The Reserve Bank of India on Thursday said that Indian banks would have to make higher provisions for lending to large corporate borrowers above a certain level from next financial year in order to avoid a build-up of high concentration of credit risk at the systemic level. The move follows an RBI study which found “many large corporates are excessively leveraged and banking sector’s aggregate exposure towards such companies is also excessively high”.
The proposals were set out by the central bank in a discussion paper and aimed at “mitigating the risk posed to the banking system on account of large aggregate lending to a single corporate”, according to the RBI document. “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,” it said.
The framework would come into effect in the financial year beginning April 2017, and apply to all banks in India as well as branches of Indian banks abroad, the RBI said. From 2017-18 onwards, incremental exposure of the banking system to a specified borrower beyond the normally permitted lending limit (NPLL) will be deemed to carry higher risk, the RBI said. There will be 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.
There will be additional risk weight of 75 per cent over and above the applicable risk weight for the exposure to the specified borrower, the RBI said. The resultant additional risk weighted exposure, in terms of risk weighted assets (RWA) will be distributed in proportion to each bank’s funded exposure to the specified borrower.
The higher provisions are expected to make loans costlier for large borrowers which have fund based credit limit of over Rs 25,000 crore in 2017-18 and Rs 15,000 crore in 2018-19.
In order to assess the current level of bank borrowings in relation to the overall indebtedness of corporate borrowers, the RBI carried out a study of 77,036 borrower companies with aggregate sanctioned credit limits of Rs 1 crore and above from banks as on December 31, 2015, based on the RBI’s
Central Repository for Information on Large Credits (CRILC) database. In addition, financial data of borrower companies sourced from other databases was also used to supplement the analysis.
The data analysis, referred to above, points towards build-up of high concentration of credit risk at the systemic level in the banking sector. “While single and group exposure norms put a ceiling on the amount an entity can borrow from a single bank, there is no ceiling on total bank borrowing by a corporate entity,” the RBI said. This has resulted in banks collectively having very large exposures to some of the large corporates in India, particularly in the power/ infrastructure, housing finance and steel sectors/ industries.