The Reserve Bank of India has proposed that banks must bring down their exposure to large borrowers to 25% of Tier-I capital over the next three years from as high as 55% of capital funds allowed now.
A discussion paper by the central bank moots this along with various other recommendations which would help channel banking credit to more productive and varied sectors and also reduce concentration risk for the banks. Also, the RBI wants large corporates to access capital markets more for funds rather than depend on the banking industry.
“It is important to have alternate sources of funding for the corporate sector, both to finance growth, de-risk the balance sheets of banks as also to strengthen balance sheets of investors as well as issuers,” the RBI paper said.
The exposure to both single and a group of companies is fixed at 25% of Tier-I capital. Under the current norms, banks can have an exposure of up to 15% of their capital funds to a single borrower and up to 40% to a group. This can go up by another 5% in case of loans to infrastructure.
The RBI believes banks will be able to meet these norms as the average exposure of banks to single and group borrowers is only 10.6% in case of the top ten banks having exposure to top 20 biggest companies.
Further, the rationale behind 25% ceiling for both single and group borrower is that among within a group, the interlinkages due to voting rights, management overlaps are significant and therefore a group of counterparties should be considered as a single counterparty.
The paper has proposed that companies must not tap the commercial paper and corporate bond market to raise funds.
Indian banks have been saddled with huge stressed assets as big companies, especially those involved in infrastructure have failed to service their loans over the past three years.