Banks get autonomy on unsecured exposures

RBI ANNUAL POLICY STATEMENT, 2004-05

The Reserve Bank of India has done way with the extant limit on unsecured exposures of banks. Henceforth, bank boards have the freedom to chalk out their own policy on unsecured exposures.

At present, banks are required to limit their commitments by way of unsecured exposure in such a manner that 20 per cent of a bank's outstanding unsecured guarantees plus the total of its outstanding unsecured advances should not exceed 15 per cent of its total outstanding advances.

The much sought liberalisation measure, however, comes with a condition that banks will be required to make an unconditional provision of 10 per cent i.e. a total provision of 20 per cent of the total outstanding advances in the substandard category to cover expected loss on unsecured exposures.

Provision at 100 per cent for unsecured exposures in doubtful and loss categories will continue as before.

The central bank said that in order to extend further flexibility to banks on their loan policies, it is proposed to withdraw the extant limit on unsecured exposures to enable banks' boards to fix their own policy on unsecured exposures.

Banks', hitherto, had been hampered by the limit on unsecured advances as more-often-than-not their exposure was at the threshold of 15 per cent of total outstanding advances.

With the removal of the cap, banks will be able to extend unsecured (without collateral) short-term loans to highly rated corporates. Some of the other examples of unsecured loans are : personal loans and staff loans.