RBI warning on guarantees

Written by Press Trust of India | Mumbai | Updated: May 30 2009, 06:46am hrs
RBI on Friday asked banks not to issue guarantees on behalf of corporates against bonds or any other debt instruments as these could impede the development of a corporate debt market and cause systemic problems.

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 RBI notification stated.

RBI clarified that banks can only issue such guarantees or equivalent commitments against loans extended by other banks or other lenders. Guarantees by the banking system for a corporate bond or any debt instrument not only has significant systemic implications, but also impedes the development of a genuine corporate debt market, it said.

RBI issued the notification as certain banks have been issuing guarantees on behalf of corporate entities against non-convertible debentures issued by these firms.