The Reserve Bank of India has decided to reduce banks’ exposure to a group of connected parties to 25% of its capital base, while the exposure to a single party has been capped at 20%. However, bank boards can allow an additional 5% exposure in ‘exceptional cases.’
Till now, a bank’s exposure to a single borrower and a borrower group was restricted to 15% and 40% of capital funds respectively.
The central bank, which notified a new framework for large exposures of banks, on Monday decided to exclude entities connected with the sovereign from definition of group of connected counterparties.
The RBI has introduced economic interdependence criteria in definition of connected counterparties in the new guidelines. “The sum of all the exposure values of a bank to a single counterparty must not be higher than 20% of the bank’s available eligible capital base at all times,” the RBI said. “The sum of all the exposure values of a bank to a group of connected counterparties must not be higher than 25% of the bank’s available eligible capital base at all times,” the new norms said. Banks have to report large exposures — defined as 10% of capital — to RBI.
“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, must be treated as a single counterparty,” it said.