Banks’ exposures to a single NBFC under Large Exposure Framework (revised)

RBI with Circular dated September 12, 2019 notified that a bank’s exposure limit to a single NBFC (excluding gold loan companies) raised to 20% of Tier-I capital of the bank. The communication said that this is a step towards harmonisation of the counterparty exposure limit to single NBFC with that of the general limit. It is further confirmed by RBI that the Bank finance to NBFCs predominantly engaged in lending against gold will continue to be governed by limits prescribed in circular DBOD.BP.BC.No.106/21.04.172/2011-12 dated May 18, 2012.

Currently, a bank’s exposure to a single NBFC is restricted to 15 percent of its Tier I capital, while for entities in the other sectors the exposure limit is, 20 percent of Tier I capital of the bank, which can be extended to 25 percent by banks’ Boards under exceptional circumstances.
Large exposure framework: A bank with a strong capital ratio may also fail if it experiences significant losses on large exposures in the event of a sudden failure of a counterparty or a group of connected counterparties. As per BCBS specification a ‘group of connected counterparties’ means that two parties are connected if at least one of the following criteria is satisfied: (i) a control relationship, where one of the counterparties has direct or indirect control over the other; and/or (ii) economic interdependence, where, if one of the counterparties were to experience financial problems, such as funding or repayment difficulties, the other would also encounter financial difficulties. The Basel large exposures framework addresses the concentration risk that could arise as a result of a bank’s exposures to its counter-parties. To know in detail what is large exposure limit, read the following post: