RBI bars banks from issuing guarantees against corporate bonds

30 May 2009

The Reserve Bank of India has barred commercial banks from issuing guarantees on behalf of corporates against bonds or any other debt instruments as these could impede development of corporate debt market and cause systemic problems.

Of late, certain banks have been issuing guarantees on behalf of corporate entities in respect of non-convertible debentures issued by such entities, RBI said, adding that the extant instructions apply only to loans and not to bonds or debt instruments.

''Guarantees by the banking system for a corporate bond or any debt instrument not only have significant systemic implications but also impede the development of a genuine corporate debt market,'' RBI said in a notification.

''Banks are advised to strictly comply with the extant regulations and in particular, not to provide guarantees or equivalent commitments for issuance of bonds or debt instruments of any kind,'' the notification said.

Earlier, in a notification dated 1 July 2008, the RBI had allowed banks to issue guarantees favouring other banks/FIs/ other lending agencies for the loans extended by the latter, subject to strict compliance of prudential norms.

According to the earlier notification, the board of directors of the banks concerned should reckon the integrity/robustness of its risk management systems and, accordingly, put in place a well-laid out policy in this regard.