Mumbai: The Reserve Bank of India (RBI) has proposed to lower the ceiling of how much a bank can lend to a single company or corporate group, a move in line with the international Basel Committee on Banking Supervision (BCBS) rules.
Under the proposal, large exposures of banks to companies or a group of connected counter parties would be capped at 25% of the bank’s available capital base, a move that would curb risks in the banking sector at a time when bad loans are on the rise.
The change has been made to align India’s exposure limits to the global benchmark and will be implemented by 1 January 2019.
Currently, Indian banks’ large exposure limit is a maximum of 55% of a banking groups’ capital, including a special ceiling if the money is lent to infrastructure projects and a 5% additional exposure on the bank boards discretion.
The proposed changes will not only reduce a bank’s risk with regards to exposure to large companies, it will also force companies to seek alternative sources of funding to finance their growth and strengthen the balance sheets of investors and issuers.
“The Reserve Bank considers it desirable that such large corporate groups should gradually start tapping the corporate bonds and commercial paper markets for meeting at least a part of their financing needs,” the central bank said in a discussion paper.
However, sick/weak industrial units, food credit, guarantees by the Government of India loans against banks’ own term deposits and exposure to the National Bank for Agriculture and Rural Development (Nabard) will be exempt from the proposed ceiling, RBI said.
Banks will have time till January 2019 to gradually adjust their exposures to abide by the new exposure limit. “Banks should avoid taking any additional exposure in cases where their exposure is at or above the exposure limit prescribed under this framework,” RBI said.
RBI has directed bank boards to devise a “smooth and non-disruptive transition plan” to complete the shift to the new limits and given banks time till 1 April only “in exceptional cases” to comply with the new norms.
“Such transition may be by way of either reducing the exposure or by increasing the eligible capital base or both,” RBI said.
The RBI discussion paper follows an announcement to the effect made in the fourth bi-monthly monetary policy on 30 September. Besides the decrease in exposure limits, RBI has also invited comments on a proposal to make large companies, enjoying working capital and term loan limits above a certain threshold, to meet a portion of both their short-term and long-term funding needs through the market mechanism such as commercial papers and corporate bonds.
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