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.