Mumbai: With an aim to reduce risk in the banking sector, RBI has proposed to limit exposure of a bank to a business group to 25 per cent of its capital, down from the existing level of 55 per cent. "The sum of all the exposure values of a bank to a single counterpart or to a group of connected counter parties must not be higher than 25 per cent of the bank's available eligible capital base at all times," a draft paper released by RBI said.
The proposed 'Large Exposure' (LE) framework will be fully applicable from January 1, 2019, the paper said, while seeking stakeholders' views on it till April 30. 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 draft paper has been released at a time when bad loans or non-performing assets are on the rise. Gross NPAs of PSU banks are Rs 2,60,531 crore as on December, 2014, up from Rs 71,080 crore in 2011.
"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," the RBI's paper added.
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 draft also noted that currently banks in India are "by and large" placed comfortably with regard to their large exposures vis-à-vis limits prescribed under the LE Framework of the BCBS.
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