Reserve Bank of India revises prudential treatment for Government of India guaranteed security receipts including CET1 deductions and NAV based valuation

The Reserve Bank of India has issued revised norms for the prudential treatment of security receipts (SRs) guaranteed by the Government of India, introducing a differentiated approach under the Master Direction on Transfer of Loan Exposures, 2021 for lenders transferring loans to asset reconstruction companies and for investors holding such SRs. The changes apply to commercial banks, co-operative banks, all-India financial institutions and non-banking financial companies, with immediate effect for both existing and subsequent investments in Government of India guaranteed SRs during the validity of the guarantee. Where a loan is transferred to an asset reconstruction company at a value above net book value, excess provisions may be reversed to the Profit and Loss Account in the year of transfer if the sale consideration consists only of cash and Government of India guaranteed SRs, but the SR component must be deducted from Common Equity Tier 1 (CET1) capital and dividends cannot be paid out of that component. Such SRs must be periodically valued using the net asset value declared by the asset reconstruction company based on recovery ratings, and any unrealised gains recognised in the Profit and Loss Account from fair valuation must be deducted from CET1 capital with no dividends paid out of those gains. Any SRs outstanding after final settlement of the guarantee or expiry of the guarantee period, whichever is earlier, must be valued at INR 1, and if SRs are converted into other instruments as part of resolution, valuation and provisioning follow the Prudential Framework for Resolution of Stressed Assets.