Executive Summary:
This circular reviews prudential norms and risk weights for exposures guaranteed by Credit Guarantee Schemes (CGS). It clarifies the conditions under which a zero percent risk weight can be applied to exposures guaranteed by CGTMSE, CRGFTLIH, and NCGTC, effective April 1, 2023, for portfolio-level guarantees. It also specifies requirements for future schemes to be eligible for zero percent risk weight.
Key Points / Main Content:
Risk Weights for Guaranteed Exposures:
* Zero percent risk weight is applicable to exposures guaranteed under existing or future schemes by CGTMSE, CRGFTLIH, and NCGTC, subject to specific conditions.
Conditions for Zero Percent Risk Weight:
* Guarantees must comply with credit risk mitigation requirements, being direct, explicit, irrevocable, and unconditional.
* If guarantee schemes restrict maximum permissible claims (e.g., extent of guarantee coverage, first loss absorption, payout cap), zero percent risk weight applies only to the maximum permissible claim. The residual exposure is subject to risk weight applicable to the counterparty.
* For portfolio-level guarantees, effective April 1, 2023, the portion of exposure subject to first loss absorption by the Member Lending Institution (MLI) requires full capital deduction. The remaining exposure is risk-weighted as per extant regulations. The maximum capital charge is capped at a notional level arrived at by treating the entire exposure as unguaranteed.
Requirements for Future Schemes:
* To be eligible for zero percent risk weight, future schemes under these Trust Funds must settle eligible guaranteed claims within 30 days from lodgement, and lodgement must be permitted within 60 days from the date of default, subject to the conditions in paragraph 2.
Illustrative Examples:
* The Annex provides examples of risk weights applicable to specific existing schemes, factoring in guarantee coverage, first loss percentage, and payout cap ratio.
Applicability:
* The regulatory stipulation applies to all regulated entities addressed in the circular, to the extent they are recognized as eligible MLIs under the respective schemes.
Impact Analysis:
Scheduled Commercial Banks (including Regional Rural Banks), Primary Urban Cooperative Banks, Non-Banking Financial Companies (including Housing Finance Companies), and All-India Financial Institutions:
Impact: These entities must adhere to the revised risk weighting guidelines when dealing with exposures guaranteed by CGTMSE, CRGFTLIH, and NCGTC.
Action Required: Review existing and future credit guarantee schemes to ensure compliance with the new conditions for zero percent risk weight and adjust capital adequacy calculations accordingly. Implement the changes regarding first loss absorption for portfolio-level guarantees by April 1, 2023.
CGTMSE, CRGFTLIH, and NCGTC:
Impact: They need to ensure their existing and future guarantee schemes comply with the requirements specified in the circular, particularly regarding settlement timelines and permissible claims.
Action Required: Review and modify scheme structures, if necessary, to meet the new requirements and to ensure that MLIs can avail of the zero percent risk weight benefit.
Member Lending Institutions (MLIs) under the Schemes:
Impact: The revised risk weights will influence the capital requirements for loans guaranteed by these schemes.
Action Required: Understand the implications of the new risk weighting rules, especially regarding first loss absorption and payout caps, and adjust lending practices accordingly.
Key Entities Referenced
Scheduled Commercial Banks: Refers to all banks listed under the Second Schedule of the Reserve Bank of India Act, 1934, including Regional Rural Banks.
Primary Urban Cooperative Banks: Banks that are cooperative societies, undertaking banking business.
Non-Banking Financial Companies: Companies engaged in the business of loans and advances, acquisition of shares, stock, bonds, debentures, securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale, purchase, construction or immovable property.
Housing Finance Companies: A type of Non-Banking Financial Company that specializes in providing finance for housing.
All-India Financial Institutions: Financial institutions established by the government to promote economic development.
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): A trust fund that provides credit guarantees to banks and financial institutions for extending loans to micro and small enterprises.
Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH): A trust fund providing credit guarantees for housing loans to low-income individuals.
National Credit Guarantee Trustee Company Ltd (NCGTC): A trustee company that manages various credit guarantee schemes on behalf of the Government of India.
RBI/2022-23/113
DOR.STR.REC.67/21.06.201/2022-23 September 07, 2022
All Scheduled Commercial Banks (including Regional Rural Banks)
All Primary (Urban) Co-operative Banks
All Non-Banking Financial Companies (including Housing Finance Companies)
All All-India Financial Institutions
Dear Sir/ Madam,
Review of Prudential Norms – Risk Weights for Exposures guaranteed by Credit
Guarantee Schemes (CGS)
Please refer to paragraph 5.2 of the Master Circular on Basel III Capital Regulations
dated April 1, 2022 in terms of which banks are permitted to apply zero percent risk
weights in respect of claims on Credit Guarantee Fund Trust for Micro and Small
Enterprises (CGTMSE), Credit Risk Guarantee Fund Trust for Low Income Housing
(CRGFTLIH) and individual schemes under National Credit Guarantee Trustee
Company Ltd (NCGTC).
2. In order to have a consistent approach with regard to risk weights for exposures
guaranteed by such Trust Funds, it is advised that the risk weight of zero percent shall
be applicable in respect of exposures guaranteed under any existing or future
schemes launched by CGTMSE, CRGFTLIH and NCGTC satisfying the following
conditions:
i. Prudential Aspects: The guarantees provided under the respective schemes
should comply with the requirements for credit risk mitigation in terms of
paragraph 7.5 of the Master Circular on Basel III Capital Regulations dated April
1, 2022 which inter alia requires such guarantees to be direct, explicit,
irrevocable and unconditional;
ii. Restrictions on permissible claims: Where the terms of the guarantee
schemes restrict the maximum permissible claims through features likespecified extent of guarantee coverage, clause on first loss absorption by
member lending institutions (MLI), payout cap, etc., the zero percent risk weight
shall be restricted to the maximum permissible claim and the residual exposure
shall be subjected to risk weight as applicable to the counterparty in terms of
extant regulations.
iii. In case of a portfolio-level guarantee, effective from April 1, 2023, the extent of
exposure subjected to first loss absorption by the MLI, if any, shall be subjected
to full capital deduction and the residual exposure shall be subjected to risk
weight as applicable to the counterparty in terms of extant regulations, on a pro
rata basis. The maximum capital charge shall be capped at a notional level
arrived at by treating the entire exposure as unguaranteed.
3. Further, subject to the aforementioned prescriptions at paragraph 2 above, any
future scheme launched under any of the aforementioned Trust Funds, in order to be
eligible for zero percent risk weight, shall provide for settlement of the eligible
guaranteed claims within thirty days from the date of lodgement, and the lodgement
shall be permitted within sixty days from the date of default.
4. Some illustrative examples of risk weights applicable on claims guaranteed under
specific existing schemes are given in the Annex.
5. The above regulatory stipulation shall be applicable to all the regulated entities to
whom this circular is addressed, to the extent these entities are recognised as eligible
MLIs under the respective schemes.
Yours faithfully,
(Manoranjan Mishra)
Chief General ManagerAnnex
Illustrative Examples - Risk Weights (RW) applicable on credit facilities
guaranteed under specific existing schemes
(Guarantee coverage, first loss percentage and payout cap ratio may be factored in
as given below and as amended from time to time in the respective schemes)
Scheme name Guarantee Cover Risk weight
1. Credit Guarantee The first loss of 10% of the amount • First loss of 10% amount in
Fund Scheme for in default to be borne by Factors. default – Full capital
Factoring (CGFSF) The remaining 90% (i.e. second deduction
loss) of the amount in default will be • 60% amount in default
borne by NCGTC and Factors in the borne by NCGTC- 0% RW.
ratio of 2:1 respectively • Balance 30% amount in
default -
Counterparty/Regulatory
Retail Portfolio (RRP) RW
as applicable.
Note: The maximum capital
charge shall be capped at a
notional level arrived by
treating the entire exposure
as unguaranteed.
2. Credit Guarantee 75% of the amount in default. • Entire amount in default -
Fund Scheme for 100% of the guaranteed claims Counterparty/ Regulatory
Skill Development shall be paid by the Trust after all Retail Portfolio (RRP) RW
(CGFSD) avenues for recovery have been as applicable.
exhausted and there is no scope for
recovering the default amount.
3. Credit Guarantee Micro Loans • First loss of 3% amount in
Fund for Micro Units The first loss to the extent of 3% of default – Full capital
(CGFMU) amount in default. deduction
Out of the balance, guarantee will • 72.75% of the amount in
be to a maximum extent of 75% of default - 0% RW, subject to
the amount in default in the maximum of
crystallized portfolioWhere-
CP = Crystallized Portfolio
o
(sanctioned amount)
C = Claims received in
o
previous years, if any, in
the crystallized portfolio
SLA = Sanctioned limit of
o
each account in the
crystallized portfolio
15 per cent represents the
o
payout cap
• Balance amount in default -
Counterparty/ RRP RW as
applicable.
Note: The maximum capital
charge shall be capped at a
notional level arrived by
treating the entire exposure
as unguaranteed.
4. CGTMSE Upto ₹5 lakh • Guaranteed amount in
guarantee coverage 85% of the amount in default default – 0% RW*
for Micro- subject to a maximum of ₹4.25 lakh • Balance amount in default -
Enterprises Counterparty/ RRP RW as
Above ₹5 lakh & upto ₹50 lakh applicable.
75% of the amount in default
subject to a maximum of ₹37.50
lakh
Above ₹50 lakh & upto ₹200 lakh
75% of the amount in default
subject to a maximum of ₹150 lakh
*In terms of the payout cap stipulations of CGTMSE, claims of the member lending
institutions will be settled to the extent of 2 times of the fee including recovery remitted
during the previous financial year. However, since the balance claims will be settled in
subsequent year/s as the position is remedied, the entire extent of guaranteed portion may
be assigned zero percent risk weight.
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