Large exposure frame work

LARGE EXPOSURES FRAMEWORK (LEF)

The following write up on Large Exposures Framework (LEF) is based on RBI Notification No. RBI/2016-17/167 DBR.No.BP.BC.43/21.01.003/2016-17 dated December 1, 2016. Candidates are

advised to refer to the Notification for additional details.

In order to align the exposure norms for Indian banks with the BCBS standards, RBI has laid down the

guidelines on Large Exposures Framework on December 1, 2016. The guidelines are aimed at

significant tightening of norms pertaining to concentration risks of banks, especially in relation to large

borrowers. The guidelines come into effect from April 1, 2019. A large exposure is defined as any exposure to a counter-party or group of counter-parties which is

equal to 10 per cent of the bank’s eligible capital base (defined as tier-I capital). LARGE EXPOSURE LIMITS

Single Counterparty: The sum of all the exposure values of a bank to a single counterparty must not

be higher than 20 percent of the bank’s available eligible capital base at all times. In exceptional cases, Board of banks may allow an additional 5 percent exposure of the bank’s available eligible capital base. Banks shall lay down a Board approved policy in this regard. Groups of Connected Counterparties: The sum of all the exposure values of a bank to a group of

connected counterparties, as defined below, must not be higher than 25 percent of the bank’s available

eligible capital base at all times. Any breach of the above LE limits shall be under exceptional conditions only and shall be reported to

RBI immediately and rectified at the earliest but not later than a period of 30 days from the date of the

breach. Definition of connected counterparties

Bank may have exposures to a group of counterparties with specific relationships or dependencies

such that, where one of the counterparties fail, all of the counterparties are likely to fail. A group of this

sort is referred to, in this framework, as a group of connected counterparties and must be treated as a

single counterparty. In this case, the sum of the bank’s exposures to all the individual entities included

within a group of connected counterparties is subject to the large exposure limit and to the regulatory

reporting requirements. Counterparties exempted from LEF

The exposures that will be exempted from the LEF are listed below:

a. Exposures to the Government of India and State Governments which are eligible for zero percent

Risk Weight under the Basel III – Capital Regulation framework of the Reserve Bank of India;

b. Exposures to Reserve Bank of India;

c. Exposures where the principal and interest are fully guaranteed by the Government of India; d. Exposures secured by financial instruments issued by the Government of India, e. Intra-day interbank exposures;

f. Intra-group exposures;

g. Borrowers, to whom limits are authorised by the Reserve Bank for food credit;

h. Banks’ clearing activities related exposures to Qualifying Central Counterparties (QCCPs)

i. Rural Infrastructure Development Fund (RIDF) deposits placed with NABARD. However, a bank’s exposure to an exempted entity which is hedged by a credit derivative shall be

treated as an exposure to the counterparty providing the credit protection notwithstanding the fact that

the original exposure is exempted.