RBI proposes to reduce banks' exposure to corporate groups to less than half

The Reserve Bank of India (RBI) proposes to reduce the ceiling of banks' loan exposure to any single large corporate group less than halve, in a move to reduce bad loan risks to the banking sector.

RBI has proposed an upper limit of 25 per cent of banks' core capital as their exposure limit to a group of connected corporate entities, against the current ceiling of 55 per cent of bank's core capital.

The proposed limit will be applicable from 1 January 2019.

''The large exposure (LE) limit in respect of each counter-party, which includes a group of connected counter-parties, will be capped at 25 per cent of the eligible capital base.''

''The eligible capital base will be defined as the Tier 1 capital of the bank as against 'capital funds' at present,'' it added.

RBI said a group of connected counter-parties will be identified on the basis of 'control' as well as 'economic interdependence' criteria as against only 'control' criteria under extant RBI exposure norms.

RBI also sought public views on a proposal to make large corporates, enjoying working capital and term loan limits above a certain threshold, to meet a portion of both their short term and long term funding needs through the market mechanism such as commercial papers (CPs) and corporate bonds.

RBI, in its discussion paper issued on Friday, 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 RBI requested feedback on its proposals by 30 April.

RBI had, in its monetary policy review in September 2014, had proposed to issue a framework for banks' large loan exposures.

The exposure limit announced by the RBI is also in conformity with the standards announced by the Basel Committee on Banking Supervision (BCBS), which would come into effect from 1 January 2019.