What changed
RBI revised the prudential norms for banks' capital market exposure, capping aggregate exposure at 40% of net worth and direct exposure at 20% on both solo and consolidated bases. The circular also simplified exemptions and updated the components of capital market exposure, including venture capital funds.
What it means for you
Banks must now strictly adhere to these revised limits, which are lower than previous norms for some exposures. This rationalization aims to curb excessive risk-taking in capital markets, ensuring banks maintain adequate capital buffers. Lenders need to reassess their portfolios to comply with the new 40% and 20% thresholds.
What you must do
- Review and recalibrate aggregate capital market exposure to ensure it does not exceed 40% of net worth (solo and consolidated).
- Ensure direct investments in shares, convertible bonds/debentures, equity-oriented mutual funds, and VCFs stay within 20% of net worth.
- Update internal policies and reporting systems to capture all components listed in the circular, including indirect exposures.
- Seek board approval for any lower ceilings than the prescribed maximums.
- Monitor compliance on a solo and consolidated basis using net worth as of March 31 of the previous year.
Who it affects
All Scheduled Commercial Banks (excluding RRBs), Bank boards and risk management teams, Stockbrokers and market makers availing bank credit, Venture Capital Funds (registered and unregistered)
What is the new aggregate capital market exposure limit for banks?
The aggregate capital market exposure, including both fund and non-fund based, must not exceed 40% of the bank's net worth on a solo and consolidated basis.
Does the direct exposure limit of 20% apply to venture capital funds?
Yes, all exposures to Venture Capital Funds (both registered and unregistered) are included within the 20% direct exposure sub-limit.
How is net worth defined for these limits?
Net worth is as defined in paragraph 2.3 of the circular, and the limits are based on net worth as on March 31 of the previous year.