RBI has proposed that a bank's exposure to its own group entities should not exceed 20% of the paid-up capital and reserves
Mumbai: Aiming to avoid concentration of credit risk, the Reserve Bank of India (RBI) has proposed that a bank's exposure to its own group entities should not exceed 20% of the paid-up capital and reserves, reports PTI.
In case of all non-financial services companies and unregulated financial services companies taken together, the exposure should not exceed 10% of the paid-up capital and reserves, the RBI's draft guidelines on 'Management of Intra-Group Transactions and Exposures' (ITEs) said.
The draft guidelines contain both quantitative limits for the financial ITEs and prudential measures for the non-financial ITEs to ensure that the banks engage in the ITEs in safe and sound manner in order to contain the concentration and contagion risk arising out of ITEs.
"These measures are aimed at ensuring that banks, at all times, maintain arms length relationship in their dealings with the Group entities, meet minimum requirements with respect to Group risk management and group-wide oversight, and adhere to prudential limits on intra-group exposures," the draft said.
The central bank has sought comments on the draft guidelines by 14th September.
The RBI said that if the exposures exceed the stipulated limits, the same should be reported without delay, with an acceptable rationale of the cause of the breach to its Department of Banking Supervision.
It said the possibility that large losses could arise due to ITEs and threaten the ongoing business operations of a Banking Group motivates supervisory concern that risk concentrations within the Group be identified, monitored and subject to an adequate management strategy.
The apex bank said the draft has been prepared in the light of experience gained in monitoring of identified financial conglomerates during last few years.
This guideline have been proposed for all scheduled commercial banks, including foreign banks operating in India, belonging to a financial Group.