Bank single borrower limit exposure to 25% by 2028

The Central Bank has mandated a comprehensive schedule for banks to conform with stringent exposure limits to a single borrower or connected group of borrowers. This initiative is set to be fully implemented by the year 2028. Under the new directive, banks are required to significantly reduce their exposure levels relative to their audited Tier 1 capital.

According to the schedule, by January 1, 2026, if a bank’s exposure is between 26% and 50% of its Tier 1 capital, it will need to reduce it to 45%. For exposures that are between 51% and 75%, the limit is set at 65%. For any exposure exceeding 76%, the cap is 85%. The directive will see these limits decrease progressively each year. By December 31, 2026, the respective limits were revised down to 45%, 65%, and 85%. A year later, by the end of 2027, they will be curtailed further to 35%, 50%, and 60%. By December 31, 2028, the banking sector is expected to reach a uniform exposure limit of 25% across all brackets, marking the final stage of this regulatory transition.

This was made through the Banking Act Directions1 of 2024 on the 25th of March. In terms of risk management, any exposure surpassing the prescribed limits is subject to a risk weight of 1250%. This heavy weighting reflects the high risk that the Central Bank attributes to large exposures, ensuring that banks maintain a diversified loan portfolio.

Additionally, the regulation stipulates that banks are prohibited from increasing their exposure to any borrower beyond the highest level of exposure reported as of the end of 2025. This measure aims to control the risk of credit concentration during the transitional period and ensures that banks steadily reduce their high exposure levels. Banks are now tasked with adjusting their credit portfolios, adhering to the planned reductions in exposure limits, and integrating the required risk weightings for any excesses. The deadline for achieving a maximum exposure limit of 25% of a bank’s Tier 1 capital is set for the end of 2028.

The directive also emphasizes the importance of assessing the interconnectedness of borrowers through control relationships or economic interdependence, acknowledging the complex nature of modern financial systems where the failure of one entity can have a ripple effect on others. Furthermore, the new regulations stipulate the reporting requirements for the types of collateral and guarantees eligible for mitigating the risks associated with large exposures. Banks are now required to detail the value of collateral pledged for the facilities, ensuring that they maintain adequate security against the loans and credit facilities they extend.

TP

The post Bank single borrower limit exposure to 25% by 2028 appeared first on DailyNews.