Issue of Guarantees by banks (RBI Circular)

RBI/2008-2009/488
DBOD.No.DIR.BC.136/13.03.00/2008-09                                                                                    May 29, 2009

All Scheduled Commercial Banks (Excluding RRBs)

Issue of Guarantees by banks

It is observed that, of late, certain banks, in terms of paragraph 2.4.2.3 (a) of the  Master circular RBI/2008-09/79 DBOD.No.Dir.BC.18/13.03.00/2008-09 dated July 1, 2008 (extract attached) , have been issuing guarantees on behalf of corporate entities in respect of non-convertible debentures issued by such entities. It is clarified 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.

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.

Extract of Master Circular RBI/2008-09/79 DBOD.No.Dir.BC.18/13.03.00/2008-09 dated July 1, 2008

Banks may issue guarantees favouring other banks/ FIs/ other lending agencies for the loans extended by the latter, subject to strict compliance with the following conditions                   .

i. The Board of Directors should reckon the integrity/ robustness of the bank’s risk management systems and, accordingly, put in place a well-laid out policy in this regard              .

The Board approved policy should, among others, address  the following issues:

1. Prudential limits, linked to bank’s Tier I capital, up to which guarantees favouring other banks/FIs/other lending agencies may be issued
2. Nature and extent of security and margins
3. Delegation of powers
4. Reporting system
5. Periodical reviews

ii. The guarantee shall be extended only in respect of borrower constituents and to enable them to avail of additional credit facility from other banks/FIs/lending agencies                  .

iii. The guaranteeing bank should assume a funded exposure of at least 10% of the exposure guaranteed.

iv. Banks should not extend guarantees or letters of comfort in favour of overseas lenders including those assignable to overseas lenders. However, AD banks may also be guided by the provisions contained in Notification No. FEMA 8/2000-RB dated May 3, 2000          .

v. 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.

vi. Banks should 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.

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Payment of Interest on Savings Bank Account on a Daily Product Basis (RBI Circular)

RBI/2008-09/452

DBOD. No. Dir. BC.128/13.03.00/2008-09                                                                            April 24, 2009

All Scheduled Commercial Banks (Excluding RRBs)

          Please refer to paragraph 88 of the Annual Policy Statement announced by Governor on April 21, 2009 (extract enclosed), in terms of which it has been proposed that payment of interest on savings bank accounts by scheduled commercial banks would be calculated on a daily product basis with effect from April 1, 2010. In terms of extant guidelines, as per paragraph 2.2B of the Master Circular dated July 1, 2008 on Interest Rates on Rupee Deposits held in Domestic, Ordinary Non-Resident (NRO) and Non-Resident (External) (NRE) Accounts, banks have been advised that in the case of savings deposits, interest should be calculated on the minimum balance to the credit of the deposit account during the period from the 10th to the last day of each calendar month and credited to the account only when it is Re.1/- or more. Several banks had suggested that interest on savings bank accounts may be calculated either on the minimum balances in the deposit accounts during the period from the first to the last day of each calendar month or on a daily product basis. The matter was referred to the Indian Banks' Association, which was of the view that payment of interest on a daily product basis would be feasible only when computerisation in banks is completed.

         We advise that on a review, and in view of the present satisfactory level of computerisation in commercial bank branches, it is proposed that payment of interest on savings bank accounts by scheduled commercial banks would be calculated on a daily product basis with effect from April 1, 2010. In order to ensure a smooth transition, banks may work out the modalities in this regard.

Reserve Bank of India Annual Policy Statement 2009-10 Part B. Developmental and Regulatory Policies 2009-10

Interest Rate Policy

Payment of Interest on Savings Bank Account on a Daily Product Basis

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At present, interest on savings bank accounts is calculated on the minimum balances held in the accounts during the period from the 10th day to the last day of each calendar month. Several banks have suggested that interest on savings bank accounts may be calculated either on the minimum balances in the deposit accounts during the period from the first to the last day of each calendar month or on a daily product basis. The matter was referred to the IBA, which was of the view that payment of interest on a daily product basis would be feasible only when computerisation in banks is completed. In view of the present satisfactory level of computerisation in commercial bank branches, it is proposed that                                                             :

* payment of interest on savings bank accounts by scheduled commercial banks (SCBs) would be calculated on a daily product basis with effect from April 1, 2010

Modalities in this regard will be worked out in consultation with banks.