RBI reviews Prudential Norms – Risk Weights for Exposures guaranteed by Credit Guarantee Schemes (CGS)

The Reserve Bank of India has advised that the risk weight of 0% will be applicable in respect of exposures guaranteed under any existing or future schemes launched by Credit Guarantee Fund Trust for Micro and Small Enterprises (“CGTMSE”), Credit Risk Guarantee Fund Trust for Low Income Housing (“CRGFTLIH”) and National Credit Guarantee Trustee Company Ltd (“NCGTC”) on satisfying the following conditions:

1. Prudential Aspects: The guarantees provided under the respective schemes should comply with the requirements for credit risk mitigation in terms of paragraph 7.5 of the Master Circular on Basel III Capital Regulations dated April 1, 2022 which requires such guarantees to be direct, explicit, irrevocable and unconditional;
2. Restrictions on permissible claims: Where the terms of the guarantee schemes restrict the maximum permissible claims through features like specified extent of guarantee coverage, clause on first loss absorption by member lending institutions (MLI), pay-out cap, etc., the 0% risk weight shall be restricted to the maximum permissible claim and the residual exposure should be subjected to risk weight as applicable to the counterparty in terms of existing regulations.
3. In case of a portfolio-level guarantee, effective from 1^st April, 2023, the extent of exposure subjected to first loss absorption by the MLI, if any, will be subjected to full capital deduction and the residual exposure shall be subjected to risk weight as applicable to the counterparty in terms of extant regulations, on a pro rata basis. The maximum capital charge should be capped at a notional level arrived at by treating the entire exposure as unguaranteed.

Further, subject to the abovementioned prescriptions, any future scheme launched under any of the aforementioned Trust Funds, in order to be eligible for zero percent risk weight, must provide for settlement of the eligible guaranteed claims within 30 days from the date of lodgement, and the lodgement shall be permitted within 60 days from the date of default.

Some illustrative examples of risk weights have also been provided in the Annex to the existing Notifications

Applicability:

The above regulatory stipulation will be applicable to all the regulated entities to whom this circular is addressed (NBFCs, Scheduled Co-operative Banks, All India Financia Institutions, etc), to the extent these entities are recognised as eligible MLIs under the respective schemes.

Background:

Paragraph 5.2 of the Master Circular on Basel III Capital Regulations dated April 1, 2022 provides that banks are permitted to apply zero percent risk weights in respect of claims on CGTMSE, CRGFTLIH and individual schemes under NCGTC. To have a consistent approach with regard to risk weights for exposures guaranteed by such Trust Funds, the present notification has been issued.

Source: Reserve Bank of India