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EXPOSURE NORMS Made by:- Kumar Anurag - 11020241048 Mohil Poojara -11020241051 Pratik Chury - 11020241055

Exposure norms

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Page 1: Exposure norms

EXPOSURE NORMSMade by:-

Kumar Anurag - 11020241048

Mohil Poojara -11020241051

Pratik Chury - 11020241055

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INTRODUCTION

RBI has advised banks to limit their exposure to specific

industry or sectors Prescribed regulatory limit on banks’ exposure to

individual and group borrowers Certain statutory and regulatory exposure limits

in respect of advances against/investments in shares, convertible debentures/bonds, units of equity-oriented mutual funds, and all exposures to venture capital firms

Reason ?

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Better Risk Management and avoidance of

concentration of Credit Risk

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IMPORTANT DEFINITIONS

Exposure: Credit exposure(funded and non funded),

investment exposure Higher of sanctioned limit or outstandings will be

taken for exposure limit Credit Exposure:

All types of funded or non funded credit limit Facilities extended by ways of leasing, hire

purchase finance, and factoring services

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IMPORTANT DEFINITIONS

Investment Exposure: Investment in shares and debentures of

companies, PSU bonds, Commercial Papers Investment in corporate bonds, guaranteed by

PFI, will be treated as exposure to the PFI For PFI – exposure of 50% on corporate as its a

non fund facility For Banks – exposure of 100% on PFIs Investments issued by SC/RC as compensation

consequent upon sale of financial assets will constitute exposure on the SC/RC

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IMPORTANT DEFINITIONS

Capital Funds Tier I and Tier II capital as defined under Capital

Adequacy Standards Infusion of capital after published balance sheet

date will also be considered for determining exposure ceiling

Other accretion by way of quarterly profit etc. not allowed

Prohibition in taking exposure exceeding ceiling in anticipation of infusion of capital

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IMPORTANT DEFINITIONS

Net Worth Net worth would comprise Paid-up capital plus

Free Reserves including Share Premium ( but excluding Revaluation Reserves), plus Investment Fluctuation Reserve and credit balance in Profit & Loss account, less debit balance in Profit and Loss account, Accumulated Losses and Intangible Assets.

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IMPORTANT DEFINITIONS

Group Left to perception of banks Guiding principle: commonality of management

and effective control Split in group: treated as 2 different groups,

prudence to be administered to check whether split is engineered to get more exposure

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IMPORTANT DEFINITIONS

Measurement of Credit Exposure to Derivative Products Current Exposure Method

The current exposure method is the sum of current credit exposure and potential future credit exposure. While computing the credit exposure banks may exclude 'sold options', provided the entire premium / fee or any other form of income is received / realized.

Current credit exposure is defined as the sum of the positive mark-to-market value of these contracts. The Current Exposure Method requires periodical calculation of the current credit exposure by marking these contracts to market, thus capturing the current credit exposure.

Potential future credit exposure is determined by multiplying the notional principal amount of each of these contracts irrespective of whether the contract has a zero, positive or negative mark-to-market value by the relevant add-on factor according to the nature and residual maturity of the instrument as detailed by the RBI in its Circular dt. 02.07.12

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EXPOSURES TO INDIVIDUAL/GROUP BORROWERS Exposure Ceiling Limits

15% of Capital Funds for Individual borrowers 40% of Capital Funds for Group borrowers

Extension of Ceiling Limits 5% for Individual and 10% for Group

Condition: Additional credit exposure is on account of extension of credit to infrastructure projects

5% for Individuals and Group Condition: Exceptional circumstances, approval of board,

disclosures in Annual Report 25% + 5%

Condition: Oil companies with GOI Oil Bonds

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NBFCS

Exposure Ceiling Limits NBFC – 10% NBFC – AFC – 15% Infrastructure Finance Companies – 15%

Extensions Additional 15% - NBFC, Additional 20% - NBFC

(AFC), Up to 20% - IFCs Condition: Lent to infrastructure sector

Banks should set internal credit limits for all NBFCs

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BILLS DISCOUNTED UNDER LC

Discounting/purchasing/negotiating bank Exposure to LC Issuing Bank

LC Issuing Bank Exposure to Borrower

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EXEMPTIONS

Rehabilitation of Sick/Weak Industrial Units Food Credit Guarantee by GOI Loans against own Term Deposits Exposure on NABARD

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EXPOSURE TO INDUSTRY/CERTAIN SECTORS

Internal Exposure Limits Fixing of Sectoral Limits Foreign Currency Exposure

Foreign currency loans > USD 10 mio, policy for appropriate limits to be set

Exporter SMEs Monthly review and monitoring unhedged portion of

exposure > USD 25 mio

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EXPOSURE TO INDUSTRY/CERTAIN SECTORS

Exposure to Real Estate Frame comprehensive prudential norms Exposure to SEZs or for acquisition of units ins

SEZs which includes real estate will be treated as exposure to commercial real estate sector for the purpose of risk weight and capital adequacy

Exposure to Leasing, Hire Purchase and Factoring Services Should not exceed 10 % of total advances

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EXPOSURE TO INDUSTRY/CERTAIN SECTORS

Exposure to Indian JVs/Wholly owned subsidiaries Abroad and Overseas Step-down Subsidiaries of Indian Corporates Exposure by way of credit and non credit finance

for facilitating exports should not exceed 20% of banks’ unimpaired capital funds

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EXPOSURE TO CAPITAL MARKETS

Banks’ capital market exposure includes both direct and indirect exposures on the various components of capital market such as direct investment in equity shares, convertible debentures, advances against shares/bonds/debentures, and etc. secured and unsecured advances to stock brokers and guarantees issued on behalf of them, etc.

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EXPOSURE TO CAPITAL MARKETS

Irrevocable Payment Commitments (IPCs) Banks issue Irrevocable Payment Commitments

(IPCs) in favour of stock exchanges on behalf of domestic mutual funds/FIIs to facilitate the transactions done by these clients

It is a financial guarantee

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LIMITS ON EXPOSURE TO CAPITAL MARKETS

Statutory Limits No banking company shall hold shares in any

company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30 percent of the paid-up share capital of that company or 30 percent of its own paid-up share capital and reserves, whichever is less (Section 19(2) of the B.R. Act, 1949)

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LIMITS ON EXPOSURE TO CAPITAL MARKETS

Regulatory Limit (Solo/Consolidated Basis) The aggregate exposure of a bank/consolidated

bank to the capital markets should not exceed 40 per cent of its net worth/consolidated net worth as on March 31 of the previous year. Within this overall ceiling, the bank’s direct investment/aggregate direct exposure by way of consolidated investment in shares, convertible bonds / debentures, units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) [both registered and unregistered] should not exceed 20 per cent of its net worth/consolidated net worth

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ITEMS EXCLUDED FROM CAPITAL MARKETS EXPOSURE Banks’ investments in own subsidiaries, joint ventures,

sponsored Regional Rural Banks (RRBs) and investments in shares and convertible debentures, convertible bonds issued by institutions forming crucial financial infrastructure as listed out in the RBI Circular.

Tier I and Tier II debt instruments issued by other banks;

Investment in Certificate of Deposits (CDs) of other banks;

Preference Shares, Non-convertible debentures and non-convertible bonds;

Units of Mutual Funds under schemes where the corpus is invested exclusively in debt instruments;

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ITEMS EXCLUDED FROM CAPITAL MARKETS EXPOSURE

Shares acquired by banks as a result of conversion of debt/overdue interest into equity under Corporate Debt Restructuring (CDR) mechanism;

Term loans sanctioned to Indian promoters for acquisition of equity in overseas joint ventures / wholly owned subsidiaries under the refinance scheme of Export Import Bank of India (EXIM Bank).

Own underwriting commitments, as also the underwriting commitments of their subsidiaries, through the book running process

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FINANCING OF EQUITIES AND INVESTMENT IN SHARESNo. Nature of Capital Market

Exposure Other Restriction/Norms

1 Advances against shares to individuals (shares, convertible bonds, convertible debentures and units of equity oriented mutual funds)

Physical Form: Not to exceed Rs. 10 LakhDemat Form : Not to exceed Rs. 20 Lakh

2 Financing of Initial Public Offerings (IPOs) to individuals (shares, convertible bonds/ debentures, units of equity oriented mutual funds and PSU bonds

Not exceed : Rs.10 lakh (for subscribing to IPOs)

3 Bank finance to assist employees to buy shares of their own companies under Employees Stock Option Plan (ESOP)/ reserved by way of employees' quota under IPO including Follow-on Public Offers (FPOs)

To the extent of 90% of the purchaseprice of the shares or Rs.20 lakhwhichever is lower.

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FINANCING OF EQUITIES AND INVESTMENT IN SHARESNo. Nature of Capital Market

Exposure Other Restriction/Norms

4 Advances against shares to Stock Brokers & Market Makers

Banks are free to provide credit facilities based on their commercial judgment, but do not extend credit facilities directly or indirectly for arbitrage operations

5 Bank financing to individuals againstshares to joint holders or third partyBeneficiaries

Finance should not be to circumvent the limits placed on loans/advances against shares and other securities specified above

6 Advances against units of Mutual Funds

Subject to:-*units listed in the Stock Exchange*completed the minimum lock-in period (relevant scheme)*linked to Net Asset Value(NAV)/repurchase price or the market value whichever is less;*attract the quantum and margin requirements;*purpose oriented

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FINANCING OF EQUITIES AND INVESTMENT IN SHARES

No. Nature of Capital Market Exposure

Other Restriction/Norms

7 Advances to other borrowers againstshares/ debentures/ bonds

Can accept as collateral for secured loans granted as working capital or for other productive purposes or margin for new projects or expansion of existing business

8 Bank Loans for financing promoters’contribution

Individual : 15% of capital fundsGroup : 40% of capital funds And subject to the Statutory limit on share holding in companies (Sec. 19(2) of B.R. Act 1949

9 Bridge Loans Period not exceeding one year

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FINANCING OF EQUITIES AND INVESTMENT IN SHARESNo. Nature of Capital Market

Exposure Other Restriction/Norms

10 Investments in Venture Capital Funds(VCFs)

It should not exceed 20% within thecapital market exposure norm of40% of the net worth as on March31st of previous year

11 Margin on advances against shares / issue of guarantees on behalf of stockbrokers and market makers

Uniform margin of 50% of whichminimum cash margin of 25%

12 Disinvestment Programme of GOI

Within the regulatory ceiling of 40% of net worth. Relaxation, on case to case basis, is permitted to banks in such a manner that the total capital exposure, net of exposure under the disinvestment programme, is within the regulatory/ prudential individual/ group exposure ceiling

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FINANCING OF EQUITIES AND INVESTMENT IN SHARESNo. Nature of Capital

Market Exposure Other Restriction/Norms

13 Financing for acquisition of equity in Overseas companies

Statutory limit on share holding incompanies (Sec. 19(2) of B.R. Act1949

14 Refinance Scheme of Export Import Bank of India

Approval of the EXIM Bank forrefinance

15 Arbitrage Operations Banks prevented from undertakingarbitrage operations themselves andextending credit facilities for thepurpose

16 Margin Trading Minimum margin 50% and theshares should be in dematerializedmode

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RISK MANAGEMENT AND INTERNAL CONTROL SYSTEMS

Transparent policy Investment committee Suitable Risk Management Mechanism Suitable Audit committee Valuation and Disclosure

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CROSS HOLDING AMONG BANKS/FINANCIAL INSTITUTIONS

Capital Status(should not exceed 10% of investing bank’s capital funds) Equity shares; Preference shares eligible for capital status; Subordinated debt instruments; Hybrid debt capital instruments; and Any other instrument approved as in the nature

of capital Subject to 5% of investee banks equity

capital Outside the purview of ceiling prescribed

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MARGIN REQUIREMENTS

Banks exposure to commodity markets Banks exposure in respect of currency

derivative segment

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LIMITS ON EXPOSURE TO UNSECURED GUARANTEES AND UNSECURED ADVANCE

Formulate own policies The rights, licenses, authorizations, etc., charged to

the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be reckoned as tangible security for the purpose of determining the amount of unsecured advances.

Annuities under build-operate-transfer (BOT) model in respect of road/highway projects and toll collection rights where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities, subject to the condition that banks’ right to receive annuities and toll collection rights is legally enforceable and irrevocable.

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THANK YOU