What is final Exposure?
A bank’s exposures to its counterparties may result in concentration of its assets to a single counterparty or a group of connected counterparties. This is an issue which requires to be addressed. To remove this anomaly 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. A comprehensive policy framework on the subject is consolidated in the Master Circular – Exposure Norms/Master Direction – Prudential Norms on Banks’ Exposures.
The final guidelines of RBI on banks’ exposure to large companies referring to lender’s total advances to a single company is now decided that it cannot be higher than 20 per cent of its capital base. The new norms will should be implemented by March 31, 2019, RBI said.
“The sum of all the exposure values of a bank to a single counter-party must not be higher than 20 per cent of the bank’s available eligible capital base at all times,” RBI said in the final guidelines on Large Exposure Framework (LEF). However, in exceptional cases, board of banks may allow an additional 5 per cent exposure of the bank’s available eligible capital base. The same can be consolidated as under:
- The sum of all the exposure values of a bank to a group of connected counter-parties must not be higher than 25 percent of the bank’s available eligible capital base at all times.
- Also, banks must lay down a board approved policy in this regard.
- The framework adds that any breach of the 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.
- The guidelines said banks must apply these exposure at the same level as the risk-based capital requirements are applied, that is, a bank shall comply with the these norms at two levels viz
→ the consolidated level and
→ solo level.
- The application of LEF at the consolidated level implies that a bank must consider exposures of all the banking group entities (including overseas operations through branches and subsidiaries), which are under regulatory scope of consolidation, to counter-parties and compare the aggregate of those exposures with the banking group’s eligible consolidated capital base.
- Under the proposed LEF, an exposure to counter-party will constitute both on and off-balance sheet exposures included in either the banking or trading book and instruments with counter-party credit risk.