The Reserve Bank of India (RBI) has tightened rules on how foreign banks operating in India must measure and report their large exposures (big loans or financial relationships). The aim is to reduce risk that comes from depending too much on a few large customers or business partners. Earlier, there was confusion about how foreign bank branches should treat their dealings with their own head office or branches in other countries. Many banks did not count these as part of their exposure limits. RBI has now cleared up these unclear rules and removed these loopholes.
Key Rules in Simple Terms:
- Foreign bank branches in India must now follow the same exposure limits for any transactions with their own head office or overseas branches. This means that when an Indian branch of a foreign bank sends money to or has financial dealings with its parent office or other foreign branches, these must be counted like any regular exposure and can no longer be excluded from the Large Exposure Framework (LEF).
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Foreign bank branches must calculate exposures to their head office or overseas branches on a gross basis.
Gross = total amount without subtracting anything. This prevents banks from reducing their exposure numbers by offsetting transactions.
- New rules set exposure limits depending on whether a bank is classified as a G-SIB (a globally important bank).
– For branches of foreign G-SIBs (big global banks), exposure to their own head office or other G-SIBs is limited to 20% of their Tier 1 capital, while exposure to smaller banks (non-G-SIBs) can go up to 25%.
– For branches of foreign non-G-SIBs, exposure to their head office or other non-G- SIBs is 25%, but exposure to G-SIBs is 20%. In short, the riskier the bank you deal with, the lower the exposure limit.
- Some financial dealings are not included in the intragroup exposure rules. This means that Indian banks’ branches abroad and foreign banks’ head offices are generally not counted under these rules, except when it comes to proprietary derivatives (financial contracts the bank trades for its own profit).
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RBI has removed previous rules related to “enhancing credit supply for large borrowers through market mechanisms.” This means the RBI has done away with earlier rules that encouraged banks to lend more to big borrowers using market tools. Instead, the RBI is now focusing on directly controlling and limiting how much banks can lend or be exposed to large borrowers, rather than relying on indirect market measures.
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This indicates a shift in RBI’s approach toward controlling big exposures more directly.
What banks must include/exclude when calculating exposure?
When calculating their exposures, banks must include both credit exposure and investment exposure. However, they should exclude equity and regulatory capital instruments from the calculation. If a bank exceeds the new exposure limits, it is given 6 months to bring its exposures back within the allowed levels.
In short RBI has tightened and clarified how foreign bank branches in India must measure and limit their financial dealings with their own group entities, to reduce risk and ensure global alignment. The new rules apply from 1 April 2026, but banks may adopt them earlier.