Banks may need an additional Rs 1 trillion in fresh capital over and above their Basel-III requirements if RBI goes ahead with its proposal to create a ceiling on bank borrowing by large corporates, says a report.
“The banks may need up to Rs 1 trillion over and above their Basel-III capital requirements to manage the concentration risks arising out of their exposure to highly levered, large stressed corporates if the Reserve Bank goes ahead and implement its recent proposal,” India Ratings said in a research report.
Of the Rs 1 trillion of additional capital, the fund-starved public sector banks alone would need Rs 93,000 crore, India Ratings director and co-head for financial institutions Abhishek Bhattacharya said in the note.
The amount is equivalent to an equity write-down of about 1.7 per cent of the banks’ risk weighted assets, and represents the loan haircut that banks may face to revive the financial viability of distressed accounts, the report said.
The agency estimates that about 20 per cent of bank credit will be to entities having aggregate fund based limits of Rs 10,000 crore and above now. These companies account for a whopping 40 per cent of the over Rs 8 trillion stressed accounts in the system now.
The new system seeks to limit single entity borrowing at Rs 25,000 crore, Rs 15,000 crore and Rs 10,000 crore for 2017-18, 2018-19 and 2019-20 onwards respectively and the agency estimates that if for any large company wants to grow entirely through bank funding, then the lending banks will have to set aside 150-200 bps provisions for those loans.
“If implemented effectively, this framework has the potential to address the significant concentration risks being posed by stressed corporates that currently account for 40 per cent of the banking system’s net worth over the medium term.
The median top 20 exposure to net worth for public sector banks was uncomfortably high at 220 per cent as of March 2015 and is estimated to have gone up further in March 2016,” says the report.
The RBI discussion paper, released last week, aims to improve the credit supply from the non-banking channels for large borrowers while also aiming to reduce concentration risks for banks, which shot up in FY16. But for a meaningful deepening of the corporate bond markets, multiple enablers will be needed so as to improve the appetite of domestic institutional investors.
Under the proposed norms, banks will be penalised for taking any exposure beyond 50 per cent of the incremental requirements of specified borrowers who have significant aggregate fund-based credit limits sanctioned by banks.