RBI’s Cap On Large Exposure Good For Banks’ Risk Management, Bad for Credit Growth

Welcoming the Reserve Bank of India's proposal to reduce the cap on banks' exposure to large corporate entities, analysts and credit experts said the new norms will help check lenders' exposure to stressed assets and also restrict excess leverage or borrowings by corporates, analysts and credit experts said.

The norms, which will come into effect from financial year 2017-18, define a large borrower as a specified borrower, that is, one with an ‘aggregate sanctioned credit limit' of Rs 25,000 crore in the first year, Rs 15,000 crore at any time during 2018-19, and Rs 10,000 crore from April 1, 2019.

Banks will have to set aside higher provisions and assign higher risk weights for loans – essentially set aside higher capital – to large companies beyond a certain limit.

One of the reasons for the current stress in the Indian banking system has been the concentration of banks' exposure to a few troubled accounts.

As a result of the new guidelines, large corporates would themselves be discouraged from approaching banks for incremental lending, and instead look for other sources of funding, Prakash Agarwal of India Ratings said in a phone interview. This could lead to a marginal impact on credit appetite and demand from such borrowers, which would, in turn, impact systemic credit growth. Risks will start getting priced in properly now, he added.

Even highly-rated large corporate borrowers could see an increase in bank borrowing costs as their risk weights would go up if the systemwide lending limit (of Rs 10,000 crore in FY19) gets breached, Agarwal said.

The guidelines are punitive and will restrict growth in corporate capital expenditure and corporate credit, according to an IDFC Securities note released on August 25.

Smaller banks with a bigger corporate book and those which are a part of consortium-based lending like Dhanlaxmi Bank, Lakshmi Vilas Bank, and Karur Vysya Bank are likely to see a greater impact, said Clyton Fernandes, analyst at Systematix Shares & Stocks, due to lack of significant retail presence and products to offset the impact on their corporate book.