Banks in a bind over RBI norm

The Reserve Bank of India’s (RBI) new norms asking banks to cap their collective exposure to a single large corporate borrower at ₹10,000 crore, by April 1, 2019, has left the lenders between a rock and a hard place.

Banks fear that stressed corporate borrowers may not be able to raise resources from the bond market — as the RBI has suggested — to repay their loans.

The lenders believe that the ratings on bonds issued by such corporates, especially in the steel, infrastructure, textile and construction sectors, may not inspire confidence among investors.

As such, the banking system may not be in a position to follow the central bank’s guidelines.

Hence, the bond market route could prove to be a tall order for corporates facing a downturn and looking to raise funds.

Take banks that have a loan exposure of ₹36,000 crore to Essar Steel, for instance. Bringing this debt pile down to ₹10,000 crore by FY20 may prove a Herculean task. Lenders now want promoters to bring in fresh capital into the company by inducting new investors.

The RBI last month prescribed a timeline for the banking system to cap its aggregate fund-based credit limits (sanctioned or outstanding) to large corporates. The collective exposure limits have been fixed as follows: ₹25,000 crore in FY18, ₹15,000 crore in FY19 and ₹10,000 crore from April 1, 2019.

If the banks do not meet the cap on aggregate exposure, they will have to bear the brunt of additional provisioning and higher risk weights on their excess exposure to a corporate. This could impact their bottomlines.

“As far as fresh lending is concerned, we see no problem. The reason is that banks can ensure that when they take fresh exposure, they will be within the limit that the RBI has prescribed,” said a senior official at a public sector bank.

“But how do banks deal with a situation where they have more exposure to companies that are stressed right now? Will they be able to find alternative means of finance? Will they be able to raise part of their requirement from the capital market,” he wondered.

Only if such large corporates are able to raise resources from the bond market and repay loans can the banks comply with the exposure caps.

But if a corporate has borrowed ₹50,000 crore from banks, it is unlikely that it will be able to drastically reduce its borrowing to ₹10,000 crore in three years’ time by raising funds from alternative sources.