The Reserve Bank of India (RBI) has rejected a government proposal to relax single and group exposure norms on bank lending to infrastructure companies. The central bank has communicated to the finance ministry that current exposure norms on infrastructure financing in India are liberal enough.
Any further relaxation would only exacerbate the problem of asset-liability mismatch and add to concentration risks, the central bank has argued, according to a government official familiar with the proposal.
Such a move would be especially detrimental in the current scenario when bad loans are widely anticipated to rise in the coming months. RBI has recently warned that non-performing assets could rise by 25% this year to 2.92% of total portfolios.
According to RBI rules, a bank can lend up to 15% of its capital to a single borrower and 40% of capital funds in the case of a borrower group. With approval of their boards, banks can utilise another leeway of 5% for a single borrower and 10% for 10% group exposure.
The central bank imposes these limits to ensure macroeconomic stability and diversity in credit deployment in the system.
Most banks are nearing the maximum limit that they can lend to the infrastructure sector, the finance ministry observed in June. Leading public sector banks (PSBs), therefore, sought a further relaxation in exposure norms for infrastructure loans.
PSBs accounted for 84.8% of the total banking sector?s exposure to the infrastructure sector in 2010-11, RBI data shows.
The country’s largest lender, State Bank of India, exceeded its exposure ceiling in 2010-11 for lending to Reliance Industries, Indian Oil Corporation, Bharat Heavy Electricals and Tata Group, according to data sourced from parliament papers.
“We asked the RBI to consider this demand. But RBI feels this is not warranted,? the official said. The government and the central bank have been trying to work out ways to close India?s $1-trillion gap in infrastructure finance for the 12th Five-year Plan.
Banks lending to infrastructure grew 40% in 2010-11, while the share of infrastructure lending in total advances rose to 12.9% in March 2011 from 11% in March 2010.
In its recent financial stability report, the RBI noted that concentration risks have been accentuated in the banking system, as a result of rising share of infrastructure credit in the total lending.With the significant probability of infrastructure projects getting delayed, the risks of asset liability management potentially get exacerbated, the report said. It argued for a need to evolve a long term funding market for the infrastructure sector.