What is Large Exposures Framework (LEF)?

A bank’s exposures to its counterparties may result in a concentration of its assets to a single counterparty or a group of connected counterparties.  To address this concentration risk RBI has fixed limits on bank exposures to an individual business concern and to business concerns of a group. As per current guidelines of RBI a bank’s exposure to a single borrower is restricted to 15 percent and to a borrower group 40 percent of capital funds.  The eligible capital for the purpose of LEF is on the effective amount of Tier 1 capital fulfilling the criteria as per the last audited balance sheet. However, the infusion of capital under Tier I after the published balance sheet date may also be taken into account for the purpose of Large Exposures Framework. In such cases, Banks are required to obtain an external auditor’s certificate on completion of the augmentation of capital and submit the same to the Reserve Bank of India (Department of Banking Supervision) before reckoning the additions to capital funds.

RBI defines Large exposure (LE) as the sum of all exposure values of a bank to a counterparty or a group of connected counterparties if it is equal to or above 10 percent of the bank’s eligible capital base (i.e., Tier 1 capital).  However, the following exposures are excluded from the gambit of Large Exposure (LE) limit specified by RBI. (i) Exposures to the Government of India and State Governments which are eligible for zero percent Risk Weight under the Basel III – Capital Regulation framework of the Reserve Bank of India; (ii) Exposures to Reserve Bank of India;  (iii) Exposures where the principal and interest are fully guaranteed by the Government of India;(iv) Exposures secured by financial instruments issued by the Government of India, to the extent that the eligibility criteria for recognition of the credit risk mitigation (CRM) are met.(v) Intra-day interbank exposures; (vi) Intra-group exposures;(vii) Borrowers, to whom limits are authorised by the Reserve Bank for food credit;(viii)  Banks’ clearing activities related exposures to Qualifying Central Counterparties (QCCPs); (ix) Rural Infrastructure Development Fund (RIDF) deposits placed with NABARD.

Reserve Bank in its circular No.RBI/2018-19/156/DBR.No.BP.BC.31/21.01.003/2018-19 dated April 1, 2019, on respect of LEF advised that;

• The non-centrally cleared derivatives exposures will be outside the purview of exposure limits till April 01, 2020. However, banks must compute these exposures separately and report to the Department of Banking Regulation on a quarterly basis for
• For the purpose of reckoning exposure limits under LEF, an Indian branch of a foreign G-SIB will be considered as any other Indian bank and can accordingly take exposure up to 25% of its Tier I capital on another non-GSIB in India.
• The interbank exposure limit of an Indian branch of a foreign G-SIB with its Head Office will be 20% of its Tier I capital in India.
• For Indian Banks, profits accrued during the year will also be reckoned as Tier I capital for the purpose of Large Exposures Framework, subject to provisions contained in Basel III – Capital Regulation.
• No additional time shall be given to banks that are in breach of specified interbank limits with other banks or with their Head Offices, to bring their exposures within a limit

The eligible capital for the purpose of LEF is decided on the effective amount of Tier 1 capital fulfilling the criteria as per the last audited balance sheet. However, the infusion of capital under Tier I after the published balance sheet date may also be taken into account for the purpose of Large Exposures Framework. In such cases, Banks are required to obtain an external auditor’s certificate on completion of the augmentation of capital and submit the same to the Reserve Bank of India (Department of Banking Supervision) before reckoning the additions to capital funds.

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