Multinational Banks Seek RBI Intervention to Avoid Breaching Large Exposure Regulation

Large multinational banks have requested the Reserve Bank of India (RBI) to either act as a dollar buyer of last resort or relax the exposure rule for banks as India prepares to move to a shorter settlement cycle from February end. The banks, which handle funds of offshore investors, fear that without RBI intervention, they will be left with no choice but to breach the large exposure regulation by converting dollars into rupees on evenings when the market is illiquid. This would increase the risk of violating RBI's regulation, which restricts banks from taking an exposure of more than a quarter of their tier-1 capital to a single counterparty.

Key Takeaways:

• Six foreign banks - JP Morgan Chase, Citi, Deutsche Bank, Standard Chartered, BNP Paribas, and HSBC - have jointly communicated to RBI their concerns regarding the large exposure regulation.
• The banks together are custodians for 75-80% of foreign portfolio investments into the country and fear that without RBI intervention, they will breach the regulation.
• The RBI's large exposure regulation restricts banks from taking an exposure of more than a quarter of their tier-1 capital to a single counterparty.
• The banks are seeking RBI's permission to exclude dollar funds received late evening from foreign portfolio investors for stock settlement from the large exposure framework.
• The banks have also requested RBI to extend the timings of the inter-bank call money market and TREPS and CROMS markets to give them more options to hedge currency risks.

Statistics:

• 75-80% of foreign portfolio investments into the country are handled by the six foreign banks - JP Morgan Chase, Citi, Deutsche Bank, Standard Chartered, BNP Paribas, and HSBC. (Source: "ET")
• The RBI's large exposure regulation restricts banks from taking an exposure of over 25% of their tier-1 capital to a single counterparty. (Source: RBI)
• The RBI has announced that the settlement cycle would be advanced by a day (to T+1) from February 25 in a phased manner. (Source: SEBI)
• The Indian branch of a foreign bank and its headquarters are considered as two distinct regulatory entities by RBI. (Source: RBI)
• The banks are seeking RBI's permission to exclude dollar funds received late evening from foreign portfolio investors for stock settlement from the large exposure framework. (Source: "ET")

Sources:

• "ET"
• RBI regulation, February 2021
• SEBI announcement
• RBI regulation (no specific date provided)
• JP Morgan Chase, Citi, Deutsche Bank, Standard Chartered, BNP Paribas, and HSBC (no specific date provided)