RBI GR B 2019 | SEBI GR A 2019

FINANCE
CURRENT AFFAIRS
LARGE EXPOSURES FRAMEWORK

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SOME OF HEADLINES IN NEWS

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 INTRODUCTION
• A bank’s exposures to its counterparties may result in concentration of its assets to a single
counterparty or a group of connected counterparties.

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

• RBI’s prudential exposure norms have evolved since then and a bank’s exposure to a single
borrower and a borrower group is currently restricted to 15 percent and 40 percent of capital
funds respectively.

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 RBI NEW FRAMEWORK

• In 2016, RBI introduced the large borrower

framework, seeking to reduce concentration risk
in a banking industry laden with bad loans.

• New guidelines on bank exposure to large

borrowers take effect on 1 April, 2019 even as
the Indian Banks’ Association (IBA) has made a
last-ditch attempt to defer the deadline.

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 LARGE EXPOSURES
RBI defines Large exposure (LE) as the sum of all exposure values of a bank to a counterparty or a group of connected
counterparties if it is equal to or above 10 percent of the bank’s eligible capital base (i.e., Tier 1 capital).

EXPOSURES EXEMPTED FROM LEF

• Exposures to the Government of India and State Governments which are eligible for zero percent Risk Weight.
• Exposures to Reserve Bank of India
• Exposures where the principal and interest are fully guaranteed by the Government of India;
• Exposures secured by financial instruments issued by the Government of India
• Intra-day interbank exposures
• Borrowers, to whom limits are authorised by the Reserve Bank for food credit
• Rural Infrastructure Development Fund (RIDF) deposits placed with NABARD.

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 Connected Counterparties
• In some cases, a bank may have exposures to a group of counterparties with specific relationships or
dependencies such that, were one of the counterparties to fail, all of the counterparties would very
likely fail. A group of this sort, referred to in this framework as a group of connected counterparties.

• Two or more natural or legal persons shall be deemed to be a group of connected counterparties if
the control criteria is satisfied i.e., one of the counterparties, directly or indirectly, has control over the
other(s).

• Banks must automatically consider that the control relationship criterion is satisfied if one entity
owns more than 50 percent of the voting rights of the other entity.

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 WHY NEW FRAMEWORK ?
• The aim is to align with the standards on supervisory framework for measuring and controlling
large exposures issued by the Basel Committee on Banking Supervision (BCBS).

• In January 1991, the Basel Committee on Banking Supervision (BCBS) issued supervisory
guidance on large exposures, viz., Measuring and Controlling Large Credit Exposures.

• In 2014, the BCBS replaced the large exposure guidelines released in January 1991, with a
measure on risk-based capital requirements and limit large exposure in relation to banks’ Tier 1
capital.

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 BASEL COMMITTEE
• Basel Committee on Banking Supervision (BCBS) is the
primary global standard setter for the prudential
regulation of banks and provides a forum for regular
cooperation on banking supervisory matters.

• It was formed in 1974.

• Its 45 members comprise central banks and bank

supervisors from 28 jurisdictions.

• BCBS has developed a series of highly influential policy

recommendations known as the Basel Accords.

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 SALIENT FEATURES
Large Exposures Framework will change the current limit of 15% of capital fund (total capital funds) for Single
Borrower Limit (SBL) and 40% for Group Borrower Limit (GBL).

It will change SBL to 20% of banks’ available eligible capital base (i.e., Tier 1 capital) at all times with an
exception of board approval to an additional 5%. To GBL, it is narrowed to 25%.

The new framework requires a bank to report largest 20 borrowers irrespective of the values of these
exposures relative to the bank’s eligible capital base.

In a relief to banks, the norms are not applicable to banks’ advancing to governments (central and state),
state-owned firms and those carrying state guarantees.

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 Eligible Capital Base

• The eligible capital base for this purpose is the effective

amount of Tier 1 capital.

• Tier 1 capital is the core measure of a bank’s financial

strength, and consists mainly of common stock and disclosed
reserves (or retained earnings).

• Tier 2 capital is composed of revaluation reserves,

undisclosed reserves and hybrid instruments, among others.

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MCQs for Practice

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 QUESTIONS FOR PRACTICE
QUESTION 1

Q. RBI defines Large exposure (LE) as the sum of all exposure values of a bank to a
counterparty or a group of connected counterparties if it is:

1. equal to or above 5 percent of the bank’s total capital funds

2. equal to or above 5 percent of the bank’s eligible capital base
3. equal to or above 10 percent of the bank’s total capital funds
4. equal to or above 10 percent of the bank’s eligible capital base

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 QUESTIONS FOR PRACTICE
QUESTION 2

Q. Which among the following exposures are excluded from RBI’s Large Exposure Framework?

1. Exposures to Reserve Bank of India

2. Exposures where the principal and interest are fully guaranteed by the Government of
India
3. Rural Infrastructure Development Fund (RIDF) deposits placed with NABARD
4. All of the above

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 QUESTIONS FOR PRACTICE
QUESTION 3

Q. Which of the following is incorrect about Basel Committee on Banking Supervision?

1. It provides a forum for regular cooperation on banking supervisory matters

2. It was formed in 1988
3. Its 45 members comprise central banks and bank supervisors from 28 jurisdictions.
4. None is incorrect

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 QUESTIONS FOR PRACTICE
QUESTION 4

Q. RBI’s new large exposure framework will change the current limit (SBL) of 15% of capital
fund:

1. to 10% of banks’ available eligible capital base

2. to 20% of banks’ available eligible capital base
3. to 30% of banks’ available eligible capital base
4. None of the above

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 QUESTIONS FOR PRACTICE
QUESTION 5
Q. Which of the following statements is/are correct?
A. Tier 1 capital is the core measure of a bank’s financial strength, and consists mainly of
common stock and disclosed reserves.
B. Tier 2 capital is composed of revaluation reserves, undisclosed reserves and hybrid
instruments, among others.

1. A&B
2. A only
3. B only
4. None

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SOLUTIONS

1. (4)
2. (4)
3. (2)
4. (2)
5. (1)

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 Query
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