What changed
The earlier limit that 20% of unsecured guarantees plus total unsecured advances should not exceed 15% of total advances has been withdrawn. Banks' boards can now fix their own unsecured exposure policies. A new additional provision of 10% (total 20% of outstanding advances) is mandated for substandard unsecured advances.
What it means for you
Banks gain flexibility to manage unsecured guarantee portfolios based on board-approved risk appetite, but must increase provisioning for substandard unsecured exposures. This aligns with risk-based supervision and Basel norms. Lenders need to reassess their unsecured exposure limits and provisioning frameworks.
What you must do
- Review and update board-approved policy on unsecured exposures including guarantees.
- Ensure additional 10% provisioning for substandard unsecured advances (total 20% of outstanding advances).
- Monitor concentration of unsecured guarantees to individual customers or groups.
- Avoid issuing bank guarantees with maturity beyond 10 years.
Who it affects
All scheduled commercial banks (excluding RRBs), Credit and risk management departments, Board of directors setting credit policies
What is the new definition of 'unsecured exposure'?
An exposure where the realisable value of tangible security is not more than 10% of the outstanding exposure, as assessed by the bank or approved valuers. It includes both funded and non-funded exposures.
What is the maximum maturity for bank guarantees?
No bank guarantee should normally have a maturity of more than 10 years. Banks should prefer shorter maturities.
How does the circular affect provisioning for unsecured advances?
For substandard unsecured advances, banks must make an additional 10% provision, totaling 20%. For doubtful and loss categories, 100% provision continues.