Banking Regulations and Credit Risk Management

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Questions and Answers

What must a borrower meet to qualify for bank assistance after being taken over by new management under the IBC?

The borrower must have a 100% repayment record.

The borrower must have been in business for at least five years.

The borrower must have a previous loan history with the bank.

The borrower must satisfy the bank's eligibility criteria. (correct)

Which of the following individuals would NOT typically be eligible for loans under connected lending guidelines?

A neighbor of a bank officer. (correct)

The brother of a bank’s director.

The son of a managing director of another bank.

A business partner of the bank’s chairman.

Which of the following scenarios would fall under connected lending?

A bank providing a loan to a newly established company with no ties to its directors.

A bank granting a credit facility to a firm in which its director has a substantial interest. (correct)

A bank making a loan to a competitor with no director relationships.

A bank offering an unsecured personal loan to a general public individual.

What is one condition for proposals related to connected lending that the MC must consider?

No deterioration in asset quality and company financials. Signup and view all the answers

Which of the following does NOT fall under the category of connected lending?

Loans to any external borrowers without ties to the bank. Signup and view all the answers

What is one possible change in sanction terms allowed under connected lending?

Altering the purpose of the loan. Signup and view all the answers

What type of credit facilities can be renewed under connected lending guidelines?

Working capital facilities including pre & post-shipment credits. Signup and view all the answers

What does the Comprehensive Approach allow for regarding eligible collateral?

It allows reduced exposure amounts based on collateral value. Signup and view all the answers

Which collateral types can be used to mitigate credit risks?

Cash, securities, or deposits from the same counterparty Signup and view all the answers

What is a stipulation related to connected lending proposals sanctioned by the CC/EC?

They must be reported to the MC thereafter. Signup and view all the answers

Under what conditions can banks exceed the single counterparty limit?

For infrastructure loans or investments with prior board approval. Signup and view all the answers

Which type of guarantees are considered valid for credit protection?

Guarantees from eligible guarantors as defined by RBI. Signup and view all the answers

What is the absolute maximum exposure limit to a single counterparty as per the regulations?

25% of the bank's eligible capital base. Signup and view all the answers

Which factor is NOT a consideration when deciding on exposures?

Qualification of the client. Signup and view all the answers

What is the role of the board concerning exposure limits?

To provide prior approval for exceeding certain exposure limits. Signup and view all the answers

What must be taken into account for compliant exposure management?

Adequate cushions for various risks and conditions. Signup and view all the answers

What is the minimum margin required for credit proposals for term loans under normal circumstances?

20% Signup and view all the answers

In which of the following scenarios can a promoter's contribution be relaxed to 10%?

Overseas acquisitions with a corporate guarantee. Signup and view all the answers

What is the acceptable Debt to Equity Ratio (DER) for borrowers seeking a balance sheet financing?

1.50 Signup and view all the answers

For which sector is the minimum promoters' contribution of 10% particularly applicable?

Agricultural and other priority sectors. Signup and view all the answers

What minimum Financial Asset Coverage Ratio (FACR) is required during the loan tenor?

1.50 Signup and view all the answers

Which of the following corporate credit ratings allows for lower promoter contributions in overseas acquisitions?

AA-. Signup and view all the answers

What is the upper limit for the Total Outside Liabilities to Total Net Worth (TOL/TNW) ratio in balance sheet financing?

3.50 Signup and view all the answers

Which type of financing allows for potentially lower promoters' contributions without insisting on project-specific margins?

Balance sheet financing. Signup and view all the answers

What is the primary objective of setting exposure norms in the loan policy?

To manage risk and avoid concentration risk Signup and view all the answers

Which of the following exposures is eligible for zero percent risk weight?

Exposures to the Government of India Signup and view all the answers

According to the exposure policy, which of the following is NOT subject to exposure limits?

Exposures to private investors Signup and view all the answers

Which document outlines the prudential norms and exposure ceilings that banks must follow?

Master Direction - Basel-III Master Directions Signup and view all the answers

What is the maximum allowable TOL/TNW ratio for borrower companies?

5:1 Signup and view all the answers

What type of exposure is included in the calculation as per the Basel-III Master Directions?

Both on and off-balance sheet exposures Signup and view all the answers

Which entity or exposure will NOT be treated as connected counterparties?

Entities with independent financial standings Signup and view all the answers

Which type of companies can be accepted with a higher TOL/TNW ratio?

Infrastructure companies Signup and view all the answers

What is the threshold for Total Indebtedness that allows for a lower current ratio?

3.5:1 Signup and view all the answers

Which of the following is listed as an exception to the exposure limits?

The refinance portfolio of the Bank Signup and view all the answers

What condition is specified for companies looking for exceptions in TOL/TNW ratios?

They must have three years of net profits Signup and view all the answers

What documentation can confirm acceptance of a lower current ratio by the lead banker?

A letter from the banker Signup and view all the answers

What is the maximum Long-term Debt/EBITDA ratio allowed for borrower companies?

5:1 Signup and view all the answers

Which of the following projects can be considered for a higher Long-term Debt/EBITDA ratio?

Infrastructure projects Signup and view all the answers

What must be met for exposures secured by government-issued financial instruments to be exempt from limits?

Eligibility criteria for Credit Risk Mitigation Signup and view all the answers

What kind of confirmation can a statutory auditor provide regarding a lower current ratio?

Confirmation that no additional interest is charged Signup and view all the answers

Study Notes

Defaulting Borrowers and Assistance

In cases of borrower default, banks can sanction assistance under the Insolvency and Bankruptcy Code (IBC) if the new management meets eligibility criteria and credit risk assessments are favorable.
The assistance relates to requests that conform to the Resolution Plan approved under the IBC.

Connected Lending Guidelines

Issued by RBI in consultation with the Government of India, aimed at managing conflicts of interest in lending practices.
connected lending includes credit facilities to:
- Directors of the financial institution (FI) or firms they are associated with.
- Firms where any directors have interests as partners or guarantors.
- Companies where directors have 'substantial interest' or directorship.
- Relatives of directors and other FIs/banks’ directors and their relatives.

Reporting and Approval of Connected Lending Proposals

Proposals attracting connected lending provisions must be sanctioned by the Credit Committee (CC) and reported to the Management Committee (MC).
New actions under connected lending can include renewals of working capital facilities and changes in loan sanctions, subject to credit exposure limits and no asset quality deterioration.

Exposure Norms and Risk Management

Exposure norms determine ceilings on single, group, substantial, country, and industry exposures to better manage risk and avoid concentration risk.
Compliance with RBI stipulated prudential norms is mandatory, according to the Basel-III Master Directions.

Calculation of Exposures

Evaluates both on-balance and off-balance sheet exposures using Basel-III guidelines.
Specific exemptions from exposure limits are allowed for:
- Government securities and zero risk-weighted government exposures.
- Intra-day exposures to banks and clearing activities.

Credit Risk Mitigation Techniques

Techniques may include cash collateral, guarantees from third parties, etc.
The Comprehensive Approach allows full offset of eligible collateral against exposures, effectively reducing exposure amounts accordingly.
Guarantees must be explicit, irrevocable, and issued by eligible guarantors, recognized under Basel III Master Directions.

Single Counterparty Limits

Exposure to a single counterparty is capped at 20% of the bank’s eligible capital base, with an allowable increase to 25% under certain conditions, including infrastructure-related loans.
Adequate risk buffers must be maintained to account for potential financial shifts.

Promoters' Contribution Requirements

Mandatory minimum margin of 20% for credit proposals, with exceptions for:
- Equipment financing (10% margin acceptable).
- Agriculture and priority sectors (minimum of 10% under specific conditions).
- Large overseas acquisitions (10% with solid promoter credit ratings).

Debt to Equity Ratios

Total Outside Liabilities to Tangible Net Worth (TOL/TNW) ratio should not exceed 5:1, with exceptions for infrastructure and NBFCs based on industry standards.
Borrowers must exhibit good financial health, including a history of profits and strong debt servicing.

Current Ratio Requirements

Current ratios are expected to align with specific guidelines, with potential for lower ratios based on assessment by the lead working capital banker, ensuring Total Indebtedness remains manageable.

Long-term Debt to EBITDA Standards

Long-term Debt/EBITDA ratio should not exceed 5:1, with allowances for higher ratios in infrastructure and long-term projects based on industry practices.

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Description

This quiz explores the implications of the Insolvency and Bankruptcy Code (IBC) on banking practices, particularly regarding the assistance provided by banks to defaulting borrowers under new management. Test your knowledge of the guidelines set by the RBI in collaboration with the Government of India concerning credit risk assessment and banking regulations.