Definition
Single Borrower Exposure Limit
The single borrower exposure limit caps how much a bank can lend to one borrower or group as a percentage of its capital, to prevent concentration risk.
Under the RBI's Large Exposures Framework, a bank's exposure to a single counterparty is generally capped at 20% of its eligible capital base (Tier 1), and to a connected group at 25%, with some flexibility. The limits prevent one large default from threatening solvency.
These caps tie lending capacity to a bank's net worth, so well-capitalised banks can underwrite bigger single tickets. Concentration limits were tightened after large corporate defaults showed how exposure to a few stressed groups could devastate weakly capitalised lenders.
Related terms
- Risk-Weighted Assets (RWA)Risk-Weighted Assets are a bank's assets weighted according to their credit risk, used as the denominator in capital adequacy calculations.
- Tier 1 CapitalTier 1 capital is a bank's core, going-concern capital, made up mainly of equity and reserves plus eligible additional Tier 1 instruments, that absorbs losses while the bank operates.
- Net Worth (Banking & NBFC)Net worth, or owned funds, is a lender's paid-up capital plus free reserves less specified deductions, the regulatory base for its capital and exposure limits.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.