What changed
RBI observed large disparities in how banks apply credit conversion factors (CCF) to guarantees. It issued a detailed indicative list to distinguish financial guarantees (100% CCF) from performance guarantees (50% CCF), replacing earlier ambiguity.
What it means for you
Banks must now strictly classify guarantees as financial or performance based on the nature of risk, not just the label. Misclassification directly impacts capital adequacy calculations, so lenders need to review their guarantee portfolios and ensure correct CCF application to avoid capital shortfalls.
What you must do
- Audit all outstanding guarantees to reclassify them as financial (100% CCF) or performance (50% CCF) per the new indicative list.
- Update internal credit risk policies and systems to enforce correct CCF assignment for new guarantees.
- Train credit and risk teams on the distinction between financial and performance guarantees to prevent future misapplication.
- Review capital adequacy impact and adjust capital planning if reclassification changes risk-weighted assets.
Who it affects
All scheduled commercial banks (excluding LABs and RRBs), Credit risk management teams, Treasury and capital planning departments, Audit and compliance functions
What is the key difference between a financial guarantee and a performance guarantee?
A financial guarantee is a direct credit substitute where the bank guarantees repayment of a financial obligation, carrying credit risk similar to a loan. A performance guarantee covers non-financial contractual obligations, where loss depends on an event, not just counterparty creditworthiness.
Does this circular change the CCF percentages?
No, the CCF percentages remain 100% for financial guarantees and 50% for performance guarantees. The circular only clarifies the classification to ensure consistent application across banks.
What happens if a bank misclassifies a guarantee?
Incorrect CCF application directly affects capital adequacy calculations, potentially leading to understated risk-weighted assets and capital shortfall. Banks must correct classifications and may need to adjust capital planning.