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RBI releases proposal on lending limits to large borrowers

The Reserve Bank of India (RBI) on Thursday released a discussion paper on the framework for enhancing credit supply to large borrowers, which will help mitigate risks for banks lending to a single corporate.

The guidelines will ideally reduce the risk for the banking sector from exposure to highly leveraged accounts. This will also encourage alternative funding for corporates.

At present, there exists no ceiling on the total amount that a corporate entity can borrow from banks. Due to this, banks have high exposure to leveraged corporates in the country in sectors like infrastructure, power and steel.

The new framework is expected to come into effect from the next financial year and will be applicable to all banks in India and branches of Indian banks abroad.

As per the discussion paper, the banks will have to keep future exposures to ‘specified borrowers’ within a specified normally permitted lending limit (NPLL).

The guidelines describes specified borrowers as having an aggregate credit limit sanction of over Rs 25,000 crore during FY18, Rs 15,000 crore in FY19 and Rs 10,000 crore from April 2019 onwards.

KC Chakrabarty, Former Deputy Governor of the Reserve Bank of India, said it wouldn’t be wise on the part of banks to impose lending limits in rupee terms.

The regulator should have it replaced with percentage limits, like 10 percent or 15 percent, he said.

A standard asset provision of 3 percent is suggested on incremental exposures of banks incase it exceeds the NPLL. This will be distributed in proportion to each bank’s funded exposure.

The paper also mentions that banks can subscribe to bonds issued by specified borrowers above NPLL in the first year of framework coming into existence. However, banks will have to reduce bonds to specified borrowers in the next three years.

Banks will have to sell 30 percent of holding in the bonds of specified borrowers by March 2019, 60 percent by March 2020 and 100 percent by March 2021.

On a more positive note, Chakrabarty felt limiting exposure to sectors could open up the bond market. Highly leveraged companies will look to tap money from the market, he said.

Hpwever, former chairman of State Bank of India Pratip Chaudhuri does not seem to agree to these relief norms.

He believes no further lending should be given to already leveraged accounts.

“The RBI has made a habit of making simple things more complicated,” he said.

RK Bansal, Executive Director, IDBI Bank, also echoed Chakrabarty’s views that corporates will be forced to raise money overseas. And, importantly, if the leveraged corporates will be offering bonds to banks, their ratings will take a hit, he said.

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