Notification DNBS. PD.No.238/CGM(US)-2011,

dated 26-12-2011

The Reserve Bank of India, having considered it necessary in public interest and being satisfied that, for the purpose of enabling the Bank to regulate the credit system to the advantage of the country, it is necessary to amend the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 (hereinafter referred to as the said Directions), contained in Notification No. DNBS. 193/DG(VL)-2007 dated February 22, 2007 , in exercise of the powers conferred by section 45JA of the Reserve Bank of India Act, 1934 (2 of 1934) and of all the powers enabling it in this behalf, hereby directs that the said Directions shall be amended with immediate effect as follows, namely –

3. In para 16(2), Explanation No. (2) may be replaced with the following:

‘(2) Off-balance sheet items

A. General

NBFCs will calculate the total risk weighted off-balance sheet credit exposure as the sum of the risk-weighted amount of the market related and non-market related off-balance sheet items. The risk-weighted amount of an off-balance sheet item that gives rise to credit exposure will be calculated by means of a two-step process:

(a) the notional amount of the transaction is converted into a credit equivalent amount, by multiplying the amount by the specified credit conversion factor or by applying the current exposure method; and

(b) the resulting credit equivalent amount is multiplied by the risk weight applicable viz.; zero per cent for exposure to Central Government/State Governments, 20 per cent for exposure to banks and 100 per cent for others.

B. Non-market-related off-balance sheet items

 i.   The credit equivalent amount in relation to a non-market related off-balance sheet item will be determined by multiplying the contracted amount of that particular transaction by the relevant credit conversion factor (CCF).

Sr. No. Instruments Credit
Conversion
Factor
i. Financial & other guarantees 100
ii. Share/debenture underwriting obligations 50
iii. Partly-paid shares/debentures 100
iv.  Bills discounted/rediscounted 100
v. Lease contracts entered into but yet to be executed 100
vi. Sale and repurchase agreement and asset sales with recourse, where the credit risk remains with the NBFC. 100
vii. Forward asset purchases, forward deposits and partly paid shares and securities, which represent commitments with certain draw down. 100
viii. Lending of NBFC securities or posting of securities as collateral by NBFC, including instances where these arise out of repo style transactions 100
ix. Other commitments (e.g., formal standby facilities and credit lines) with an original maturity of

up to one year

over one year

 

20

50

x. Similar commitments with an original maturity upto one year, or which can be unconditionally cancelled at any time 0
xi. Take-out Finance in the books of taking-over institution
(i)  Unconditional take-out finance 100
(ii) Conditional take-out finance 50
Note : As the counter-party exposure will determine the risk weight, it will be 100 per cent in respect of all borrowers or zero per cent if covered by Government guarantee.
xii. Commitment to provide liquidity facility for securitization of standard asset transactions 100
xiii. Second loss credit enhancement for securitization of standard asset transactions provided by third party 100
xiv. Other contingent liabilities (To be specified) 50

Note:

iii. Cash margins/deposits shall be deducted before applying the conversion factor

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iv. Where the non-market related off-balance sheet item is an undrawn or partially undrawn fund-based facility, the amount of undrawn commitment to be included in calculating the off-balance sheet non-market related credit exposures is the maximum unused portion of the commitment that could be drawn during the remaining period to maturity. Any drawn portion of a commitment forms a part of NBFC’s on-balance sheet credit exposure’.

C. Market Related Off-Balance Sheet Items

  i.  NBFCs should take into account all market related off-balance sheet items (OTC derivatives and Securities Financing Transactions such as repo/reverse repo/CBLO etc.) while calculating the risk weighted off-balance sheet credit exposures.

ii.   The credit risk on market related off-balance sheet items is the cost to an NBFC of replacing the cash flow specified by the contract in the event of counterparty default. This would depend, among other things, upon the maturity of the contract and on the volatility of rates underlying the type of instrument.

iii.  Market related off-balance sheet items would include :

  a.  interest rate contracts – including single currency interest rate swaps, basis swaps, forward rate agreements, and interest rate futures;

  b.  foreign exchange contracts, including contracts involving gold, – includes cross currency swaps (including cross currency interest rate swaps), forward foreign exchange contracts, currency futures, currency options;

  c.  Credit Default Swaps; and

  d.  any other market related contracts specifically allowed by the Reserve Bank which give rise to credit risk.

iv.  Exemption from capital requirements is permitted for –

 a.   foreign exchange (except gold) contracts which have an original maturity of 14 calendar days or less; and

 b.   instruments traded on futures and options exchanges which are subject to daily mark-to-market and margin payments.

 v. The exposures to Central Counter Parties (CCPs), on account of derivatives trading and securities financing transactions (e.g. Collateralised Borrowing and Lending Obligations – CBLOs, Repos) outstanding against them will be assigned zero exposure value for counterparty credit risk, as it is presumed that the CCPs’ exposures to their counterparties are fully collateralised on a daily basis, thereby providing protection for the CCP’s credit risk exposures.

vi. A CCF of 100 per cent will be applied to the corporate securities posted as collaterals with CCPs and the resultant off-balance sheet exposure will be assigned risk weights appropriate to the nature of the CCPs. In the case of Clearing Corporation of India Limited (CCIL), the risk weight will be 20 per cent and for other CCPs, risk weight will be 50 per cent.

vii. The total credit exposure to a counterparty in respect of derivative transactions should be calculated according to the current exposure method as explained below:

D. Current Exposure Method

The credit equivalent amount of a market related off-balance sheet transaction calculated using the current exposure method is the sum of (a) current credit exposure and (b) potential future credit exposure of the contract.

(a) Current credit exposure is defined as the sum of the gross positive mark-to-market value of all contracts with respect to a single counterparty (positive and negative marked-to-market values of various contracts with the same counterparty should not be netted). The Current Exposure Method requires periodical calculation of the current credit exposure by marking these contracts to market.

(b) Potential future credit exposure is determined by multiplying the notional principal amount of each of these contracts, irrespective of whether the contract has a zero, positive or negative mark-to-market value by the relevant add-on factor indicated below according to the nature and residual maturity of the instrument.

Credit Conversion Factors for interest rate related, exchange rate related and gold related derivatives
Credit Conversion Factors (%)
Interest Rate Contracts Exchange Rate Contracts & Gold
One year or less 0.50 2.00
Over one year to five years 1.00 10.00
Over five years 3.00 15.00

  i.   For contracts with multiple exchanges of principal, the add-on factors are to be multiplied by the number of remaining payments in the contract.

 ii.   For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, the residual maturity would be set equal to the time until the next reset date. However, in the case of interest rate contracts which have residual maturities of more than one year and meet the above criteria, the CCF or add-on factor is subject to a floor of 1.0 per cent.

 iii.  No potential future credit exposure would be calculated for single currency floating/floating interest rate swaps; the credit exposure on these contracts would be evaluated solely on the basis of their mark-to-market value.

 iv.  Potential future exposures should be based on ‘effective’ rather than ‘apparent notional amounts’. In the event that the ‘stated notional amount’ is leveraged or enhanced by the structure of the transaction, the ‘effective notional amount’ must be used for determining potential future exposure. For example, a stated notional amount of USD 1 million with payments based on an internal rate of two times the lending rate of the NBFC would have an effective notional amount of USD 2 million.

E. Credit conversion factors for Credit Default Swaps (CDS):

A CDS creates a notional short position for specific risk in the reference asset/obligation for the protection buyer. This position will attract a Credit Conversion Factor of 100 and a risk weight of 100. The Add On factor may be fixed as 10 per cent (of notional principal of CDS) in relation to potential future exposure’.

4. In the notes to the table under ‘Explanations: On balance sheet items’ in para 16(2), the note No.4 may be deleted.

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