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RBI/2018-19/196
DBR.No.BP.BC.43/21.01.003/2018-19 June 03, 2019
All Scheduled Commercial Banks
(Excluding Regional Rural Banks)
Dear Sir/Madam,
Large Exposures Framework
Please refer to the instructions contained in circulars DBR.No.BP.BC.43/
21.01.003/2016-17 dated December 01, 2016 and DBR.No.BP.BC.31/
21.01.003/2018-19 dated April 01, 2019 on “Large Exposures Framework (LEF)”.
2. In order to capture exposures and concentration risk more accurately and to align
the above instructions with international norms, the following amendments have
been incorporated in the above mentioned instructions:
i) Exclusion of entities connected with the sovereign from definition of group of
connected counterparties.
ii) Introduction of economic interdependence criteria in definition of connected
counterparties.
iii) Mandatory application of look-through approach (LTA) in determination of relevant
counterparties in case of collective investment undertakings, securitisation vehicles
and other structures.
3. Revised guidelines superseding the above mentioned circulars are annexed.
These have come into effect from April 1, 2019 (as was already specified in our LEF
circular dated December 1, 2016), except guidelines in respect of para 2(ii) above
(contained in paragraphs 6.2(b), 6.7, 6.8, 6.9, and 6.10 of the Annex) and non-
centrally cleared derivatives exposures, which will become applicable with effect
from April 1, 2020.
Yours faithfully,
(Saurav Sinha)
Chief General Manager-in-ChargeAnnex
Large Exposures Framework
1. Introduction
1.1 A bank’s exposures to its counterparties may result in concentration of its assets
to a single counterparty or a group of connected counterparties. As a first step to
address the concentration risk, the Reserve Bank, in March 1989, fixed limits on
bank exposures to an individual business concern and to business concerns of a
group. RBI’s prudential exposure norms have evolved since then and a bank’s
exposure to a single borrower and a borrower group was restricted to 15 percent and
40 percent of capital funds respectively. A comprehensive policy framework on the
subject is consolidated in the Master Circular – Exposure Norms.
1.2 In January 1991, the Basel Committee on Banking Supervision (BCBS) issued
supervisory guidance on large exposures, viz., Measuring and Controlling Large
Credit Exposures. Further, the Core Principles for Effective Banking Supervision
(Core Principle 19), published by BCBS in October 2006 (since revised in September
2012) prescribed that local laws and bank regulations set prudent limits on large
exposures to a single borrower or a closely related group of borrowers. In order to
foster a convergence among widely divergent national regulations on dealing with
large exposures, the BCBS issued the Standards on ‘Supervisory framework for
measuring and controlling large exposures’ in April 2014. The Reserve Bank has
decided to suitably adopt these standards for banks in India and, accordingly, the
instructions on banks' Large Exposures (LE) are described in the following
paragraphs.
2. Scope of application
2.1 Banks must apply LEF at the same level as the risk-based capital requirements
are applied, that is, a bank shall comply with the LEF norms at two levels: (a)
consolidated (Group1) level and (b) Solo2 level.
2.2 The application of the LEF at the consolidated level implies that a bank must
consider exposures of all the banking group entities (including overseas operations
1 This requires that banks shall apply LE framework at the consolidated group level, after consolidating the
assets and liabilities of its subsidiaries / joint ventures / associates (including overseas operations through bank’s
branches) etc., except those engaged in insurance and any non-financial activities
2 Banks shall apply LE framework at the standalone level also (including overseas operations through branches),
which should measure the exposures to a counterparty based on its standalone capital strength and risk profile
1through branches and subsidiaries), which are under regulatory scope of
consolidation, to counterparties and compare the aggregate of those exposures with
the banking group’s eligible consolidated capital base.
3. Scope of counterparties and exemptions
3.1 Under the LEF, a bank’s exposure to all its counterparties and groups of
connected counterparties, excluding the exposures listed below3, will be considered
for exposure limits. The exposures that are exempted from the LEF are listed below:
a. 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;
b. Exposures to Reserve Bank of India;
c. Exposures where the principal and interest are fully guaranteed by the
Government of India;
d. 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 in terms of paragraph 7.III of this circular;
e. Intra-day interbank exposures;
f. Intra-group exposures4;
g. Borrowers, to whom limits are authorised for food credit;
h. Banks’ clearing activities related exposures to Qualifying Central
Counterparties (QCCPs), as detailed in paragraph 10.I of this circular;
i. Deposits maintained with NABARD on account of shortfall in achievement of
targets for priority sector lending.
3.2 Where two (or more) entities that are outside the scope of the sovereign
exemption are controlled by or are economically dependent on an entity that falls
within the scope of the sovereign exemption (para 3.1 (a) and 3.1 (b)), and are
otherwise not connected, those entities will not be deemed to constitute a group of
connected counterparties.
3 The exemptions available under the Master Circular on Exposure Norms not listed herein will cease to exist
under the LE Framework.
4 Intra-group exposures will continue to be governed by the circular dated February 11, 2014 on “Guidelines on
Management of Intra-Group Transactions and Exposures”.
23.3 However, a bank’s exposure to an exempted entity which is hedged by a credit
derivative shall be treated as an exposure to the counterparty providing the credit
protection notwithstanding the fact that the original exposure is exempted.
3.4 All exempted exposures must be reported by a bank as required under
regulatory reporting specified in paragraph 4.2 below, if these exposures meet the
criteria for definition of a ‘Large Exposure’ as per para 4.1 below.
4. Definition of a large exposure and regulatory reporting
4.1. Under the LEF, the sum of all exposure values of a bank (measured as specified
in paragraphs 7, 8, 9 and 10 of this framework) to a counterparty or a group of
connected counterparties (as defined in paragraph 6 below) is defined as a ‘Large
Exposure(LE)’, if it is equal to or above 10 percent of the bank’s eligible capital base
(i.e., Tier 1 capital as specified in paragraph 5.3 below).
4.2. Banks shall report their Large Exposures to the Reserve Bank of India (RBI),
Department of Banking Supervision, Central Office, (DBS, CO), as per the reporting
template given in Appendix 1. The reporting, inter-alia, will include the following:
(i) all exposures, measured as specified in paragraphs 7, 8, 9 and 10 of this
framework, with values equal to or above 10 percent of the bank’s eligible
capital (i.e., meeting the definition of a large exposure as per para 4.1 above);
(ii) all other exposures, measured as specified in paragraphs 7, 8, 9 and 10 of
this framework without the effect of credit risk mitigation (CRM), with values
equal to or above 10 percent of the bank’s eligible capital base;
(iii) all the exempted exposures (except intraday inter-bank exposures) with
values equal to or above 10 percent of the bank’s eligible capital base;
(iv) 20 largest exposures included in the scope of application, irrespective of
the values of these exposures relative to the bank’s eligible capital base.
5. The Large Exposure limits
5.1 Single Counterparty: The sum of all the exposure values of a bank to a single
counterparty must not be higher than 20 percent of the bank’s available eligible
capital base at all times. In exceptional cases, Board of banks may allow an
additional 5 percent exposure of the bank’s available eligible capital base. Banks
shall lay down a Board approved policy in this regard.
35.2 Groups of Connected Counterparties: The sum of all the exposure values of a
bank to a group of connected counterparties (as defined in paragraph 6 of this
circular) must not be higher than 25 percent of the bank’s available eligible capital
base at all times.
5.3 The eligible capital base for this purpose is the effective amount of Tier 1 capital
fulfilling the criteria defined in the Master Circular on Basel III – Capital Regulation
dated July 1, 2015 (as amended from time to time) 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.
Banks shall 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. Further, for Indian
Banks, profits accrued during the year, subject to provisions contained in para
4.2.3.1 (vii) of Master Circular on Basel III – Capital Regulation dated July 01, 2015
(as amended from time to time), will also be reckoned as Tier I capital for the
purpose of Large Exposures Framework
5.4 The exposures must be measured as specified in paragraphs 7 -10 ibid. It may
be noted that the LE limits will be modulated in case of certain counterparties as
mentioned in paragraph 10.
5.5 Any breach of the above LE limits shall be under exceptional conditions beyond
the control of the bank, shall be reported to RBI (DBS, CO) immediately and rapidly
rectified.
6. Definition of connected counterparties
6.1 In some cases, a bank may have exposures to a group of counterparties with
specific relationships or dependencies such that, were one of the counterparties to
fail, all of the counterparties would very likely fail. A group of this sort, referred to in
this framework as a group of connected counterparties, must be treated as a single
counterparty. In this case, the sum of the bank’s exposures to all the individual
entities included within a group of connected counterparties is subject to the large
exposure limit, as mentioned at paragraph 5.2 above, and to the regulatory reporting
requirements as specified above.
46.2 Two or more natural or legal persons shall be deemed to be a group of
connected counterparties if at least one of the following criteria is satisfied:
(a) Control relationship: one of the counterparties, directly or indirectly, has control
over the other(s) or the counterparties are, directly or indirectly, controlled by a third
party (bank may or may not have exposure towards this third party). In case of
financial problems of the controlling entity, it is highly likely that the controlling entity
could make use of its ability to extract capital and/or liquidity from the controlled
entity, thereby weakening the financial position of the latter. Financial problems could
be transferred to the controlled entity, with the result that both the controlling entity
and the controlled entity would experience financial problems (domino effect). From
prudential perspective, these type of clients (connected by control) form a single risk.
(b) Economic interdependence: if one of the counterparties were to experience
financial problems, in particular funding or repayment difficulties, the other(s), as a
result, would also be likely to encounter funding or repayment difficulties.
6.3 Banks must assess the relationship amongst counterparties with reference to (a)
and (b)5 above in order to establish the existence of a group of connected
counterparties. In assessing whether there is a control relationship between
counterparties, banks must automatically consider that the control relationship
criterion (paragraph 6.2(a) above) is satisfied if one entity owns more than 50
percent of the voting rights of the other entity. In addition, banks must assess
connectedness between counterparties based on control using the following
evidences:
a. Voting agreements (e.g., control of a majority of voting rights pursuant to an
agreement with other shareholders);
b. Significant influence on the appointment or dismissal of an entity’s
administrative, management or supervisory body, such as the right to appoint
or remove a majority of members in those bodies, or the fact that a majority of
members have been appointed solely as a result of the exercise of an
individual entity’s voting rights;
c. Significant influence on senior management, e.g., an entity has the power,
pursuant to a contract or otherwise, to exercise a controlling influence over
the management or policies of another entity (e.g., through consent rights
5 Banks are required to assess connectedness based on economic interdependence from April 01, 2020.
5over key decisions, to decide on the strategy or direct the activities of an
entity, to decide on crucial transactions such as transfer of profit or loss);
d. The above criteria may also be assessed with respect to a common third
party (such as holding company), irrespective of whether the bank has an
exposure to that entity or not;
6.4 Banks are also expected to refer to criteria specified in the extant accounting
standards for further qualitative guidance when determining control.
6.5 While determining control relationship, banks should also examine cases where
clients have common owners, shareholders or managers; for example, horizontal
groups where an undertaking is related to one or more other undertakings because
they all have the same shareholder structure without a single controlling shareholder
or because they are managed on a unified basis. This management may be
pursuant to a contract concluded between the undertakings, or to provisions in the
memoranda or articles of association of those undertakings, or if the administrative
management or supervisory bodies of the undertaking and of one or more other
undertakings consist, for the major part, of the same persons.
6.6 Where control has been established based on any of the above criteria, a bank
may still demonstrate to the RBI in exceptional cases (e.g., existence of control
between counterparties due to specific circumstances and corporate governance
safeguards) that such control does not necessarily result in the entities concerned
constituting a group of connected counterparties. For example, in specific cases
where a special purpose entity (SPE) that is controlled by another client (e.g. an
originator) is fully ring-fenced and bankruptcy remote (ie. arrangements exist to the
effect that assets of SPE are not available to lenders of parent undertaking in the
event of insolvency of the parent undertaking) – so that there is no possible channel
of contagion. Hence no single risk exists between the special purpose entity and the
controlling parent entity.
6.7 In establishing connectedness based on economic interdependence, banks must
consider, at a minimum, the following criteria:
Where 50% or more of one counterparty's gross receipts or gross
expenditures (on an annual basis) is derived from transactions with the other
counterparty;
6 Where one counterparty has fully or partly guaranteed the exposure of the
other counterparty, or is liable by other means, and the exposure is so
significant that the guarantor is likely to default if a claim occurs;
Where a significant part of one counterparty’s production/output is sold to
another counterparty, which cannot easily be replaced by other customers;
When the expected source of funds to repay the loans of both counterparties
is the same and neither counterparty has another independent source of
income from which the loan may be serviced and fully repaid;
Where it is likely that the financial problems of one counterparty would cause
difficulties for the other counterparties in terms of full and timely repayment of
liabilities;
Where the insolvency or default of one counterparty is likely to be associated
with the insolvency or default of the other(s);
When two or more counterparties rely on the same source for the majority of
their funding and, in the event of the common provider’s default, an alternative
provider cannot be found - in this case, the funding problems of one
counterparty are likely to spread to another due to a one-way or two-way
dependence on the same main funding source.
Illustrations are provided in appendix 2.
6.8 There may, however, be circumstances where some of these criteria do not
automatically imply an economic dependence that results in two or more
counterparties being connected. Provided that the bank can demonstrate that a
counterparty which is economically closely related to another counterparty may
overcome financial difficulties, or even the second counterparty’s default, by finding
alternative business partners or funding sources within an appropriate time period,
the bank does not need to combine these counterparties to form a group of
connected counterparties.
6.9 In order to avoid cases where a thorough investigation of economic
interdependencies will not be proportionate to the size of the exposures, banks are
expected to identify possible connected counterparties on the basis of economic
interdependence in all cases where the sum of all exposures to one individual
counterparty exceeds 5% of the eligible capital base, and not in other cases.
76.10 Relation between interconnectedness through control and
interconnectedness through economic dependency: Group of counterparties
based on control and economic interdependence are to be assessed separately.
However, there may be situations where the two types of dependencies are
interlinked and could therefore exist within one group of connected counterparties in
such a way that all relevant clients constitute a single risk. Risk of contagion is
present irrespective of type of connectedness (i.e. control or economic
interdependence) between counterparties. The chain of contagion leading to
possible default of all entities concerned is the relevant factor for the grouping and
needs to be assessed in each individual case. Illustrations are given in appendix 3.
6.11 Banks shall frame Board approved policies for determining connectedness
using the criteria mentioned above. The policies are subject to supervisory scrutiny.
7. Values of exposures
7.I General measurement principles
7.1 Under the proposed LE Framework, an exposure to a counterparty will constitute
both on and off-balance sheet exposures included in either the banking or trading
book and instruments with counterparty credit risk. Definitions and measurements of
such exposures are given in this section.
7.II Definitions of exposure values under the LE Framework
7.2 Banking book on-balance sheet non-derivative assets: The exposure value
is defined as the accounting value of the exposure6. As an alternative, a bank may
consider the exposure value gross of specific provisions and value adjustments.
7.3 Banking book and trading book OTC derivatives (and any other instrument
with counterparty credit risk): The exposure value for instruments which give rise
to counterparty credit risk and are not securities financing transactions, should be
determined as per the extant instructions as prescribed by the Reserve Bank (on
exposure at default) for the counterparty credit risk7.
6
Net of specific provisions and value adjustments.
7 Refer to Master Circular – Basel III Capital Regulation, as amended from time to time
87.4 Securities financing transactions (SFTs): Banks should use the method they
currently use for calculating their risk-based capital requirements against SFTs.
7.5 Banking book “traditional” off-balance sheet commitments: For the purpose
of the LEF, off-balance sheet items will be converted into credit exposure equivalents
through the use of credit conversion factors (CCFs) by applying the CCFs set out for
the Standardised Approach for credit risk for risk-based capital requirements, with a
floor of 10 percent.
7.III Eligible credit risk mitigation (CRM) techniques
7.6 Eligible credit risk mitigation techniques for LE Framework purposes are those
that meet the minimum requirements and eligibility criteria for the recognition of
unfunded credit protection8 and financial collateral that qualify as eligible financial
collateral under the Standardised Approach for credit risk for risk-based capital
requirement purposes.
7.7 Other forms of collaterals that are only eligible under the Internal-Ratings based
(IRB) Approach (receivables, commercial and residential real estate and other
collateral) are not eligible to reduce exposure values for LEF purposes.
7.8 A bank must recognise an eligible CRM technique in the calculation of an
exposure whenever it has used this technique to calculate the risk-based capital
requirements, provided it meets the conditions for recognition under the LEF.
7.9 Treatment of maturity mismatches in CRM: In accordance with provisions set
out in the paragraphs 5.17 and 7 of ‘Master Circular – Basel III Capital Regulations’,
hedges with maturity mismatches will be recognised only when their original
maturities are equal to or greater than one year and the residual maturity of a hedge
is not less than three months.
7.10 If there is a maturity mismatch in respect of credit risk mitigants (collateral, on-
balance sheet netting, guarantees and credit derivatives) recognised in the risk-
based capital requirement, the adjustment of the credit protection for the purpose of
8 Unfunded credit protection refers collectively to credit derivatives and guarantees the treatment of which is
described in paragraphs 5.17 & 7.5 respectively (The standardised approach – credit risk mitigation) of the
Master Circular – Basel III Capital Regulations dated July 1, 2015
9calculating large exposures will be determined using the same approach as in the
risk-based capital requirement9.
7.11 On-balance sheet netting: Where a bank has in place legally enforceable
netting arrangements for loans and deposits, it may calculate the exposure values
for LE purposes according to the calculation it uses for capital requirements
purposes – i.e., on the basis of net credit exposures subject to the conditions set out
in the approach to on-balance sheet netting in the risk-based capital requirement10.
7.IV. Recognition of CRM techniques in reduction of original exposure
7.12. Under the LEF, a bank may reduce the value of the exposure to the original
counterparty by the amount of the eligible CRM technique (except for cases
mentioned in paragraph 7.14 below) recognised for risk-based capital requirements
purposes. This recognised amount is:
• the value of the protected portion in the case of unfunded credit protection;
• the value of the collateral as recognized in calculation of the counterparty
credit risk exposure value for any instruments with counterparty credit risk,
such as OTC derivatives;
• the value of the collateral adjusted after applying the required haircuts, in the
case of financial collateral. The haircuts used to reduce the collateral amount
are the supervisory haircuts under the comprehensive approach11 as
specified under risk based capital requirements.
7.V Recognition of exposures to CRM providers
7.13 Where a bank reduces its exposure to the original counterparty on account of
an eligible CRM instrument provided by another counterparty (CRM provider) with
respect to that exposure, it must also recognise an exposure to the CRM provider.
The amount assigned to the CRM provider will be the amount by which the exposure
to the original counterparty is reduced (except in the cases defined in paragraph 7.14
below). It is clarified that any CRM instrument (e.g. SBLC/BG from Head Office/other
overseas branch) from which CRM benefits like shifting of exposure/ risk weights etc
are not derived, may not be counted as an exposure on the CRM provider.
9 Refer to the Master Circular on Basel III Capital Regulations
10 Paragraph 7.4 of the Master Circular on Basel III Capital Regulation.
11 Paragraph 7.3.4 of Master Circular on Basel III Capital Regulations.
107.14 When the credit protection takes the form of a credit default swap (CDS) and
either the CDS provider or the referenced entity is not a financial entity, the amount
to be assigned to the credit protection provider is not the amount by which the
exposure to the original counterparty is reduced but will be equal to the counterparty
credit risk exposure value calculated according to the Standardised Approach –
Counterparty Credit Risk (SA-CCR), once the guidelines in the matter are finalised
by the RBI. Till such time, the banks may follow the extant method as prescribed by
the RBI for the counterparty credit risk in the Master Circular – Basel III Capital
Regulation.
For the purpose of this paragraph, financial entities comprise:
i Regulated financial institutions, defined as a parent and its subsidiaries where
any substantial legal entity in the consolidated group is supervised by a
regulator that imposes prudential requirements consistent with international
norms. These include, but are not limited to, prudentially regulated insurance
companies, broker/dealers, banks;
and
ii Unregulated financial institutions, defined as legal entities whose main
business includes: the management of financial assets, lending, factoring,
leasing, provision of credit enhancements, securitisation, investments,
financial custody, central counterparty services, proprietary trading and other
financial services activities identified by supervisors.
7.VI Calculation of exposure value for Trading Book positions
7.15 A bank must add any exposures to a counterparty arising in the trading book to
any other exposures to that counterparty that lie in the banking book to calculate its
total exposure to that counterparty. The exposures considered here correspond to
concentration risk associated with the default of a single counterparty for exposures
included in the trading book. Therefore, a bank’s exposures to financial instruments
issued by counterparties not exempted under this Framework will be governed by
the LE limit, but concentrations in a particular commodity or currency will not be.
117.16 The exposure value of straight debt instruments and equities will be equal to the
market value of the exposure12.
7.17 Instruments such as swaps, futures, forwards and credit derivatives13 must be
converted into positions following the risk-based capital requirements14. These
instruments should be decomposed into their individual legs. Only transaction legs
representing a bank’s exposures to the counterparty within the scope of the large
exposures framework should be considered15 for calculating a bank’s total exposure
to that counterparty.
7.18 In the case of credit derivatives that represent sold protection, the exposure will
be to the referenced name, and it will be the amount due in case the respective
referenced name triggers the instrument, minus the absolute value of the credit
protection16. For credit-linked notes (CLNs)17, the protection seller bank will be
required to consider its positions both in the bond of the note issuer and in the
underlying referenced by the note.
7.19 The measures of exposure values of options (primarily meant for credit and
equity options, where permitted) under this framework differ from the exposure
values used for risk-based capital requirements. The exposure value of option under
this framework will be based on the change(s) in option prices that would result from
a default of the respective underlying instrument. The exposure value for a simple
long call option would therefore be its market value and for a short put option would
be equal to the strike price of the option minus its market value. In the case of short
call or long put options, a default of the underlying would lead to a profit (i.e., a
negative exposure) instead of a loss, resulting in an exposure of the option’s market
12 As provided in terms of our RBI Master Circular – Exposure norms / Master Circular on Prudential Norms for
Classification, Valuation and Operation of Investment Portfolio by Banks.
13 CDS is the only credit derivative allowed under our extant guidelines and banks do not have direct exposures
to the equity derivatives. It is clarified that restrictions on dealing with certain type of instruments, assets and
derivatives etc., which are currently in place shall continue to be applicable even if the guidelines contained in
this circular contains references to the same.
14 Refer Master Circular - Basel III Capital Regulations
15 At present, banks are not permitted to have exposures to equity derivatives, however, for the sake illustration,
a future on stock X, for example, is decomposed into a long position in stock X and a short position in a risk-
free interest rate exposure in the respective funding currency, or a typical interest rate swap is represented by a
long position in a fixed and a short position in a floating interest rate exposure or vice versa.
16 In the case that the market value of the credit derivative is positive from the perspective of the protection
seller, such a positive market value would also have to be added to the exposure of the protection seller to the
protection buyer (counterparty credit risk; see paragraph 7.3 of this circular). Such a situation could typically
occur if the present value of already agreed but not yet paid periodic premiums exceeds the absolute market
value of the credit protection.
17 CLNs are not permitted to be issued by banks in India under the extant RBI guidelines.
12value in the former case and equal the strike price of the option minus its market
value in the latter case. The resulting positions in all cases should be aggregated
with those from other exposures. After aggregation, negative net exposures shall be
treated as zero.
7.20 Exposure values of banks’ investments in transactions (i.e., index positions,
securitisations, hedge funds or investment funds) must be calculated applying the
same rules as for similar instruments in the banking book (see paragraphs under 8.3
to 8.10).
7.VII Offsetting long and short positions in the trading book
7.21 Offsetting between long and short positions in the same issue: Banks may
offset long and short positions in the same issue (two issues are defined as the
same if the issuer, coupon, currency and maturity are identical). Consequently,
banks may consider a net position in a specific issue for the purpose of calculating a
bank’s exposure to a particular counterparty.
7.22 Offsetting between long and short positions in different issues: Positions
in different issues from the same counterparty may be offset only when the short
position is junior to the long position, or if the positions are of the same seniority.
7.23 Similarly, for positions hedged by credit derivatives, the hedge may be
recognised provided the underlying of the hedge and the position hedged fulfil the
provision of paragraph 7.22 above (the short position is junior or of equivalent
security to the long position).
7.24 In order to determine the relative seniority of positions, securities may be
allocated into broad buckets of degrees of seniority (for example, “Equity”,
“Subordinated Debt” and “Senior Debt”).
7.25 The banks that find it excessively burdensome to allocate securities to different
buckets based on relative seniority, should not recognise offsetting of long and short
positions in different issues relating to the same counterparty in calculating
exposures.
7.26 Offsetting short positions in the trading book against long positions in the
banking book: Netting across the banking and trading books is not permitted.
137.27 Net short positions after offsetting: When the result of the offsetting is a net
short position with a single counterparty, this net exposure need not be considered
as an exposure for the purpose of LEF.
8. Treatment of specific exposure types
8.1 This section covers exposures for which a specific treatment is deemed
necessary.
Interbank Exposures
8.2 The interbank exposures, except intra-day interbank exposures, will be subject to
the large exposure limit of 25% of a bank’s Tier 1 capital (also refer to paragraph
10.III). In stressed circumstances, RBI may accept a breach of an interbank limit ex
post, in order to help ensure stability in the interbank market.
Collective Investment Undertakings (CIUs), securitisation vehicles and other
structures - adoption of “Look Through Approach” (LTA)
8.3 There are cases when a structure lies between the bank and its exposures, that
is, the bank invests in structures which themselves have exposures to assets
underlying the structures (hereafter referred to as the “underlying assets”). Such
structures include funds18, securitisations and other structures19 with underlying
assets. Banks must assign such exposure amount, i.e., the amount invested in a
particular structure, to specific counterparties of the underlying assets following the
LTA described below. Illustrative example is provided in Appendix 4.
8.4 A bank may assign the exposure amount to the structure itself, defined as a
distinct counterparty, if it can demonstrate that the bank’s exposure amount to each
underlying asset of the structure is smaller than 0.25% of its eligible capital base,
considering only those exposure to underlying assets that result from the investment
in the structure itself and using the exposure value calculated according to
paragraph 8.9 and 8.10. In this case, a bank is not required to look through the
structure to identify the underlying assets.
8.5 A bank must look through the structure to identify those underlying assets for
which the underlying exposure value is equal to or above 0.25% of its eligible capital
18 such as mutual funds, venture capital funds, alternative investment funds
19 such as investment in security receipts, real estate investment trusts, infrastructure investment
trusts
14base. In this case, the counterparty corresponding to each of the underlying assets
must be identified so that these underlying exposures can be added to any other
direct or indirect exposure to the same counterparty. The bank’s exposure amount to
the underlying assets that are below 0.25% of the bank’s eligible capital base may
be assigned to the structure itself (i.e. partial look-through is permitted).
8.6 If a bank is unable to identify the underlying assets of a structure:
a) where the total amount of a bank’s exposures to a structure does not exceed 0.25
per cent of its eligible capital base, it must assign the total exposure amount to the
structure itself, as a distinct counterparty.
b) Otherwise (i.e. if the exposure to the structure equals or exceeds 0.25 per cent of
its eligible capital base), it must assign this total exposure amount to the ‘unknown
client’.
The large exposure limit will apply on the aggregate of all such exposures to
‘unknown clients’ as if they are a single counterparty.
8.7 Where the LTA is not required (para 8.4 above), a bank must nevertheless be
able to demonstrate that regulatory arbitrage considerations have not influenced the
decision whether to look through or not – e.g. that the bank has not circumvented the
large exposure limit by investing in several individually immaterial transactions with
identical underlying assets.
8.8 If LTA need not be applied, a bank’s exposure to the structure must be the
nominal amount it invests in the structure.
8.9 Any structure where all investors rank pari passu (e.g., CIU) - When the LTA is
required according to the paragraphs above, the exposure value assigned to a
counterparty is equal to the pro rata share that the bank holds in the structure
multiplied by the value of the underlying asset in the structure. Thus, a bank holding
a ₹1 investment in a structure, which invests in 20 assets each with a value of ₹ 5,
must assign an exposure of ₹ 0.05 to each of the counterparties. An exposure to
such counterparty must be added to any other direct or indirect exposures the bank
has to that counterparty.
8.10 Any structure with different seniority levels among investors (e.g. securitisation
vehicles) - When the LTA (in terms of paragraphs above) is required for an
investment in a structure with different levels of seniority, the exposure value to a
15counterparty should be measured for each tranche within the structure, assuming a
pro rata distribution of losses amongst investors in a single tranche. To compute the
exposure value to the underlying asset, a bank must:
i. first, consider the lower of the value of the tranche in which the bank invests
and the nominal value of each underlying asset included in the underlying
portfolio of assets
ii. second, apply the pro rata share of the bank’s investment in the tranche to
the value determined in the first step above.
9. Identification of additional risks
9.1 While taking exposures to structures, banks should identify such third parties
which may constitute an additional risk factor and which are inherent in the structure
itself rather than in the underlying assets. Such a third party could be a risk factor for
more than one structure that a bank invests in. Examples of roles played by third
parties include originator, fund manager, liquidity provider and credit protection
provider. RBI as a part of its pillar 2 supervisory review and evaluation process will
look into this aspect and if required specify a specific course of action which may
either include reduction in exposure or raising of additional capital.
9.2 It is conceivable that a bank may consider multiple third parties to be potential
drivers of additional risk. In this case, the bank must assign the exposure resulting
from the investment in the relevant structures to each of the third parties.
10. Exposures to and among certain specific counterparties
10.I Exposures to Central Counterparties
10.1 Banks’ exposures to QCCPs20 related to clearing activities will be exempted
from the LE framework. However, these exposures will be subject to the regulatory
reporting requirements as defined in paragraph 4.2.
10.2 The definition of QCCP for the purpose of this Framework is the same as that
used for risk-based capital requirement purposes. A QCCP is an entity that is
licensed to operate as a CCP (including a license granted by way of confirming an
20 For designation of CCPs as QCCPs please refer to circular DBOD.No.BP.BC.82/21.06.217/2013-14 dated
January 7, 2014 on Banks' Exposure to Central Counterparties (CCPs) - Interim Arrangements,
16exemption), and is permitted by the appropriate regulator/overseer to operate as
such with respect to the products offered. This is subject to the provision that the
CCP is based and prudentially supervised in a jurisdiction where the relevant
regulator/overseer has established, and publicly indicated that it applies to the CCP
on an ongoing basis, domestic rules and regulations that are consistent with the
CPSS-IOSCO Principles for Financial Market Infrastructures.
10.3 In the case of non-QCCPs, banks must measure their exposure as a sum of
both the clearing exposures described in paragraph 10.5 and the non-clearing
exposures described in paragraph 10.7, and the same will be subject to the LE limit
of 25 percent of the eligible capital base.
10.4 The concept of connected counterparties described in paragraph 6 does not
apply in the context of exposures to CCPs that are specifically related to clearing
activities.
10.5 Calculation of exposures related to clearing activities: Banks must identify
exposures to a CCP related to clearing activities and sum together these exposures.
Exposures related to clearing activities are listed in the table below together with the
exposure value to be used:
Trade exposures The exposure value of trade exposures
must be calculated using the exposure
measures prescribed in other parts of
this framework for the respective type of
exposures.
Segregated initial margin The exposure value is 021.
Non-segregated initial margin The exposure value is the nominal
amount of initial margin posted.
Pre-funded default fund contributions Nominal amount of the funded
contribution
Unfunded default fund contributions The exposure value is 0
21 When the initial margin (IM) posted is bankruptcy-remote from the CCP – in the sense that it is segregated
from the CCP’s own accounts, eg when the IM is held by a third-party custodian – this amount cannot be lost by
the bank if the CCP defaults; therefore, the IM posted by the bank can be exempted from the large exposure
limit.
1710.6 Regarding exposures subject to clearing services (the bank acting as a clearing
member or being a client of a clearing member), the bank must determine the
counterparty to which exposures must be assigned by applying the provisions of the
risk-based capital requirements.
10.7 Other exposures: Other types of exposures that are not directly related to
clearing services provided by the CCP, such as equity stake22, funding facilities,
credit facilities, guarantees etc., must be measured according to the rules set out in
this framework, as for any other type of counterparty. These exposures will be added
together and be subjected to the LE limit.
10. II. Exposures to NBFCs
10.8 Exposure Ceilings proposed under LE Framework
(i) Exposures to NBFCs: Banks’ exposures to a single NBFC will be restricted to 15
percent of their eligible capital base. However, based on the risk perception, more
stringent exposure limits in respect of certain categories of NBFCs may be
considered.
(ii) Banks’ exposures to a group of connected NBFCs or group of connected
counterparties having NBFCs in the group will be restricted to 25 percent of their Tier
I Capital.
10.9 The above exposure limits are subject to all other instructions in relation to
banks’ exposures to NBFCs.23
10.III Large exposures rules for global systemically important banks (G-SIBs)
and domestic systemically important banks (D-SIBs)
10.10 The LE limit applied to a G-SIB’s exposure to another G-SIB is set at 15
percent of the eligible capital base.
10.11 The LE limit of a non G-SIB in India to a G-SIB in India or overseas will be 20
percent of the eligible capital base.
10.12 For above paragraphs, the limit applies to G-SIBs as identified by the Basel
Committee and published annually by the FSB. When a bank becomes a G-SIB, it
must apply the 15 percent exposure limit to another G-SIB within 12 months from the
22 If equity stakes in a CCP are deducted from the capital on which the large exposure limit is based, these must
not be included as exposure to the CCP.
23 As contained in Master Circular – Exposure Norms/ Master Circular - Bank finance to NBFCs
18date of becoming G-SIB, which is the same time frame within which a bank that has
become a G-SIB would need to satisfy its higher loss absorbency capital
requirement. Similarly, when a counterparty bank becomes G-SIB, banks may apply
limits as indicated in para 10.10 or 10.11, as applicable, within 12 months from the
date of counterparty bank becoming G-SIB. For the purpose of computing exposure
limits under LEF, Indian branches of foreign G-SIBs will not be considered as G-
SIBs. Accordingly, for Indian branches of foreign G-SIBs, exposure limit on a G-SIB,
including their head office24, will be 20% of eligible capital base and exposure limit
on any other bank (i.e. not G-SIB) will be 25% of eligible capital base. Similarly, for
Indian branches of foreign non-GSIBs, exposure limit on a non-GSIB, including their
head office24, will be 25% of eligible capital base and exposure limit on a G-SIB will
be 20% of eligible capital base.
10.13 The Reserve Bank has issued the Framework for dealing with Domestic
Systemically Important Banks (D-SIBs) on July 22, 2014 and discloses names of the
banks classified as D-SIBs on an annual basis. There is no separate exposure limit
applicable to D-SIBs and they will continue to be governed by interbank exposure
limits under the LEF.
11. Implementation date and transitional arrangements
All aspects of the LE Framework except guidelines with reference to economic
interdependence criteria and non-centrally cleared derivatives exposures, (both of
which are applicable from April 1, 2020), are applicable in full with effect from April 1,
2019 (as was already specified in our LEF circular dated December 1, 2016) and the
exposure norms applicable to single/group of connected counterparties are no longer
applicable from that date25. Banks must adjust their exposures so as to comply with
the LE limit with respect to their eligible capital base by the date of implementation.
Accordingly, for aspects applicable from April 01, 2020, prior to this date, banks
should avoid taking any additional exposure/reduce exposure in cases where their
exposure is at or above the exposure limit prescribed under this Framework. While
non-centrally cleared derivatives exposures are exempt till March 31, 2020, banks
24 Including other overseas branches/subsidiaries
25 The LE Framework is applicable to a bank’s counterparties and does not address other types of concentration
risks such as sectoral exposures. As such, the extant instructions contained in the RBI Master Circular –
Exposure norms, will continue to be applicable, except to the extent superseded by the provisions of this
Framework.
19must compute these exposures separately and report to the Department of Banking
Regulation on quarterly basis.
20Appendix 1
Return on Large Exposures
Name of the Bank
Return for the Month
Eligible Capital base (Tier I) (Rs. crore)
A. Bank’s 20 Largest Exposures to counterparties (single as well as group of
connected counterparties) irrespective of their values relative to bank’s
eligible capital base
Sl No. Name of the Whether Exposure Exposure as
Counterparty Single (S) or Amount % of Tier I
Group (G) of Capital
connected
Counterparties
1.
2.
3.
--
--
18.
19.
20.
B. Bank’s exposures with values equal to or above 10% of Tier I Capital
Sl No. Name of the Whether Exposure Exposure as
Counterparty Single (S) or Amount % of Tier I
Group (G) of Capital
connected
Counterparties
1.
2.
--
n
21C. Bank’s other exposures (measured without effect of CRM) with values
equal to or above 10% of Tier I Capital (not including exposures reported in
B already)
Sl No. Name of the Whether Exposure Exposure as
Counterparty Single (S) or Amount % of Tier I
Group (G) of Capital
connected
Counterparties
1.
2.
--
n.
D. Bank’s exempted exposures with values equal to or above 10% of Tier I
Capital
Sl No. Name of the Whether Exposure Exposure as
Counterparty Single (S) or Amount % of Tier I
Group (G) of Capital
connected
Counterparties
1.
2.
--
n.
22Appendix 2
Illustrative examples of Economic Interdependence Criteria
Requirement: Both A and B are customers of the bank and the exposure of the bank
to each of them is more than 5% of its eligible capital base (i.e. Tier-1 capital).
Where 50% or more of one counterparty's gross receipts or gross
expenditures (on an annual basis) is derived from transactions with the other
counterparty
Illustrative Example:
Company A is a commercial space provider and company B utilises a major
portion of this space and accounts for more than 50% of gross receipts for
Counterparty A.
Where one counterparty has fully or partly guaranteed the exposure of the
other counterparty, or is liable by other means, and the exposure is so
significant that the guarantor is likely to default if a claim occurs;
Illustrative Example:
Company A fully or partly guarantees the loans undertaken by company B and
the guarantee is so large that it could result in default in payments for A if it is
invoked. Banks may consider parameters like networth, EBITDA, liquid
assets, etc to assess whether the guarantor will be in a position to honour the
claim on an on-going basis.
Where a significant part of one counterparty’s production/output is sold to
another counterparty, which cannot easily be replaced by other customers;
Illustrative Example:
When a significant part of product/output/services of Company A is sold to
Company B and there are no alternate buyers who can be approached if B
fails to buy, in such a case goods may remain unsold and could lead to default
in loan repayment by A. An auto part supplier and auto manufacturing firm
could be part of the same economically dependent group based on this
criteria. For deciding if the criteria would be applicable to the counterparties
23under consideration, banks may use financial criteria like unsold inventory
leading to operating loss/default in repayment as well as subjective criteria like
ability of the seller to find alternate buyer/ market, R&D capability of the seller,
etc.
When the expected source of funds to repay the loans of both counterparties
is the same and neither counterparty has another independent source of
income from which the loan may be serviced and fully repaid;
Illustrative Example:
Two auto component manufacturers i.e. company A and company B are
suppliers to a commercial vehicle manufacturer i.e. company C. Source of
funds for repayment of loans taken by A and B is dependent on sales to C. In
this case, A and B are connected to each other based on the criteria of
economic interdependence. Important factors to consider would be extent of
dependence of A and B on C, ability of A and B to find another buyer, etc.
Where it is likely that the financial problems of one counterparty would cause
difficulties for the other counterparties in terms of full and timely repayment of
liabilities;
Illustrative Example: Company A supplies intermediate goods to Company C.
Company C processes these goods and then sells it to company B. In such
cases, difficulties at A could lead to difficulties for B. In such cases A and B
are economically dependent. Banks may consider factors like financial
strength of counterparty B to withstand the shock, its ability to find alternate
supplier in place of C, etc. to decide on applicability of the criteria.
Where the insolvency or default of one counterparty is likely to be associated
with the insolvency or default of the other(s);
Illustrative Example:
Examples would include all such cases where insolvency or default of one
company may lead to the insolvency or default of the other companies. Banks
may use criteria such as intercorporate liabilities, significant trade receivables,
etc. to decide on applicability of the criteria.
24 When two or more counterparties rely on the same source for the majority of
their funding and, in the event of the common provider’s default, an alternative
provider cannot be found - in this case, the funding problems of one
counterparty are likely to spread to another due to a one-way or two-way
dependence on the same main funding source.
Illustrative Example:
Company A and Company B rely on the same non-bank source for their
funding requirements and may not have access to alternative sources of
funds. In such cases, difficulties at common source could lead to difficulties at
both the companies and thus these companies are interconnected based on
economic interdependence. Important factors to consider would be strength of
A and B to decide alternate source of funds, likelihood of failure of the non-
bank source, etc.
Economic interdependence with two different entities
If an entity (C) is economically dependent on two (or more) other entities (A and B)
then payment difficulty of any one of the entities (A or B) may cause payment
difficulties to dependent entity (C). Thus, C needs to be added in two different groups
(A and C; B and C).
Grouping requirement
Since exposure to C is considered as single risk for two separate groups, it does not
amount to double counting of exposure of C.
25Appendix 3
Relation between interconnectedness through control and interconnectedness
through economic dependency and illustration of grouping requirements
Following examples provide illustrations for formulation of groups in case of one-way
dependency and two-way dependencies.
a) For example, consider A controls A1 and A2, and B controls B1, and B1 is
economically dependent on A2 (one-way dependency only i.e. financial difficulties at
A2 could impact B1 but not vice versa). In this case, B1 should be part of two
separate groups of A and B.
A B
A1 A2 B1
Grouping requirements:
A B
A1 A2 B1 B1
Three different groups of i) A, A1, A2, ii) B, B1, iii) A2, B1, may not be sufficient as
financial difficulties of A2 is likely to cause difficulties for B1 also which is
economically dependent on A2 (which in turn is dependent on A).
b) In above example, consider that A2 and B1 have two-way economic dependency
i.e. both are economically dependent on each other, which means that financial
difficulty at either entity could impact the other entity.
26A B
A1 A2 B1
Grouping requirements:
A B
A2
A1 A2 B1 B1
Downstream Contagion
Downstream contagion should be assumed when an entity is economically
dependent on another entity and is itself the head of a ‘control group’. If the other
entity is part of a group of connected clients, the control group of the economically
dependent entity should then be included in the group of connected counterparties to
which the economic dependency relationship exists. To overcome its own pending
payment difficulties, the economically dependent entity is likely to withdraw
resources from controlled entities, thus extending the risk of contagion downstream.
a) For example, consider A controls A1 and A2, and B controls B1, and B1 controls
B2 and B3. Further, consider B1 has one-way economic dependency on A2. If A2
faces financial difficulty, it may impact B1 adversely, which then is likely to withdraw
resources from its controlled
entities B2 and B3.
B
A
B1
A1 A2
B2 B3
27Grouping requirements:
A
B1
A1 A2
B2 B3
B
B1
B2 B3
Upstream Contagion
On the other hand, upstream contagion of entities that control the economically
dependent entity should be assumed only when the controlling entity is also
economically dependent on the entity that constitutes the economic link between the
two controlling groups.
a) For instance, in the above example of downstream contagion, if B1 is so important
to B that in a sense B is also dependent on B1, then contagion at A could also
spread to B, through AA2B1B and all these entities would form a single group.
28A
B
B1
A1 A2
B2 B3
Limitations in formulating groups of connected counterparties
If a bank is not having exposure to all the entities, it may be difficult to accurately
form group of connected counterparties. Such groups shall be formed on best efforts
basis and banks should take reasonable steps to collect and use relevant
information; this includes publicly available information (e.g. annual financial
statements), information beyond institutions’ clients and also soft information that
typically exists at the level of individual loan officers and relationship managers. If
there are interconnections among entities that are not clients of the bank, it may be
difficult for the bank to formulate correct groupings. However, the bank should
incorporate any information that may be available to it publicly or through other
clients or entities outside its clientele.
a) For instance, in illustration shown below, if bank has exposure to A and B5
only, then it may be difficult to formulate correct groupings.
29B
B1
A
B2 B3
A1
B4 B5
A2 A3
A4 A5
30Appendix 4
Look-Through Approach - a flow chart
Whether the bank is able
to identify the underlying
counterparties in the
structure?
Yes No
Whether the bank can
Is total exposure to
demonstrate that all
structure less than
underlying exposures are
0.25% of eligible
less than 0.25% of eligible
capital base?
capital base?
Yes No Yes No
Exposure to Is exposure to Exposure to Exposure to be
be reckoned an underlying be reckoned reckoned on “Unknown
on structure less than on structure Client” (aggregate of all
itself as a 0.25% of itself as a such unknown clients to
distinct eligible capital distinct be subject to single
counterparty base? counterparty counterparty limits)
Yes No
Exposure to be
reckoned on
Exposure may be
underlying and
reckoned on
should be added with
structure itself as a
other direct/indirect
distinct counterparty
exposures to that
underlying
31Look-Through Approach - An Illustrative example
Bank’s eligible capital base: 1000
Corpus of structure: 500
Bank’s investment in structure: 100 (which is 10% of eligible capital base i.e. more
than 0.25% of eligible capital base)
Exposure values as per look-through approach:
Bank's exposure to Bank's other direct
Investment of Total exposure to
underlying through / indirect exposure
structure in that underlying
structure to underlying
underlying
as % of as % of as % of
as % of eligible eligible eligible
amount amount amount amount
corpus capital capital capital
base base base
Underlying 1 125 25.00% 25 2.50% 200 20.00% 225 22.50%
Underlying 2 100 20.00% 20 2.00% 150 15.00% 170 17.00%
Underlying 3 90 18.00% 18 1.80% 100 10.00% 118 11.80%
Underlying 4 75 15.00% 15 1.50% 80 8.00% 95 9.50%
Underlying 5 50 10.00% 10 1.00% 70 7.00% 80 8.00%
Underlying 6 30 6.00% 6 0.60% 50 5.00% 56 5.60%
Underlying 7 20 4.00% 4 0.40% 100 10.00% 104 10.40%
Underlying 8 10 2.00% 2 0.20% 150 15.00% 152 15.20%
Note:
1. Exposure to underlying 8 (which is less than 0.25% of eligible capital base)
may be counted as exposure on structure itself. Consequently, for underlying
8 total exposure to underlying will be 15.00% or 15.20% at the option of the
bank.
2. Had the bank been not able to identify underlying exposures, entire exposure
to the structure (i.e. 100, which is greater than 0.25% of eligible capital base)
would be exposure on ‘unknown client’. All such unknown clients would be
treated as a single counterparty and single counterparty limit would apply on
aggregate exposure to all such unknown clients.
32