After making Legal Entity Identifier (LEI) mandatory for transactions in interest rate, forex and credit derivative market, the Reserve Bank of India (RBI) is set to make LEI compulsory for companies having aggregate fund-based and non-fund based exposure over Rs 5 crore. LEI is a unique 20 digit alphanumeric code that will be assigned to corporate borrowers. Banks will be required to capture this number in the Central Repository of Information on Large Credits (CRILC) database that captures details of loan above Rs 5 crore.
The LEI number will help banks in monitoring the aggregate exposure of corporate borrowers. It would also enable banks in preventing multiple loans to companies against the same collateral. While the requirement for obtaining LEI will be rolled out in phases, the RBI will issue detailed instructions by the month-end detailing time lines for different set of companies depending upon their size
Firms can obtain their LEI code from Legal Entity Identifier India Ltd.(LEIL), which is a wholly owned subsidiary of Clearing Corporation India Ltd. LEIL is accredited by the Global Legal Entity Identifier Foundation (GLEIF) and recognised by RBI as issuer of LEI under the Payment and Settlement Systems Act, 2007.
Apart from the LEIL, any local operating unit accredited by GLEIF can issue LEI numbers. LEI mechanism will enable banks to effectively monitor debt exposure of companies having businesses in multiple sectors and dealing with large number of banks and non-banking finance companies (NBFCs). It will make it easier for banks to detect frauds and willful defaulters and prevent ever-greening of loans. The need for such a system was felt after the 2008 global financial crisis and global body, the Financial Stability Board, worked on the global structure of the LEI system.
In June, the central bank has made mandatory all participants in the Over-the-Counter (OTC) markets for Rupee Interest Rate derivatives, foreign currency derivatives and credit derivatives in India, to obtain LEI in a phased manner starting from August 1 till March 31, 2018. “Entities without an LEI code would not be eligible to participate in the OTC derivative markets, after the date specified in the schedule,” the RBI had said in June. In the recent monetary policy, the central bank said it would announce the detailed norms on implementing the LEI requirement for corporate borrowers.
The LEI initiative comes in the backdrop of the RBI planning to set up a Public Credit Registry which will capture the entire database of credit information that is accessible to all stakeholders. While CRILC maintains database of loans of over Rs 5 crore, PCR is expected to be more broad-based in its scope and capture credit data on all kinds of loans. A PCR would complement the private credit bureaus — four such already exist in India — by certifying details of collateral.
What is an LEI?
The Legal Entity Identifier (LEI) is a global reference number that uniquely identifies every legal entity or structure that is party to a financial transaction, in any jurisdiction. It is a unique 20 digit alphanumeric code that is assigned to a legal entity.
What is the purpose of an LEI?
The global LEI system has been set up by regulatory authorities, including G20 and the Financial Stability Board, to address the global financial crisis. The LEI is designed to enable the identification and linking of parties to financial transactions in order to manage counterparty risk. Its goal is to improve measuring and monitoring of systemic risk and support more cost-effective compliance with regulatory reporting requirements.