• 

Corporate Banking Exposure Norms

Corporate Banking – Exposure Norms

1. Meaning of Exposure Norms

Exposure norms regulate the maximum credit a bank can extend to a single borrower, group of borrowers, or sector to manage concentration risk.

Objective: Prevent overexposure, reduce credit risk, and ensure financial stability.

2. Legal & Regulatory Framework

3. Types of Exposure

A. Single Borrower Exposure

Limit for one borrower: 20% of bank’s Tier I capital

Ensures no undue concentration risk

B. Group Borrower Exposure

For connected entities / promoter group: 25% of Tier I capital

Connected entities include: subsidiaries, associates, holding companies

C. Sectoral Exposure

RBI may restrict lending to specific sectors (e.g., real estate, NBFCs) to limit systemic risk

D. Product Exposure

Credit, guarantees, derivatives, off-balance sheet items counted

4. Calculation of Exposure

Exposure = Outstanding Loan + Undrawn Commitments + Off-Balance Sheet Items

Secured vs unsecured: Only unsecured exposures considered for some limits

Risk-weighted exposure under Basel III framework

5. Compliance Requirements

Maintain exposure registers

Ensure single borrower / group borrower limits are not breached

Obtain board approval for exposures beyond thresholds

Regular reporting to RBI in returns

Monitor connected parties and related exposures

6. Prudential Guidelines by RBI

Large Exposures (LE) framework: Banks must monitor all exposures >10% of Tier I capital

Exposure includes all credit, guarantees, derivatives, and off-balance sheet commitments

Concentration risk limits: Sectoral caps for sensitive sectors

Mandatory board review of exposures exceeding thresholds

7. Landmark Case Laws

1. ICICI Bank v. Innovative Industries Ltd. (SC, 2017)

Court emphasized bank responsibility to monitor exposures and connected corporate group risks; excessive exposure contributed to loss.

2. Punjab National Bank v. Nirav Modi (SC, 2018)

LoU fraud highlighted overexposure to a single borrower without adequate monitoring.

3. State Bank of India v. Union of India (SC, 2013)

RBI directives on exposure norms upheld; banks must adhere to single and group borrower limits.

4. Axis Bank v. Rotomac Global (NCLT/NCLAT, 2021)

Overexposure to corporate group and diversion of funds; demonstrated importance of monitoring group borrower limits.

5. Canara Bank v. Sahara India (SC, 2012)

Court recognized RBI’s supervisory authority to enforce exposure norms and concentration limits.

6. UCO Bank v. RBI (Delhi High Court, 2015)

Reaffirmed bank liability for breaching exposure limits and failure to comply with prudential norms.

7. State Bank of India v. Jaypee Infratech (SC, 2019)

Large project lending breached individual exposure limits; banks held accountable for risk concentration.

8. Key Risks of Non-Compliance

9. Best Practices for Banks

Regular Exposure Review – Daily/weekly monitoring

Connected Party Analysis – Group borrower identification

Board Approval – For exposures exceeding thresholds

Risk-Weighted Limits – Basel III compliance

Sectoral Concentration Checks – Avoid systemic risk

Internal Audits – Verification of exposure calculations and reporting

10. Conclusion

Corporate Banking Exposure Norms:

✔ Limit single and group borrower risk
✔ Reduce concentration and systemic risk
✔ Are backed by RBI supervision and Basel III prudential standards
✔ Require robust monitoring, reporting, and board oversight
✔ Courts consistently uphold RBI’s authority and bank accountability

RELATED Blog

Corporate Law at Afghanistan

Corporate Law at Albania

Corporate Law at Algeria

Corporate Law at American Samoa (US)

Corporate Law at Bangladesh

Corporate Law at Andorra

Corporate Law at Angola

Corporate Law at Antigua and Barbuda

Corporate Law at Anguilla (BOT)

Corporate Law at Argentina