The Reserve Bank of India (RBI) has issued new directives to banks regarding their involvement in the capital markets, stressing the importance of adhering to prescribed guidelines. The latest circular specifically addresses "Banks' Exposure to Capital Market - Issue of Irrevocable Payment Commitments (IPCs)".

This move by the RBI follows changes in the settlement cycle introduced by stock exchanges, transitioning from T+2 to T+1 rolling settlement for equities. Consequently, existing guidelines on the issuance of IPCs by banks have been reevaluated to align with the new settlement cycle.

Under the revised guidelines, custodian banks issuing IPCs must include a clause in their agreements with clients granting the banks an inalienable right over the securities to be received as payout in any settlement. However, this clause is not mandatory for pre-funded transactions.

The circular also introduces a maximum intraday risk limit for custodian banks issuing IPCs, capped at 30 percent of the settlement amount, considering potential downward price movements of equities on T+1.

Furthermore, the circular outlines procedures for reducing exposure through margin payments and mandates capital maintenance for any outstanding exposure at the end of T+1.

Additionally, banks' underlying exposures to counterparties arising from intraday Capital Market Exposure (CME) will be subject to limits prescribed under the Large Exposure Framework.

It's important to note that the instructions for the T+2 settlement cycle remain unchanged.

These directives are effective immediately upon issuance and are aimed at promoting prudent risk management practices among banks operating in the capital markets. Banks are expected to adjust their operations accordingly to comply with the revised guidelines laid out by the RBI.