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The Reserve Bank of India (RBI) on Tuesday prescribed caps on banks’ transactions with and exposure to its group entities to restrict concentration and contagion risks.
Single-group entity exposure of banks has been capped at 10 per cent of net worth (capital and reserves) of their regulated financial services units. For exposure to non-financial and unregulated financial companies, the limit will be five per cent of net worth.
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The cap on aggregate group exposure has been fixed at 20 per cent of the net worth, taking into account financial and non-financial group entities.
The guidelines are effective October 1 this year. Banks have to report their intra-group exposures to RBI from the quarter ending December 31.
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By March 31, 2016, banks will have to reduce their intra-group exposure that exceeds the prescribed limit. At that time, the additional exposure would be deducted from the bank’s common equity Tier-I capital, RBI said. The central bank might impose a penalty for frequent breaches of the prescribed limits.
A ‘group’, RBI said, was an arrangement involving two or more entities that had subsidiary-parent or associate-joint venture ties, while a ‘group entity’ was any entity involved in such ties. RBI said despite the government being their common owner of public sector banks, these entities wouldn’t be treated as group entities. However, the norms will apply to the entities of each public sector banking group separately.
Both credit exposure and investment exposure, including underwritings and other such commitments, will be considered.
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However, exposure on account of equity and other regulatory capital instruments will be excluded while determining exposure to group entities.
RBI said certain intra-group exposures would be excluded from prudential limits. Banks’ exposure to other banks/financial institutions in form of equity and other capital instruments in a particular group are exempt from the prescribed norms. Letters of comfort issued by parent banks in favour of foreign group entities will be outside the purview of announced caps.
RBI has prohibited banks from credit or investment (equity/debt capital) exposure in its non-operating financial holding companies, promoters/promoter group entities or individuals associated with the promoter group.
Also, banks shouldn’t buy/sell low-quality assets (non-performing loans) from/to group entities, except when such transactions are in accordance with RBI norms in this regard. Banks must also ensure transactions in low-quality assets with group entities aren’t carried out to hide losses or window-dress balance sheets.
Low-quality assets shouldn’t be accepted as collateral for loans or letters of credit issued on behalf of group entities, RBI said.
