The Reserve Bank of India has mandated the banks to fix limits on their exposure to specific industry or sectors and has prescribed regulatory limits on banks’ exposure to single and group borrowers in India. This measure of RBI is aimed at better risk management and avoidance of credit risks. In addition to credit exposure banks are required to observe certain statutory and regulatory exposure limits in respect of advances against / investments in shares, convertible debentures /bonds, units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) as prudential norms.
RBI’s prudential exposure norms mandate that a bank exposure to a single borrower should capped to 20% of a lender’s tier -I capital base and to 25% limit to a group of connected entities with effect from April 1, 2019. Further banks must classify the sum of all exposures of 10% or above as ‘large exposure’ and report them to the central bank. According to RBI guidelines, a large exposure is defined as any exposure to a counter-party or group of counter-parties which is equal to 10 per cent of the bank’s eligible capital base (defined as tier-I capital). Banks may, in exceptional circumstances, with the approval of their Boards, consider enhancement of the exposure to a borrower (single as well as group) up to a further 5 percent of capital funds with Board approval subject to the borrower consenting to the banks making appropriate disclosures in their Annual Reports.
The Credit exposure comprises the all types of funded and non-funded credit limits, and facilities extended by way of equipment leasing, hire purchase finance and factoring services. The Investment Exposure comprises investments in shares and debentures of companies, investment in PSU bonds and investments in Commercial Papers (CPs)
