Local Area Banks Concentration Risk Management Directions
RBI master-direction RBI/DOR/2025-26/233 · 28 Nov 2025
Official title
Reserve Bank of India (Local Area Banks – Concentration Risk Management) Directions, 2025
RBI master-direction RBI/DOR/2025-26/233 · 28 Nov 2025
Official title
Reserve Bank of India (Local Area Banks – Concentration Risk Management) Directions, 2025
Summary
Check the official recordThe Reserve Bank of India establishes prudential exposure limits for Local Area Banks to manage concentration risk. These directions define exposure norms for single and group borrowers, specific counterparties, and capital market activities. Banks must maintain a Board-approved policy for concentration risk management, including sectoral limits and unsecured consumer credit exposure limits. Credit exposure to a single borrower must not exceed 15 percent of capital funds, while group borrower exposure is capped at 40 percent. Specific limits apply to NBFCs and capital market exposures. These directions take effect immediately and replace all previous instructions on this subject. Banks must ensure ongoing compliance with these ceilings and report specific equity acquisitions to the Reserve Bank of India.
What you must do
Key dates
Who is affected
Thresholds
Exceptions
RBI/DOR/2025-26/233 DOR.CRE.REC.152/07-03-003/2025-26 November 28, 2025 Reserve Bank of India (Local Area Banks - Concentration Risk Management) Directions, 2025
Table of Contents Chapter I - Preliminary Chapter II - Exposure Norms Chapter III - Prudential Limits for Inter-Bank Liabilities (IBL) Chapter IV - Repeal and other provisions Annex - I
Introduction
The concentration of a bank’s exposures to a single counterparty or a group of connected counterparties poses significant risks. The Reserve Bank of India (RBI), recognizing the imperative of robust risk management, therefore introduced prudential exposure limits in March 1989. These limits restricted banks’ exposures to individual borrower and group borrowers to a certain percentage of capital funds, laying the foundation for mitigating concentration risk on assets side of their balance sheets. Cognizant of the concentration risk on the liability side of the balance sheet, the RBI introduced Prudential Limits for Inter-Bank Liabilities in 2007 further strengthening its comprehensive approach on concentration risk management. These prudential limits are proportionately applicable on Local Area Banks (LABs) as given in these Directions.
Accordingly, in exercise of the powers conferred by Sections 21 and 35A of the Banking Regulation Act, 1949, and all other provisions / laws enabling the Reserve Bank of India (‘RBI’) in this regard, RBI being satisfied that it is necessary and expedient in the public interest so to do, hereby, issues the Directions hereinafter specified.
These Directions shall be called the Reserve Bank of India (Local Area Banks - Concentration Risk Management) Directions, 2025.
These Directions shall come into effect immediately upon issuance.
(1) "Capital Funds for exposure norms" shall comprise Tier I and Tier II capital as defined in the Reserve Bank of India (Local Area Banks – Prudential Norms on Capital Adequacy) Directions, 2025, and as per the published accounts as on March 31 of the previous year. However, the infusion of capital under Tier I and Tier II after the published balance sheet date will also be taken into account for determining the exposure ceiling. Other accretions to capital funds by way of quarterly profits, etc., would not be eligible to be reckoned for determining the exposure ceiling. Banks are also prohibited from taking exposure in excess of the regulatory ceiling in anticipation of infusion of capital at a future date.
(2) "Exposure" shall include credit exposure (funded and non-funded credit limits) and investment exposure (including underwriting and similar commitments). The sanctioned limits or outstandings, whichever are higher, shall be reckoned for arriving at the exposure limit. However, in the case of fully drawn term loans, where there is no scope for re-drawal of any portion of the sanctioned limit, banks may reckon the outstanding as the exposure. The credit exposure, investment exposure and exposure for derivative products shall be reckoned as under:
(i) "Credit Exposure" comprises all types of funded and non-funded credit limits, and facilities extended by way of equipment leasing, hire purchase finance and factoring services.
(ii) "Investment Exposure" comprises the investments in shares and debentures of companies, PSU bonds, and Commercial Papers (CPs).
Explanation: A bank’s investment in debentures / bonds / security receipts / pass-through certificates (PTCs) issued by a Securitisation Company (SC) / Reconstruction Company (RC) as compensation consequent upon sale of financial assets shall constitute exposure on the SC / RC.
The investment made by a bank in bonds and debentures of corporates which are guaranteed by an RBI Regulated Entity shall also be governed by Reserve Bank of India (Local Area Banks – Credit Facilities) Directions, 2025.
(iii) "Credit Exposure of Derivative Products" is the credit exposure arising on account of the interest rate and foreign exchange derivative transactions and gold. For the purpose of exposure norms, a bank shall compute its credit exposure of derivative products using the method prescribed in the Reserve Bank of India (Local Area Banks – Prudential Norms on Capital Adequacy) Directions, 2025.
(3) "Group" shall have the following definition.
The concept of 'Group' and the task of identification of the borrowers belonging to specific industrial groups is left to the perception of the bank/financial institution. The bank / financial institution is generally aware of the basic constitution of its clientele for the purpose of regulating its exposure to risk assets. The group to which a particular borrowing unit belongs, may, therefore, be decided by it on the basis of the relevant information available with it, the guiding principle being commonality of management and effective control. In so far as public sector undertakings are concerned, only single borrower exposure limit would be applicable.
In the case of a split in the group, if the split is formalised the splinter groups will be regarded as separate groups. If a bank and financial institution has doubts about the bona fides of the split, a reference may be made to RBI for its final view in the matter to preclude the possibility of a split being engineered in order to prevent coverage under the Group Approach.
(4) "Net worth" shall comprise Paid-up capital plus Free Reserves including Share Premium but excluding Revaluation Reserves, plus Investment Fluctuation Reserve and credit balance in Profit & Loss account, less debit balance in Profit and Loss account, Accumulated Losses and Intangible Assets. No general or specific provisions should be included in computation of net worth. Infusion of capital through equity shares, either through domestic issues or overseas floats after the published balance sheet date, may also be taken into account for determining the ceiling on exposure to capital market. Banks should obtain an external auditor’s certificate on completion of the augmentation of capital and submit the same to the RBI (Department of Supervision) before reckoning the additions, as stated above.
(5) "Qualifying Central Counterparty" or "QCCP" is an entity that is licensed to operate as a central counterparty (CCP), including a license granted by way of confirming an exemption, and is permitted by the appropriate regulator / overseer to operate as such with respect to the products offered. This is subject to the provision that the CCP is based and prudentially supervised in a jurisdiction where the relevant regulator / overseer has established, and publicly indicated that it applies to the CCP on an ongoing basis, domestic rules and regulations that are consistent with the CPSS-IOSCO Principles for Financial Market Infrastructures.
(6) "Securities financing transaction (SFTs)" are transactions such as repurchase agreements, reverse repurchase agreements, security lending and borrowing, collateralised borrowing and lending and margin lending transactions, where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements.
(7) "Trade exposures" include the current exposure and potential future exposure of a clearing member or a client to a CCP arising from OTC derivatives, exchange traded derivatives transactions or SFTs, as well as initial margin. The current exposure of a clearing member includes the variation margin due to the clearing member but not yet received.
(8) "Default funds", also known as clearing deposits or guarantee fund contributions (or any other names), are clearing members’ funded or unfunded contributions towards, or underwriting of, a CCP’s mutualised loss sharing arrangements. The description given by a CCP to its mutualised loss sharing arrangements is not determinative of their status as a default fund; rather, the substance of such arrangements shall govern their status.