The Reserve Bank of India (RBI) on Thursday said it would cap banks’ exposure to a group of connected companies at 25% of the lenders’ core capital, seeking to reduce concentration risk in a banking industry laden with bad loans.The central bank lowered the limit from 40% of the banks’s total capital funds, which include both Tier 1 (core) and Tier 2 capital, and gave banks until 2019 to meet the new norm.
In the case of an individual company, this limit would be changed to 20% of Tier 1 capital, compared with 15% of total capital funds currently, RBI said in a statement.Tier 1 capital is the core measure of a bank’s financial strength, and consists mainly of common stock and disclosed reserves (or retained earnings). Tier 2 capital is composed of revaluation reserves, undisclosed reserves and hybrid instrument, among others.The new limits will be applicable starting 1 April 2019, the RBI said. They follow a set of draft guidelines which the banking regulator had unveiled in August.Regulations under this framework will be required to be implemented at the individual bank level as well as the entire banking group level. This means that while calculating large exposures, banks will have to consider exposures in their overseas operations through branches and subsidiaries.