The Telegraph
Wednesday , February 12 , 2014
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New rules for bank group loan

Mumbai, Feb. 11: Commercial banks in the country will have to conform to new exposure limits in their own group entities beginning October 1.

The new norms will ensure that banks maintain an arm’s length relationship in dealings with their own group entities, meet minimum requirements on group risk management and group-wide oversight and adhere to prudential limits on intra-group exposures, the RBI said.

Banks will be allowed to invest 5 per cent of their paid-up capital in the case of non-financial companies and unregulated financial services companies. The limit is 10 per cent for regulated financial services companies.

The RBI has also fixed an aggregate group exposure limit for intra-group transactions at 20 per cent for all financial and non-financial entities taken together and 10 per cent for non-financial and unregulated entities.

The objective is to limit the maximum loss in the event of a default of a counterparty to the extent that it does not endanger the bank’s solvency.

Banks should ensure they have systems and controls in place to identify, monitor, manage and review exposures arising from intra-group transactions, the RBI said.

Banks have been given time till March 31, 2016 to bring down their exposure if it is more than the limits as stipulated in the guidelines. The RBI further added that if the exposure beyond permissible limits continued beyond March 31, 2016, it would be deducted from the equity of the bank.