The Reserve Bank of India has proposed a significant tightening of norms pertaining to concentration risk of banks vis-a-vis their exposure to large borrowers (both single and group).
The RBI has proposed the capping of exposure of banks to each counter-party or group of connected counter-parties at 20 and 25 per cent of their eligible capital base, respectively.
In exceptional cases, boards of banks can allow an extra 5 per cent (of the eligible capital base) exposure to a single borrower. There must be a board-approved policy in this regard.
In its draft large exposures (LE) framework unveiled today, the RBI said that the eligible capital base will now be defined as Tier-1 capital as against capital funds earlier.
A large exposure is defined as any exposure to a counter-party or group of connected counter-parties that is equal or larger than 10 per cent of a bank’s eligible capital base.
Importantly, a group of connected counter-parties will be identified on the basis of both “control” as well as “economic dependence” criteria. This framework will be applicable from March 31, 2019.
At present, as part of the RBI’s prudential exposure norms, bank exposure to a single borrower is capped at 15 per cent of their net worth while their group exposure is restricted to 40 per cent of their networth.