June 03, 2019

RBI has introduced certain amendments to the large exposures framework, which went into effect on April 01, 2019. Annex to the circular contains the revised guidelines, which supersede any earlier circulars that have been issued. The guidelines in the framework have come into effect from April 01, 2019 (as specified in a circular dated December 01, 2016), except guidelines in respect of paragraph 2(ii) (contained in paragraphs 6.2(b), 6.7, 6.8, 6.9, and 6.10 of the Annex) and non-centrally cleared derivatives exposures, which will become applicable with effect from April 01, 2020.

The recent amendments capture exposures and concentration risk more accurately and align the instructions with international norms. The amendments include the following:

  • Exclusion of entities connected with the sovereign from definition of group of connected counterparties
  • Introduction of economic interdependence criteria in definition of connected counterparties
  • Mandatory application of look-through approach in determination of relevant counterparties, in case of collective investment undertakings, securitization vehicles, and other structures

Banks must apply the large exposures framework at the same level as the risk-based capital requirements are applied—that is, a bank shall comply with the norms at both the consolidated (Group) and solo levels. The application of the 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), 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. Appendix 1 for the large exposures framework contains the reporting template for large exposures. The reporting template covers the following:

  • All exposures, measured as specified in paragraphs 7, 8, 9 and 10 of this framework, with values equal to or above 10% of the bank’s eligible capital (that is, meeting the definition of a large exposure as per para 4.1 above)
  • All other exposures, measured as specified in paragraphs 7, 8, 9 and 10 of this framework without the effect of credit risk mitigation, with values equal to or above 10% of the bank’s eligible capital base
  • All the exempted exposures (except intraday inter-bank exposures) with values equal to or above 10% of the bank’s eligible capital base
  • Twenty largest exposures included in the scope of application, irrespective of the values of these exposures, relative to the bank’s eligible capital base

 

Effective Date: April 01, 2019/April 01, 2020

Keywords: Asia Pacific, India, Banking, Large Exposures, Concentration Risk, Basel III, Credit Risk, RBI

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