Banking · Capital Adequacy & Risk Exposure
Regarding the regulatory treatment of Irrevocable Payment Commitments (IPCs) issued by banks under the 2026 Revised Directions, which of the following best explains their structural classification and the resulting capital adequacy requirements?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Regulatory guidelines categorize IPCs as short-term trade-related contingencies, allowing for a 20% Credit Conversion Factor (CCF) if the underlying transaction is pre-funded by at least 50% cash collateral.
- 2An IPC structurally functions as a financial guarantee where the bank assumes the client's payment obligations, necessitating the regulatory assignment of a 100% Credit Conversion Factor (CCF).✓
- 3The Reserve Bank of India treats IPCs as operational settlement tools that are exempt from Capital Market Exposure (CME) limits provided they are issued for transactions involving Government Securities.
- 4IPCs are classified as performance-based credit substitutes that allow banks to apply a 50% Credit Conversion Factor (CCF) to accommodate the high turnover of intraday trading without straining capital reserves.
Correct answer
An IPC structurally functions as a financial guarantee where the bank assumes the client's payment obligations, necessitating the regulatory assignment of a 100% Credit Conversion Factor (CCF).
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