The Reserve Bank of India (RBI) on Thursday released guidelines on ‘enhancing credit supply to large borrowers’ through market mechanism and asked banks to set aside an additional provision of 3% on incremental exposure of the banking system to large borrowers if they cross a certain threshold.
The central bank cautioned lenders against borrowers trying to circumvent the cut-off aggregate sanctioned credit limit (ASCL) criteria by borrowing through dummy or fictitious group companies and said banks should apply their due diligence while deciding the normally permitted lending limit (NPLL) for a single borrower.
The central bank also mandated an additional risk weight of 75 per cent over and above the applicable risk weight for the exposure to the specified borrower. The framework will come into effect from the next financial year.
According to the guidelines, ASCL means the aggregate of the fund-based credit limits sanctioned or outstanding, whichever is higher, to a borrower by the banking system.
It would also include unlisted privately placed debt with the banking system. A specified borrower is a borrower having an ASCL of more than R25,000 crore at any time during FY2017-18; R15,000 crore at any time during FY2018-19 and R10,000 crore at any time from April 1, 2019, onward.
It explained that NPLL means 50% of the incremental funds raised by the specified borrower over and above its sanctioned limit as on the reference date.
These prudential measures — additional provision and risk weight — will be applicable if banks fail to keep its future incremental exposures within the NPLL.
The RBI explained that banks may subscribe to bonds issued by specified borrowers (over and above NPLL) in 2017-18 provided these are divested in the subsequent three years – not less than 30% by March 2019; not less than 60% by March 2020 and not less than 100% by March 2021.
Intending to encourage large corporates with borrowings from the banking system above a cut-off level to tap the market for their working capital and term loan needs, the RBI had issued a discussion paper in May 2015.