The Reserve Bank of India (RBI) on Thursday said banks need to set aside a standard asset provision of 3% on incremental exposure of the banking system to borrowers if they cross a certain threshold.
Another aspect is an additional risk weight of 75% over and above the applicable risk weight for the exposure to the specified borrower. The framework will come into effect from the financial year 2017-18.
The discussion paper was titled ‘framework for enhancing credit supply for large borrowers through market mechanism’.
The paper said from 2017-18 onward, incremental exposure of the banking system to a specified borrower beyond normally permitted lending limit (NPLL) shall be deemed to carry higher risk which shall be recognised by way of additional standard asset provisioning and higher risk weights as specified.
The standard asset provision would be at 3% on the incremental exposure of the banking system in excess of NPLL, which shall be distributed in proportion to each bank’s funded exposure to the specified borrower.
NPLL means 50% of the incremental funds raised by the specified borrower over and above its ASCL as on the reference date, in the financial years (FYs) succeeding the FY in which the reference date falls.
For the purpose of determining exposure beyond NPLL, the RBI said subscription to market instruments shall be included except any subscription made by the banking system to the market instruments issued by a specified borrower in 2017-18 and held within the permissible limits by a bank.
The central bank pointed out that banks may subscribe to bonds issued by the specified borrowers over and above NPLL in the first year of this framework taking effect subject to extant investment guidelines, and these being sold off in the subsequent three years as per some set milestones.
All holdings by a bank of market instruments issued by a ‘specified borrower’ after the ‘reference date’ shall be held in the AFS/HFT category and marked to market, the RBI said.