RBI to review single, group exposure limit norms for banking stability

The grave risks from ever growing pool of corporate stressed loans – bad loans and restructured advances-- has prompted Reserve Bank of India to think about a relook at existing single and group borrower limits. 

 

Following detailed impact analysis, RBI’s Financial Stability report (FSR) - December 2013 has recommended a review of existing limits to enhance stability of the banking sector. At present a bank can take single borrower exposure upto 25 per cent of bank total capital and upto 55 per cent for group exposure. 

 

The current exposure norms in India are in the higher side when compared to global norms. A Basel committee in March 2013 had proposed that threshold defining large exposure should be set at five per cent of banks eligible capital. The large exposure limit may be fixed at 25 per cent of common equity tier I (as against the currently used total capital). 

 

World Bank’s financial sector assessment program of India in 2011-12 had commented that large group exposure limit (upto 50 per cent) in India is significantly higher than 25 per cent norm which is good international practice. 

 

RBI’s impact analysis indicated in several cases the contagion losses are significant and could exceed the direct loses caused by failed group. The failure of large corporate group could result in a total loss of over 60 per cent of the banking system’s capital. 

 

The performance of the corporate sector in the current economic scenario has been a matter of concern. The defaults by corporate or business have twin effect (on bank) – one, the direct loss in tune with exposure and second, loss due to the effect of contagion. 

 

The corporate loans have a large share in gross non-performing assets. Plus, kitty of restructured advances, which is predominantly corporate loans, has grown substantially.