JOIN USRBI plans to restrict bank exposure to corporate loans
The Reserve Bank of India (RBI) has proposed to lower the ceiling on how much a bank can lend to a single corporate group, in a move to curb risks in the banking sector at a time when bad loans are on the rise.
Under the proposal, banks would only be allowed to lend up to 25 per cent of their core capital, down from the earlier ceiling of up to 55 per cent, starting January 1, 2019.
The central bank also said late on Friday that it would consider setting a minimum percentage of capital requirements that companies must raise from corporate bond and commercial paper markets, saying the corporate sector had become too dependent on banks for their financial needs.
The RBI requested feedback on its proposals by April 30. The central bank regularly issues discussion papers on proposals, which are not final measures.
The RBI had said earlier that it planned to review the lending cap to companies to gradually align it with a 25 per cent ceiling set by global standard-setter Basel Committee on Banking Supervision (BCBS).
Analysts have said in the past that this was more of a prudential measure, as banks typically do not breach current caps.
“The sum of all the exposure values of a bank to a single counterpart or to a group of connected counterparties must not be higher than 25 per cent of the bank’s available eligible capital base at all times,” a draft paper released by RBI said.
The proposed ‘Large Exposure’ (LE) framework will be fully applicable from January 1, 2019, the paper said, while seeking stakeholders’ views on it till April 30.
Bad loans
The draft paper has been released at a time when bad loans or non-performing assets are on the rise. Gross NPAs of PSU banks are Rs 2,60,531 crore as on December, 2014, up from Rs 71,080 crore in 2011.
“Banks must gradually adjust their exposures to abide by the LE limit with respect to the eligible capital base (effective amount of tier-1 capital)... Banks should avoid taking any additional exposure in cases where their exposure is at or above the exposure limit prescribed under this Framework,” the RBI’s paper added.
It noted that a bank’s exposure to its counterparties may result in concentration of its assets to a single counterparty or a group of connected counterparties.