RBI made certain amendments to the large exposures framework for all scheduled commercial banks in India. RBI decided that a bank’s exposure to a single non-banking financial institution, or NBFC (excluding gold loan companies), will be restricted to 20% of that bank’s eligible capital base, instead of the earlier restriction of 15%. The large exposures framework has been effective since April 01, 2019. However, non-centrally cleared derivatives exposures will be outside the purview of exposure limits till April 01, 2020.
Under the revised guidelines on large exposure framework that came into effect from April 01, 2019, a bank’s exposure to a single NBFC is restricted to 15% of its tier I capital. However, for entities in the other sectors, the exposure limit is 20% of tier I capital of the bank, which can be extended to 25% by banks’ Boards under exceptional circumstances. As a step toward harmonization of the counterparty exposure limit to single NBFC with that of the general limit, RBI has decided to raise a bank’s exposure limit to a single NBFC to 20% of tier I capital of the bank. Under the large exposures framework, an 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.
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.
Keywords: Asia Pacific, India, Banking, NBFC, Large Exposures, Basel III, Credit Risk, Regulatory Capital, RBI
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