The Reserve Bank of India (RBI) on Thursday issued the final large exposures (LE) framework, capping the LE limit for each counterparty and group of connected counterparties at 20% and 25%, respectively, of the eligible capital base.
These measures remain unchanged from the draft framework issued by the central bank in August and will be applicable from April 1, 2019.
According to the existing prudential exposure norms, a bank’s exposure to a single borrower and a borrower group is restricted to 15% and 40%, respectively, of capital funds. The eligible capital base, the RBI said, is defined as the effective amount of Tier 1 capital of the bank as per the last audited balance sheet. A group of connected counterparties will be identified on the basis of ‘control’.
Under the proposed LE framework, exposure to a counterparty will constitute both on- and off-balance sheet exposures included in either the banking or trading book and instruments with counterparty credit risk.
“The application of the LEF at the consolidated level implies that a bank must consider exposures of all the banking group entities (including overseas operations through branches and subsidiaries), which are under regulatory scope of consolidation, to counterparties and compare the aggregate of those exposures with the banking group’s eligible consolidated capital base,” the RBI said.
According to the central bank, a bank’s exposures to its counterparties may result in concentration of its assets to a single counterparty or a group of connected counterparties. 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.
Banks will be required to report their LEs to the RBI and the Department of Banking Supervision – Central Office.
The reporting will include all exposures measured with values equal to or above 10% of the bank’s eligible capital.
It will also include all exposures measured without the effect of credit risk mitigation, with values equal to or above 10% of the bank’s eligible capital base, and all the exempted exposures (except intraday inter-bank exposures) with values equal to or above 10% of the bank’s eligible capital base.
The 20 largest exposures included in the scope of application, irrespective of values of these exposures relative to the bank’s eligible capital base, will also be included in the banks’ report.