The Reserve Bank of India’s (RBI) norms on large exposures for banks are not only compliant with the Basel requirements, they are stricter in some areas as well, according to the findings of the Basel Committee on Banking Supervision.
BCBS, the primary global standard setter for the prudential regulation of banks, has 45 members, comprising central banks and bank supervisors from 28 jurisdictions.
The assessment was conducted by the Regulatory Consistency Assessment Programme (RCAP), part of the Basel committee, and focused on the completeness and consistency of the domestic regulations in force on 7 June 2019, as applied to commercial banks in India, with the Basel large exposures framework.
“Issues related to prudential outcomes, the resilience of the banking system or the supervisory effectiveness of the Indian authorities were not in the scope of this assessment. The assessment relied on regulations, other information and explanations provided by the Indian authorities, and it ultimately reflects the view of the Basel Committee," the report of the committee said.
It said that as of 7 June, 2019, the large exposures regulations in India are assessed as compliant with the Basel large exposures framework.
“This is highest possible grade. In some other respects, the Indian regulations are stricter than the Basel large exposures framework. For example, banks’ exposures to global systemically important banks are subject to stricter limits, in line with the letter and spirit of the Basel Guidelines, and the scope of application of the Indian standards is wider than just the internationally active banks covered by the Basel framework," the committee said.
The RCAP assessment team was led by Vasily Pozdyshev, deputy governor of the Central Bank of the Russian Federation. It comprised four technical experts, from Belgium, Brazil, Denmark and the Basel Committee Secretariat.
The Basel large exposures framework requires banks to identify third parties that may constitute an additional risk factor inherent in the structure itself rather than in underlying assets. RBI’s implementation of the large exposures framework requires banks to identify such third parties (like originator, fund manager, liquidity provider and credit protection provider).
“In addition, in cases where there are multiple third parties considered to be potential drivers of additional risk, the bank must assign the exposures resulting from the investment in the structures to each of the third parties. However, the RBI’s large exposures framework does not specify the identification of additional risks, nor provide instructions for banks to group these exposures," the report said.
The report of the committee also found that while Basel large exposures framework limits the sum of all exposures of a bank to a single counterparty to 25% of Tier 1 capital, Indian regulations establish the large exposure limit at 20% adding that, in exceptional cases, banks’ boards may allow an additional 5% exposure of the bank’s available eligible capital base.