Banking Regulations and Credit Risk Management

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.