Foreign banks seek leeway on LEF rules for Nostro accounts

A Nostro account is one that a bank holds with an overseas lender which is denominated in the currency of that country. Such accounts help banks in enabling for international trade.

"Flows into Nostro accounts are considered as deposits for the purposes of LEF calculations and this has led to instances where the exposure limits that are permitted have been breached. Given that these inflows are typically meant for transactions that are set to occur very soon, banks have requested the RBI that this should not be counted under the LEF," a source said.

An email sent to the RBI seeking comment on the matter did not receive a response by the time of publication.

According to a June 2019 RBI notification on the LEF, the sum of all exposure values of a bank to a single counterparty must not exceed 20% of the lender's available eligible capital base at all times. However, in exceptional cases, banks' boards can permit an additional 5% exposure, the central bank said.

For counterparty groups that are connected, the sum of all exposure values of an individual bank cannot exceed 25% of the lender's available eligible capital base at all times, the RBI said.

ET Bureau

In May 2020, amidst the Covid crisis, the RBI said that it had decided to increase the limits for bank exposures to groups of connected counterparties to 30% from 20% to facilitate greater flow of resources to corporates. The increased limit was applicable till June 2021.

Sources said that some had also requested flexibility in lending and borrowing from the parent organisation.

"The RBI's regulations on lending and borrowing from the parent banks are rightly aimed at closing all potential channels of contagion. For banks, the restriction blocks an avenue for closing in on the differences in money market rates and forward premia whenever the interest rate differential deviates from fundamentals," another source said.