2019] 33
LARGE EXPOSURES FRAMEWORK : NEW RBI RULES
SEBI^
AND CORPORATE LAWS JULY 15 - JULY 21 , 2019 111[2019] 154 SCL 33 (Mag.)/106taxmann.com 141 (Article)
LARGE EXPOSURES FRAMEWORK : NEW RBI RULES TO
DETER BANKS’ CONCENTRIC LENDING
KANAKPRABHA JETHANI*
Background
The
RBI
has
made
some
crucial
amendments
to
the
Large
Exposures
Framework^
(LEF)
by
notification
dated
June
3 ,
2019.
These
changes
are
in
tended -
to
align
such
framework
with
global
practices,
such
as
look
through
approach^
for
identifying
exposures,
determination
of
the
group
of
“connected”
counter-parties,^
to
name
a
few.
The
LEF,
announced
by
the
RBI
videits
notification
dated
December
1 ,
20161
and^
amended
through
notification
dated
June
3 ,
20192 ,
is
applicable
with
effect^
from
April
1 ,
2019.
However,
the
provisions
relating
to
introduction
of
economic^
interdependence
criteria
in
definition
of
connected
counterparties
and^
non-centrally
cleared
derivative
exposures
shall
become
applicable
from
April^
1 ,
2020.
This
framework
is
likely
to
widen
the
scope
of
the
definition
of
group^
of
connected
counterparties
on
one
hand,
and
narrowing
down
the
same
by^
expanding
the
scope
of
exempted
counterparties.
Further,
look-through
approach^
demarcates
between
direct
or
indirect
exposure
of
banks
in
various
counterparties.^More about the LEF
A
bank
may
have
exposure
to
various
large
borrowers,
and
of
group
of
en
tities -
that
are
related
to
each
other.
This
exposure
of
large
borrowers,
whether
singularly^
or
by
way
of
different
related
entities,
results
in
concentration
of
bank’s^
exposure
in
the
same
group,
thus,
increasing
the
credit
risk
of
the
bank.
There^
have
been
examples
of
large
banking
failures
throughout
the
world.
In
the^
words
of
the
Basel
Committee
on
Banking
Supervision—
“Throughout history there have been instances of banks failing due to concen-
trated exposures to individual counterparties (e.g., Johnson Matthey Bankers in
the United Kingdom in 1984 , the Korean banking crisis in the late 1990 s). Large
exposures regulation has been developed as a tool for limiting the maximum loss
a bank could face in the event of a sudden counterparty failure to a level that
does not endanger the bank’s solvency.”
To
deal
with
the
risk
arising
out
of
such
concentration,
there
has
to
be
in
place
limits^
on
concentration
in
a
single
borrower
or
a
borrower
group.
Accord
ingly, -
after
considering
various
frameworks
being
included
in
local
laws
and
banking^
regulations
and
recommendations
of
the
committees
such
as
Basel*Executive - Vinod Kothari & Company.