RBI to review banks’ single, group borrowing exposure limit norms
Considering the serious risks from ever enlarging pool of corporate stressed loans – bad loans and restructured advances, the Reserve Bank of India is likely to revise its extant single and group borrower limits. RBI’s Financial Stability report (FSR) released in December 2013 has suggested review of current limits to improve stability of the banking sector. As per existing norms, a bank can take single borrower exposure upto 25% of bank total capital and upto 55% for group exposure.
If we compare India’s existing exposure norms with global norms, we find India to be on the higher side. As per the proposal made by the Basel committee in March 2013, threshold defining large exposure should be set at 5% of banks eligible capital. The large exposure limit may be pegged at 25% of common equity tier I (as against the currently used total capital). As per World Bank’s financial sector assessment program of India in 2011-12, the large group exposure limit (upto 50%) in India is considerably higher than 25% norm which is healthy international practice.
According to RBI’s impact study, the contagion losses are significant and could exceed the direct loses caused by failed group. The failure of large corporate group could result in a total loss of over 60% of the banking system’s capital. The performance of the corporate sector in the present economic condition has been a matter of concern. The defaults by corporate or business makes two impact on a bank:
- Direct loss in tune with exposure
- Loss on account of the effect of contagion.
The share of corporate loans is quite big in gross Non-Performing Assets (NPA). Besides, pool of restructured advances, which is preponderantly corporate loans, has also grown considerably.