Large Exposures Framework: RBI Limits on Bank Lending
Why in the news
RBI withdrew its 2016 guidelines that pushed big borrowers towards the corporate bond market. The Large Exposures Framework (LEF) itself continues in full.
Key facts
- LEF is an RBI rule to restrict concentration of credit risk, in line with BCBS global norms.
- Single borrower: 20% of Tier-1 capital (RBI may permit up to 25%).
- Connected group: 25% of Tier-1 capital (up to 30% in exceptional cases).
- Exposure to NBFCs: up to 25% of Tier-1 capital.
Limits at a glance
| Counterparty | Normal cap | Relaxed cap |
|---|---|---|
| Single counterparty | 20% of Tier-1 | 25% |
| Connected group | 25% of Tier-1 | 30% |
| NBFCs | 25% of Tier-1 | Not stated |
About LEF
- Goals: lower systemic risk from large defaults, avoid heavy lending concentration, push diversified loan books and support financial stability.
- Exposure covers funded and non-funded limits, derivatives, off-balance-sheet items and securities investments.
- Connected counterparties are treated as one if linked by control (ownership, voting, management) or economic interdependence (shared funding, guarantees).
- Exempt: exposure to the Government of India, exposure covered by equal cash margin or government guarantee, and intraday interbank exposure.
The 2016 framework withdrawal
- The old rule required large borrowers to raise part of their funds via corporate bonds.
- Industry feared lower bond volumes; RBI said volumes are strong and the old rules raised costs.
Foreign banks
- Foreign bank branches follow LEF on their India operations only, using Tier-1 capital or net owned funds in India.
- All Indian branches count as one entity; a parent’s guarantee cannot push branch exposure above the caps.
Exam angle
- Regulator: RBI; global standard-setter: BCBS.
- Key numbers: 20% and 25% of Tier-1 capital.
- Related terms: Tier-1 capital, connected counterparties, off-balance-sheet exposure.