1. Curbing bad loans: RBI vows to trim banks’ corporate exposure limit to 25% of its capital

Curbing bad loans: RBI vows to trim banks’ corporate exposure limit to 25% of its capital

In a move to reduce risks in the banking sector and curb the rising bad loans, the Reserve Bank of India (RBI) has proposed to reduce the exposure of a bank...

By: | New Delhi | Updated: March 29, 2015 1:58 PM
RBI bad loans, reserve bank of india, RBI, rbi corporate, rbi corporate exposure limit, bad loans india To curb bad loans, RBI has proposed to reduce the exposure of a bank to a business group to 25 per cent of its capital, down from the existing level of 55 per cent. (Reuters)

In a move to reduce risks in the banking sector and curb the rising bad loans, the Reserve Bank of India (RBI) has proposed to reduce the exposure of a bank to a business group to 25 per cent of its capital, down from the existing level of 55 per cent.

The RBI proposal has come at time when many of the top business groups, especially in the infrastructure segment, are already over-leveraged and reeling under heavy debt burden.

In a draft paper, the RBI said, “the sum of all the exposure values of a bank to a single counterpart or to a group of connected counter-parties must not be higher than 25 per cent of the bank’s available eligible capital base at all times.”

The proposed ‘Large Exposure’ (LE) framework will be fully applicable from January 1, 2019, the paper said, while seeking stakeholders’ views on it till April 30.

The RBI said a bank’s exposure to its counter-parties may result in concentration of its assets to a single counter-party or a group of connected counter-parties.

The central bank also said it would consider setting a minimum percentage of capital requirements that companies must raise from corporate bond and commercial paper markets, saying the corporate sector had become too dependent on banks for their financial needs.

The LE Framework is proposed in accordance with the announcement made by the RBI in the 4th bi-monthly monetary policy statement, 2014-15 announced on September 30, 2014 to issue a discussion paper on banks’ large exposures and convergence of the exposure limits applicable in India with the standards announced by the Basel Committee on Banking Supervision (BCBS) which come into effect from January 1, 2019.

The draft paper has been released at a time when bad loans or non-performing assets are on the rise. Gross NPAs of PSU banks are Rs 2,60,531 crore as on December, 2014, up from Rs 71,080 crore in 2011.

Internationally, it said concentration risk has been addressed by prescribing regulatory and statutory limits on exposures towards counter-parties and various sectors of the economy.

The draft paper also noted that currently banks in India are “by and large” placed comfortably with regard to their large exposures vis-a-vis limits prescribed under the LE Framework of the BCBS.

In India, the corporates continue to predominantly depend on banks for their financial needs, instead of accessing the market.

  1. M
    Matthew
    Apr 2, 2015 at 4:46 pm
    Payday loans are always be in great necessity while people need extra money. The thing is that many loan companies increase their commission rate and that's impossible to pay back money (unless you check the rates from Personal Money Service).
    Reply
    1. R
      Ramesh
      Mar 29, 2015 at 8:44 pm
      Reducing exposure limit to single corporate/Group as a risk mitigation is acceptable. But if it is done to reduce the bad loans, then it is highly foolish. Bad loans are visible right from the appraisal stage. Take the case of Kingfisher Airlines . Very poor appraisal. Clear closing of eyes for compliance. It is a general practice not to lend to a corporate when there is an outstanding undisputed statutory liability. KFA has undisputed TDS and Service Tax Liability over Rs.1000 cr at the time of restructuring. Generally, the event of default do contain a clause regarding Non Payment of Undisputed Tax Liabilities. In KFA case, this clause was dropped knowingly - which is a clear fraud as the banks may not be able to extend any furthur istance as there will be event of default on day one. Then the collusion of private banks with Corporate is a major crime against the Public Sector Banks. Just study which private bank loose money on a Major Corporate , which otherwise taken the PSB for a ride. RBI do not act judiciously to prevent bad loans. Study and tracking of fund transfer can clearly indicate and stop bad loans.
      Reply
      1. S
        Sadasivan
        Mar 29, 2015 at 4:23 pm
        In Banking "getting the money back",is the most important thing.For this the Corporates should have Legally Sound,NON-REHYPOTHECABLE collaterals for getting loans.Procedures should be made easy for banks to lay their hands on these collaterals in case of a Default,instead of looking on helplessly and getting involved in litigations When the Co gets lOANS without Litigation giving back the same,SHOULD, also be without Litigation..
        Reply
        1. S
          Sadasivan
          Mar 29, 2015 at 4:22 pm
          The Hindubusinessline site gives a more detailed picture with percentage of Tier I and Tier 2 capital,for LE,as.given below:- "Mumbai, Mar 28: The Reserve Bank of India is planning to cap banks’ large exposure (LE) to each counterparty, including a group of connected counterparties, at 25 per cent of their Tier 1 capital. The current single and borrower group exposure (loan) limits are placed at 15 per cent and 40 per cent respectively of the banks’ Capital Funds (Tier I Tier II capital)." So in one case there is rise of 10% and in another case there is a reduction of 155 in exposure.The rise in exposure is bad.. The more important point is the need for a collateral legally sound non-repothecable and zero leverage,for a loan to be sound and .getting the "money back: easy by way confiscating the collateral.Otherwise the banks; NPA will rise.
          Reply

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