Module: | MODULE B: RISK MANAGEMENT
Q393: Scenario: An MSME borrower approaches ABC Bank for a 50 Lakh loan. The loan is fully covered under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme. Based on the Basel Credit Risk Mitigation (CRM) framework, consider the following statements regarding the correct regulatory actions:
1. The bank can substitute the standard risk weight of the MSME sector with a 0 percent risk weight for the guaranteed portion of the exposure.
2. The protection provided by the guarantee must be direct, explicit, irrevocable, and unconditional to qualify for credit risk mitigation.
3. The unguaranteed portion of the loan will continue to attract the standard risk weight applicable to the specific MSME borrower.
Which of the statements given above is/are correct?
2. The protection provided by the guarantee must be direct, explicit, irrevocable, and unconditional to qualify for credit risk mitigation.
3. The unguaranteed portion of the loan will continue to attract the standard risk weight applicable to the specific MSME borrower.
Which of the statements given above is/are correct?
✅ Correct Answer: D
The correct answer is D. Statement 1 is correct: Under the Credit Risk Mitigation (CRM) framework, guarantees from eligible entities (like the Sovereign government or CGTMSE) allow the bank to apply the risk weight of the guarantor (which is 0 percent for sovereign or CGTMSE) to the guaranteed portion of the exposure.
This is called risk weight substitution.
Statement 2 is correct: Basel norms explicitly mandate that for a guarantee to be recognized for CRM, it must be direct, explicit, irrevocable, and unconditional.
It cannot contain clauses that allow the guarantor to easily cancel the cover.
Statement 3 is correct: If the exposure is only partially guaranteed, the CRM benefit is strictly limited to the covered amount.
The unguaranteed portion continues to attract the risk weight assigned to the underlying counterparty (for example, the standard 75 percent or 100 percent MSME risk weight).
This is called risk weight substitution.
Statement 2 is correct: Basel norms explicitly mandate that for a guarantee to be recognized for CRM, it must be direct, explicit, irrevocable, and unconditional.
It cannot contain clauses that allow the guarantor to easily cancel the cover.
Statement 3 is correct: If the exposure is only partially guaranteed, the CRM benefit is strictly limited to the covered amount.
The unguaranteed portion continues to attract the risk weight assigned to the underlying counterparty (for example, the standard 75 percent or 100 percent MSME risk weight).