What changed
Previously, zero percent risk weight applied only to specific schemes under CGTMSE, CRGFTLIH, and NCGTC. Now, it covers all existing and future schemes from these trust funds, subject to conditions like guarantee irrevocability and timely settlement within 30 days of lodgement. For portfolio-level guarantees, first-loss portions must be fully deducted from capital from April 1, 2023.
What it means for you
Banks can reduce capital requirements on guaranteed portions of exposures, freeing up capital for lending. However, residual exposures beyond guarantee caps or first-loss pieces will attract higher risk weights or full deduction, requiring careful structuring. This aligns prudential norms across guarantee schemes and encourages lending to micro, small, and low-income housing sectors.
What you must do
- Review all existing and new exposures under CGTMSE, CRGFTLIH, and NCGTC to apply zero risk weight only on guaranteed portions meeting RBI conditions.
- For portfolio-level guarantees, identify first-loss absorption amounts and prepare to deduct them fully from capital from April 1, 2023.
- Ensure guarantee documentation confirms direct, explicit, irrevocable, and unconditional nature for credit risk mitigation eligibility.
- Monitor claim settlement timelines: guarantees must allow lodgement within 60 days of default and settlement within 30 days.
Who it affects
All Scheduled Commercial Banks including RRBs, Primary (Urban) Co-operative Banks, Non-Banking Financial Companies including HFCs, All-India Financial Institutions
Does this circular apply to all guarantee schemes under CGTMSE, CRGFTLIH, and NCGTC?
Yes, zero percent risk weight applies to any existing or future scheme from these trust funds, provided the guarantees meet conditions like being direct, explicit, irrevocable, and unconditional, and settlement occurs within 30 days of lodgement.
How should we treat exposures where the guarantee has a payout cap or first-loss clause?
Zero risk weight applies only up to the maximum permissible claim. The residual exposure must be risk-weighted as per the counterparty's standard. For portfolio-level guarantees, the first-loss portion must be fully deducted from capital from April 1, 2023.
What happens if the guarantee does not meet the settlement timeline?
If a future scheme does not provide for lodgement within 60 days of default and settlement within 30 days, it will not be eligible for zero percent risk weight under this circular.