Mumbai, Apr 08: The Reserve Bank of India (RBI) has allowed banks to issue guarantees favouring other banks, financial institutions and lending agencies for the loans extended by them. However, the guarantees will be subject to strict compliance norms, the RBI said in a notification published on its web site. The RBI said the move is in tune with the liberalisation and deregulation of the banking sector and in view of the adoption of risk management system in banks.
The RBI said the board of directors of a bank must put a well-laid out policy after taking in to account the integrity and robustness of the bank’s own risk management system. The policy must indicate the prudential limits for such guarantees, which must be linked to the bank’s Tier I capital.

The guarantee shall only be to enable a borrower to avail of additional credit facility from other banks, institutions, or lending agencies.
Banks should not extend guarantees or letter of comfort in favour of overseas lenders, except for the relaxation permitted under Foreign Exchange Management Act, the RBI said.
Banks that extend credit on the basis of guarantees from another banks or financial institutions must assign appropriate risk weight as per the guidelines, the central bank said.
Since the exposure assumed by the bank against the guarantee will be for a fairly longer period compared with interbank money market or foreign exchange dealings, the board of directors should fix an appropriate sub-limit because of the greater risk, the RBI said. Bureau Report