In order to mitigate the risk of high exposure of banking system to any single borrower, Reserve Bank today came out with prudential norms on enhancing credit supply to large borrowers through market mechanism.
As per the norms, which will come into affect from April 1, 2017, incremental exposure of banking system to a specified borrower beyond normally permitted lending limit (NPLL) will be deemed to carry higher risk which will be recognised by way of additional provisioning and higher risk weights.
“Additional provisions of 3 percentage points over and above the applicable provision 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,” said the Guidelines on Enhancing Credit Supply for Large Borrowers through Market Mechanism.
‘Specified borrower’ means a borrower with an aggregate of the fund-based credit limits (ASCL) of more than Rs 25,000 crore at any time during 2017-18, Rs 15,000 crore at any time during 2018-19 and Rs 10,000 crore at any time from April 1, 2019, onwards.
Earlier, the RBI had come out with a discussion paper proposing a framework for addressing the concentration risk of the banking system arising from its exposures towards a single counter party.
Also, an additional risk weight of 75 percentage points over and above the applicable risk weight for the exposure to the specified borrower has been provided in the norms.
Banks can, at their discretion, subscribe to bonds issued by the specified borrowers (over and above NPLL) in the first year of the framework taking effect (2017-18), but will have to divest in the subsequent three years, the guidelines said.
RBI further said it will review the entire guidelines including the ASCL limits after a year of the guidelines becoming fully implemented (during FY 2019-20).