Large Exposures Framework – Credit Risk Mitigation (CRM) for offsetting – non-centrally cleared derivative transactions of foreign bank branches in India with their Head Office

Executive Summary: This circular from the Reserve Bank of India (RBI) clarifies the use of Credit Risk Mitigation (CRM) for foreign bank branches in India concerning their exposures to their Head Offices. It allows Indian branches of foreign banks to use certain funds held with the RBI as CRM for offsetting exposures when calculating Large Exposure Framework (LEF) limits. The circular specifies conditions for using these funds as CRM and mandates specific disclosures in the bank's balance sheet. Key Points / Main Content: Credit Risk Mitigation (CRM) for LEF: * Indian branches of foreign banks can use cash/unencumbered approved securities held with RBI under Section 11(2)(bi) of the Banking Regulation Act, 1949, as CRM. * This CRM is specifically for offsetting gross exposure to the Head Office (including overseas branches) for LEF calculation. * The source of the cash/securities must be interest-free funds from the Head Office or remittable surplus retained in Indian books/reserves. Conditions for CRM: * The amount held as CRM must be over and above other regulatory and statutory requirements and certified by statutory auditors. * This amount cannot be included in regulatory capital (no double counting). It will form part of regulatory adjustments to Common Equity Tier 1 Capital when assessing capital adequacy. * The bank must furnish an undertaking to the Department of Supervision (DoS), RBI, annually (as of March 31) confirming continuous maintenance of the balance reckoned as CRM. * The CRM must comply with the principles/conditions in paragraph 7 of the Master Circular on Basel III Capital Regulations dated July 1, 2015, as amended. Disclosure Requirements: * The amount held under section 11(2)(bi) of the BR Act and earmarked as CRM must be disclosed in a note in Schedule 1: Capital to the Balance Sheet. * The note should state the amount designated as CRM for offsetting non-centrally cleared derivative exposures to the Head Office (including overseas branches) and clarify that it is not reckoned for regulatory capital or any other statutory requirements. Withdrawal of Excess Amounts: * Excess amounts (over CRM requirements) can be withdrawn subject to certification by the Statutory Auditor and approval from the DoS, RBI. Derivative Contract Exclusion: * Derivative contracts executed prior to April 1, 2019, can be excluded while computing derivative exposures to the Head Office (including overseas branches). Impact Analysis: Foreign Bank Branches in India: * Impact: Benefit from reduced LEF exposure calculations, potentially allowing for more efficient capital allocation. Must comply with conditions for CRM usage, including maintaining sufficient balances, providing annual undertakings, and ensuring compliance with Basel III principles. * Action Required: Ensure compliance with all conditions for utilizing funds as CRM. Disclose the earmarked CRM amount in the balance sheet. Obtain certification from Statutory Auditors and approval from DoS, RBI, for any withdrawals of excess amounts. Provide an undertaking to the DoS, RBI, annually. Statutory Auditors: * Impact: Required to certify the amount held as CRM and verify that it meets the specified conditions. * Action Required: Certify the amount held as CRM, ensuring it is over and above regulatory/statutory requirements and not double-counted as regulatory capital. Department of Supervision (DoS), RBI: * Impact: Responsible for overseeing compliance with the framework and approving withdrawals of excess amounts held as CRM. * Action Required: Review annual undertakings from banks, assess requests for withdrawals of excess amounts, and ensure overall compliance with the circular's requirements.

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