RBI modifies large exposures framework for bank with view to reduce concentration of risk, align them with global norms

Mumbai: The Reserve Bank of India on Monday modified the guidelines on large exposures for banks with a view to reduce the concentration of risk and align them with the global norms. The modified ‘Large Exposures Framework’ (LEF) provides exclusion of entities connected with the sovereign from the definition of a group of connected counterparties. It also introduces economic interdependence criteria in the definition of connected counterparties. The amendment, the RBI said, is being done in order to “capture exposures and concentration risk more accurately” and to align the above instructions with international norms. [caption id=“attachment_4875601” align=“alignleft” width=“380”] File image of RBI. AFP[/caption] As per the revised norms, the sum of all the exposure values of a bank to a single counter-party must not be higher than 20 percent of the bank’s available eligible capital base at all times. In exceptional cases, the board of banks may allow an additional 5 percent exposure of the bank’s available eligible capital base. In case of groups of connected counter-parties, the sum of all the exposure values of a bank to a group of connected counter-parties must not be higher than 25 percent of the bank’s available eligible capital base at all times, the revised LEF said. Under the LE Framework, 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. On exposures to NBFCs, the banks’ exposures to a single NBFC should be restricted to 15 percent of their eligible capital base. Also, banks’ exposures to a group of connected NBFCs or group of connected counter-parties having NBFCs in the group should be restricted to 25 percent of their Tier I Capital.