The Basel Committee on Banking Supervision (BCBS) found that the Reserve Bank of India’s (RBI) rules on large exposures framework (LEF) are more stringent than those recommended by the committee, as per the results of a regulatory consistency assessment programme (RCAP). This examination was centered on the totality and uniformity of the domestic regulations active from 7 June 2019, which apply to commercial banks in India. The BCBS comprises 45 members including central banks and bank supervisors from 28 jurisdictions and is deemed as the primary global standard setter for banks’ prudential regulation. In December 2016 the RBI implemented the large exposures framework through a circular which was later modified in June 2019. Majority of these requirements came into effect on April 1, 2019 applying to all scheduled commercial banks, excluding regional rural banks.
A Glance at Regulatory Consistency Assessment Programme
The Basel Committee initiated a meticulous Regulatory Consistency Assessment Programme (RCAP) in 2012. This was established with the aim to observe and gauge the adoption and execution of its standards. It encouraged transparent and predictable regulatory environments for internationally active banks. The two core but complementary workstreams of RCAP consist of monitoring and assessment. Monitoring ensures the conversion of Basel III regulatory standards into each member jurisdiction’s domestic regulations, on a semiannual basis. Assessment aims to evaluate the consistency and completeness of the adopted policies, including the significance of any deviations from the Basel III regulatory framework. These assessments are executed on a jurisdictional and thematic basis, focusing on the alignment of domestic regulations with the Basel Committee’s minimum requirements and ensuring that prudential ratios are calculated consistently by banks across multiple jurisdictions.
Key Findings of the Assessment
According to the Basel LEF, the total exposure of a bank to a single party must not exceed 25% of Tier 1 capital. However, Indian banking regulations cap this at 20%. Under exceptional circumstances, an additional 5% exposure is permissible if approved by the bank’s board. In terms of banks’ exposures to globally significant banks, Indian regulations are deemed stricter, aligning with the spirit of the Basel Guidelines. The scope of application of Indian standards extends beyond internationally active banks, which is the focus of the Basel framework. Another aspect of Basel’s LEF requires banks to identify third parties that may pose an additional risk factor. This could range from originators and fund managers to liquidity providers and credit protection providers. If multiple third parties are deemed potential risk drivers, the bank must allocate the exposures from the investments in the structures to each of these parties. Conversely, RBI’s LEF doesn’t stipulate identifying additional risks or provide guidelines for grouping these exposures.
RBI’s Response to the Assessment
Reacting to these key findings, the RBI has decided to include economic interdependence criteria while determining a group of connected counterparties in every instance where the total exposure to each such counter-party exceeds 5% of the eligible capital base. To allow banks ample time to adjust to this new requirement, it will be effective from April 1, 2020.
Key Facts on Basel Committee and RBI Regulation Framework:
| RBI Large Exposures Framework (LEF) | Basel Committee Large Exposures Framework (LEF) |
|---|---|
| Caps exposure of a bank to a single party to 20% | Limits exposure of a bank to a single party to 25% |
| Allows additional 5% exposure, subject to board approval | No provision for additional exposure beyond the stipulated limit |
| Stricter regulations for banks’ exposure to globally significant banks | Standard regulations for banks’ exposure to globally significant banks |
| Does not require the identification of third parties posing potential risks | Requires banks to identify third parties that may pose additional risk factors |
The Way Forward
In response to the Basel Committee’s findings, the RBI plans to introduce economic interdependence criteria for identifying connected counterparties. This would apply if the total exposure to each counter-party exceeds 5% of the bank’s eligible capital base. In order to facilitate a smooth transition, this change will come into effect from April 1, 2020.
