Large Exposures Framework Of RBI: An Assessment By Basel Committee

By moderator July 10, 2019 10:43

Recently, in an assessment conducted by Basel Committee under Regulatory Consistency Assessment Programme, it was assessed that RBI’s norms on large exposures for banks are not only compliant with Basel Committee requirements but are stricter in some areas.

The scope of application of Indian standards is wider than internationally active banks covered by the Basel framework.

 RCAP assessment team was led by VasilyPozdyshev, deputy governor of the Central Bank of the Russian Federation.


As a step to address the concentration risk and credit risk in the banking system, the Reserve Bank in March 1989, fixed limits on bank exposures to an individual business concern and to concerns of a group.

This was necessary as the bank’s exposures to its counterparties may result in the concentration of its assets to a single counterparty or a group of counterparties.

These norms were called the RBI’s prudential exposure norms and have evolved since then and are currently restricted to 15% and 40% of capital funds respectively.

In January 1991, the Basel Committee on Banking Supervision (BCBS) issued supervisory guidelines on large exposures, i.e. “Measuring and Controlling Large Credit Exposures”. Further, the Core Principles of Effective Banking Supervision, published by BCBS in October 2006 prescribed that local laws and bank regulations set prudent limits on dealing with large exposures. Again in April 2014, BCBS issued the Standards on “Supervisory framework for measuring and controlling large exposures” to foster the convergence of widely divergent national regulations. RBI suitably adopted these standards under the policy framed on Large Exposures Framework.

Scope and Exemptions

Banks must apply LEF at the same level as the risk-based capital requirements are applied, i.e. a bank shall comply with LEF norms at two levels – consolidated (Group) level and Solo level.

The exposures that are exempted from LEF are –

  • Exposures to GOI and State Governments which are eligible for zero percent Risk Weight under Basel Committee III – the Capital Regulation framework of RBI.
  • Exposures to RBI
  • Exposures where principal and interest are guaranteed by GOI.
  • Deposits maintained with NABARD on account of shortfall in achievement of targets of priority sector lending.
  • Borrowers to whom limits are authorized for food credit
  • Intraday interbank exposures
  • Intragroup Exposures
  • Exposures insured by financial instruments issued by GOI subject to eligibility criteria

Under LEF, the sum of all exposure values of a bank to a counterparty or a group of connected counterparties is defined as a “Large Exposure”, if its equal to or above 10 % of bank’s eligible capital base ( Tier 1 Capital). These exposures shall be reported to RBI, Department of Banking Supervision.

Revised Large Exposure Limits

Single-Counterparty – Sum of exposure values of a bank must not be higher than 20 % of the bank’s available eligible capital base at all times. In exceptional cases, the Board of banks may allow an additional 5 % exposure of bank’s available eligible capital base.

NBFC – On exposure to NBFCs, the bank’s exposures to a single NBFC should be restricted to 15 % of their eligible capital base

Group of Connected Counterparties – Sum of all exposure values of the bank to a group of connected counterparties must not be higher than 25 % of the bank’s available eligible capital base at all times. Same applies for a group of connected NBFCs or group of connected counterparties having NBFC in their group.

In some cases, the bank may have exposures to a group with the specific relationship or dependencies such that, were one of the counterparties to fail, all of the counterparties would very likely fail, such group is referred as a group of connected counterparties and can be treated as a single counterparty

The eligible capital base is the effective amount of Tier 1 capital fulfilling Basel Committee III criteria on Capital Regulation as per the latest audited balance sheet. However, infusion of capital under Tier 1 after the published balance sheet may also be taken into account for the purposes of LEF.

Current Developments

RBI has made some crucial amendments to the Large Exposures Framework by notification dated June 3, 2019. These changes are intended to align with global practices, such as look through approach for identifying exposures, determination of the group of  “connected counterparties, etc. These amendments will be applicable wef from April 1, 2019, except some provisions like economic interdependence criteria which will be in effect from April 1, 2020.

The modified “LEF” provides for the exclusion of entities connected with the sovereign from the definition of a group of connected counterparties. It also introduces economic interdependence criteria of connected counterparties. This is likely to widen the scope of the definition of a group of connected counterparties on one hand and narrowing down the same by expanding the scope of exempted counterparties.

The revised guidelines have an impact on the borrowers who used to take advantage of different entities and hide behind the corporate veil to avail funding. Introduction of economic interdependence as a criterion for determining connected counterparties ensures that no same persons, whether promoters or management avail facilities through other entity. This may lead to shrinkage of availability of borrowed funds that would have otherwise been available to the entities.

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By moderator July 10, 2019 10:43