In modern banking, one of the biggest threats to financial stability is concentration risk – when a bank lends too much to a single borrower or related group. To address this, the Reserve Bank of India (RBI) has implemented the Large Exposures Framework (LEF). This framework ensures that no single exposure can threaten a bank’s capital base.
This article provides a complete explanation of Large Exposure Norms as per the latest RBI and IIBF guidelines for Compliance in Bank certification. It includes practical explanations, examples, and conceptual clarity designed for aspirants preparing for banking exams.
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What is the Large Exposure Framework (LEF)?
The Large Exposure Framework (LEF) is a prudential regulation that limits a bank’s exposure to a single borrower or a group of connected counterparties. The purpose is to ensure that banks diversify their lending portfolios and avoid excessive exposure to any single entity or group.
Objectives of the LEF
- Reduce concentration risk within the banking system.
- Align Indian banks with global Basel Committee (BCBS) standards.
- Enhance the resilience of banks against large borrower defaults.
- Promote systemic stability in the financial system.
RBI Limits: Single & Group Counterparty
Single Counterparty Limit
The exposure of a bank to a single counterparty must not exceed 20% of the bank’s eligible capital base (Tier I capital). In exceptional cases, with Board approval, this may extend up to 25%.
Group of Connected Counterparties
Exposure to a group of connected counterparties is capped at 25% of the eligible capital base. This ensures that interconnected entities are treated as one for risk measurement.
Applicability Levels
- Solo level – the bank itself and its branches.
- Consolidated/group level – the bank plus subsidiaries and overseas branches.
Applicability of LEF
The framework applies to all Scheduled Commercial Banks (excluding RRBs) and large NBFCs categorized as NBFC-UL (Upper Layer). It covers both on-balance sheet and off-balance sheet exposures including derivatives, guarantees, and commitments.
Types of Credit Exposure under LEF
- Fund-based: Loans, advances, overdrafts, and investments.
- Non-fund-based: Guarantees, letters of credit, acceptances, and commitments.
- Off-balance sheet: Derivative contracts and other contingent exposures converted using Credit Conversion Factors (CCF).
- Trading book exposures: Repo, reverse repo, and securities financing transactions.
Connected Counterparties
Definition
Entities are considered connected if one controls the other or both are controlled by a common entity, or if they are economically interdependent in such a way that financial distress in one could affect the other.
Purpose
This ensures that exposure limits reflect true economic risk, even if lending is spread across multiple entities of the same group.
Bank Policy Requirement
Each bank must maintain a Board-approved policy for identifying and aggregating connected counterparties for exposure calculation.
Off-Balance Sheet Exposure Conversion
Off-balance sheet exposures are converted into credit-equivalent exposures using predefined Credit Conversion Factors (CCF). For example, a guarantee of ₹100 crore with a 50% CCF will result in ₹50 crore exposure counted toward LEF limits.
Breach Reporting & Rectification
- Any breach of exposure limit must be reported to RBI immediately.
- Breach must be rectified within 30 days of occurrence.
- Board approval is mandatory for any exceptions.
Trading Book & Periodic Reporting
Exposures from the trading book (such as repos, derivatives, or equity positions) are also included for LEF compliance. Banks are required to monitor these monthly and report quarterly to the regulator.
Loan Threshold Calculation
A loan or exposure becomes a Large Exposure when it equals or exceeds 10% of the bank’s eligible capital base. Such exposures must be reported and monitored separately.
Real Estate Exposure Norms
RBI also issues sector-specific exposure caps for industries like real estate and capital markets. These are part of overall concentration management, ensuring balanced sectoral lending by banks.
Sectoral & Industry-wise Limits
Besides LEF thresholds, banks fix internal exposure limits for sensitive sectors (e.g., steel, real estate, NBFCs, power). These serve as internal controls to avoid sectoral over-exposure.
Overseas JVs & Subsidiaries
For consolidated exposure calculation, banks must include exposures through overseas branches and subsidiaries. This prevents bypassing exposure limits through offshore lending arms.
Capital Market Exposure, Underwriting & Payment Commitments
- Underwriting obligations and irrevocable payment commitments are treated as part of the exposure.
- Such exposures are off-balance sheet in nature and must be converted using CCFs.
- Capital market exposures like share financing or margin funding also count toward total exposure.
Secured vs Unsecured Advances
Exposures secured by own term deposits or government securities may be exempted or assigned lower risk weights. However, unsecured advances or bridge loans attract full exposure treatment.
Loans Against Shares & Mutual Funds
Loans against shares or mutual fund units are closely monitored under separate prudential guidelines. Banks must ensure such exposures do not breach RBI’s capital market exposure limits.
Intra-Group Exposure & NOFHC Restrictions
Intra-group loans and investments also fall under LEF calculations. RBI prohibits lending by Non-Operative Financial Holding Companies (NOFHCs) to related banks or subsidiaries to prevent intra-group risk buildup.
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Promoter Equity & Bridge Loans
Bridge loans extended for promoter equity participation in projects or acquisitions must be carefully monitored. These are often high-risk and can breach exposure norms if not controlled.
Compliance & Monitoring Process
- Daily monitoring of large exposures using automated MIS.
- Independent risk review by credit risk department.
- Quarterly reporting to RBI and Board Risk Committee.
- Internal audit verification for exposure aggregation and group identification.
Key Points for IIBF Exam Aspirants
- Single Counterparty Limit – 20% of Tier I capital (extendable to 25%).
- Group Counterparty Limit – 25% of Tier I capital.
- Large Exposure Threshold – 10% of Tier I capital.
- Breach Rectification – within 30 days.
- Applicable to all Scheduled Commercial Banks (excluding RRBs) and NBFC-ULs.
- Includes both on-balance and off-balance sheet exposures.
Summary Table: At-a-Glance
| Item | Norm / Definition |
|---|---|
| Eligible Capital Base | Tier I capital as per Basel III norms |
| Large Exposure Definition | Exposure ≥ 10% of eligible capital base |
| Single Counterparty Limit | Up to 20% (exceptionally 25%) of Tier I capital |
| Group of Connected Counterparties | Up to 25% of Tier I capital |
| Breach Reporting | Immediate reporting to RBI |
| Rectification Period | Within 30 days of breach |
| Applicability | All Scheduled Commercial Banks and NBFC-ULs |
| Includes | On-balance, off-balance, and trading book exposures |
Conclusion
The Large Exposure Framework is a critical component of banking risk management and regulatory compliance. For IIBF aspirants, mastering this topic ensures a strong understanding of how RBI safeguards the banking system against concentration risk.
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