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The Reserve Bank of India (RBI) has proposed to tighten the norms for large exposure by capping a bank's exposure to 25 per cent of its tier-I capital, both for single borrower and also for the group.
At present, banks can lend up to 15 per cent of their net worth to a single borrower and there's an additional five per cent leeway for firms involved in infrastructure development. The additional five per cent leeway is given to the banks' board. So, in effect, the total single company exposure of a bank could go up to 25 per cent of its net worth. Similarly, group exposure is capped at 55 per cent of the net worth of a bank.
"Under the proposed LE (large exposure) Framework, the sum of all the exposure values of a bank to a single counter-party or to a group of connected counter-parties must not be higher than 25 per cent of the bank's available eligible capital base at all times," RBI said in the 'Discussion Paper on Large Exposures Framework and Enhancing Credit Supply through Market Mechanism', released on its website on Friday.
Under the proposed LE framework, banks will get additional headroom for taking exposures towards single-name counter-parties. However, the exposure ceilings toward groups of borrowers will be significantly reduced in comparison with the present exposure ceilings.
The central bank said the new norms would come into effect from 1 April, 2019.
"A group of connected counter-parties will be identified on the basis of 'control' as well as 'economic interdependence' criteria against only 'control' criteria under the extant RBI exposure norms," it said.
Currently, banks are allowed group exposure of up to 55 per cent of their capital funds. However, the discussion paper noted that a study of 20 largest group exposures of 10 largest banks showed that the average group exposure of banks is only 10.60 percent of the capital funds.
The discussion paper highlighted the need for companies to rely more on market borrowings such as commercial paper and corporate bonds to meet their working capital needs rather than looking for bank funding.
"The discussion paper also invites comments on a proposal to make large corporates, enjoying working capital and term loan limits above a certain threshold, to meet a portion of both their short term and long term funding needs through the market mechanism such as Commercial Papers and Corporate Bonds," it said.
The paper noted that banks should avoid taking any additional exposure in cases where their exposure is above the exposure limit prescribed under this new framework.
The bank board has been advised to devise a smooth, non-disruptive transition plan for existing exposures which are currently in excess of the proposed LE limit.
"Such transition may be by way of either reducing the exposure or by increasing the eligible capital base or both," the paper said.
