With an aim to reduce risk in banking sector, RBI has proposed to limit exposure of a bank to a business group to up to 25 per cent of its capital, down from the existing 55 per cent.
"The Large Exposure (LE) limit in respect of each counterparty and group of connected counterparties, under normal circumstances, will be capped at 20 per cent and 25 per cent, respectively of the eligible capital base," RBI said in a Draft Large Exposures (LE) Framework.
The eligible capital base will be defined as the tier 1 capital of the bank as against capital funds at present, it said.
A group of connected large borrowing companies will be identified on the basis of control as well as economic dependence criteria, it said.
While inviting comment from public, it said, the proposed 'Large Exposure' (LE) framework will be fully applicable from March 31, 2019.
The Basel Committee on Banking Supervision (BCBS) too recognised the need for banks to measure and limit the size of large exposures in relation to their capital.
The RBI's proposal is in line with BCBS standards (BASEL norms on capital adequacy).
The exposure framework has been released at a time when bad loans or non-performing assets are on the rise. Gross NPAs of PSU banks are Rs 4.7 lakh crore as on March, 2015, up from Rs 71,080 crore in 2011.
"Since the LE Framework is constructed to serve as a backstop to and complement the risk-based capital standards, it must apply at the same level as the risk-based capital requirements are to be applied, that is, a bank shall comply with the LE norms at two levels: (a) consolidated (Group1) level and (b) Solo2 level," it said.
The application of the LE framework at the consolidated level implies that a bank must consider exposures of all the banking group entities (including overseas operations through branches and subsidiaries) under regulatory scope of consolidation, to counterparties and compare the aggregate of those exposures with the banking group s eligible consolidated capital base for the purpose of complying with the norms, it said.
"Banks must gradually adjust their exposures to abide by the LE limit with respect to the eligible capital base (effective amount of Tier 1 capital)... Banks should avoid taking any additional exposure in cases where their exposure is at or above the exposure limit prescribed under this Framework," it said.
It noted that a bank's exposure to its counterparties may result in concentration of its assets to a single counterparty or a group of connected counterparties.
Internationally, it said concentration risk has been addressed by prescribing regulatory and statutory limits on exposures towards counterparties and various sectors of the economy.
The framework also noted that currently banks in India are "by and large" placed comfortably with regard to their large exposures vis- -vis limits prescribed under the LE Framework of the BCBS.
There may be cases where a thorough investigation of economic dependencies will not be proportionate to the size of the exposures, it said.
"Therefore, banks will be expected to necessarily identify possible connected counterparties on the basis of economic dependence only in cases where the sum of all exposures to one individual counterparty exceeds 5 per cent of the eligible capital base," it said.
In view of the practical difficulties involved in identifying the relationship between counterparties on the basis of economic dependence criteria, it has been decided to allow banks some discretion in this regard for an initial period of two years, it said.
Therefore, it said, for the first two years, while the banks may decide to identify the Groups of connected counterparties on the basis of economic dependence criteria on a best effort basis as per their Board approved policy, this provision will not mandatorily apply on immediate basis.