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New RBI norms to help de-risk balance sheet of banks: IDBI Bank

Last month the Reserve Bank of India (RBI) took two definitive steps to ensure that banks are not excessively exposed to over indebted groups.

To begin with companies which have more than Rs 25,000 crore of total debt from all banks put together shall be identified and called ‘specified companies’. 50 percent of incremental loans to these companies shall carry higher provisioning of 3.4 percent and additional risk weight of 75 percentage points.

By 2019 the cut-off limit for such ‘specified companies’ will be brought down to Rs 10,000 crore.

RBI has also announced draft rules for bank-wise exposure to companies whereby exposure of any bank to any company will be limited to 20 percent of its Tier I capital, down from 25 percent of Tier 1 and Tier 2 capital as of now. For corporate groups, similarly, exposure is limited to 25 percent of its tier I capital versus 40 percent of tier I and tier II capital permitted now.

In an interview to CNBC-TV18, RK Bansal, Executive Director, IDBI Bank , says this is a positive move from the RBI and it is going to help de-risk the balance sheets of banks.

“The reality is the banking sector has suffered from large exposures in the past and as a result of that the Reserve Bank of India (RBI) is rightly looking at ways in which it can de-risk the whole banking system,” says Ananth Narayan, Head-Financial Markets, Standard Chartered.

But he adds that, if a capital and infrastructure starved country like ours is subjected to these regulations, capital and lending can become scarce.

Below is the verbatim transcript of RK Bansal, Ananth Narayan, Ashish Gupta & R Govindan’s interview to Latha Venkatesh on CNBC-TV18.

Q: First up, Rs 25,000 crore is a fairly big limit for a single company. Do you think in FY17-18 itself a lot of companies are going to be impacted?

Govindan: Starting Rs 25,000 crore may just be appropriate, may just be enough. However, as we go down to Rs 10,000 crore it will become challenging and let us say we have a metro company, their total project size may be around Rs 20,000 crore, Rs 5,000-6,000 crore of equity, Rs 14,000 of debt since bond market is not yet available for public-private partnership (PPP) projects or a metro project it is not yet ready, Rs 14,000-15,000 crore of bank debt, today most of the financing happens through bank debt.

The other challenge you will also have is that if the bond market if it is not ready, even financial closure, for new projects I am saying, there is an old project and you will have some new projects as well. New projects, banks also will have to take a call on whether the new company which is the raising debt will have the ability to re-finance or ability to assume the debt from corporate bond market for that period, till then the financial closure cannot happen. I mean that is the sort of challenges you may have.

Q: Your thoughts, is this a good step at de-risking or is it risking infrastructure?

Bansal: I think both sides are true. If I really look at it, it is a good move to de-risk the balance sheet of the banks, but we need to understand two points, what we were just discussing, one thing which will perhaps happen with this move is that many of the project, which let us say companies putting with its own balance sheet, they will move towards special purpose vehicles (SPVs).

Now that brings one more challenge for the banks that when you lend to the SPVs, we normally lend to let us say if a big company like Larsen and Toubro (L&T) takes money, certainly banks are more comfortable. When it becomes an SPV and now with Section 185 and all these issues, perhaps giving a guarantee also becomes a difficult thing. So banks may find it slightly difficult, but yes the exposure will move towards more SPVs that is one challenge. However, there the other norm which you mentioned in the beginning of 20-25 percent that will also come into play. So, that can to some extent risk the investment in infrastructure from the banking system.

The other point which we need to see is, that in any case these groups who have so much debt today, perhaps they may not need so much money. All banks are telling them in fact to reduce the leverage, to reduce the debt, so additional incremental funding to these groups in any case may be somewhat less.