Lending cap on large corporations lifted as RBI scraps 2016 circular

RBI has withdrawn its 2016 system-wide cap on lending to large corporates citing reduced risks, while large exposure limits for individual banks will remain in force

The Reserve Bank of India (RBI) has withdrawn a 2016 circular that restricted the banking system from lending to a borrower beyond a certain threshold, introduced to reduce concentration risk from aggregate credit exposure to a single large corporate. However, the large exposure framework, which sets limits on credit exposure of individual banks to a single borrower or a group of connected borrowers, will continue.

 

As per the circular, the threshold of credit exposure to a borrower by the banking system was reduced from Rs 25,000 crore in FY18 to Rs 15,000 crore in FY19, and to Rs 10,000 crore from FY20.

 

 

“Upon review, considering inter alia the changes evident in the profile of bank funding to the corporate sector since the introduction of the guidelines, it is proposed to withdraw the guidelines,” the central bank said in a statement.

 

“While the large exposure framework since put in place for banks addresses concentration risk at an individual bank level, concentration risk at the banking system level, as and when considered as a risk, will be managed through specific macroprudential tools,” the central bank added.

 

According to the large exposure framework, a bank’s total exposure to a single borrower cannot exceed 20 per cent of its eligible capital base (Tier 1 capital), and 25 per cent in the case of exposure to a corporate group.

 

RBI governor Sanjay Malhotra said the 2016 policy was aimed at mitigating risk and limiting exposure to large corporates at the system level. He highlighted that the share of corporates in total banking exposure has declined by about 10 per cent over the years, reducing risks. This was the primary reason for the withdrawal of the circular.

 

“We need to continue looking at rationalising our regulations so that the productive needs of the economy are met with the least compliance burden and the least cost, while at the same time ensuring that wherever prudential measures are required, they are not compromised,” Malhotra said.

 

He clarified that the measures should not be seen as any form of relaxation or dilution of financial stability. “Stability is foremost for us, whether it is price stability or financial stability. At the same time, we have to be very careful and ensure that we are not impeding growth or limiting the genuine requirements of the productive sectors of our economy,” he said.

 

According to bankers, the withdrawal of the 2016 circular is unlikely to have a significant impact on the ground, as corporate demand for credit remains muted due to factors such as a slower capex cycle, alternative funding sources, and strong cash reserves.

 

“Relaxation will not change anything substantially. Banks will still be cautious while lending to corporates. However, we may see some increase in lending towards the infrastructure and MSME segments. As overall corporate credit demand is subdued, nothing will change significantly unless demand picks up,” said a senior banker at a state-owned bank.

 

“It will be over-optimistic to say that relaxation in limits will increase lending to corporates. It will barely change anything. The underlying issue of weak private capex persists. However, 10–11 per cent of what corporates were raising from external commercial borrowings or the bond market may come back to the banking system,” said another banker at a state-owned bank.

 

A third banker said the 2016 circular capping system-wide exposure to large borrowers was not always adhered to in spirit. Banks had long sought its removal, and the RBI has now addressed that. However, this is unlikely to trigger a surge in lending to large corporates, as demand remains subdued.

 

SBI Research, in a note, said the move could support corporate bank credit. Incremental corporate borrowing, including from bonds, commercial papers and external commercial borrowings, was around Rs 30 trillion in FY25. If 10–15 per cent of this shifts back to banks, it could translate into additional lending of Rs 3–4.5 trillion, subject to risk pricing.