Skip to main content

Banks' Exposure to Capital Market - Issue of Irrevocable Payment Commitments (IPCs)

Reserve Bank of India (RBI) has updated the guidelines on issuance of Irrevocable Payment Commitments (IPCs) by banks.

What are Irrevocable Payment Commitments (IPCs)?

Irrevocable Payment Commitment (IPC) means irrevocable confirmation issued by the custodian bank in favour of a stock exchange / clearing corporation of a stock exchange on behalf of its customers, to meet the payment obligation arising out of a 'buy' transaction.

Why does IPCs issued by banks forms part of capital market exposure?

Banks issue IPCs to various stock exchanges on behalf of Mutual Funds and Foreign Institutional Investor (FIIs) to facilitate the transactions done by these clients. IPCs are in the nature of non-fund based credit facility for purchase of shares and are treated at par with guarantees issued for the purpose of capital market operations. Such exposure of banks, therefore, forms part of their Capital Market Exposure (CME). 

What are the guidelines on recognition of CME for IPCs issued by banks?

The extant risk mitigation measures were based on T+2 rolling settlement for equities (T being the Trade day). The extant guidelines on issuance of IPCs by banks have been reviewed and the guidelines for T+1 rolling settlement have been issued. The extant instructions continue to remain valid for T+2 settlement cycle.

Guidelines for T+2 settlement cycle Guidelines for T+1 settlement cycle
Only those custodian banks, would be permitted to issue IPCs, who have a clause in the Agreement with their clients which gives them an inalienable right over the securities to be received as pay out in any settlement. However, this clause will not be insisted upon in cases where transactions are pre-funded i.e. there are clear INR funds in the customer’s account and, in case of FX deals, the bank’s nostro account has been credited before the issuance of the IPC by custodian banks. Only those custodian banks will be permitted to issue IPCs, who have a clause in the Agreement with clients giving the banks an inalienable right over the securities to be received as pay out in any settlement. However, this clause will not be insisted upon if the transactions are pre-funded i.e., either clear INR funds are available in the customer’s account or, in case of FX deals, the bank’s nostro account has been credited before the issuance of the IPC.
The maximum risk to the custodian banks issuing IPCs would be reckoned at 50%, on the assumption of downward price movement of the equities bought by FIIs / Mutual Funds on the two successive days from the trade date (T) i.e., on T+1 and T+2, of 20% each with an additional margin of 10% for further downward movement. The maximum intraday risk to the custodian banks issuing IPCs would be reckoned as CME at 30% of the settlement amount. This is based on the assumption of 20% downward price movement of the equities on T+1, with an additional margin of 10% for further downward movement of price.
The potential risk on T+1 would be reckoned at 50% of the settlement amount and this amount would be reckoned as CME at the end of T+1 if margin payment / early pay in does not come in. Under T+1 settlement cycle, the exposure shall normally be for intraday. However, in case any exposure remains outstanding at the end of T+1 Indian Standard Time, capital will have to be maintained on the outstanding CME in terms of the Master Circular – Basel III Capital Regulations dated April 01, 2024, as amended from time to time.
In case there is early pay in on T+1, there will be no CME. T+1 means ‘end of day’ (EOD) as per Indian Time. Thus, funds received after EOD as per Indian Time, will not be reckoned as early pay-in on T+1. CME will have to be computed accordingly.
In case margin is paid in cash on T+1, the CME would be reckoned at 50% of settlement price minus the margin paid. In case margin is paid on T+1 by way of permitted securities to FIIs / Mutual Funds, the CME would be reckoned at 50% of settlement price minus the margin paid plus haircut prescribed by the Exchange on the securities tendered towards margin payment. In case margin is paid in cash, the exposure will stand reduced by the amount of margin paid. In case margin is paid by way of permitted securities to Mutual Funds / FIIs, the exposure will stand reduced by the amount of margin after adjusting for haircut as prescribed by the Exchange on the permitted securities accepted as margin.
The IPC will be treated as a financial guarantee with a Credit Conversion Factor (CCF) of 100. However, capital will have to be maintained only on exposure which is reckoned as CME and the risk weight would be 125% thereon. The underlying exposures of banks to their counterparties, emanating from the intraday CME, will be subject to limits prescribed under Large Exposure Framework dated June 3, 2019, as amended from time to time.


References

Reserve Bank of India. (2007, December 14). 'Loans/advances to MFs to be included in Banks’ Capital Market Exposure'. Retrieved from https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=3978&Mode=0

Reserve Bank of India. (2010, September 30). 'Banks' Exposure to Capital Market - Issue of Irrevocable Payment Commitments (IPCs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=6020&Mode=0

Reserve Bank of India. (2010, October 28). 'Issue of Irrevocable Payment Commitments'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=6061&Mode=0

Reserve Bank of India. (2011, December 27). 'Banks' Exposure to Capital Market - Issue of Irrevocable Payment Commitments (IPCs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=6903&Mode=0

Reserve Bank of India. (2012, March 30). 'Foreign Exchange Management (Guarantees) (Amendment) Regulations, 2010'. Retrieved from https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7861&Mode=0

Reserve Bank of India. (2024, May 03). 'Banks' Exposure to Capital Market - Issue of Irrevocable Payment Commitments (IPCs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12681&Mode=0


Follow at - Telegram   Instagram   LinkedIn   X   Facebook

Labels:

Comments

Post a Comment

Popular Posts

Payment of Agency Commission to Agency Banks (ABs) and Disbursement of Government Pension by ABs

Reserve Bank of India (RBI) has issued guidelines on the conduct of Government business by Agency Banks (ABs), payment of agency commission to ABs and disbursement of Government pension by ABs. Who are ABs? ABs mean all Public Sector Banks (PSBs), scheduled Private Sector Banks (PVBs), scheduled Payments Banks (PBs), and scheduled Small Finance Banks (SFBs) appointed by the RBI under Section 45 of the RBI Act, 1934, by mutual agreement, to carry out Government banking business of the Central Government (CG) / State Governments (SGs). What is agency commission? Agency commission means the remuneration paid by the RBI to an AB in consideration of it acting as an agent of the RBI in the conduct of general banking business of the CG and the SGs at the places and in the manner specified in the agreement between the RBI and the bank, with the exception of the functions relating to the management of the public debt. What are the guidelines on appointment of ABs? Any eligible bank which intend...
Post a Comment
Read more

Kisan Credit Card (KCC) Scheme

Reserve Bank of India (RBI) has issued directions on Kisan Credit Card (KCC) Scheme. To whom are the directions applicable? The directions are applicable to the following entities – Commercial Banks (excluding overseas branches of Indian banks) Small Finance Banks (SFBs) Regional Rural Banks (RRBs) Rural Co-operative Banks – State Co-operative Banks (StCBs) Central Co-operative Banks (CCBs) To which loans shall the directions be applicable? The directions shall be applicable to loans sanctioned under the KCC Scheme with effect from January 01, 2027.  What are the crop seasons? Crop season means the period up to harvesting and marketing of the crops raised. Short duration crops shall mean crops with anticipated period from sowing to marketing up to 12 months. Long duration crops mean crops which are not short duration crops. The crop season for long duration crops i.e., anticipated period from sowing to marketing is more than 12 months and up to 18 months. For the purpose of the KCC...
Post a Comment
Read more

Credit Derivatives

Reserve Bank of India (RBI) has issued directions on credit derivatives. What is Credit Derivative? Credit derivative means a derivative contract whose value is derived from the credit risk of an underlying debt instrument or an index of underlying debt instruments. What is Credit Default Swap (CDS) and Total Return Swap (TRS)? Credit Default Swap (CDS) means a credit derivative contract in which one counterparty (protection seller) commits to pay to the other counterparty (protection buyer) in the case of a credit event with respect to a reference entity and in return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier. Total Return Swap (TRS) means a credit derivative contract under which one counterparty (total return payer) commits to transfer the entire economic performance of a reference asset to the other counterparty (total return receiver), and, in return, receives a pre-d...
Post a Comment
Read more

Deposits between a person resident in India and a person resident outside India

Reserve Bank of India (RBI) has updated the regulations on deposits between a person resident in India and a person resident outside India. What are the restrictions on deposits between a person resident in India and a person resident outside India? No person resident in India shall accept any deposit from, or make any deposit with, a person resident outside India. However, the following deposits are exempted – Deposits held in rupee accounts maintained by foreign diplomatic missions and diplomatic personnel and their family members in India with an authorised dealer. Deposits held by diplomatic missions and diplomatic personnel in special rupee accounts namely Diplomatic Bond Stores Account to facilitate purchases of bonded stocks from firms and companies who have been granted special facilities by customs authorities for import of stores into bond. The funds in the account may be repatriated outside India without the approval of the RBI. Deposits held in accounts maintained in foreig...
Post a Comment
Read more

Credit Cards and Debit Cards

Reserve Bank of India (RBI) has issued directions on issuance of credit cards and debit cards. To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Non-Banking Financial Companies (NBFCs) for all layers – NBFC-Investment and Credit Companies (NBFC-ICC) NBFC-Factor  NBFC-Micro Finance Institutions (NBFC-MFI)  Housing Finance Company (HFC)  What is a credit card? Credit Card is a physical / virtual payment instrument issued with a pre-approved revolving credit limit that can be used to purchase goods and services or draw cash advances. What is a debit card? Debit Card is a physical / virtual payment instrument linked to a Savings Bank / Current Account which can be used to withdraw cash, make online payments, do Point of Sale (PoS) terminal / Quick Response (QR) code transactions, fund transfer, e...
Post a Comment
Read more