The Indian Banks' Association (IBA) is still seeking clarification on how to treat letters of credit (L/Cs) and bank guarantees under the country's new banking guidelines.

New guidelines on bank exposure to large borrowers took effect on 1 April 2019, despite efforts by the IBA to delay implementation.

The new guidelines come in the wake of a series of major non-performing loans, one of which resulted from the major alleged scam at Punjab National Bank in which bank officials colluded with celebrity jeweller Nirav Modi to cheat the bank out of US$2 billion using fraudulent L/Cs and letters of undertaking.

L/C clarity

Specifically, the IBA is seeking clarification on whether exposure taken against L/Cs or bank guarantees issued by the parent entity of a local foreign bank should be accounted for or not.

The association has also asked for clarification on the calculation of group exposure where dependent and joint venture companies are involved.

Exposure caps

The new guidelines cap a bank's exposure to a group of connected companies at 25 per cent of its core capital, and to an individual company at 15 per cent.

The IBA has called for an extension of the deadline by another one to two years, the association's chief executive V G Kannan said. "We have taken up the matter on extension of the deadline and clarification. The extension is primarily for smaller banks," he said.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.