With a view to facilitating flow of credit flow to large corporates, Reserve Bank of India (RBI) governor Shaktikanta Das on Friday raised the exposure limit of banks to a group by 5% to 30%. This relaxation will be available till June 30, 2021.
The Reserve Bank of India came to the rescue of cash-strapped large corporations on Friday. With a view to facilitating flow of credit flow to large corporates, Reserve Bank of India (RBI) governor Shaktikanta Das on Friday raised the exposure limit of banks to a group by 5% to 30%. This relaxation will be available till June 30, 2021.
“Many corporates were not able to draw additional funds from banks as their exposure limit was hit,” a senior PSU bank official told FE. This short-term measure will allow additional credit flow to corporates that need money due to Covid-19 pandemic, he added.
Karthik Srinivasan, group head, Financial Sector Ratings, Icra, is of the view that this move may help certain large banks with competitive costs of funds to increase their exposure, as large groups otherwise borrow at competitive rates from bond markets. “With volatility in bond markets, this could also enable banks/corporates to meet funding requirements,” he added.
Companies were finding it difficult to raise money from resources, other than banks due to Covid-19 uncertainty. RBI governor said, “On account of the Covid-19 pandemic, debt markets and other capital market segments are witnessing heightened uncertainty,” As a result, many corporates are finding it difficult to raise funds from the capital market and are predominantly dependent on funding from banks, RBI governor further added.
With failures of big groups like Videocon, IL&FS etc., the regulator had set a limit for exposure to a single business house for minimising the risk for banks. Under the extant guidelines of RBI on the large exposures framework (LEF) applicable from April, 2019, the exposure of a bank to a group of connected counterparties shall not be higher than 25% of the bank’s eligible capital base at all time.
RBI introduced LEF in December 2016 to reduce concentration risk in a banking industry laden with bad loans. The central bank lowered the limit from 40% of the banks’ total capital funds to 25% and gave them time until 2019 to meet the new norm.