What changed
This master circular updates the previous one from July 1, 2006, incorporating instructions issued up to June 30, 2007. It consolidates existing guidelines without introducing new regulatory changes, focusing on risk weights for off-balance sheet exposures and withdrawal of the earlier 20% unsecured guarantee limit.
What it means for you
Banks must continue to manage contingent liabilities like guarantees and letters of credit prudently, as they impact soundness. The removal of the unsecured exposure cap gives boards flexibility to set their own policies, but they must ensure adequate risk assessment and avoid concentration in unsecured guarantees.
What you must do
- Review and update board-approved policies on unsecured exposures, including guarantees and co-acceptances.
- Ensure no guarantee has a maturity exceeding 10 years, and prefer shorter maturities.
- Avoid issuing large unsecured guarantees, especially for medium to long terms, and monitor concentration risks.
- Classify unsecured exposure correctly: where tangible security is ≤10% of outstanding exposure.
- Follow precautions for guarantee issuance, including limiting individual unsecured guarantees to a reasonable proportion of total.
Who it affects
All scheduled commercial banks (excluding RRBs), Bank boards and risk management committees, Credit and guarantee processing departments
Are banks still required to follow the 20% unsecured guarantee limit?
No, the earlier limit was withdrawn. Banks' boards may now set their own policies on unsecured exposures.