The Reserve Bank of India (RBI) has introduced significant regulatory changes, removing key exemptions for foreign lenders operating in the country. In a move to tighten oversight on concentration risk, the central bank has clarified that foreign bank branches in India will no longer enjoy special treatment for exposures to their overseas entities.
Key Amendments to the Large Exposures Framework
Announced on Thursday, the final amendments state that exposures of an Indian branch of a foreign bank to its head office or any overseas branches or subsidiaries must now be treated as regular counterparty exposures. These exposures will fall under the strict limits of the Large Exposures Framework (LEF). Previously, such internal exposures were often interpreted as exempt, creating a regulatory gap.
The RBI has mandated that all transactions between these Indian branches and their overseas head office or branches must be calculated on a gross basis. This rule applies even if the transactions are centrally cleared. This crucial change prevents netting of positions, ensuring a more conservative and transparent assessment of potential risks.
Revised Intragroup Exposure Limits
The regulator has also refined the specific exposure limits, differentiating between types of banks. For branches of foreign banks that are globally systemically important banks (G-SIBs), the exposure limit to their own head office or other G-SIBs is set at 20% of eligible tier I capital. Their exposure to non-G-SIB banks is capped at a slightly higher 25%.
For branches of foreign banks that are not G-SIBs, the limits are reversed. They can have up to 25% exposure to their head office and other non-G-SIBs, but only 20% exposure to G-SIB entities.
The central bank provided clarification on other points: exposures to overseas branches of Indian banks and to foreign bank head offices are generally not covered under intragroup norms, except for proprietary derivatives. Banks must compute their exposure based on credit and investment exposure, explicitly excluding equity and regulatory capital instruments.
Implementation Timeline and Transition
These updated regulations will come into full effect from 1 April 2026. However, the RBI has stated that banks are permitted to adopt the new rules earlier if they choose to do so. The changes follow feedback received on draft circulars issued on 29 September.
Banks that find themselves in breach of the new intragroup limits once the rules are active will be granted a six-month window to rebalance their exposures. This transition period is designed to allow for a smooth adjustment to the stricter regime.
In a related move, the RBI has also repealed the chapter on enhancing credit supply for large borrowers through market mechanisms, effective from 1 January. This signals a broader shift in the central bank's approach to managing concentration risk within the financial system.
The overarching goal of these amendments, as stated by the RBI, is to ensure consistent measurement of concentration risk, remove ambiguities in how foreign bank exposures are treated, and align India's regulatory framework with evolving bank structures and global best practices.
