News: The RBI has tightened rules for foreign banks, removing exemptions and imposing stricter intragroup exposure limits to align with the Large Exposure Framework (LEF) for Indian branches. The revised framework comes into effect from April 1, 2026, though banks can adopt the changes earlier.
About RBI’s Large Exposures Framework (LEF)
- The LEF is designed to manage and limit concentration risk in banks by capping the maximum exposure a bank can have to a single counterparty or group of connected counterparties.
- Scope: It applies to all exposures of banks, including loans, investments, and off-balance-sheet exposures, ensuring that banks do not overexpose themselves to a single party or group.
- Exposures Covered: The framework covers domestic exposures, exposures to foreign branches, and intragroup exposures between the bank’s branches and head office or other subsidiaries.
- Exposure Limits: Banks must ensure that their exposure to a single counterparty or group does not exceed a specified percentage of their Tier I Capital.
- For globally systematically important banks (G-SIBs), exposure limits are capped at 20% of Tier I capital for exposures to their head office or other G-SIBs, and 25% for non-G-SIBs.
- For non-G-SIB foreign banks, the limits are reversed: 25% for exposures to their head office or non-G-SIBs and 20% for exposures to G-SIBs.
- Intragroup Exposures: Exposures between foreign bank branches in India and their head office or overseas branches must be treated as regular counterparty exposures and fall within LEF limits.
- Transactions between foreign branches in India and their head offices or overseas branches must be computed on a gross basis (i.e., no netting), ensuring a conservative approach to risk assessment.
- Exposure Calculation: Exposures are calculated based on credit and investment exposure, excluding equity and regulatory capital instruments.
- Amendments to the LEF: The changes were made to remove ambiguities in how foreign bank exposures are treated, aligning the framework with global banking practices and evolving bank structures.
- Non-compliance: Banks that breach the intergroup exposure limits will be given six months to rebalance their exposures to comply with the framework.
- Additional Changes: The RBI has repealed certain older measures, including a chapter focused on enhancing credit supply for large borrowers through market mechanisms, signaling a shift in its approach to concentration risk.
