Bank concentration risk: limits, capital bases and connected borrowers
The October 2026 consolidated bank Direction separates large exposures, capital-market exposure, intra-group limits and country risk. The percentage and its capital base must be tested together.
Finin2min · Updated 25 October 2026
Rules, scope and practical implications
Start with the covered entity and eligible capital
The Direction covers its defined commercial banks, excluding Small Finance Banks, Payments Banks and Local Area Banks. Its eligible capital base is effective Tier 1 capital under the Capital Adequacy Direction, based on the last audited balance sheet with the specified permitted additions. Subsequent capital augmentation requires the stated external-auditor certification and submission before recognition. Permitted current-year profit follows its separate capital conditions. This base is not automatically total capital, net worth or paid-up share capital.
Sources: RBI Commercial Banks Concentration Risk Management Directions, 2025 — official PDF — PDF pages 2–6
A reportable large exposure is not the lending ceiling
A large exposure starts at 10% of eligible capital. The ordinary single-counterparty ceiling is 20%, with an exceptional additional five percentage points only under the Board-approved route. Connected-counterparty groups have a 25% ceiling. LEF applies at both consolidated and solo levels. Report the specified exposures at or above 10%, pre-CRM exposures meeting that threshold, exempted exposures subject to the stated exception, and the 20 largest covered exposures regardless of size. Breaches must be reported immediately and rapidly rectified.
Sources: RBI Commercial Banks Concentration Risk Management Directions, 2025 — official PDF — PDF pages 9–12
Connectedness includes dependence, not just share ownership
Assess both control and economic interdependence. More than 50% voting rights automatically meets the stated control criterion, but voting agreements, appointment rights and controlling influence can also matter. Economic links include significant receipts/expenditure dependence, guarantees capable of causing default, irreplaceable customers/suppliers and shared repayment or funding sources. The detailed economic-dependence investigation is expected when an individual counterparty exposure exceeds 5% of eligible capital. One-way dependence can place an entity in two groups; downstream and upstream contagion must be assessed as the source explains.
Sources: RBI Commercial Banks Concentration Risk Management Directions, 2025 — official PDF — PDF pages 12–20
Measure exposures before testing the limit
Include the relevant banking-book, trading-book, off-balance-sheet and counterparty-credit-risk exposures. Ordinary non-derivative banking-book assets use the defined accounting amount; traditional off-balance-sheet commitments use the specified capital CCF with a 10% floor. Eligible CRM may reduce the original exposure but ordinarily creates the corresponding exposure to its provider. Real estate and other collateral accepted for different prudential purposes are not automatically eligible LEF collateral. Cross-book netting is prohibited; trading-book offsets have strict issue/seniority conditions.
Sources: RBI Commercial Banks Concentration Risk Management Directions, 2025 — official PDF — PDF pages 21–27
Look through funds and structures where required
For identified underlying assets, look through when the bank’s indirect exposure to an underlying is at least 0.25% of eligible capital, and add the result to other direct/indirect exposure to that counterparty. Pro-rata sharing applies to equal-ranking fund investors; tranches use the separate lower-of and pro-rata steps. Unidentified structures above 0.25% go to an aggregated unknown client; smaller structures have the stated structure-level route. Do not treat an exposure exactly at 0.25% as an unconditional exemption: apply the look-through test to identified underlying assets and use a conservative inclusion approach at that boundary. Anti-arbitrage and additional third-party risk rules also apply.
Sources: RBI Commercial Banks Concentration Risk Management Directions, 2025 — official PDF — PDF pages 28–31
Interbank, NBFC and CCP exceptions have different rules
Ordinary interbank exposure generally has a 25% Tier 1 ceiling, with the specified G-SIB and foreign-branch/head-office limits. A bank’s single ordinary NBFC exposure is restricted to 20% of eligible capital. For the defined predominantly gold-jewellery lender, the separate 7.5% ceiling uses Tier 1 plus Tier 2 capital, with the conditional additional infrastructure on-lending allowance. QCCP clearing exposure is exempt from the LEF ceiling but still reportable as specified; non-clearing CCP exposure is a different category. D-SIB status does not itself create a separate LEF ceiling.
Current capital-market ceilings use Tier 1
From the specified July 2026 amendment, aggregate CME is capped at 40% of eligible capital on solo and consolidated bases. Direct investment CME is capped at 20%; acquisition finance has its separate 20% sub-ceiling within the 40% total. CME includes the listed direct and indirect funded/non-funded categories, with exact exclusions. Direct investment is measured at cost; credit exposure generally uses the higher of sanctioned limit or outstanding, with the fully drawn non-redrawable term-loan qualification. Intra-day/IPC amounts have conditional 30%/50% treatments and end-of-day rules. These are exposure measures, not general risk weights.
Sources: RBI Commercial Banks Concentration Risk Management Directions, 2025 — official PDF — PDF pages 37–42
Real estate and statutory shareholding are separate tests
Paragraph 94A, operative from October 2026, requires internal real-estate limits and sub-limits; the aggregate REIT sub-limit has a 10% eligible-capital ceiling. Paragraph 96 separately restates the statutory shareholding test using 30% of the investee’s paid-up share capital or 30% of the bank’s paid-up share capital and reserves, whichever is less, subject to its stated exception. Do not replace that statutory base with the Tier 1 CME base. A debt-to-equity regulatory exemption does not remove the stated statutory compliance, reporting or disclosure requirements.
Sources: RBI Commercial Banks Concentration Risk Management Directions, 2025 — official PDF — PDF pages 36–40
Intra-group exposure has its own definition and ceilings
For the group definition and exclusions in paragraph 4(5), single-entity limits are 5% of eligible capital for the specified non-financial/unregulated-financial entities and 10% for regulated financial entities. Aggregate limits are 10% for the first category and 20% for all group entities, subject to the exclusions and prohibitions. Equity/other regulatory capital instruments receive the stated separate treatment. Maintain arm’s-length terms, controls, reporting and conflict management. A NOFHC structure has additional prohibitions; group membership does not make support permissible.
Country and sector risk cannot be replaced by LEF
Set and review the required sector/consumer-credit limits; movable depreciating-asset top-ups have the stated unsecured treatment. Country limits use regulatory capital, Tier 1 plus Tier 2, and generally cannot exceed that capital except for the insignificant-risk category. Include funded/non-funded and qualifying indirect country exposure; apply the permitted netting conditions. The interbank-liability rules are in the ALM Direction, distinct from these asset-side LEF ceilings.
Practical illustration and assumptions
Hypothetical: a bank has ₹1,000 crore eligible Tier 1 capital and invests ₹100 crore in an equal-ranking ₹500 crore fund. If that fund holds ₹125 crore exposure to a borrower, the bank’s look-through share is 100/500 × 125 = ₹25 crore. Add ₹200 crore of its other exposure to that borrower: ₹225 crore, or 22.5% of eligible capital. It is above the ordinary 20% single-counterparty ceiling; it cannot be treated as within the ordinary limit merely because the direct exposure alone is 20%. Any exceptional additional-five-percentage-point route needs its actual required approval and conditions.
Questions answered
Is 10% the maximum exposure a bank can take?
No. It is the large-exposure definition/reporting threshold. Ordinary single and connected-group ceilings are separate, with specified category rules.
Does every limit in this Direction use the same capital base?
No. Most LEF/CME/ITE limits use eligible Tier 1 capital, while specified gold-NBFC and country-risk rules use Tier 1 plus Tier 2, and statutory shareholding has its own base.
Official sources and editions
Illustrations are hypothetical and depend on the stated assumptions. Official blank formats and guidance are identified separately from completed reports.