The Reserve Bank of India has barred commercial banks from issuing guarantees on behalf of corporates against bonds or any other debt instruments as these could impede development of corporate debt market and cause systemic problems.
Of late, certain banks have been issuing guarantees on behalf of corporate entities in respect of non-convertible debentures issued by such entities, RBI said, adding that the extant instructions apply only to loans and not to bonds or debt instruments.
''Guarantees by the banking system for a corporate bond or any debt instrument not only have significant systemic implications but also impede the development of a genuine corporate debt market,'' RBI said in a notification.
''Banks are advised to strictly comply with the extant regulations and in particular, not to provide guarantees or equivalent commitments for issuance of bonds or debt instruments of any kind,'' the notification said.
Earlier, in a notification dated 1 July 2008, the RBI had allowed banks to issue guarantees favouring other banks/FIs/ other lending agencies for the loans extended by the latter, subject to strict compliance of prudential norms.
According to the earlier notification, the board of directors of the banks concerned should reckon the integrity/robustness of its risk management systems and, accordingly, put in place a well-laid out policy in this regard.
It should, among others, address issues like prudential limits linked to bank's Tier I capital - up to which guarantees favouring other banks/FIs/other lending agencies may be issued - nature and extent of security and margins; delegation of powers; reporting system and periodical reviews.
Guarantee can be extended only in respect of borrower constituents and to enable them to avail of additional credit facility from other banks / Fis / lending agencies.
The guaranteeing bank should assume a funded exposure of at least 10 per cent of the exposure guaranteed. Banks should also not extend guarantees or letters of comfort in favour of overseas lenders, including those assignable to overseas lenders.
The guarantee issued by the bank will be an exposure on the borrowing entity on whose behalf the guarantee has been issued and will attract appropriate risk weight, as per the extant guidelines.
Banks should also 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.