 "FinMin for tightening banks' exposure limits")
The limit might also be tightened for certain stressed sectors where the risk is higher.
According to the Reserve Bank of India (RBI)'s current prudential credit norms, a bank can't give loans in excess of 15 per cent of capital funds to a single borrower. The cap is 40 per cent for the borrower group.
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The government is discussing with RBI and public sector banks (PSBs) on whether to lower the cap for small banks, as well as others not performing well due to high levels of stressed assets. Some small banks have lent to the brink of the cap, to a single entity or group, potentially exposing them to the risk of being hit if the loan turns bad.
A ministry official said in the current economic situation it was not possible to adopt a uniform approach and small banks neededed to be careful while taking high exposure to a company or a group. "There is a feeling in some quarters that the limits are on the higher side. Exposure should be depending on a bank's strengths. Sometimes, a small bank has bigger exposure to a sector than a larger one. So, the cap might come down for small banks," said the official, requesting anonymity.
Though RBI sets the ceiling, bank boards have operational freedom to set their own limits within that cap. The government notes many lenders have hit the ceiling.
"Some small banks have taken higher exposure than what is warranted. One small disturbance in a particular account shakes the entire balance sheet. So, the ministry feels though there is a cap set by RBI, the banks should prudentially fix it at a much lower level," said V Kannan, chairman and managing director, Vijaya Bank.
If RBI lowers the limit, it would apply to all commercial banks, including private and foreign lenders. An option before the ministry is to issue a circular to PSBs to set the limit lower while lending. More, it wants lower caps only in view of the current economic situation. The ministry would like to review it when the economy, now growing below five per cent a year, improves.
The ministry official said a review was also being considered for certain high-risk sectors. Banks might be asked to cut on lending to such sectors if there was over-exposure. At present, it is left to the boards of banks to decide on sectoral exposure.
"Textiles, iron and steel are all cyclical industries. If you get on the wrong side of the cycle, your entire portfolio goes for a toss. Power, particularly thermal power, iron and steel, textiles, gems and jewellery are all high-risk. In these sectors, banks have taken higher exposure than warranted, and that is why they (the ministry) are suggesting a review," Kannan added.
Earlier, the country's largest lender, State Bank of India, had to take special permission from the central bank after it breached the exposure limits in the case of Reliance Industries and Indian Oil Corporation.
RBI's Financial Stability Report in December had said banks' exposure limits to corporate and business groups were far in excess of best global practices (25 per cent for a group) and could put the banking system at a major risk in case of a loan default. It said failure of a large corporate group could result in a loss of over 60 per cent of the banking system's capital.
Corporate loans have a large share of gross non-performing assets. Also, the amount of restructured advances, predominantly corporate loans, has grown substantially.
Gross bad debts of PSBs rose to 5.17 per cent of advances at the end of December, against 4.8 per cent a year before.
PRUDENCE SCAN
* Up to 15% of a company's capital funds can be lend by banks
* Ceiling for a single group is 40% of capital funds
* FinMin to lower these limits for small PSBs
* Limits to be lowered for other PSBs not performing well
* Review is due to economic slow-down