The Reserve Bank of India (RBI) on Thursday issued the draft large exposures (LE) framework and capped the LE limit for each counter party and group of connected counter parties at 20 per cent and 25 per cent, respectively, of the eligible capital base. The proposed framework will be applicable from March 31, 2019.
According to the existing prudential exposure norms, a bank’s exposure to a single borrower and a borrower group is restricted to 15 per cent and 40 per cent of capital funds respectively. The eligible capital base, RBI said, will be defined as the Tier 1 capital of the bank as against ‘Capital Funds’ at present. A group of connected counter parties will be identified on the basis of ‘control’ as well as ‘economic dependence’ criteria.
Under the proposed LE Framework, an exposure to a counter party will constitute both on and off-balance sheet exposures included in either the banking or trading book and instruments with counter party credit risk. “The application of the LE framework at the consolidated level implies that a bank must consider exposures of all the banking group entities (including overseas operations through branches and subsidiaries) under regulatory scope of consolidation, to counter parties and compare the aggregate of those exposures with the banking group’s eligible consolidated capital base for the purpose of complying with the framework,” RBI said.
According to the central bank, a bank’s exposures to its counterparties may result in concentration of its assets to a single counter party or a group of connected counter parties. As a first step to address the concentration risk, the Reserve Bank, in March 1989, had fixed limits on bank exposures to an individual business concern and to business concerns of a group.