RBI plans checks on banks' exposure to group entities

The Reserve Bank of India has planned to cap banks’ total exposure to own group entities at 20 per cent of net worth, to avoid concentration and contagion risk from intra-group transactions.

The limit for exposure for a single entity — a non-finance company or an unregulated finance entity — in a group will be five per cent of paid-up capital plus reserves. The draft norms propose a higher exposure limit for a group’s regulated financial services companies.

A bank can have exposure up to 10 per cent of net worth to a single regulated financial services entity of a group. The aggregate group exposure in the case of all non-financial entities and unregulated group finance units is proposed to be capped at 10 per cent of net worth.

Banks are to operate within these limits on an ongoing basis. They should report their exposure, on a quarterly basis. If exposure exceeds the limits, these should be reported without delay and with acceptable rationale. If satisfied, RBI might allow the bank an appropriate timeline to comply with the limits.

Any excess exposure over the limits is to be deducted from the Common Equity Tier-1 capital until the limits are restored, say the draft norms.

RBI might impose penalties andor prohibit a bank from conducting further intra-group transactions if it fails to comply with the timeline to bring exposure within limits. Banks are not to hold unlimited exposures to group entities, either aggregate or at an individual entity level.

They should avoid entering into cross-default clauses where a default by a group entity becomes ground to trigger an obligation for the bank.

Also, banks should not purchase a low-quality asset from group entities. A low-quality asset should not be accepted as collateral for loan or extension of credit or a guarantee issued on behalf of the group entity, goes the proposal.