RBI / 2004-05 / 79 July 30, 2004 All Scheduled Commercial Banks (Excluding RRBs) Dear Sirs, Master Circular-Loans and Advances –Statutory and Other Restrictions
Ref No. DBOD. Dir. BC. 20 /13.03.00/2004-05
Please refer to the Master Circular DBOD. No. Dir. BC. 18/13.03.00/2003-04 dated August 22, 2003 consolidating the instructions/guidelines issued to banks till June 30, 2003 relating to statutory and other restrictions on Loans and Advances. The Master Circular has been suitably updated by incorporating the instructions issued up to June 30, 2004 and has been placed on the RBI website (http://www.rbi.org.in)
2. It may be noted that all the instructions contained in circulars listed in the Appendix have been consolidated. We advise that this revised Master Circular supersedes the instructions contained in these circulars issued by the RBI.
Yours faithfully
(Prashant Saran)
Chief General Manager
Table of contents
1. | Statutory Restrictions | |
1.1 | Advances against bank’s Own Shares | |
1.2 | Advances to bank’s Directors | |
1.3 | Restrictions on Holding Shares in Companies | |
1.4 | Restrictions on Credit to Companies for Buy-Back of their Securities | |
2. | Regulatory Restrictions | |
2.1 | Granting loans and advances to relatives of Directors | |
2.2 | Restrictions on Grant of Loans and Advances to Officers and the Relatives of Senior Officers of Banks | |
2.3 | Restrictions on Grant of Financial Assistance to Industries Producing/Consuming Ozone Depleting Substances (ODS) | |
2.4 | Restrictions on Advances against Sensitive Commodities under Selective Credit Control (SCC) | |
3. | Restrictions on other loans and advances | |
3.1 | Loans and advances against Shares, Debentures and Bonds | |
3.2 | Advances against Money Market Mutual Funds | |
3.3 | Advances against Fixed Deposits Receipts issued by Other Banks | |
3.4 | Advances to Agents/Intermediaries for Deposits Mobilisation | |
3.5 | Loans against Certificate of Deposits (CDs) | |
3.6 | Bank Finance to Non-Bank Financial Companies (NBFCs) | |
3.7 | Bank Finance to Equipment Leasing Companies | |
3.8 | Bank Finance for Purchase/Lease of Existing Assets | |
3.9 | Financing of Infrastructure/Housing Projects | |
3.10 | Issue of Bank Guarantees in favour of financial institutions | |
3.11 | Discounting/rediscounting of bills by banks | |
3.12 | Advances against gold/silver bullion | |
3.13 | Loans and advances to Small Scale Industries | |
3.14 | Loan system for delivery of Bank Credit | |
3.15 | Working Capital Finance to Information Technology and Software Industry | |
3.16 | Guidelines for Bank Finance for PSU Disinvestments of Government of India | |
Annexure 1 | ||
Annexure 2 | ||
Annexure 3 | ||
Appendix |
Master Circular on Loans and Advances – Statutory and Other Restrictions
1.1 Advances against bank's Own Shares
In terms of Section 20(1) of the Banking Regulation Act, 1949, a bank cannot grant any loans and advances on the security of its own shares.
1.2 Advances to bank's Directors
Section 20(1) of the Banking Regulation Act, 1949 also lays down the restrictions on loans and advances to the Directors and the firms in which they hold substantial interest. 1.2.1The banks are prohibited from entering into any commitment for granting any loans or advances to or on behalf of any of its directors, or any firm in which any of its directors is interested as partner, manager, employee or guarantor, or any company (not being a subsidiary of the banking company or a company registered under Section 25 of the Companies Act, 1956, or a Government company) of which, or the subsidiary or the holding company of which any of the directors of the bank is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest, or any individual in respect of whom any of its directors is a partner or guarantor. 1.2.2 There are certain exemptions in this regard. In the explanation to the Section, ‘loans or advances’ shall not include any transaction which the Reserve Bank may specify by general or special order as not being a loan or advance for the purpose of this Section. While doing so the RBI shall, keep in view the nature of the transaction, the period within which, and the manner and circ*mstances in which, any amount due on account of the transaction is likely to be realised, the interest of the depositors and other relevant considerations.
1.2.3 If any question arises whether any transaction is a loan or advance for the purpose of this Section, it shall be referred to RBI, whose decision thereon shall be final.
1.2.4 For the above purpose, the term 'loans and advances' shall not include the following: - Note: For obtaining the prior approval of the Reserve Bank as stipulated in clause (d) and (e) above, the bank should make an application to the concerned regional office of the Bank.
1.2.5Purchase of or discount of bills from directors and their concerns which is in the nature of clean accommodation is reckoned as ‘loans and advances’ for the purpose of Section 20 of the Banking Regulation Act, 1949.
1.2.6 As regards giving guarantees and opening of L/Cs on behalf of bank’s directors, it is pertinent to note that in the event of the principal debtor committing default in discharging his liability and the bank being called upon to honour its obligations under the guarantee or L/C, the relationship between the bank and the director could become one of the creditor and debtor. Further, it is possible for the directors to evade the provisions of Section 20 by borrowing from a third party against the guarantee given by the bank. Such transactions may defeat the very purpose of restrictions imposed under Section 20, if the bank does not take appropriate steps to ensure that the liabilities there under do not devolve on them.
1.2.7In view of the above, while extending non-fund based facilities such as guarantees, L/Cs, acceptance on behalf of directors and the companies/firms in which the directors are interested, it should be ensured that -
1.2.8 In case, such contingencies arise as at (b) & (c) above, the bank will be deemed to be a party to the violation of the provisions of Section 20 of the Banking Regulation Act, 1949.
1.2.9 Restrictions on Power to Remit Debts
Section 20A of the Banking Regulation Act, 1949 stipulates that notwithstanding anything to the contrary contained in Section 293 of the Companies Act, 1956, a banking company shall not, except with the prior approval of the Reserve Bank, remit in whole or in part any debt due to it by - Any remission made in contravention of the provisions stated above shall be void and have no effect.
1.3 Restrictions on Holding Shares in Companies
1.3.1 In terms of Section 19(2) of the Banking Regulation Act, 1949, the banks should not hold shares in any company except as provided in sub-section (1) 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. 1.3.2 Further, in terms of Section 19(3) of the Banking Regulation Act, 1949, the banks should not hold shares whether as pledgee, mortgagee or absolute owner, in any company in the management of which any managing director or manager of the bank is in any manner concerned or interested 1.3.3 Accordingly, while granting loans and advances against shares, statutory provisions contained in Sections 19(2) and (3) should be strictly observed.
1.4 Restrictions on Credit to Companies for Buy-back of their Securities
In terms of Section 77A(1) of the Companies Act, 1956, the companies are permitted to purchase their own shares or other specified securities out of their subject to compliance of various conditions specified in the Companies (Amendment) Act, 1999. Therefore, the banks should not provide loans to companies for buy-back of shares/securities.
2.1Granting loans and advances to relatives of Directors Without prior approval of the Board or without the knowledge of the Board, no loans and advances should be granted to relatives of bank's Chairman/Managing Director or other Directors, Directors (including Chairman/Managing Director) of other banks and their relatives, Directors of Scheduled Co-operative Banks and their relatives, Directors of Subsidiaries/Trustees of Mutual Funds/Venture Capital Funds set up by the financing banks or other banks as per details given below 2.1.1Lending to directors and their relatives on reciprocal basis There have been instances where certain banks have developed an informal understanding or mutual/reciprocal arrangement among themselves for extending credit facilities to each other’s directors, their relatives, etc. By and large, they did not follow the usual procedures and norms in sanctioning credit limits to the borrowers, particularly those belonging to certain groups or directors, their relatives, etc. Facilities far in excess of the sanctioned limits and concessions were allowed in the course of operation of individual accounts of the parties. Although, there is no legal prohibition on a bank from giving credit facilities to a director of some other banks or his relatives, serious concern was expressed in Parliament that such quid pro quo arrangements are not considered to be ethical. The banks should, therefore, follow the guidelines indicated below in regard to grant of loans and advances and award of contracts to the relatives of their directors and directors of other banks and their relatives: 2.1.2Unless sanctioned by the Board of Directors/Management Committee, banks should not grant loans and advances aggregating Rs. 25 lakhs and above to -
2.1.3 Unless sanctioned by the Board of Directors/Management Committee, banks should also not grant loans and advances aggregating Rs. 25 lakhs and above to -
*including directors of Scheduled Co-operative Banks, directors of subsidiaries/trustees of mutual funds/venture capital funds. 2.1.4 The proposals for credit facilities of an amount less than Rs.25 lakh to these borrowers may be sanctioned by the appropriate authority in the financing bank under powers vested in such authority, but the matter should be reported to the Board. 2.1.5The Chairman/Managing Director or other director who is directly or indirectly concerned or interested in any proposal should disclose the nature of his interest to the Board when any such proposal is discussed. He should not be present in the meeting unless his presence is required by the other directors for the purpose of eliciting information and director so required to be present shall not vote on any such proposal. The above norms relating to grant of loans and advances will equally apply to awarding of contracts. 2.1.6The scope of the term ‘relative’ will be as under: 2.1.7 The term ‘loans and advances’ will not include loans or advances against - 2.1.8The term ‘substantial interest’ shall have the same meaning as assigned to it in Section 5(ne) of the Banking Regulation Act, 1949. 2.1.9 Banks should evolve, inter alia, the following procedure for ascertaining the interest of a director of a financing bank or of another bank, or his relatives, in credit proposals/award of contracts placed before the Board/Committee or other appropriate authority of the financing banks.
2.1.10 In order to ensure compliance with the instructions, banks should forthwith recall the loan when it transpires that the borrower has given a false declaration.
2.1.11 The above guidelines should also be followed while granting loans/ advances or awarding contracts to directors of scheduled co-operative banks or their relatives.
2.1.12 These guidelines should also be followed by banks when granting loans and advances and awarding of contracts to directors of subsidiaries/trustees of mutual funds/venture capital funds set up by them as also other banks.
2.1.13 These guidelines should be duly brought to the notice of all directors and also placed before the bank's Board of Directors.
2.2Restrictions on Grant of Loans & Advances to Officers and the Relatives of Senior Officers of Banks
2.2.1 The statutory regulations and/or the rules and conditions of service applicable to officers or employees of public sector banks indicate, to a certain extent, the precautions to be observed while sanctioning credit facilities to such officers and employees and their relatives. In addition, the following guidelines should be followed by all the banks with reference to the extension of credit facilities to officers and the relatives of senior officers:
No officer or any Committee comprising, inter alia, an officer as member, shall, while exercising powers of sanction of any credit facility, sanction any credit facility to his/her relative. Such a facility shall ordinarily be sanctioned only by the next higher sanctioning authority. Credit facilities sanctioned to senior officers of the financing bank should be reported to the Board. Proposals for credit facilities to the relatives of senior officers of the bank sanctioned by the appropriate authority should be reported to the Board. Further, when a credit facility is sanctioned by an authority, other than the Board to - such transaction should also be reported to the Board. 2.2.2 The above norms relating to grant of credit facility will equally apply to the awarding of contracts. 2.2.3 Application of the Guidelines in case of Consortium Arrangements In the case of consortium arrangements, the above norms relating to grant of credit facilities to relatives of senior officers of the bank will apply to the relatives of senior officers of all the participating banks. 2.2.4 Scope of certain expressions (i) The scope of the term ‘relative’ is same as mentioned at para 2.1.6 (ii) The term ‘Senior Officer’ will refer to - (iii) The term ‘credit facility’ will not include loans or advances against - (iv) Credit facility will also not include loans and advances such as housing loans, car advances, consumption loans, etc. granted to an officer of the bank under any scheme applicable generally to officers. (v) The term ‘substantial interest’ shall have the same meaning assigned to it in Section 5(ne) of the Banking Regulation Act, 1949. 2.2.5 In this context, banks may, inter alia, 2.3 Restrictions on Grant of Financial Assistance to Industries Producing / Consuming Ozone Depleting Substances (ODS) 2.3.1 Government of India has advised that as per the Montreal Protocol, to which India is a party, Ozone Depleting Substances (ODS) are required to be phased out as per schedule prescribed therein. The list of chemicals given in Annexure 1 & 2 to the Montreal Protocol is annexed for ready reference. The Protocol has identified the main ODS and set time limit on phasing out their production/consumption in future, leading to a complete phase out eventually. Projects for phasing out ODS in India are eligible for grants from the Multilateral Fund. The sectors covered in the phase out programme are given below:
Sector | Type of substance |
Foam products | Chlorofluoro carbon - 11(CFC - 11) |
Refrigerators and Air-conditioners | CFC - 12 |
Aerosol products | Mixtures of CFC - 11 and CFC - 12 |
Solvents in cleaning applications | CFC - 113Carbon Tetrachloride, Methyl Chloroform |
Fire extinguishers | Halons - 1211, 1301, 2402 |
2.3.2The banks should not extend finance for setting up of new units consuming/producing above ODS. In this connection, a reference may be made to the circular No. FI/12/96-97 dated 16.02.96 issued by Industrial Development Bank of India to banks advising that no financial assistance should be extended to small/medium scale units engaged in the manufacture of the aerosol units using CFC and that no refinance would be extended to any project assisted in this sector. 2.4Restrictions on Advances against Sensitive Commodities under Selective Credit Control (SCC) (i)With a view to preventing speculative holding of essential commodities with the help of bank credit and the resultant rise in their prices, in exercise of powers conferred by Section 21 & 35A of the Banking Regulation Act, 1949, the Reserve Bank of India, being satisfied that it is necessary and expedient in the public interest to do so, issues, from time to time, directives to all commercial banks, stipulating specific restrictions on bank advances against specified sensitive commodities. (ii)The commodities, generally treated as sensitive commodities are the following: 2.4.2 Commodities currently exempted from Selective Credit Control (i)Presently the following commodities are exempted from all the stipulations of Selective Credit Controls:
Sr. No. | Commodity | Exemption w.e.f. |
1. | Pulses | 21.10.1996 |
2. | Other food grains (viz. course grains) | 21.10.1996 |
3. | Oilseeds (viz. groundnut, rapeseed/mustard, cotton seed, linseed, castorseed) | 21.10.1996 |
4. | Oils (viz. groundnut oil, rapeseed oil, mustard oil, cottonseed oil, linseed oil, castor oil) including vanaspati | 21.10.1996 |
5. | All imported oil seeds and oils | 21.10.1996 |
6. | Sugar, including imported sugar, excepting buffer stocks and unreleased stock of sugar with Sugar Mills | 21.10.1996 |
7. | Gur and Khandsari | 21.10.1996 |
8. | Cotton and Kapas | 21.10.1996 |
9. | Paddy/Rice | 18.10.1994 |
10. | Wheat * | 12.10.1993 |
* Temporarily covered under SCC w.e.f. 8.4.97 to 7.7.97. |
Banks are free to fix prudential margins on advances against these sensitive commodities. 2.4.4 Stipulations of Selective Credit Control
Commodity | Minimum Margin | With effect from |
(a)Buffer stocks of sugar | 0% | 01.04.1987 |
(b)Unreleased stocks of sugar with Sugar Mills representing -
| 10% @ | 22.10.1997 10.10.2000 |
@Margins on credit for free sale sugar will be decided by banks including RRBs and LABs based on their commercial judgement. (ii) Valuation of sugar stocks (a) The unreleased stocks of levy sugar charged to banks as security by the sugar mills shall be valued at levy price fixed by Government. (b) The unreleased stocks of free sale sugar including buffer stocks of sugar charged to the bank as security by the sugar mills, shall be valued at the average of the price realised in the preceding three months (moving average) or the current market price, whichever is lower; the prices for this purpose shall be exclusive of excise duty. (iii) Interest rates With effect from 18.10.1994, the banks have the freedom to fix lending rates for the commodities coming within the purview of Selective Credit Control. (iv) Other operational stipulations (a) The other operational stipulations vary with the commodities. These stipulations are advised whenever Selective Credit Control are reintroduced for any specific sensitive commodities. (b) Although, none of the earlier stipulations are currently applicable to the only sensitive commodity covered under Selective Credit Control viz. buffer stocks and unreleased stocks of levy/free sale sugar with Sugar Mills, yet these are reproduced in the Annexure 3 for understanding therefrom the underlying objectives of Selective Credit Control so that the banks do not allow the customers dealing in Selective Credit Control commodities any credit facilities which would directly or indirectly defeat the purpose of the directives. (v) Delegation of powers (a) The matter relating to delegation of powers with regard to approval of credit proposals relating to sensitive commodities coming under Selective Credit Control has been reviewed and it has been decided that with effect from 23 November 2000 the existing practice of banks’ submitting credit proposals above Rs. 1 crore to Reserve Bank of India for its prior approval under Selective Credit Control shall be discontinued and banks will have the freedom to sanction such credit proposals in terms of their individual loan policies. Accordingly, banks need not forward the credit proposals above Rs. 1 crore in respect of borrowers dealing in sensitive commodities to Reserve Bank of India for its prior approval.
(b) The banks are also advised to circulate these instructions among their controlling offices/branches and take all necessary steps to ensure that the powers delegated at various levels are exercised with utmost caution without sacrificing the broad objectives of the Selective Credit Control concept.
3. Restrictions on other loans and advances
3.1 Loans and Advances against Shares, Debentures and Bonds
Banks are required to strictly observe regulatory restrictions on grant of loans and advances against shares, debentures and bonds which are detailed in the Master Circular on 'Bank Finance Against Shares and Debentures'
The restrictions, inter alia, on loans and advances against shares and debentures, are :-
- No loans to be granted against partly paid shares.
- No loans to be granted to partnership/proprietorship concerns against the primary security of shares and debentures.
- Banks and their subsidiaries should not undertake financing of 'Badla' transactions.
3.2 Advances against Money Market Mutual Funds
All the guidelines issued by the Reserve Bank of India on Money Market Mutual Funds (MMMF) have been withdrawn and the banks are to be guided by the SEBI Regulations in this regard. However the banks/ FIs which are desirous of setting up MMMFs would, however, have to take necessary clearance from the RBI for undertaking this additional activity before approaching SEBI for registration.
3.3Advances against Fixed Deposit Receipts (FDRs) Issued by Other Banks
There have been instances where fake term deposit receipts purported to have been issued by some banks were used for obtaining advances from other banks. In the light of these happenings, the banks should desist from sanctioning advances against FDRs, or other term deposits of other banks.
3.4 Advances to Agents/Intermediaries based on Consideration of Deposit Mobilisation
Banks should desist from being party to unethical practices of raising of resources through agents/intermediaries to meet the credit needs of the existing/prospective borrowers or from granting loans to the intermediaries, based on the consideration of deposit mobilisation, who may not require the funds for their genuine business requirements.
3.5 Loans against Certificate of Deposits (CDs)
Banks cannot grant loans against CDs.
3.6 Bank Finance to Non-Banking Financial Companies (NBFCs)
3.6.1 The following activities undertaken by NBFCs, are not eligible for bank credit:
(i) Bills discounted/rediscounted by NBFCs, except for rediscounting of bills discounted by NBFCs arising from sale of –
- commercial vehicles (including light commercial vehicles), and
- two wheeler and three wheeler vehicles, subject to the following conditions:
- the bills should have been drawn by the manufacturers on dealers only:
- the bills should represent genuine sale transactions as may be ascertained from the chassis/engine number: and
- before rediscounting the bills, banks should satisfy themselves about the bona fides and track record of NBFCs which have discounted the bills.
- Investments of NBFCs both of current and long term nature, in any company/entity by way of shares, debentures, etc. However, Sock Broking Companies may be provided need-based credit against shares and debentures held by them as stock-in-trade.
- Unsecured loans/inter-corporate deposits by NBFCs to/in any company
- All types of loans/advances by NBFCs to their subsidiaries, group companies/entities.
- Finance to NBFCs for further lending to individuals for subscribing to Initial Public Offerings (IPOs)
3.6.2 Banks should not grant bridge loans of any nature, or interim finance against capital/debenture issues and/or in the form of loans of a bridging nature pending raising of long-term funds from the market by way of capital, deposits, etc. to all categories of Non-Banking Financial Companies, i.e. equipment leasing and hire-purchase finance companies, loan and investment companies and also Residuary Non-Banking Companies (RNBCs). 3.7 Bank Finance to Equipment Leasing Companies 3.8 Bank Finance for Purchase/Lease of Existing Assets Banks are precluded from granting term loans for acquisition of existing assets (except imported second hand machinery). Bank finance to leasing concerns should cover purchases of only new equipment. Banks should not extend finance against existing assets whether by way of term loans for purchase of such assets or by way of finance to leasing companies for purchase and release of such assets. 3.9 Financing Infrastructure/ Housing Projects 3.9.1 Housing Finance 3.9.2 Guidelines for Financing of Infrastructure Projects In view of the critical importance of the infrastructure sector and high priority being accorded for development of various infrastructure services, the matter has been reviewed in consultation with Government of India and the revised guidelines on financing of infrastructure projects are set out as under: (a) Definition of ‘infrastructure lending’ Any credit facility in whatever form extended by lenders (i.e. banks, FIs or NBFCs) to an infrastructure facility as specified below falls within the definition of 'infrastructure lending'. In other words, a credit facility provided to a borrower company engaged in: xii. any other infrastructure facility of similar nature (b) Criteria for Financing Banks/FIs are free to finance technically feasible, financially viable and bankable projects undertaken by both public sector and private sector undertakings subject to the following conditions: (i) The amount sanctioned should be within the overall ceiling of the prudential exposure norms prescribed by RBI for infrastructure financing. (ii) Banks/ FIs should have the requisite expertise for appraising technical feasibility, financial viability and bankability of projects, with particular reference to the risk analysis and sensitivity analysis. (iii) In respect of projects undertaken by public sector units, term loans may be sanctioned only for corporate entities (i.e. public sector undertakings registered under Companies Act or a Corporation established under the relevant statute). Further, such term loans should not be in lieu of or to substitute budgetary resources envisaged for the project. The term loan could supplement the budgetary resources if such supplementing was contemplated in the project design. While such public sector units may include Special Purpose Vehicles (SPVs) registered under the Companies Act set up for financing infrastructure projects, it should be ensured by banks and financial institutions that these loans/investments are not used for financing the budget of the State Governments. Whether such financing is done by way of extending loans or investing in bonds, banks and financial institutions should undertake due diligence on the viability and bankability of such projects to ensure that revenue stream from the project is sufficient to take care of the debt servicing obligations and that the repayment/servicing of debt is not out of budgetary resources. Further, in the case of financing SPVs, banks and financial institutions should ensure that the funding proposals are for specific monitorable projects. (iv) Banks may also lend to SPVs in the private sector, registered under Companies Act for directly undertaking infrastructure projects which are financially viable and not for acting as mere financial intermediaries. Banks may ensure that the bankruptcy or financial difficulties of the parent/ sponsor should not affect the financial health of the SPV. (c) Types of Financing by Banks (i) In order to meet financial requirements of infrastructure projects, banks may extend credit facility by way of working capital finance, term loan, project loan, subscription to bonds and debentures/ preference shares/ equity shares acquired as a part of the project finance package which is treated as 'deemed advance' and any other form of funded or non-funded facility. (ii) Take-out Financing Banks may enter into take-out financing arrangement with IDFC/ other financial institutions or avail of liquidity support from IDFC/ other FIs. A brief write-up on some of the important features of the arrangement is given in para 3.9.2(f). Banks may also be guided by the instructions regarding take-out finance contained in Circular No. DBOD. BP. BC. 144/ 21.04.048/ 2000 dated 29 February 2000. (iii) Inter-institutional Guarantees Banks are permitted to issue guarantees favouring other lending institutions in respect of infrastructure projects, provided the bank issuing the guarantee takes a funded share in the project at least to the extent of 5 per cent of the project cost and undertakes normal credit appraisal, monitoring and follow up of the project. For detail instructions on inter-institutional guarantee please see para 3.10. (iv) Financing promoter's equity In terms of our Circular DBOD. Dir. BC. 90/ 13.07.05/ 98 dated 28 August 1998, banks were advised that the promoter's contribution towards the equity capital of a company should come from their own resources and the bank should not normally grant advances to take up shares of other companies. In view of the importance attached to infrastructure sector, it has been decided that, under certain circ*mstances, an exception may be made to this policy for financing the acquisition of promoter's shares in an existing company, which is engaged in implementing or operating an infrastructure project in India. The conditions, subject to which an exception may be made, are as follows: (d) Appraisal (ii) Infrastructure projects are often financed through Special Purpose Vehicles. Financing of these projects would, therefore, call for special appraisal skills on the part of lending agencies. Identification of various project risks, evaluation of risk mitigation through appraisal of project contracts and evaluation of creditworthiness of the contracting entities and their abilities to fulfil contractual obligations will be an integral part of the appraisal exercise. In this connection, banks/FIs may consider constituting appropriate screening committees/special cells for appraisal of credit proposals and monitoring the progress/performance of the projects. Often, the size of the funding requirement would necessitate joint financing by banks/FIs or financing by more than one bank under consortium or syndication arrangements. In such cases, participating banks/ FIs may, for the purpose of their own assessment, refer to the appraisal report prepared by the lead bank/FI or have the project appraised jointly. (e) Prudential requirements (i) Prudential credit exposure limits Credit exposure to borrowers belonging to a group may exceed the exposure norm of 40 per cent of the bank's capital funds by an additional 10 per cent (i.e up to 50 per cent), provided the additional credit exposure is on account of extension of credit to infrastructure projects. Credit exposure to single borrower may exceed the exposure norm of 15 per cent of the bank's capital funds by an additional 5 per cent (i.e. up to 20 per cent) provided the additional credit exposure is on account of infrastructure as defined in paragraph (a) above. In addition to the exposure permitted above, banks may, in exceptional circ*mstances, with the approval of their Boards, consider enhancement of the exposure to a borrower up to a further 5 per cent of capital funds. The bank should make appropriate disclosures in the ‘Notes on account’ to the annual financial statements in respect of the exposures where the bank had exceeded the prudential exposure limits during the year. (ii)Assignment of risk weight for capital adequacy purposes Banks may assign a concessional risk weight of 50 per cent for capital adequacy purposes, on investment in securitised paper pertaining to an infrastructure facility subject to compliance with the following: (iii) Asset - Liability Management The long - term financing of infrastructure projects may lead to asset – liability mismatches, particularly when such financing is not in conformity with the maturity profile of a bank’s liabilities. Banks would, therefore, need to exercise due vigil on their asset-liability position to ensure that they do not run into liquidity mismatches on account of lending to such projects. (iv) Administrative arrangements Timely and adequate availability of credit is the pre-requisite for successful implementation of infrastructure projects. Banks/ FIs should, therefore, clearly delineate the procedure for approval of loan proposals and institute a suitable monitoring mechanism for reviewing applications pending beyond the specified period. Multiplicity of appraisals by every institution involved in financing, leading to delays, has to be avoided and banks should be prepared to broadly accept technical parameters laid down by leading public financial institutions. Also, setting up a mechanism for an ongoing monitoring of the project implementation will ensure that the credit disbursed is utilised for the purpose for which it was sanctioned. (f) Take-out financing/liquidity support Take-out financing structure is essentially a mechanism designed to enable banks to avoid asset-liability maturity mismatches that may arise out of extending long tenor loans to infrastructure projects. Under the arrangements, banks financing the infrastructure projects will have an arrangement with IDFC or any other financial institution for transferring to the latter the outstandings in their books on a pre-determined basis. IDFC and SBI have devised different take-out financing structures to suit the requirements of various banks, addressing issues such as liquidity, asset-liability mismatches, limited availability of project appraisal skills, etc. They have also developed a Model Agreement that can be considered for use as a document for specific projects in conjunction with other project loan documents. The agreement between SBI and IDFC could provide a reference point for other banks to enter into somewhat similar arrangements with IDFC or other financial institutions. As an alternative to take-out financing structure, IDFC and SBI have devised a product, providing liquidity support to banks. Under the scheme, IDFC would commit, at the point of sanction, to refinance the entire outstanding loan (principal+ unrecovered interest) or part of the loan, to the bank after an agreed period, say, five years. The credit risk on the project will be taken by the bank concerned and not by IDFC. The bank would repay the amount to IDFC with interest as per the terms agreed upon. Since IDFC would be taking a credit risk on the bank, the interest rate to be charged by it on the amount refinanced would depend on the IDFC’s risk perception of the bank (in most of the cases, it may be close to IDFC’s PLR). The refinance support from IDFC would particularly benefit the banks which have the requisite appraisal skills and the initial liquidity to fund the project. 3.10 Issue of Bank Guarantees in favour of Financial Institutions Banks may issue guarantees favouring other banks/FIs/other lending agencies for the loans extended by the latter, subject to strict compliance with the following conditions. (i)The Board of Directors should reckon the integrity/robustness of the bank’s risk management systems and accordingly put in place a well-laid out policy in this regard. The Board approved policy should, among others, address the following issues: (vi) Banks should ensure compliance with the recommendations of the Ghosh Committee and other internal requirements relating to issue of guarantees to obviate the possibility of frauds in this area. Lending banks Banks extending credit facilities against the guarantees issued by other banks/FIs should ensure strict compliance with the following conditions: However, the above conditions will not be applicable in the following cases: (a) Issuance of guarantee in favour of IDBI, in the case of import of technical know-how by way of drawings and designs under the Technical Development Scheme of the IDBI, under certain circ*mstances and where no tangible security is available to IDBI. (c) Issuance of guarantees in favour of various Development Agencies/Boards, like Indian Renewable Energy Development Agency, National Horticulture Board, etc. for obtaining soft loans and/or other forms of development assistance from such Agencies/Boards with the objective of improving efficiency, productivity, etc., subject to the following conditions: (d) Issue of guarantees favouring HUDCO/State Housing Boards and similar bodies for loans granted by them to private borrowers who are unable to offer clean or marketable title to property, provided banks are otherwise satisfied about the capacity of borrowers to adequately service such loans. (e) Issuance of guarantees by consortium member banks unable to participate in rehabilitation packages on account of temporary liquidity constraints, in favour of the banks which take up their share of the limit. Banks should not grant co-acceptance/guarantee facilities under Buyers Lines of Credit Schemes introduced by IDBI, SIDBI, Exim Bank, Power Finance Corporation (PFC) or any other financial institution, unless specifically permitted by the RBI. 3.11 Discounting/Rediscounting of Bills by Banks Banks may adhere to the following guidelines while purchasing / discounting / negotiating / rediscounting of genuine commercial / trade bills: 3.12 Advances against Gold/Silver Bullion 3.13Loans and advances to Small Scale Industries SSI units having working capital limits of up to Rs 5 crore from the banking system are to be provided working capital finance computed on the basis of 20 percent of their projected annual turnover. The banks should adopt the simplified procedure in respect of all SSI units (new as well as existing). 3.14Loan system for delivery of bank credit Loan Component and Cash Credit Component 3.15Working Capital Finance to Information Technology and software industry Following the recommendations of the 'National Task force on Information Technology and Software development ' Reserve Bank has framed guidelines for extending working capital to the said industry. The banks are however free to modify the guidelines based on their own experience without reference to the Reserve Bank of India to achieve the purpose of the guidelines in letter and spirit. The salient features of these guidelines are set forth below:
3.16 Guidelines for bank finance for PSU disinvestments of Government of India
In terms of RBI circular DBOD No. Dir. BC .90/13.07.05/98 dated August 28, 1998, banks have been advised that the promoters’ contribution towards the equity capital of a company should come from their own resources and the bank should not normally grant advances to take up shares of other companies. Banks were also advised to ensure that advances against shares were not used to enable the borrower to acquire or retain a controlling interest in the company/companies or to facilitate or retain inter-corporate investment. It is clarified that the aforesaid instructions of the 1998 circular would not apply in the case of bank finance to the successful bidders under the PSU disinvestment programme of the Government, subject to the following : In case the advances against the PSU disinvestment is secured by the shares of the disinvested PSUs or any other shares, banks should follow our extant guidelines on capital market exposures on margin, ceiling on overall exposure to the capital market, risk management and internal control systems, surveillance and monitoring by the Audit Committee of the Board, valuation and disclosure, etc. (cf. our circular No.DBOD.BP.BC.119/21.04.137/2000-01 dated May 11, 2001). 3.16.1 Stipulation of lock-in period for shares (ii)Banks may extend finance to the successful bidders even though the shares of the disinvested company acquired/ to be acquired by the successful bidder are subjected to a lock-in period/ other such restrictions which affect their liquidity, subject to fulfillment of following conditions: As per the terms and conditions of the PSU disinvestments by the Government of India, the pledgee bank will not be allowed to invoke the pledge during the first year of the lock-in period. During the second and third year of the lock-in period, in case of inability of the borrower to restore the margin prescribed for the purpose by way of additional security or non performance of the payment obligations as per the repayment schedule agreed upon between the bank and the borrower, bank would have the right to invoke the pledge. The pledgee bank’s right to invoke the pledge during the second and third years of the lock-in period, would be subject to the terms and conditions of the documentation between Government and the successful bidder, which might also cast certain responsibilities on the pledgee banks. It is clarified that the concerned bank must make a proper appraisal and exercise due caution about credit worthiness of the borrower and the financial viability of the proposal. The bank must also satisfy itself that the proposed documentation, relating to the disposal of shares pledged with the bank, are fully acceptable to the bank and do not involve unacceptable risks on the part of the bank. In terms of IECD Circular No. 10/ 08.12.01/ 2000- 2001 dated 8 January 2001, banks are precluded from financing investments of NBFCs in other companies and inter-corporate loans / deposits to/ in other companies. The position has been reviewed and banks are advised that SPVs which comply with the following conditions would not be treated as investment companies and therefore would not be considered as NBFCs : SPVs, which satisfy the above conditions, would be eligible for bank finance for PSU disinvestments of Government of India. In this context, it may be mentioned that Government of India, Ministry of Finance (DEA), Investment Division, vide its press note dated July 8, 2002 on guidelines for Euro issues, has permitted an Indian company utilizing ADR/GDR/ECB proceeds for financing disinvestment programme of the Government of India, including the subsequent open offer. Banks may, therefore, take into account proceeds from such ADR/GDR/ECB issues, for extending bank finance to successful bidders of PSU disinvestment programme.
Master Circular on Loans and Advances – Statutory and Other Restrictions List of Controlled Substances (Vide paragraph 2.3.1)
Group | Substance | Ozone Depleting Potential * |
Group I | ||
CFCl3 | (CFC-11) | 1.0 |
CF2Cl2 | (CFC-12) | 1.0 |
C2F3Cl3 | (CFC-113) | 0.8 |
C2F4Cl2 | (CFC-114) | 1.0 |
Cl | (CFC-115) | 0.6 |
Group II | ||
CF2BrCl | (halon-1211) | 3.0 |
CF3Br | (halon-1301) | 10.0 |
C2F4Br2 | (halon-2402) | 6.0 |
*These ozone depleting potentials are estimated based on existing knowledge |
Master Circular on Loans and Advances – Statutory and Other Restrictions List of Controlled Substances (Vide paragraph 2.3.1)
Group | Substance | Ozone Depleting Potential |
Group I | ||
CF3Cl | (CFC-13) | 1.0 |
CF2Cl5 | (CFC-111) | 1.0 |
C2F2Cl4 | (CFC-112) | 1.0 |
C2FCl7 | (CFC-211) | 1.0 |
C2F2Cl6 | (CFC-212) | 1.0 |
C3F3Cl5 | (CFC-213) | 1.0 |
C3F4Cl4 | (CFC-214) | 1.0 |
C3F5Cl3 | (CFC-215) | 1.0 |
C3F6Cl2 | (CFC-216) | 1.0 |
C3F7Cl | (CFC-217) | 1.0 |
Group II | ||
CCl4 | Carbon Tetrachloride | 1.1 |
Group III | ||
C2H3Cl3 * | 1,1,1 - trichloroethane (methyl chloroform) | 0.1 |
*This formula does not refer to 1,1,2 - trichloroethane. |
Master Circular on Loans and Advances – Statutory and Other Restrictions Selective Credit Control Other Operational Stipulations [Vide paragraph 2.4.4 (iv)]
Appendix Master Circular on Loans and Advances – Statutory and Other Restrictions List of Circulars consolidated by the Master Circular
1. | DBOD No. Dir.BC. | 18/13.03.00/03-04 | dated 22.8.2003 |
2. | DBOD BP.BC. | 34/21.04.0137/03-04 | dated 15.10.2003 |
3. | IECD No. | 9/08/12.01/2003-04 | dated 11.3.2004 |
4. | DBOD BP.BC. | 92/21.04.048/03-04 | dated 16.6.2004 |
5 | DBOD BP.BC. | 97/21.04.141/03-04 | dated 17.6.2004 |
6. | DBOD BP. BC. | 100/21.03. 054/2003-04 | dated 21.6.2004 |