RBI Revises Norms on Government-Guaranteed Security Receipts

The Reserve Bank of India (RBI) has introduced new guidelines for Government of India-guaranteed Security Receipts (SRs) issued by Asset Reconstruction Companies (ARCs). These regulations aim to differentiate sovereign-backed SRs from ordinary SRs, providing banks with greater flexibility in provisioning while ensuring stricter capital discipline. The move is expected to streamline bad loan resolutions, enhance investor confidence, and strengthen financial stability.

Key Provisions of the Circular

Reversal of Excess Provisions

• Banks can reverse excess provisions to their Profit & Loss (P&L) account.
• This applies only if the sale consideration is received in cash and government-guaranteed SRs.

Capital Treatment of SRs

• Non-cash SRs must be deducted from Common Equity Tier 1 (CET1) capital.
• Ensures unrealized gains do not inflate capital reserves.
• Banks cannot distribute dividends from this portion of capital.

Revised Valuation Methodology

• Government-backed SRs must be valued periodically based on Net Asset Value (NAV) declared by ARCs.
• Adjustments will be linked to recovery ratings.
• Unrealized fair valuation gains must be deducted from CET1 capital, restricting dividend payouts.

Differentiation from Previous Norms

• The 2021 Master Direction on Transfer of Loan Exposures (MD-TLE) applied uniform regulations to all SRs.
• The new guidelines recognize the lower risk profile of government-backed SRs and optimize provisioning while maintaining prudent capital buffers.

Entities Covered Under the Circular

• Commercial Banks (including Small Finance Banks, Regional Rural Banks, and Local Area Banks)
• Cooperative Banks (urban, state, and central)
• All-India Financial Institutions (AIFIs)
• Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs)

Impact on the Banking Sector

• Enhancing Investor Confidence
• Encourages greater participation in ARC transactions involving government-backed SRs.
• Expediting Stressed Asset Resolutions
• Provides a clearer valuation methodology, making transactions more transparent and efficient.

Strengthening Capital Discipline

• Prevents premature dividend payouts from unrealized valuation gains.