RBI plans tighter rules for large corporate borrowers

In a bid to limit the banking sector’s exposure to highly leveraged corporates, the Reserve Bank of India (RBI) is planning to put in place risk recognition measures that could lead to banks charging higher interest rates on borrowings beyond permissible limits.

This proposal is part of a discussion paper on evolving a framework to manage risks arising from the credit exposure of the banking system to a single large corporate.

“The absence of an overarching ceiling on total bank borrowing by a corporate entity from the banking system has resulted in banks collectively having very high exposures to some of the large corporates,” the RBI said, in a release.

The framework will take effect from the next financial year, and apply to all banks in India as well as the branches of Indian banks overseas, it added. The paper has sought comments till May 30.

Background

In March 2015, the RBI had released another paper, titled ‘Large Exposures Framework and Enhancing Credit Supply through Market Mechanism’. The paper had focussed on the need to encourage sources of funding other than bank credit for the corporate sector to finance growth. Specifically, it proposed ways to encourage large corporates with borrowings from the banking system above a cut-off level to tap the market for their working capital and term loan needs. Based on comments from stakeholders and after examining several options to enhance credit supply through the market, the apex bank decided to issue the latest paper, to seek public comments before finalising regulatory instructions.

Risk recognition

According to the RBI paper, the risk recognition measures will be in the form of additional standard asset provisioning and higher risk weights by banks for a specified borrower.

In order to assess the current level of bank borrowings in relation to the overall indebtedness of corporate borrowers, the RBI analysed 77,036 borrower companies with aggregate sanctioned credit limits of ₹1 crore and above at the end of December. The data analysis shows that many large corporates are excessively leveraged and the banking sector’s aggregate exposure towards such companies is also very high. This poses a collective concentration risk for the sector, even when the single and group borrower exposures for each bank remain well within the prescribed exposure limits.

Incremental exposure

The banking system will ordinarily have to keep its future incremental exposures to the specified borrowers within the Normal Permitted Lending Limit (NPLL).

The paper proposes that there be a standard asset provision of 3 per cent on the incremental exposure of the banking system in excess of NPLL, which will be distributed in proportion to each bank’s funded exposure to the specified borrower.

It also proposes an additional risk weight of 75 per cent over and above the applicable risk weight for the exposure to the specified borrower.

“The resultant additional risk weighted exposure, in terms of risk weighted assets, shall be distributed in proportion to each bank’s funded exposure to the specified borrower,” said the paper.