All commercial banks will be required to make provisions on the net funded country exposures on a graded scale ranging from 0. 25 to 100 per cent under the new country exposure norms that the Reserve Bank of India has put in place.

The central bank has directed banks to switchover to real-time monitoring of country exposures (all categories) by March 31, 2003.

RBI has asked banks to take into account indirect country risk exposures too. If a domestic borrower has a substantial economic dependence on a certain country, this will be construed as indirect exposure for the lending bank. The indirect exposure will quantify as 50 per cent of direct exposure.

To start with, only in respect of the country, where a bank's net funded exposure is 2 per cent or more of its total assets, the bank is required to make provision for dealing with that country risk exposure.

State Bank of India, Bank of India and Bank of Baroda which have significant presence outside the country will be required to make the provisionings.

The provision for country risk shall be in addition to the provisions required to be held according to the asset classification status of the asset. In the case of 'loss assets' and 'doubtful assets', total provisions taking into account country risk  may not exceed 100 per cent  of the outstanding, RBI said.

The RBI has directed all banks to frame 'country risk management' policies which will also include contingency plans and clear exit strategies that can be activated at times of crisis.

The policy should also stipulate rigorous application of the 'know your customer' principle in international activities which should not be compromised by availability of collateral or shortening of maturities.

Banks also need to look at both funded and non-funded exposures from their domestic as well as foreign branches while identifying, measuring, monitoring and controlling country risks.

For provisioing purpose, exposures should be computed on a net basis -- gross exposure minus collaterals, guarantees, insurance, etc, it said. In the case of foreign banks operating in India, the scope would be confined to their branches in India.

The RBI has also asked banks not to rely solely on rating agencies or other external sources as their only country risk-monitoring tool.

"Banks should also incorporate information from the relevant country managers of their foreign branches into their country risk assessments.

"However, the rating accorded by a bank to any country should not be better than the rating of that country by an international rating agency," it said.

Till such time as banks move over to internal rating systems, they are allowed to use the seven category classification followed by Export Credit Guarantee Corporation of India Ltd for the purpose of classification and making provisions for country risk exposures.

The RBI has directed the banks to place the guidelines before their boards at the next meeting. These guidelines will be reviewed after one year.