What changed
RBI observed banks issuing guarantees for non-convertible debentures under paragraph 2.4.2.3(a) of the Master Circular. It clarified that those instructions apply only to loans, not bonds or debt instruments. Banks are now explicitly barred from providing guarantees or equivalent commitments for any bonds or debt instruments.
What it means for you
Banks must stop issuing guarantees for corporate bonds and debt instruments, as this practice had systemic implications and hindered the development of a genuine corporate debt market. This reinforces the distinction between loan guarantees and bond guarantees, limiting banks' off-balance-sheet exposure to corporate debt. Lenders need to review their guarantee policies and ensure compliance to avoid regulatory action.
What you must do
- Immediately cease issuing guarantees or equivalent commitments for corporate bonds or any debt instruments.
- Review existing guarantee portfolios to identify and unwind any guarantees issued for bonds or debt instruments.
- Update internal policies and board-approved guidelines to explicitly prohibit guarantees for bonds/debt instruments.
- Ensure compliance teams are trained on the distinction between loan guarantees and bond guarantees.
- Report any past guarantees issued for bonds/debt instruments to the appropriate regulatory authority.
Who it affects
All scheduled commercial banks (excluding RRBs), Corporate banking and credit departments, Risk management and compliance teams, Banks issuing guarantees for non-convertible debentures
Does this circular apply to guarantees for loans extended by other banks?
No, the circular clarifies that the existing instructions (paragraph 2.4.2.3(a)) apply only to loans. Guarantees for loans are still permitted subject to the conditions in the Master Circular, such as a minimum 10% funded exposure and board-approved policies.
What are the systemic implications of banks guaranteeing corporate bonds?
RBI noted that such guarantees have significant systemic implications and impede the development of a genuine corporate debt market. They create contingent liabilities that could amplify risks during stress and distort market pricing of credit risk.
Are there any exceptions for guarantees in favor of overseas lenders?
The circular does not create new exceptions. The existing prohibition on guarantees or letters of comfort in favor of overseas lenders (including assignable ones) remains, as per the Master Circular. AD banks should also follow FEMA provisions.