UCBs: Risk Weight on LC Bills Revised

RBI/2005-06/367 UBD.(PCB).BPD.Cir No: 46/13.05.000/2005-06 April 19, 2006 The Chief Executive Officers of All Primary (urban) Co-operative Banks Dear Sir/Madam, Bills discounted under LC – Risk Weight and Exposure Norms - UCBs Please refer to our circular UBD.BPD.PCB.cir. 37/13.05.00/2003-04 dated March 16, 2004. In terms of para 2 (iv) of the circular, the credit exposure on account of bills purchased / discounted / negotiated under LCs or otherwise should be reckoned on the bank’s borrower constituent. Accordingly, the exposure should attract a risk weight appropriate to the borrower constituent (viz. 100% for firms, individuals, corporate, etc.) for capital adequacy purposes. 2. The above instructions have been reviewed and it has now been decided that : i. Bills purchased / discounted / negotiated under LC (where the payment to the beneficiary is not made ‘under reserve’) will be treated as an exposure on the LC issuing bank and not on the borrower. ii. All clean negotiations as indicated above in para (i) above, will be assigned the risk weight as is normally applicable to inter-bank exposures, for capital adequacy purposes. iii. In the case of negotiations ‘under reserve’ the exposure should be treated as on the borrower and risk weight assigned accordingly. 3. The above guidelines will come into operation with immediate effect. 4. Please acknowledge receipt to the concerned Regional Office of Reserve Bank of India. Yours faithfully, (N.S.Vishwanathan) Chief General Manager in-Charge

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2005-06/367 · issued 19 Apr 2006. The plain-English explanation above is BankPulse’s own independent summary.

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