RBI proposes stringent norms on high exposure to corporates

Concerned over "very high" exposure of banks to some large corporates, RBI today proposed tighter norms to mitigate the risk posed to the banking system on account of large aggregate lending to a single borrower.
The framework has been proposed to be introduced from 2017-18 onwards and the banking system should ordinarily keep its future incremental exposure to specified borrowers within the normally-permitted lending limit (NPLL), RBI said.
"From 2017-18 onwards, incremental exposure of the banking system to a specified borrower beyond NPLL shall be deemed to carry higher risk which shall be recognised by way of additional standard asset provisioning and higher risk weights," read the proposal.

As per the discussion paper, there would be a standard asset provision of 3 per cent on 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.
Also, it proposes an additional risk weight of 75 per cent over and above the applicable risk weight for the exposure to the specified borrower.
The paper has sought comments till May 30.

"The resultant additional risk weighted exposure, in terms of risk weighted assets (RWA), shall be distributed in proportion to each bank's funded exposure to the specified borrower," said the proposed framework.

RBI said that in order to assess the current level of bank borrowings in relation to the overall indebtedness of corporate borrowers, an analysis was carried out in respect of the 77,036 borrower companies with aggregate sanctioned credit limits of Rs 1 crore and above, from banks, at December-end.
"The data analysis... Points towards build-up of high concentration of credit risk at the systemic level in the banking sector... As observed from the analysis, many large corporates are excessively leveraged and banking sector's aggregate exposure towards such companies is also excessively high," RBI said.
"This poses a collective concentration risk to the banking sector even when single and group borrower exposures for each bank remain well within the prescribed exposure limits."

Giving the rationale behind the proposal, RBI said that in absence of an overarching ceiling on total bank borrowing by a corporate entity has resulted in banks collectively having very high exposure to some of the large corporates in India.