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RBI revises Large Exposures Framework

Date: 04 June 2019 Tags: Banking Laws & Regulations

Reserve Bank of India (RBI) has modified 'Large Exposures Framework' (LEF) that deals with large exposures for banks with view to reduce concentration of risk and align them with the global norms. The revised LEF will make lending to non-banking financial companies (NBFC) more streamlined and invite scrutiny on the structure of these entities.

Revised Large Exposures Framework

  • It provides exclusion of entities connected with sovereign from definition of group of connected counter-parties.  Thus, bank loans to government-run firms have been exempted from the ambit of rules governing the large exposure limit.
  • It introduces economic interdependence criteria in definition of connected counter-parties. 
  • The sum of all the exposure values of a bank to a single counter-party 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 to 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% of the bank's available eligible capital base at all times.
  • Exposure to counter-party will constitute both on and off-balance sheet exposures included in either 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% of their eligible capital base.
  • Banks' exposures to group of connected NBFCs or group of connected counter-parties having NBFCs in the group should be restricted to 25% of their Tier I Capital.
  • Banks must apply look-through approach in cases where  bank invested in structures that themselves had exposures to assets underlying structures. Such structures should include funds, securitisations and those with underlying assets.

Significance

The changes in LEF were more relevant for regulating NBFCs, as the relationship between different balance sheets of NBFCs had to be established. It also makes clear that liquidity will be provided only to those finance companies who qualify on the certain parameters as per revised framework. This will basically increase scrutiny on such large NBFCs that have various arms invested in each other’s business. It also makes it possible for government entities to borrow more, as they will not be considered part of a group of connected entities.