures %onds are transferred in the %ank9sname and that the %ank has e;clusive and unconditional votin! ri!hts in respect of suchshares# 2or this purpose the a!!re!ate of limits a!ainst shares de%entures %onds !ranted%y a %ank at all its offices to a sin!le %orrower should %e taken into account# Bheresecurities are held in dematerialised form the re$uirement relatin! to transfer of shares in%ank9s name will not apply and %anks may take their own decision in this re!ard# "anksshould however avail of the facility provided in the depository system for pled!in! securitiesheld in dematerialised form under which the securities pled!ed %y the %orrower !et %lockedin favour of the lendin! %ank# 'n case of default %y the %orrower and on the %ank e;ercisin!the option of invocation of pled!e the shares and de%entures !et transferred in the %ank9s

name immediately#

*;, "anks may take their own decision in re!ard to e;ercise of votin! ri!hts and mayprescri%e procedures for this purpose#

*;i, "anks should ensure that the scrips lod!ed with them as security are not stolen duplicate fake %enami# Any irre!ularities comin! to their notice should %e immediatelyreported to R"'#

*;ii, The "oards of >irectors may decide the appropriate level of authority for sanction ofadvances a!ainst shares de%entures# They may also frame internal !uidelines andsafe!uards for !rant of such advances#

*;iii, "anks operatin! in 'ndia should not %e a party to transactions such as makin! advancesor issuin! %ack?up !uarantees favourin! other %anks for e;tendin! credit to clients of 'ndiannationality ori!in %y some of their overseas %ranches to ena%le the %orrowers to makeinvestments in shares and de%entures %onds of 'ndian companies#


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*;iv, A uniform mar!in of ) shall %e applied on all advances a!ainst sharesfinancin! of'/Osissue of 7uarantees# A minimum cash mar!in of ( *within mar!in of ), shall %emaintained in respect of !uarantees issued %y %anks for capital market operations# Thesemar!in re$uirements will also %e applica%le in respect of %ank finance to stock %rokers %yway of temporary overdrafts for >E/ transactions#

.*. Advances a#ainst 3i(ed Deosit Receits 73DRs8 Issued $y Other an%s

(#6#(#+ There have %een instances where fake term deposit receipts purported to have %eenissued %y some %anks were used for o%tainin! advances from other %anks# 'n the li!ht ofthese happenin!s the %anks should desist from sanctionin! advances a!ainst 2>Rs orother term deposits of other %anks#

(#6#(#( Restrictions on advances a!ainst @R*=,RA and 2C@R *", >eposits ?

3uantum of loans

7rant of advance a!ainst @R*=, and 2C@R*", deposits would %e su%Dect to the !uidelinesissued under 2orei!n =;chan!e Mana!ement Act +---

.*.* Advances to A#ents5Inter-ediaries $ased on

Consideration o0 Deosit Mo$i,isation

"anks should desist from %ein! party to unethical practices of raisin! of resources throu!ha!entsintermediaries to meet the credit needs of the e;istin!prospective %orrowers or from!rantin! loans to intermediaries %ased on the consideration of deposit mo%ilisation whomay not re$uire the funds for their !enuine %usiness re$uirements#

.*./ Loans a#ainst Certi0icate o0 Deosits 7CDs8

"anks may lend a!ainst C>s and %uy %ack their own C>s until further notice only inrespect of C>s held %y mutual funds su%Dect to the provisions of para!raph ..*(, of theS="' *Mutual 2unds, Re!ulations +--I# 2urther such finance if e;tended to e$uity?orientedmutual funds will form part of %anks1 capital market e;posure as hitherto#

.*.9 3inance 0or and Loans5Advances a#ainst Indian Deository Receits 7IDRs8

@o %ank should !rant any loan advance for su%scription to 'ndian >epository Receipts*'>Rs,# 2urther no %ank should !rant any loan advance a!ainst security collateral of '>Rsissued in 'ndia#

.*.: an% 3inance to Non2an%in# 3inancia, Co-anies 7N3Cs8

"anks may %e !uided %y the Master Circular on "ank 2inance to @on?"ankin! 2inancialCompanies *@"2Cs, dated Nuly + ()+ in this re!ard#

.*#> 3inancin# In0rastructure5 +ousin# 4ro?ects

(#6#J#+ Housin! 2inance

"anks may refer to the Master Circular on Housin! 2inance dated Nuly + ()+ in thisre!ard#

(#6#J#( 7uidelines for 2inancin! 'nfrastructure /roDects

'n order to harmonise the definition of 9infrastructure lendin! for the purpose of financin! ofinfrastructure %y the %anks and 2inancial 'nstitutions9 with that of

>"R MC on Loans & Advances Statutory & Other Restrictions ? ()+ (I

the Master List of 'nfrastructure su%?sectors9 notified %y the 7overnment of 'ndia on Octo%erJ ()+6 the definition of 9infrastructure lendin!9 has %een revised as %elow: *As amendedfrom time to time, The revised definition of 0infrastructure lendin!1 are in effect from

@ovem%er () ()+(# The e;posure of %anks to proDects under su%?sectors which wereincluded under our previous definition of infrastructure vide our Master Circular>"R#@o#>ir#"C#+(+6#)6#))()+?+I dated Nuly + ()+ on 0=;posure @orms1 %ut notincluded under the revised definition will continue to !et the %enefits under 9infrastructure


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lendin!9 for such e;posures till the completion of the proDects# However any fresh lendin! tothose su%?sectors from the date of this circular will not $ualify as 9infrastructure lendin!9#

The definition of infrastructure lendin! and the list of items included under infrastructuresector is revised vide circular >"O>#"/#"C#@o#5)5#+(#)+. ()+(?+6 dated @ovem%er ()()+(# Eide circular >"O>#"/#"C#@o#+)I )5#+(#)+. ()+(?+6 dated Nune (5 ()+6 threemore sectors were added to the list# 2urther vide circular

>"O>#"/#"C#@o#II)5#+(#)+.()+6?+. dated @ovem%er ( ()+6 two more sectors wereadded to the list#

(#6#J#6 Criteria for 2inancin!

"anks2's are free to finance technically feasi%le financially via%le and %anka%le proDectsundertaken %y %oth pu%lic sector and private sector undertakin!s su%Dect to the followin!conditions:

*i, The amount sanctioned should %e within the overall ceilin! of the prudential e;posurenorms prescri%ed %y R"' for infrastructure financin!#

*ii, "anks 2's should have the re$uisite e;pertise for appraisin! technical feasi%ility financialvia%ility and %anka%ility of proDects with particular reference to the risk analysis andsensitivity analysis#

*iii, 'n respect of proDects undertaken %y pu%lic sector units term loans may %e sanctionedonly for corporate entities *i#e# pu%lic sector undertakin!s re!istered under Companies Act ora Corporation esta%lished under the relevant statute,# 2urther such term loans should not %ein lieu of or to su%stitute %ud!etary resources envisa!ed for the proDect# The term loan couldsupplement the %ud!etary resources if such supplementin! was contemplated in the proDectdesi!n# Bhile such pu%lic sector units may include Special /urpose Eehicles *S/Es,re!istered under the Companies Act set up for financin! infrastructure proDects it should %eensured %y %anks and financial institutions that these loansinvestments are not used forfinancin! the %ud!et of the State 7overnments# Bhether such financin! is done %y way ofe;tendin! loans or investin! in %onds %anks and financial institutions should undertake due

dili!ence on the via%ility and %anka%ility of such proDects to ensure that revenue stream fromthe proDect is sufficient to take care of the de%t servicin! o%li!ations and that therepaymentservicin! of de%t is not out of %ud!etary resources# 2urther in the case offinancin! S/Es %anks and financial institutions should ensure that the fundin! proposals arefor specific monitora%le proDects# 't has %een o%served that some %anks have e;tendedfinancial assistance to State /SFs which is not in accordance with the a%ove norms#"anks2's are therefore advised to follow the a%ove instructions scrupulously even whilemakin! investment in %onds of sick State /SFs as part of the reha%ilitation effort#

*iv, "anks may also lend to S/Es in the private sector re!istered under the Companies Actfor directly undertakin! infrastructure proDects which are financially via%le and not for actin!as mere financial intermediaries# "anks may ensure that the %ankruptcy or financial

difficulties of the parent sponsor should not affect the financial health of the S/E#(#6#J#. Types of 2inancin! %y "anks

*i, 'n order to meet financial re$uirements of infrastructure proDects %anks may e;tend creditfacility %y way of workin! capital finance term loan proDect loan su%scription to %onds andde%entures preference shares e$uity shares ac$uired as a part of the proDect financepacka!e which is treated as deemed advanceP and any other form of funded or non?fundedfacility#

*ii, Take?out 2inancin!

"anks may enter into take?out financin! arran!ement with '>2C other financial institutionsor avail of li$uidity support from '>2C other 2's# A %rief write?up on some of the important

features of the arran!ement is !iven in para!raph (#6#J#J*i,# "anks may also %e !uided %ythe instructions re!ardin! take?out finance contained in Circular @o#>"O>#"/#"C#+..(+#).#).5())) dated 2e%ruary (- ()))#


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*iii, 'nter?institutional 7uarantees

"anks are permitted to issue !uarantees favourin! other lendin! institutions in respect ofinfrastructure proDects provided the %ank issuin! the !uarantee takes a funded share in theproDect at least to the e;tent of per cent of the proDect cost and undertakes normal creditappraisal monitorin! and follow?up of the proDect# 2or detailed instructions on inter?institutional !uarantee please see para!raph (#6#5#

*iv, 2inancin! promoter9s e$uity

'n terms of Circular @o#>"O>#>ir#"C#-)+6#)J#) -5 dated Au!ust (5 +--5 %anks wereadvised that the promoters1 contri%ution towards the e$uity capital of a company shouldcome from their own resources and the %ank should not normally !rant advances to take upshares of other companies# 'n view of the importance attached to the infrastructure sector ithas %een decided that under certain circumstances an e;ception may %e made to thispolicy for financin! the ac$uisition of the promoters1 shares in an e;istin! company which isen!a!ed in implementin! or operatin! an infrastructure proDect in 'ndia# The conditionssu%Dect to which an e;ception may %e made are as follows:

*i, The %ank finance would %e only for ac$uisition of shares of e;istin! companies providin!

infrastructure facilities# 2urther ac$uisition of such shares should %e in respect of companieswhere the e;istin! forei!n promoters *and or domestic Doint promoters, voluntarily proposeto disinvest their maDority shares in compliance with S="' !uidelines where applica%le#

*ii, The companies to which loans are e;tended should inter alia have a satisfactory networth#

*iii, The company financed and the promoters directors of such companies should not %e adefaulter to %anks 2's#

*iv, 'n order to ensure that the %orrower has a su%stantial stake in the infrastructurecompany %ank finance should %e restricted to ) of the finance re$uired for ac$uirin! thepromoter9s stake in the company %ein! ac$uired#

*v, 2inance e;tended should %e a!ainst the security of the assets of the %orrowin! companyor the assets of the company ac$uired and not a!ainst the shares of that company or thecompany %ein! ac$uired# The shares of the %orrower company company %ein! ac$uiredmay %e accepted as additional security and not as primary security# The security char!ed tothe %anks should %e marketa%le#

*vi, "anks should ensure maintenance of stipulated mar!ins at all times#

*vii, The tenor of the %ank loans may not %e lon!er than seven years# However the "oardsof %anks can make an e;ception in specific cases where necessary for financial via%ility ofthe proDect#

*viii, This financin! would %e su%Dect to compliance with the statutory re$uirements under

Section +-*(, of the "ankin! Re!ulation Act +-.-#*i;, The %anks financin! ac$uisition of e$uity shares %y promoters should %e within there!ulatory ceilin! of .) per cent of their net worth as on March 6+ of the previous year for thea!!re!ate e;posure of the %anks to the capital markets in all forms *%oth fund %ased andnon?fund %ased,#

*;, The proposal for %ank finance should have the approval of the "oard#

(#6#J# Appraisal

*i, 'n respect of financin! of infrastructure proDects undertaken %y 7overnment ownedentities %anks2inancial 'nstitutions should undertake due dili!ence on the via%ility of theproDects# "anks should ensure that the individual components of financin! and returns on the

proDect are well defined and assessed# State 7overnment !uarantees may not %e taken as asu%stitute for satisfactory credit appraisal and such appraisal re$uirements should not %ediluted on the %asis of any reported arran!ement with the Reserve "ank of 'ndia or any %ankfor re!ular standin! instructionsperiodic payment instructions for servicin! the loans%onds#


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*ii, 'nfrastructure proDects are often financed throu!h Special /urpose Eehicles# 2inancin! ofthese proDects would therefore call for special appraisal skills on the part of lendin!a!encies# 'dentification of various proDect risks evaluation of risk miti!ation throu!h appraisalof proDect contracts and evaluation of creditworthiness of the contractin! entities and theira%ilities to fulfill contractual o%li!ations will %e an inte!ral part of the appraisal e;ercise# 'nthis connection %anks2's mayconsider constitutin! appropriate screenin!

committeesspecial cells for appraisal of credit proposals and monitorin! thepro!ressperformance of the proDects# Often the siKe of the fundin! re$uirement wouldnecessitate Doint financin! %y %anks2's or financin! %y more than one %ank underconsortium or syndication arran!ements# 'n such cases participatin! %anks 2's may for thepurpose of their own assessment refer to the appraisal report prepared %y the lead %ank2'or have the proDect appraised Dointly#

(#6#J#I /rudential re$uirements

*i, /rudential credit e;posure limits

"anks may %e !uided %y >"R Master Circular on =;posure @orms dated Nuly + ()+#

*ii, Assi!nment of risk wei!ht for capital ade$uacy purposes

"anks are re$uired to %e !uided %y the 7uidelines on 0"asel ''' Capital Re!ulations1 asamended from time to time in the matter of capital ade$uacy#

*iii, Asset?Lia%ility Mana!ement

The lon!?term financin! of infrastructure proDects may lead to asset lia%ility mismatchesparticularly when such financin! is not in conformity with the maturity profile of a %ank1slia%ilities# "anks would therefore need to e;ercise due vi!il on their asset?lia%ility position toensure that they do not run into li$uidity mismatches on account of lendin! to such proDects#

*iv, Administrative arran!ements

Timely and ade$uate availa%ility of credit is the pre?re$uisite for successful implementationof infrastructure proDects# "anks 2's should therefore clearly delineate the procedure forapproval of loan proposals and institute a suita%le monitorin! mechanism for reviewin!applications pendin! %eyond the specified period# Multiplicity of appraisals %y everyinstitution involved in financin! leadin! to delays has to %e avoided and %anks should %eprepared to %roadly accept technical parameters laid down %y leadin! pu%lic financialinstitutions# Also settin! up a mechanism for an on!oin! monitorin! of the proDectimplementation will ensure that the credit dis%ursed is utilised for the purpose for which itwas sanctioned#

(#6#J#J Take?out financin!li$uidity support

*i, Take?out financin! arran!ement

Take?out financin! structure is essentially a mechanism desi!ned to ena%le %anks to avoid

asset?lia%ility maturity mismatches that may arise out of e;tendin! lon! tenor loans toinfrastructure proDects# Fnder the arran!ements %anks financin! the infrastructure proDectswill have an arran!ement with '>2C or any other financial institution for transferrin! to thelatter the outstandin!s in their %ooks on a pre?determined %asis# '>2C and S"' have deviseddifferent take?out financin! structures to suit the re$uirements of various %anks addressin!issues such as li$uidity asset?lia%ility mismatches limited availa%ility of proDect appraisalskills etc# They have also developed a Model A!reement that can %e considered for use asa document for specific proDects in conDunction with other proDect loan documents# Thea!reement %etween S"' and '>2C could provide a reference point for other %anks to enterinto somewhat similar arran!ements with '>2C or other financial institutions#

*ii, Li$uidity support from '>2C

As an alternative to take?out financin! structure '>2C and S"' have devised a productprovidin! li$uidity support to %anks# Fnder the scheme '>2C would commit at the point ofsanction to refinance the entire outstandin! loan *principalQ unrecovered interest, or part of


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the loan to the %ank after an a!reed period say five years# The credit risk on the proDect will%e taken %y the %ank concerned and not %y '>2C# The %ank would repay the amount to'>2C with interest as per the terms a!reed upon# Since '>2C would %e takin! a credit risk onthe %ank the interest rate to %e char!ed %y it on the amount refinanced would depend onthe '>2C1s risk perception of the %ank *in most of the cases it may %e close to '>2C1s /LR,#The refinance support from '>2C would particularly %enefit the %anks which have the

re$uisite appraisal skills and the initial li$uidity to fund the proDect#(#6#J#5 'ssue of Lon! Term "onds %y "anks 2inancin! of 'nfrastructure

and Afforda%le Housin!

'n response to the "ud!et announcement on Nuly +) ()+. R"' has allowed %anks to issuelon!?term %onds with a minimum maturity of seven years to raise resources for lendin! to *i,lon! term proDects in infrastructure su%?sectors and *ii, afforda%le housin! with e;emptionsfrom certain re!ulatory pre?emptions# >etailed instructions in this re!ard are !iven in circular>"O>#"/#"C#@o#()5#+(#)+.()+.?+ dated Nuly + ()+.# The investment will %e su%Dectto !uidelines on cross holdin!

.*.@ Issue o0 an% !uarantees in 0avour o0 3inancia, Institutions

(#6#5#+ "anks may issue !uarantees favourin! other %anks2'sother lendin! a!encies forthe loans e;tended %y the latter su%Dect to strict compliance with the followin! conditions#

*i, The "oard of >irectors should reckon the inte!rityro%ustness of the %ank1s riskmana!ement systems and accordin!ly put in place a well?laid out policy in this re!ard#

The "oard approved policy should amon! others address the followin! issues:

a, /rudential limits linked to %ank1s Tier ' capital up to which !uarantees favourin! other%anks2'sother lendin! a!encies may %e issued#

%, @ature and e;tent of security and mar!ins

c, >ele!ation of powers

d, Reportin! system

e, /eriodical reviews

*ii, The !uarantee shall %e e;tended only in respect of %orrower constituents and to ena%lethem to avail of additional credit facility from other %anks2'slendin! a!encies#

*iii, The !uaranteein! %ank shall assume a funded e;posure of at least +) of the e;posure!uaranteed#

*iv, "anks should not e;tend !uarantees or letters of comfort in favour of overseas lendersincludin! those assi!na%le to overseas lenders e;cept for the rela;ations permitted under2=MA#

*v, The !uarantee issued %y the %ank will %e an e;posure on the %orrowin! entity on whose%ehalf the !uarantee has %een issued and will attract appropriate risk wei!ht as per thee;tant !uidelines#

*vi, "anks should ensure compliance with the recommendations of the 7hosh Committeeand other internal re$uirements relatin! to issue of !uarantees to o%viate the possi%ility offrauds in this area#

(#6#5#( Lendin! %anks

A# "anks e;tendin! credit facilities a!ainst the !uarantees issued %y other %anks2's shouldensure strict compliance with the followin! conditions:

*i, The e;posure assumed %y the %ank a!ainst the !uarantee of another %ank2' will %e

deemed as an e;posure on the !uaranteein! %ank2' and will attract appropriate risk wei!htas per the e;tant !uidelines#


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*ii, =;posures assumed %y way of credit facilities e;tended a!ainst the !uarantees issued %yother %anks should %e reckoned within the inter %ank e;posure limits prescri%ed %y the"oard of >irectors# Since the e;posure assumed %y the %ank a!ainst the !uarantee ofanother %ank2' will %e for a fairly lon!er term than those assumed on account of inter %ankdealin!s in the money market forei!n e;chan!e market and securities market the "oard of>irectors should fi; an appropriate su%?limit for the lon!er term e;posures since these

e;posures attract !reater risk#*iii, "anks should monitor the e;posure assumed on the !uaranteein! %ank2' on acontinuous %asis and ensure strict compliance with theprudential limitssu% limits prescri%ed%y the "oards for %anks and the prudential sin!le %orrower limits prescri%ed %y R"' for 2's#

*iv, "anks should comply with the recommendations of the 7hosh Committee and otherinternal re$uirements relatin! to acceptance of !uarantees of other %anks to o%viate thepossi%ility of frauds in this area#

"# However the a%ove conditions will not %e applica%le in the followin! cases:

*a, 'n respect of infrastructure proDects %anks may issue !uarantees favourin! other lendin!institutions provided the %ank issuin! the !uarantee takes a funded share in the proDect at

least to the e;tent of percent of the proDect cost and undertakes normal credit appraisalmonitorin! and follow up of the proDect#

*%, 'ssuance of !uarantees in favour of various >evelopment A!encies"oards like 'ndianRenewa%le =ner!y >evelopment A!ency @ational Horticulture "oard etc# for o%tainin! softloans andor other forms of development assistance from such A!encies"oards with theo%Dective of improvin! efficiency productivity etc# su%Dect to the followin! conditions:

"anks should satisfy themselves on the %asis of credit appraisal re!ardin! the technicalfeasi%ility financial via%ility and %anka%ility of individual proDects andor loan proposals i#e#the standard of such appraisal should %e the same as is done in the case of a loan proposalseekin! sanction of term financeloan#

"anks should conform to the prudential e;posure norms prescri%ed from time to time for anindividual %orrower!roup of %orrowers#

"anks should suita%ly secure themselves %efore e;tendin! such !uarantees#

*c, 'ssue of !uarantees favourin! HF>COState Housin! "oards and similar %odiesfor loans !ranted %y them to private %orrowers who are una%le to offer clean ormarketa%le title to property provided %anks are otherwise satisfied a%out thecapacity of %orrowers to ade$uately service such loans#

d, 'ssuance of !uarantees %y consortium mem%er %anks una%le to participate inreha%ilitation packa!es on account of temporary li$uidity constraints in favour of the%anks which take up their share of the limit#

C# "anks should not !rant co?acceptance!uarantee facilities under "uyers Lines ofCredit Schemes introduced %y '>"' S'>"' =;im "ank /ower 2inance Corporation*/2C, or any other financial institution unless specifically permitted %y the R"'#

.*. Discountin#5Rediscountin# o0 i,,s $y an%s

"anks may adhere to the followin! !uidelines while purchasin! discountin! ne!otiatin! rediscountin! of !enuine commercial trade %ills:

*i, Since %anks have already %een !iven freedom to decide their own !uidelines forassessin! sanctionin! workin! capital limits of %orrowers they may sanctionworkin! capital limits as also %ills limit to %orrowers after proper appraisal of their

credit needs and in accordance with the loan policy as approved %y their "oard of>irectors#


20/37


*ii, "anks should clearly lay down a %ills discountin! policy approved %y their "oardof >irectors which should %e consistent with their policy of sanctionin! of workin!capital limits# 'n this case the procedure for "oard approval should include %anks1core operatin! process from the time the %ills are tendered till these are realised#"anks may review their core operatin! processes and simplify the procedure inrespect of %ills financin!# 'n order to address the often?cited pro%lem of delay in

realisation of %ills %anks may take advanta!e of improved computer communication networks like the Structured 2inancial Messa!in! system *S2MS,and adopt the system of 0value datin!1 of their clients1 accounts#

*iii, "anks should open letters of credit *LCs, and purchase discount ne!otiate %illsunder LCs only in respect of !enuine commercial and trade transactions of their%orrower constituents who have %een sanctioned re!ular credit facilities %y the%anks# "anks should nottherefore e;tend fund?%ased *includin! %ills financin!, ornon?fund %ased facilities like openin! of LCs providin! !uarantees and acceptancesto non?constituent %orrower or and non?constituent mem%er of a consortium multiple %ankin! arran!ement# However in cases where ne!otiation of %ills drawn

under LC is restricted to a particular %ank and the %eneficiary of the LC is not aconstituent of that %ank the %ank concerned may ne!otiate such an LC su%Dect tothe condition that the proceeds will %e remitted to the re!ular %anker of the%eneficiary# The prohi%ition re!ardin! ne!otiation of unrestricted LCs of non?constituents will continue to %e in force# "ank 7uarantee *"7, LC may %e issued %yscheduled commercial %anks to clients of co?operative %anks a!ainst counter!uarantee of the co?operative %ank# 'n such cases %anks may %e !uided %y theprovisions of para!raph (#6#5#( of the Master Circular# 2urther %anks must satisfythemselves that the concerned co?operative %anks have sound credit appraisal andmonitorin! systems as well as ro%ust now our Customer *C, re!ime# "eforeissuin! "7 LCs to specific constituents of co?operative %anks they must satisfy

themselves that C has %een done properly in these cases#

*iv, Sometimes a %eneficiary of the LC may want to discount the %ills with the LCissuin! %ank itself# 'n such cases %anks may discount %ills drawn %y %eneficiary onlyif the %ank has sanctioned re!ular fund?%ased credit facilities to the %eneficiary# Bitha view to ensurin! that the %eneficiary1s %ank is not deprived of cash flows into itsaccount the %eneficiary should !et the %ills discounted ne!otiated throu!h the %ankwith whom he is enDoyin! sanctioned credit facilities#

*v, "ills purchased discounted ne!otiated under LC *where the payment to the%eneficiary is not made 0under reserve1, will %e treated as an e;posure on the LCissuin! %ank and not on the %orrower# All clean ne!otiations as indicated a%ove will

%e assi!ned the risk wei!ht as is normally applica%le to inter?%ank e;posures forcapital ade$uacy purposes# 'n the case of ne!otiations 0under reserve1 the e;posureshould %e treated as on the %orrower and risk wei!ht assi!ned accordin!ly# Howeverin cases where the %ills discountin! purchasin!

ne!otiatin! %ank and LC issuin! %ank are part of the same %ank i#e# where LC isissued %y the Head Office or %ranch of the same %ank then the e;posure should %etaken on the third party %orrower and not on the LC issuin! %ank#

*vi, Bhile purchasin! discountin! ne!otiatin! %ills under LCs or otherwise %anksshould esta%lish !enuineness of underlyin! transactions documents#

*vii, "anks should ensure that %lank LC forms are kept in safe custody as in case ofsecurity items like %lank che$ues demand drafts etc# and verified %alanced on daily


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%asis# LC forms should %e issued to customers under Doint si!natures of the %ank1sauthorised officials#

*viii, The practice of drawin! %ills of e;chan!e claused 0without recourse1 and issuin!letters of credit %earin! the le!end 0without recourse1 should %e discoura!ed %ecausesuch notations deprive the ne!otiatin! %ank of the ri!ht of recourse it has a!ainst the

drawer under the @e!otia%le 'nstruments Act# "anks should not therefore open LCsand purchase discount ne!otiate %ills %earin! the 0without recourse1 clause# On areview it has %een decided that %anks may ne!otiate %ills drawn under LCs on 0withrecourse 0or 0without recourse 0%asis as per their discretion and %ased on theirperception a%out the credit worthiness of the LC issuin! %ank# However therestriction on purchasediscount of other %ills *the %ills drawn otherwise than underLC, on 0without recourse 0%asis will continue to %e in force#

*i;, Accommodation %ills should not %e purchased discounted ne!otiated %y%anks# The underlyin! trade transactions should %e clearly identified and a properrecord thereof maintained at the %ranches conductin! the %ills %usiness#

*;, "anks should %e circumspect while discountin! %ills drawn %y front financecompanies set up %y lar!e industrial !roups on other !roup companies#

*;i, "ills rediscounts should %e restricted to usance %ills held %y other %anks# "anksshould not rediscount %ills earlier discounted %y non?%ank financial companies*@"2Cs, e;cept in respect of %ills arisin! from sale of li!ht commercial vehicles andtwo three wheelers#

*;ii, "anks may e;ercise their commercial Dud!ment in discountin! of %ills of theservices sector# However while discountin! such %ills %anks should ensure thatactual services are rendered and accommodation %ills are not discounted# Servicessector %ills should not %e eli!i%le for rediscountin!. 2urther providin! finance a!ainst

discountin! of services sector %ills may %e treated as unsecured advance andtherefore should %e within the norm prescri%ed %y the "oard of the %ank forunsecured e;posure limit#

*;iii, 'n order to promote payment discipline which would to a certain e;tentencoura!e acceptance of %ills all corporates and other constituent %orrowers havin!turnover a%ove threshold level as fi;ed %y the %ank1s "oard of >irectors should %emandated to disclose 0a!in! schedule1 of their overdue paya%les in their periodicalreturns su%mitted to %anks#

*;iv, "anks should not enter into Repo transactions usin! %ills discounted rediscounted as collateral#

.*.1B Advances 0or urchase o0 !o,d and ,endin# a#ainst !o,du,,ion5Coins54ri-ary #o,d

*a, The si!nificant rise in imports of !old in recent years is a cause for concern asdirect %ank financin! for purchase of !old in any form viK# "ullion primary !oldDewellery !old coin etc# could lead to fuellin! of demand for !old# Accordin!ly it isadvised that with effect from @ovem%er +- ()+( no advances should %e !ranted %y%anks for purchase of !old in any form includin! primary !old !old %ullion !oldDewellery !old coins units of 7old =;chan!e Traded 2unds *=T2, and units of !oldMutual 2unds# However %anks can provide finance for !enuine workin! capitalre$uirements of Dewellers# The scheme of 7old *Metal, Loan detailed vide our

circular >"O># @o# '"S# "C# ++- (6#IJ#))+ +--5?-- dated >ecem%er 6+ +--5 asamended from time to time will continue to %e in force#


22/37


*%, "anks should not !rant any advance a!ainst %ullion /rimary !old# However asspecially minted !old coins sold %y %anks may not %e in the nature of %ullion orprimary !old it was indicated in the mail%o; clarificationdated April ()++ thatthere would %e no o%Dection to the %ank !rantin! loans a!ainst these coins# Howeveras pointed out in the monetary policy statement ()+6?+. there is a risk that some ofthese coins would %e wei!hin! much more there%y circumventin! the Reserve

"ank9s !uidelines re!ardin! restriction on !rant of advance a!ainst !old %ullion#Accordin!ly it is advised that while !rantin! advance a!ainst the security of speciallyminted !old coins sold %y them %anks should ensure that the wei!ht of the coin*s,does not e;ceed ) !rams per customer and the amount of loan to any customera!ainst !old ornaments !old Dewellery and !old coins *wei!hin! up to ) !rams,should %e within the "oard approved limit# Such loans to %e !ranted %y the %ankmay %e covered under the policy framed %y the %ank9s "oard in terms of our circular>"O>#@o#"C#+65(+#)+#)(6-. dated @ovem%er (( +--.# 2urther while !rantin!advances a!ainst the !old coins they may ensure without fail that the end use ofthe funds is for approved non?speculative purposes#

*c, 2urther as units of !old =;chan!e Traded 2unds *=T2, and !old Mutual 2undsare %acked %y %ullion primary !old it is clarified that the restriction on !rant of loana!ainst 0!old %ullion1 stipulated as per e;tant instructions will also %e applica%le to!rant of advance a!ainst units of !old =T2s and units of !old Mutual 2unds#

*d, "anks should desist from !rantin! advances to the silver %ullion dealers whichare likely to %e utilised for speculative purposes#

.*.11 Advances a#ainst !o,d Orna-ents &


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*ii, The tenor of the loans shall not e;ceed +( months from the date of sanctionir#"C#+++6#)6#)) ()+?+I dated Nuly + ()+, may %e followed %y the %anks in thisre!ard#

*;, "ank dis%ursin! 7ML should open current account of the %orrower with theconsent of stand?%y LC"7 issuin! %ank so that funds can %e arran!ed %y the%orrower in the account for monthly servicin! of interest and repayment of loan ondue date#

*;i, The 7ML providin! %ank may o%tain all relevant information from the %orrowerviK# daily salesstock position deposit of sales proceeds etc# at stipulated intervalsand there should %e proper sharin! of the a%ove information %etween 7ML providin!%ank and stand?%y LC"7 issuin! %ank#

*;ii, 'nspection of stocks $uality check of the !old stock verification of insurancecover etc may %e undertaken Dointly or on rotation %asis %y the 7ML providin! %ankand stand?%y LC"7 issuin! %ank#

*;iii, 'n case 7ML is !iven %y the nominated %ank to its own e;istin! customers !oldmetal loans under the scheme may %e carved out within the credit limit sanctioned%y the %ank# 'n case of new %orrowers the !old metal loan limit may %e fi;ed aftercarryin! out a detailed credit appraisal and due dili!ence#

*;iv, 7ML can %e availed of only %y !old Dewellers who are themselves

manufacturers of !old Dewellery# The Dewellers cannot sell the !old %orrowed under7ML scheme to any other party for manufacture of Dewellery#

(#6#+(#( The nominated %anks may continue to e;tend 7old *Metal, Loans toDewellery

e;porters su%Dect to the followin! conditions:

The e;posure assumed %y the nominated %ank e;tendin! the 7old *Metal, Loana!ainst the stand?%y LC "7 of another %ank will %e deemed as an e;posure on the!uaranteein! %ank and attract appropriate risk wei!ht as per the e;tant !uidelines#

The transaction should %e purely on %ack?to?%ack %asis i#e# the nominated %anks

should e;tend 7old *Metal, Loan directly to the customer of a non?nominated %anka!ainst the stand?%y LC "7 issued %y the latter#


25/37


7old *Metal, Loans should not involve any direct or indirect lia%ility of the %orrowin!entity towards forei!n suppliers of !old#

The %anks may calculate their e;posure and compliance with prudential normsdaily %y convertin! into Rupee the !old $uantity %y crossin! London AM fi;in! for7old FS >ollar rate with the rupee?dollar reference rate announced %y R"'#

(#6#+(#6# There will %e no chan!e in the e;istin! policy on lendin! a!ainst %ullion#"anks should reco!nise the overall risks in e;tendin! 7old *Metal, Loans as also ine;tendin! S"LC "7# "anks should lay down an appropriate risk mana!ement lendin! policy in this re!ard and comply with the recommendations of the 7hoshCommittee and other internal re$uirements relatin! to acceptance of !uarantees ofother %anks to o%viate the possi%ility of frauds in this area#

(#6#+(#.# @ominated %anks are not permitted to enter into any tie up arran!ementsfor retailin! of !old !old coins with any other entity includin! non?%ankin! financialcompanies co?operative %anks non?nominated %anks#

(#6#+(## The a%ove !uidelines are su%Dect to the directions issued under 2orei!n

=;chan!e Mana!ement Act *2=MA, from time to time#

.*.1* Loans and advances to Rea, "state Sector

Bhile appraisin! loan proposals involvin! real estate %anks should ensure that the%orrowers have o%tained prior permission from !overnment local !overnments otherstatutory authorities for the proDect wherever re$uired# 'n order that the loan approvalprocess is not hampered on account of this while the proposals could %e sanctioned innormal course the dis%ursements should %e made only after the %orrower has o%tainedre$uisite clearances from the !overnment authorities#

.*.1/ Loans and advances to Micro and S-a,, "nterrises 7MS"s8

MS= units havin! workin! capital limits of up to Rupees five crore from the %ankin! systemare to %e provided workin! capital finance computed on the %asis of () percent of theirproDected annual turnover# The %anks should adopt the simplified procedure in respect of allMS= units *new as well as e;istin!,#

.*.19 Loan syste- 0or de,ivery o0 $an% credit

*a, 'n the case of %orrowers enDoyin! workin! capital credit limits of Rupees ten crore anda%ove from the %ankin! system the loan component should normally %e 5) percent# "ankshowever have the freedom to chan!e the composition of workin! capital %y increasin! thecash credit component %eyond () percent or to increase the 0Loan Component1 %eyond 5)

percent as the case may %e if they so desire# "anks are e;pected to appropriately priceeach of the two components of workin! capital finance takin! into account the impact ofsuch decisions on their cash and li$uidity mana!ement#

*%, 'n the case of %orrowers enDoyin! workin! capital credit limit of less than Rupees tencrore %anks may persuade them to !o in for the 0Loan System1 %y offerin! an incentive inthe form of lower rate of interest on the loan component as compared to the cash creditcomponent# The actual percenta!e of 0loan component1 in these cases may %e settled %y the%ank with its %orrower clients#

*c, 'n respect of certain %usiness activities which are cyclical and seasonal in nature or haveinherent volatility the strict application of loan system may create difficulties for the%orrowers# "anks may with the approval of their respective "oards identify such %usiness

activities which may %e e;empted from the loan system of delivery#

.*.1: Lendin# under Consortiu- Arran#e-ent5Mu,ti,e an%in# Arran#e-ent


26/37


*a, Earious re!ulatory prescriptions re!ardin! conduct of consortium multiple %ankin! syndicate arran!ements were withdrawn %y Reserve "ank of 'ndia in Octo%er +--I with aview to introducin! fle;i%ility in the credit delivery system and to facilitate smooth flow ofcredit# However Central Ei!ilance Commission 7overnment of 'ndia in the li!ht of fraudsinvolvin! consortium multiple %ankin! arran!ements which have taken place recently hase;pressed concerns on the workin! of Consortium Lendin! and Multiple "ankin!

Arran!ements in the %ankin! system# The Commission has attri%uted the incidence of fraudsmainly to the lack of effective sharin! of information a%out the credit history and the conductof the account of the %orrowers amon! various %anks#

"anks are encoura!ed to stren!then their information %ack?up a%out the %orrowers enDoyin!credit facilities from multiple %anks as under:

*i, At the time of !rantin! fresh facilities %anks may o%tain declaration from the %orrowersa%out the credit facilities already enDoyed %y them from other %anks in the format prescri%edin circulars >"O>#@o#"/#"C#.I)5#+(#))+ ())5?)- dated Septem%er +- ())5 and>"O>#@o#"/#"C#-.)5#+(#))+ ())5?)- dated >ecem%er )5 ())5# 'n the case of e;istin!lenders all the %anks may seek a declaration from their e;istin! %orrowers availin!sanctioned limits of Rupees five crore and a%ove or wherever it is in their knowled!e that

their %orrowers are availin! credit facilities from other %anks and introduce a system ofe;chan!e of information with other %anks as indicated a%ove#

*ii, Su%se$uently %anks should e;chan!e information a%out the conduct of the %orrowers9accounts with other %anks in the format !iven in circulars>"O>#@o#"/#"C#.I)5#+(#))+())5?)- dated Septem%er +- ())5 and>"O>#@o#"/#"C#-.)5#+(#))+())5?)- dated >ecem%er )5 ())5 at least at $uarterlyintervals#

*iii, O%tain re!ular certification %y a professional prefera%ly a Company Secretary CharteredAccountant or Cost Accountant re!ardin! compliance of various statutory prescriptions thatare in vo!ue as per specimen !iven in circulars >"O>#@o#"/#"C#.I)5#+(#))+())5?)-dated Septem%er +- ())5 >"O>#@o#"/#"C#-.)5#+(#))+())5?)- dated >ecem%er )5

())5 and >"O>#@o#"/#"C#++))5#+(#))+())5?)- dated 2e%ruary +) ())-.

*iv, Make !reater use of credit reports availa%le from a credit information company which haso%tained Certificate or Re!istration from R"' and of which the %ank is a mem%er#

*v, The %anks should incorporate suita%le clauses in the loan a!reements in future *at thetime of ne;t renewal in the case of e;istin! facilities, re!ardin! e;chan!e of creditinformation so as to address confidentiality issues#

*%, 'n terms of our e;tant instructions on 9Lendin! under Consortium Arran!ement Multiple"ankin! Arran!ements9 %anks were advised to stren!then their information %ack?up a%outthe %orrowers enDoyin! credit facilities from multiple %anks %y o%tainin! declaration from the

%orrowers a%out the credit facilities already enDoyed %y them from other %anks# "anks werealso advised to e;chan!e information a%out the conduct of %orrowers9 accounts with other%anks in the specified format at least at $uarterly intervals# The format specified in thecircular was finalised in consultation with 'ndian "anks9 Association# "anks were furtheradvised on 9Lendin! under Consortium Arran!ement Multiple "ankin! Arran!ements9 thatthe information e;chan!e should also inter alia cover information relatin! to %orrowers9derivative transactions and unhed!ed forei!n currency e;posures# 'n terms of circular>"O>#"/#"C#@o#I( (+#).#+)6 ()+(?+6 dated @ovem%er (+ ()+( %anks are advised tostrictly adhere to the instructions re!ardin! sharin! of information relatin! to creditderivatives and unhed!ed forei!n currency e;posures amon! themselves and put in placean effective mechanism for information sharin! %y end?>ecem%er ()+(# Any sanction of

fresh loans ad hoc loans renewal of loans to new e;istin! %orrowers with effect fromNanuary + ()+6 should %e done only after o%tainin! sharin! necessary information# @on?adherence to the a%ove instructions %y %anks would %e viewed seriously %y the Reserve


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"ank and they would %e lia%le to action includin! imposition of penalty wherever consideredappropriate#

.*.1> or%in# Caita, 3inance to In0or-ation Techno,o#y and So0t'are Industry

2ollowin! the recommendations of the @ational Task 2orce on 'nformation Technolo!y andSoftware development Reserve "ank has framed !uidelines for e;tendin! workin! capital

to the said industry# "anks are however free to modify the !uidelines %ased on their owne;perience without reference to the Reserve "ank of 'ndia to achieve the purpose of the!uidelines in letter and spirit# The salient features of these !uidelines are set forth %elow:

*i, "anks may consider sanction of workin! capital limits %ased on the track record of thepromoters !roup affiliation composition of the mana!ement team and their work e;perienceas well as the infrastructure#

*ii, 'n the case of the %orrowers with workin! capital limits of up to Rs ( crore assessmentmay %e made at () percent of the proDected turnover# However in other cases the %anksmay consider assessment of M/"2 on the %asis of the monthly cash %ud!et system# 2or the%orrowers enDoyin! workin! capital limits of Rs +) crore and a%ove from the %ankin! systemthe !uidelines re!ardin! the loan system would %e applica%le#

*iii, "anks can stipulate reasona%le amount as promoters1 contri%ution towards mar!in#

*iv, "anks may o%tain collateral security wherever availa%le# 2irst second char!e on currentassets if availa%le may %e o%tained#

*v, The rate of interest as prescri%ed for !eneral cate!ory of %orrowers may %e levied#Concessional rate of interest as applica%le to pre?shipmentpost?shipment credit may %elevied#

*vi, "anks may evolve tailor?made follow up system for such advances# The %anks couldo%tain $uarterly statements of cash flows to monitor the operations# 'n case the sanction wasnot made on the %asis of the cash %ud!ets they can devise a reportin! system as theydeem fit#

.*.1@ !uide,ines 0or $an% 0inance 0or 4SU

Disinvest-ents o0 !overn-ent o0 India

(#6#+5#+ The instructions contained in the circular >"O> @o# >ir# "C #-)+6#)J#)-5 datedAu!ust (5 +--5 would not apply in the case of %ank finance to the successful %iddersunder the /SF disinvestment pro!ramme of the 7overnment su%Dect to the followin!:

"anks1 proposals for financin! the successful %idders in the /SF disinvestment pro!rammeshould %e approved %y their "oard of >irectors#

"ank finance should %e for ac$uisition of shares of /SF under a disinvestment pro!rammeapproved %y 7overnment of 'ndia includin! the secondary sta!e mandatory open offer

wherever applica%le and not for su%se$uent ac$uisition of the /SF shares# "ank financeshould %e made availa%le only for prospective disinvestments %y 7overnment of 'ndia#

The companies includin! the promoters to which %ank finance is to %e e;tended shouldhave ade$uate net worth and an e;cellent track record of servicin! loans availed from the%ankin! system#

The amount of %ank finance thus provided should %e reasona%le with reference to the%anks9 siKe its net worth and %usiness and risk profile#

(#6#+5#( 'n case the advances a!ainst the /SF disinvestment is secured %y the shares ofthe disinvested /SFs or any other shares %anks should follow R"'9s e;tant !uidelines oncapital market e;posures on mar!in ceilin! on overall e;posure to the capital market riskmana!ement and internal control systems surveillance and monitorin! %y the AuditCommittee of the "oard valuation and disclosure etc# 'n this re!ard %anks may %e !uided%y the Master Circular on =;posure @orms dated Nuly + ()+

(#6#+5#6 Stipulation of lock?in period for shares


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i, "anks should while decidin! to e;tend finance to the %orrowers who participate in the/SF disinvestment pro!ramme advise such %orrowers to e;ecute an a!reement where%ythey undertake to: *a, /roduce the letter of waiver %y the 7overnment for disposal of sharesac$uired under /SF disinvestment pro!ramme durin! the lock?in period or

*%, 'nclude a specific provision in the documentation with the 7overnment permittin! thepled!ee to li$uidate the shares durin! the lock?in period in case of shortfall in mar!in

re$uirement or default %y the %orrower#

*ii, "anks may e;tend finance to the successful %idders even thou!h the shares of thedisinvested company ac$uired to %e ac$uired %y the successful %idder are su%Dected to alock?in period other such restrictions which affect their li$uidity su%Dect to fulfillment offollowin! conditions:

*a, The documentation %etween the 7overnment of 'ndia and the successful %idder shouldcontain a specific provision permittin! the pled!ee to li$uidate the shares even durin! lock?inperiod that may %e prescri%ed in respect of such disinvestments in case of shortfall inmar!in re$uirements or default %y the %orrower#

*%, 'f the documentation does not contain such a specific provision the %orrower *successful

%idder, should o%tain waiver from the 7overnment for disposal of shares ac$uired under/SF disinvestment pro!ramme durin! the lock?in period#

(#6#+5#. As per the terms and conditions of the /SF disinvestments %y the 7overnment of'ndia the pled!ee %ank will not %e allowed to invoke the pled!e durin! the first year of thelock?in period# >urin! the second and third year of the lock?in period in case of ina%ility ofthe %orrower to restore the mar!in prescri%ed for the purpose %y way of additional security ornon?performance of the payment o%li!ations as per the repayment schedule a!reed upon%etween the %ank and the %orrower the %ank would have the ri!ht to invoke the pled!e# Thepled!ee %ank1s ri!ht to invoke the pled!e durin! the second and third years of the lock?inperiod would %e su%Dect to the terms and conditions of the documentation %etween7overnment and the successful %idder which mi!ht also cast certain responsi%ilities on the

pled!ee %anks#(#6#+5# 't is clarified that the concerned %ank must make a proper appraisal and e;ercisedue caution a%out creditworthiness of the %orrower and the financial via%ility of the proposal#The %ank must also satisfy itself that the proposed documentation relatin! to the disposal ofshares pled!ed with the %ank are fully accepta%le to the %ank and do not involveunaccepta%le risks on the part of the %ank#

(#6#+5#I 'n terms of '=C> Circular @o# +) )5#+(#)+ ()))? ())+ dated 5 Nanuary ())+%anks are precluded from financin! investments of @"2Cs in other companies and inter?corporate loans deposits to in other companies# The position has %een reviewed and%anks are advised that S/Es which comply with the followin! conditions would not %etreated as investment companies and therefore would not %e considered as @"2Cs:

a# They function as holdin! companies special purpose vehicles etc# with not less than -)per cent of their total assets as investment in securities held for the purpose of holdin!ownership stake

%# They do not trade in these securities e;cept for %lock sale

c# They do not undertake any other financial activities and

d# They do not holdaccept pu%lic deposits

(#6#+5#J S/Es which satisfy the a%ove conditions would %e eli!i%le for %ank finance for/SF disinvestments of 7overnment of 'ndia#

(#6#+5#5 'n this conte;t it may %e mentioned that 7overnment of 'ndia Ministry of 2inance

*>=A, 'nvestment >ivision vide its /ress @ote dated Nuly 5 ())( on !uidelines for =uroissues has permitted an 'ndian company utiliKin! A>R7>R=C" proceeds for financin!disinvestment pro!ramme of the 7overnment of 'ndia includin! the su%se$uent open offer#


29/37


"anks may therefore take into account proceeds from such A>R7>R=C" issues fore;tendin! %ank finance to successful %idders of the /SF disinvestment pro!ramme#

.*.1 !rant o0 Loans 0or ac=uisition o0 isanEi%as4atras 7E4s8

*i, Certain instances have come to notice where %anks have sanctioned loans to individuals*mostly Hi!h @etworth 'ndividuals?H@'s, for ac$uisition of isanEikas/atras *E/s,# The

H@'s were first re$uired to %rin! in +) of the total face value of the proposed investment inthe E/s as mar!in and the remainin! -) of the investment was treated as loan andfunded %y the %ank

>"R MC on Loans & Advances

for ac$uisition of the E/s# Once the E/s were ac$uired in the %orrower1s name the samewere pled!ed thereafter to the %ank#

*ii, The sanction of loans as descri%ed a%ove is not in conformity with the o%Dectives of smallsavin!s schemes# The %asic o%Dective of small savin!s schemes is to provide a secureavenue of savin!s for small savers and promote savin!s as well as to inculcate the ha%it ofthrift amon! the people# The !rant of loans for ac$uirin!investin! in E/s does not promotefresh savin!s and rather channelises the e;istin! savin!s in the form of %ank deposits tosmall savin!s instruments and there%y defeats the very purpose of such schemes# "anksshould therefore ensure that no loans are sanctioned for ac$uisition ofinvestin! in SmallSavin!s 'nstruments includin! isanEikas/atras.

.*.B >F Savin#s onds BB; :.9F Savin#s onds BB* 7Non2ta(a$,e8 & @F Savin#s7Ta(a$,e8 onds BB*2Co,,atera, 0aci,ity

't has %een decided %y the 7overnment of 'ndia to allow pled!e or hypothecation or lien ofthe %onds issued under the captioned schemes as collateral for o%tainin! loans fromscheduled %anks# Accordin!ly the holders of the said %onds will %e entitled to create pled!eor hypothecation or lien in favour of scheduled %anks in accordance with section (5 of the7overnment Securities Act ())I *the 7 S Act, and re!ulations (+ and (( of the 7overnment

Securities Re!ulations ())J *the 7 S Re!ulations,# A copy each of the amendin!notification num%ers @o# 2#.*+6,?B & M())( dated Au!ust +- ())5 for J Savin!s "onds())( @o# 2#.*-,?B & M())6 dated Au!ust +- ())5 for I# Savin!s "onds ())6 *@on?ta;a%le, and @o# 2#.*+),?B & M())6 dated Au!ust +- ())5 for 5 Savin!s *Ta;a%le,"onds ())6 issued %y the 7overnment of 'ndia is enclosed with R"' circular >"O># @o#>ir#"C#II+6#)6#))())5?)- dated Octo%er (. ())5# 'n view of the a%ove amendments%anks are advised to facilitate e;tension of collateral facility throu!h pled!e or hypothecationor lien as per the procedure laid down in Section (5 of the 7S Act and Re!ulations (+ and(( of the 7S Re!ulations# Relevant e;tracts of the Act Re!ulations alon! with the formsand the relative press release issued %y the 7overnment of 'ndia are also enclosed in thea%ove circular for ready reference# 't may %e noted that collateral facility is availa%le only forthe loans e;tended to the holders of the %onds and as such the facility is not availa%le in

respect of the loans e;tended to third parties#.*.1 !uide,ines on Sett,e-ent o0 Non 4er0or-in# Assets2

O$tainin# Consent Decree 0ro- Court

The >e%t Recovery Tri%unal =rnakulam has o%served in a case that althou!h the %ank andthe defendant %orrowers had reached a settlement under the compromise SettlementScheme the %ank had not only failed to o%tain the consent decree from the >RT %ut hadalso suppressed from the >RT the fact of settlement for more than two and half yearsthere%y violatin! the aforesaid R"' !uidelines and causin! the Tri%unal to unnecessarilywaste its valua%le time# "anks are therefore advised to invaria%ly ensure that once a caseis filed %efore a Court >RT "'2R any settlement arrived at with the %orrower is su%Dect too%tainin! a consent decree from the Court >RT "'2R concerned#

.*. 4ro?ect 3inance 4ort0o,io o0 an%s


30/37


(#6#((#+ At the time of financin! proDects %anks !enerally adopt one of the followin!methodolo!ies for determinin! the level of promoters1 e$uity:

+, /romoters %rin! their entire contri%ution upfront %efore the %ank starts dis%ursin! itscommitment#

(, /romoters %rin! certain percenta!e of their e$uity *.) ), upfront and

%alance is %rou!ht in sta!es#

6, /romoters a!ree a%?initio that they will %rin! in e$uity funds proportionately as the %anksfinance the de%t portion#

(#6#((#( Bhile it is appreciated that such decisions are to %e taken %y the %oards of therespective %anks it has %een o%served that the last method has !reater e$uity fundin! risk#'n order to contain this risk %anks are advised in their own interest to have a clear policyre!ardin! the >e%t =$uity Ratio *>=R, and to ensure that the infusion of e$uityfund %ypromoters should %e such that the stipulated level of >=R is maintained at all times# 2urtherthey may adopt fundin! se$uences so that possi%ility of e$uity fundin! %y %anks is o%viated#

.*.* rid#e Loans a#ainst receiva$,es 0ro- !overn-ent

*i, "anks should not e;tend %rid!e loans a!ainst amounts receiva%le from CentralState7overnments %y way of su%sidies refunds reim%ursements capital contri%utions etc# Thefollowin! e;emptions are however made:

a, "anks may continue to finance su%sidy receiva%le under the normal Retention /riceScheme *R/S, for periodsupto I) days in case of fertiliKer industry# 't is clarified that thefacility is %ein! allowed as a purely temporary measure and the fertiliKer companies shouldstren!then their financial position !radually so that they do not depend on the %anks forfinance a!ainst su%sidy# @o other su%sidy receiva%les such as those in respect of claimsraised %y units on the %asis of e;pected revision in retention price %ecause of escalation incosts of inputs and in respect of frei!ht etc# should %e financed %y the %anks#

%, "anks may continue to !rant finance a!ainst receiva%les from 7overnment %y e;porters*viK# >uty >raw "ack and '/RS, to the e;tent covered %y the e;istin! instructions#

*ii, "anks have %een permitted to sanction to companies for a period not e;ceedin! one yeara!ainst e;pected e$uity flowsissues#

*iii, "anks should formulate their own internal !uidelines with the approval of their "oard of>irectors for !rant of such loans e;ercisin! due caution and attention to security of suchloans#

*iv, "anks may e;tend %rid!e loans a!ainst the e;pected proceeds of @on?Converti%lede%entures =;ternal Commercial "orrowin!s 7lo%al >epository receipts andor funds in the

nature of 2orei!n >irect 'nvestments provided the %anks are satisfied that the %orrowin!company has already made firm arran!ements for raisin! the aforesaid resourcesfunds#

.*./ 3und5Non23und $ased credit 3aci,ities to Overseas


31/37


*ii, /roper systems for mana!ement of credit and interest rate risks arisin! out of such cross%order lendin! are in place

*iii, Bhile e;tendin! such facilities %anks will have to comply with Section ( of the "ankin!Re!ulation Act +-.- in terms of which the assets in 'ndia of every $uarter shall not %e lessthan J of its demand and time lia%ilities in 'ndia#

*iv, The resource %ase for such lendin! should %e funds held in forei!n currency accountssuch as 2C@R*", ==2C R2C etc# in respect of which %anks have to mana!e e;chan!erisk#

*v, Maturity mismatches arisin! out of such transactions are within the overall !ap limitsapproved %y R"'#

*vi, Adherence to all e;istin! safe!uardsprudential !uidelines relatin! to capital ade$uacye;posure norms etc# applica%le to domestic creditnon?credit e;posures#

*vii, The setup of the step?down su%sidiary should %e such that %anks can effectively monitorthe facilities !ranted %y them#

(#6#(.#( 2urther the loan policy for such creditnon?credit facility should %e interalia in

keepin! with the followin!:

*i, 7rant of such loans is %ased on proper appraisal and commercial via%ility of the proDectsand not merely on the reputation of the promoters %ackin! the proDect# @on?fund %asedfacilities should %e su%Dected to the same ri!orous scrutiny as fund?%ased limits#

*ii, The countries where the Doint ventures wholly owned su%sidiaries are located shouldhave no restrictions applica%le to these companies in re!ard to o%tainin! forei!n currencyloans or for repatriation etc# and should permit non?resident %anks to have le!al char!e onsecuritiesassets a%road and the ri!ht disposal in case of need#

(#6#(.#6 'n terms of our 2orei!n =;chan!e >epartment circular A#/#*>'R Series,

Circular @o +6. dated Nune ( ()+( 'ndian companies in the manufacturin!

and infrastructure sector were allowed to avail of e;ternal commercial

%orrowin!s *=C"s, for repayment of Rupee loans availed of from domestic

%ankin! system and or for fresh Rupee capital e;penditure under the

approval route su%Dect to satisfyin! certain conditions# However if the =C" is

availed from overseas %ranches su%sidiaries of 'ndian %anks the risk

remains within the 'ndian %ankin! system# 't has therefore %een decided that

repayment of Rupee loans availed of from domestic %ankin! system throu!h

=C"s e;tended %y overseas %ranches su%sidiaries of 'ndian %anks will not

%e permitted with effect from April (( ()+.#

./ Trans0er o0 $orro'a, accounts 0ro- one $an% to another

Of late R"' has %een receivin! references complaints that critical information on the healthof the %orrowal accounts %ein! taken over is not %ein! shared %y the transferor %ank with thetransferee %ank resultin! in inade$uate due dili!ence at the time of takin! over of accounts#Therefore %anks are advised that:

a, "anks should put in place a "oard approved policy with re!ard to take?over of accountsfrom another %ank# The policy may include norms relatin! to the nature of the accounts thatmay %e taken over authority levels for sanction of takeover reportin! of takeover to hi!her

authorities monitorin! mechanism of taken over accounts credit audit of taken overaccounts e;amination of staff accounta%ility especially in case of $uick mortality of suchcases after takeover periodic review of taken over accounts at "oard "oard Committeelevel Top Mana!ement level etc#


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%, 'n addition %efore takin! over an account the transferee %ank should o%tain necessarycredit information from the transferor %ank as per the format prescri%ed in Anne; '' of R"'circular >"O>#@o#"/#"C#-. )5#+(#))+())5?)- dated >ecem%er 5 ())5 on Lendin!under Consortium Arran!ement Multiple "ankin! Arran!ements# This would ena%le thetransferee %ank to %e fully aware of the irre!ularities if any e;istin! in the %orrower9saccount*s, with the transferor %ank# The transferor %ank on receipt of a re$uest from the

transferee %ank should share necessary credit information as per the prescri%ed format atthe earliest#

.9 !uide,ines on 3air 4ractices Code 0or Lenders

(##+# On the %asis of the recommendations of the Borkin! 7roup on Lenders1 Lia%ility Lawsconstituted %y the 7overnment of 'ndia the feasi%ility of introducin! the 2air /ractices Codefor Lenders was e;amined in consultation with 7overnment select %anks and financialinstitutions# The !uidelines have since %een finalised and %anks all 'ndia 2inancial'nstitutions are advised to adopt the followin! %road !uidelines and frame the 2air /racticesCode duly approved %y their "oard of >irectors#

(##( 7uidelines

*i, Applications for loans and their processin!*a, Loan application forms in respect of all cate!ories of loans irrespective of the amount ofloan sou!ht %y the %orrower should %e comprehensive# Bith a view to %rin!in! in fairnessand transparency %anks are advised that they must transparently disclose to the %orrowerall information a%out fees char!es paya%le for processin! the loan application the amountof fees refunda%le if loan amount is not sanctioned dis%ursed pre?payment options andchar!es if any penalty for delayed repayments if any conversion char!es for switchin! loanfrom fi;ed to floatin! rates or vice versa e;istence of any interest reset clause and any othermatter which affects the interest of the %orrower# Such information should also %e displayedon the we%site of the %anks for all cate!ories of loan products# 't has come to our notice thatsome %anks levy in addition to a processin! fee certain char!es which are not initially

disclosed to the %orrower# 't may %e mentioned that levyin! such char!es su%se$uentlywithout disclosin! the same to the %orrower is an unfair practice# "anks2's should ensurethat all information relatin! to char!esfees for processin! are invaria%ly disclosed in the loanapplication forms# 2urther the %anks must inform 0all?in?cost1 to the customer to ena%le himto compare the rates char!es with other sources of finance# 't should also %e ensured thatsuch char!es fees are non?discriminatory#

*%, "anks and financial institutions should devise a system of !ivin! acknowled!ement forreceipt of all loan applications#

*c, Timelines for Credit >ecisions

Bhile %anks are re$uired to carry out necessary due dili!ence %efore arrivin! at creditdecisions timely and ade$uate availa%ility of credit is a pre?re$uisite for successful

implementation of lar!e proDects# Therefore %anks are advised that they should clearlydelineate the procedure for disposal of loan proposals with appropriate timelines andinstitute a suita%le monitorin! mechanism for reviewin! applications pendin! %eyond thespecified period# 't is however reiterated that there should not %e any compromise on duedili!ence re$uirements# "anks may also make suita%le disclosures on the timelines forconveyin! credit decisions throu!h their we%sites notice?%oards product literature etc#

*d, "anks financial institutions should verify the loan applications within a reasona%le periodof time# 'f additional details documents are re$uired they should intimate the %orrowersimmediately#

*e, 'n case of all cate!ories of loans irrespective of any threshold limits includin! credit cardapplications the lenders should convey in writin! the main reasonreasons which in theopinion of the %ank after due consideration have led to reDection of the loan applicationswithin stipulated time#


33/37


*ii, Loan appraisal and termsconditions

a, Lenders should ensure that there is proper assessment of credit application %y %orrowers#They should not use mar!in and security stipulation as a su%stitute for due dili!ence oncredit worthiness of the %orrower#

%, The lender should convey to the %orrower the credit limit alon! with the terms and

conditions thereof and keep the %orrower9s acceptance of these terms and conditions !ivenwith his full knowled!e on record#

c, Terms and conditions and other caveats !overnin! credit facilities !iven %y %anksfinancial institutions arrived at after ne!otiation %y lendin! institution and the %orrower should%e reduced in writin! and duly certified %y the authorised official# A copy of the loana!reement alon! with a copy each of all enclosures $uoted in the loan a!reement should %efurnished to the %orrower# 't is reiterated that %anks should invaria%ly furnish a copy of theloan a!reement alon! with a copy each of all enclosures $uoted in the loan a!reement to allthe %orrowers at the time of sanction dis%ursement of loans#

d, As far as possi%le the loan a!reement should clearly stipulate credit facilities that aresolely at the discretion of lenders# These may include approval or disallowance of facilities

such as drawin!s %eyond the sanctioned limits honourin! che$ues issued for the purposeother than specifically a!reed to in the credit sanction and disallowin! drawin! on a%orrowal account on its classification as a non?performin! asset or on account of non?compliance with the terms of sanction# 't may also %e specifically stated that the lender doesnot have an o%li!ation to meet further re$uirements of the %orrowers on account of !rowth in%usiness etc# without proper review of credit limits#

e, 'n the case of lendin! under consortium arran!ement the

Documents

Statutory Other Restrictions