No. 2004/ 118
DBOD No. BP.BC. 29 / 21.04.048/ 2004-05
August 13, 2004
All Commercial Banks (excluding
RRBs)
Dear Sir,
Prudential norms – State Government
guaranteed exposures
Please refer to our circular DBOD
No. BP.BC.103/ 21.00.002/ 98 dated October 31, 1998, which contained, among
others, prudential norms regarding State Government guaranteed advances. Presently,
asset classification and provisioning requirements in respect of State Government
guaranteed exposures are linked to invocation of the State Government guarantee.
2. The prudential norms pertaining
to State Government guaranteed exposures have been reviewed and it has been
decided to delink the requirement of invocation of State Government guarantee
for deciding the asset classification and provisioning requirements and prescribe
revised norms in respect of the following exposures, which are backed by State
Government guarantee:
- Loans and advances; and
- Investments.
The existing and the revised prudential norms
applicable to exposures backed by State Government guarantees are furnished
in the Annex.
3. With a view to enabling banks to have a smooth
transition to the revised norms, it has been decided that the revised prudential
norms in respect of State Government guaranteed exposures may be implemented
in a phased manner as under:
- For the year ending March 31, 2005, State Government
guaranteed advance and investment in State Government guaranteed securities
would attract asset classification and provisioning norms, if interest and/or
principal or any other amount due to the bank remains overdue for more than
180 days.
- With effect from the year ending March 31,
2006, State Government guaranteed advance and investment in State Government
guaranteed securities would attract asset classification and provisioning
norms, if interest and/or instalment of principal or any other amount due
to the bank remains overdue for more than 90 days.
Yours faithfully,
(C.R.Muralidharan)
Chief General Manager-in-Charge
Encls: as above
ANNEX
Prudential norms for State Government
guaranteed exposures
1. Loans and advances
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Sr. No.
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Existing Prudential norms
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Revised Prudential norms
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(a)
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Income recognition
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A State Government guaranteed
advance, where interest and/or instalment of principal/ or any other amount
due to the bank remains overdue for a period more than 90 days shall become
a non performing advance. The interest due on such advances should not
be taken to income account, unless it has been realised.
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A State Government guaranteed
advance, where interest and/or instalment of principal/ or any other amount
due to the bank remains overdue for a period more than 90 days shall become
a non performing advance. The interest due on such advances should
not be taken to income account, unless it has been realised. (No change)
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(b)
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Asset Classification and
Provisioning
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A State Government guaranteed
advance where interest and/or instalment of principal/ or any other amount
due to the bank remains overdue for a period of more than 90 days after
invocation of the State Government guarantee shall be subjected to appropriate
asset classification and provisioning norms.
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For the year ending March
31, 2005, a State Government guaranteed advance shall be classified
as ‘substandard’ or ‘doubtful’ or ‘loss’, if interest and/or principal
or any other amount due to the bank remains overdue for more
than 180 days and attract appropriate provisioning norms.
With effect from the year
ending March 31, 2006, a State Government guaranteed advance shall
be classified as ‘substandard’ or ‘doubtful’ or ‘loss’, if interest and/or
instalment of principal or any other amount due to the bank remains
overdue for more than 90 days and attract appropriate provisioning
norms.
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(c)
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Risk Weights
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(i) A State Government
guaranteed advance attracts zero per cent risk weight.
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A State Government guaranteed
advance will attract zero per cent risk weight. (No change).
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(ii) A State Government
guaranteed advance where guarantee has been invoked and the concerned
State Government has remained in default for a period of more than 90
days, will attract a risk weight of 100 per cent.
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A State Government guaranteed
advance which has become a non performing advance will attract a risk
weight of 100 per cent.
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2. Investments
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Sr. No.
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Existing Prudential norms
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Revised Prudential norms
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(a)
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Income recognition
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Investment in securities
where payment of interest or repayment of principal is guaranteed by State
Governments will become a non-performing investment if interest/ instalment
(including maturity proceeds) is due and remains unpaid for more than
90 days.
Banks should not take income
on non-performing investments to income account unless it has been realised.
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Investment in securities
where payment of interest or repayment of principal is guaranteed by State
Government will become a non-performing investment if interest/
instalment (including maturity proceeds) or any other amount due to the
bank remains unpaid for more than 90 days.
Banks should not take income
on non-performing investments to income account unless it has been realised.
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(b)
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Asset Classification and
Provisioning
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i) Investment in the nature
of deemed advance
Investments in State Government
guaranteed securities, which are in the nature of ‘deemed advance’, will
attract appropriate asset classification and provisioning norms as
in the case of advances when interest and/or instalment of principal
or any other amount due to the bank remains overdue for a period of more
than 90 days after invocation of the state government guarantee.
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For the year ending March 31, 2005, investment in State Government
guaranteed securities, which are in the nature of ‘deemed advance’, will
attract appropriate asset classification and provisioning norms as
in the case of advances when interest and/or instalment of principal
or any other amount due to the bank remains overdue for more than 180
days.
With effect from the year
ending March 31, 2006, investment in State Government guaranteed securities,
which are in the nature of ‘deemed advance’, will attract appropriate
asset classification and provisioning norms as in the case of advances
when the interest and/or installment of principal or any other amount
due to the bank remains overdue for a period of more than 90 days.
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ii) Other Investments
which are not in the nature of deemed advance
Investments in State Government
guaranteed securities, which are not in the nature of ‘deemed
advance’, will attract appropriate asset classification and provisioning
norms, when interest and/or instalment of principal (including maturity
proceeds) or any other amount is due to the bank and remains overdue for
a period more than 90 days after invocation of the state government guarantee.
The provisioning norms would
be as under:
- Quoted securities
Banks should mark to market
these securities with reference to their market value and make appropriate
provisions for the depreciation in the value of the investment. Banks
should not set-off the depreciation requirement in respect of these non-performing
securities against the appreciation in respect of other performing securities.
b) Unquoted securities
Banks should make provisions
for the debentures as in the case of debentures/ bonds treated as advances.
The depreciation/ provision requirement towards debentures where the interest
is in arrears or principal is not paid as per due date, shall not be allowed
to be set-off against appreciation against other debentures/ bonds.
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Investment in State Government
guaranteed securities, which are not in the nature of ‘deemed advance’,
will attract appropriate asset classification and provisioning norms when
interest/ instalment of principal (including maturity proceeds) or any
other amount due to the bank remains unpaid as under :
(i) for more than 180 days
for the year ending March 31, 2005 and
(ii) for more than 90 days
with effect from the year ending March 31, 2006.
The provisioning norm would
be as under :
- Quoted securities
Banks should mark to market
these securities with reference to their market value and make appropriate
provisions for the depreciation in the value of the investment. Banks
should not set-off the depreciation requirement in respect of these non-performing
securities against the appreciation in respect of other performing securities.
b) Unquoted securities
Banks should make provisions
for the unquoted securities as in the case of investments in the nature
of deemed advances. Banks should not set-off the depreciation/ provision
requirement in respect of these non-performing securities against the
appreciation in respect of other performing securities.
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(c)
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Risk Weights
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Investment in State Government
guaranteed securities of Government undertakings which form part of the
approved market borrowing programme attracts an aggregate risk weight
of 2.5 per cent (zero per cent for credit risk and 2.5 per cent for market
risk).
Investment in State Government
guaranteed securities of Government undertakings which do not form
part of the approved market borrowing programme attract an aggregate risk
weight of 22.5 per cent (20 per cent for credit risk + 2.5 per cent for
market risk)
Investment in State Government
guaranteed securities attract a risk weight of 102.5 per cent if the guarantee
is invoked and concerned State Government has remained in default.
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Investment in State Government
guaranteed securities of Government undertakings which form part of the
approved market borrowing programme attracts a zero per cent risk weight
for credit risk.
Investment in State Government guaranteed securities of Government undertakings
which do not form part of the approved market borrowing programme
attracts a 20 per cent risk weight for credit risk.
Investment in securities
where payment of interest or repayment of principal is guaranteed by State
Government, which has become a non performing investment, will attract
a 100 per cent risk weight for credit risk.
The above securities will
attract an additional risk weight of 2.5 per cent for market risk. The
additional risk weight of 2.5 per cent for market risk would not be required
with effect from March 31, 2005 on the investment included under Held
for Trading category. The additional risk weight of 2.5 per cent towards
market risk would not be required with effect from March 31, 2006 on the
investment included under Available for Sale and Held to Maturity categories.
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