Concerned over the rising NPAs (non-performing assets) in the banking sector, the Reserve Bank of India (RBI) has proposed to lower the ceiling on how much a bank can lend to a single corporate group.
Under the proposal, banks can lend up to 25 per cent of their core capital to a single corporate group.
Currently, they have been given flexibility, with riders though, to lend up to 55 per cent of their core capital to a single corporate group.
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The apex bank has proposed that the revised lower ceiling could come into effect from January 1, 2019.
The proposal is in tune with the announcement made by the RBI in its fourth bi-monthly Monetary Policy Statement 2014-15 on September 20 to come out with a discussion paper on the subject.
The RBI also wants to align its lending caps to companies with the 25 per cent norm set by the Basel Committee on Banking Supervision, which comes into effect from January 1, 2019.
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The apex bank has sought feedback on the discussion paper by April 30.
“The corporates in India continue to predominantly depend on banks for their financial needs, instead of accessing the market. Notwithstanding the various steps taken by the government, RBI, and various other regulators to augment alternative sources of credit flow to the economy, the desired results have not been visible. It is important to have alternate sources of funding for the corporate sector, both to finance growth, de-risk the balance sheets of banks and also to strengthen balance sheets of investors as well as issuers,” the discussion paper said.
“The Reserve Bank considers it desirable that such large corporate groups should gradually start tapping the corporate bonds and commercial paper markets for meeting at least a part of their financing needs. RBI proposes to encourage large borrowers to raise a certain portion of their financing needs through the market mechanism,” it added.
The apex banks has proposed that large corporate borrowers enjoying working capital (fund-based) limits above a certain threshold from the banking system should necessarily meet a minimum prescribed percentage of their working capital requirements from the commercial paper market. This percentage could be progressively increased, the discussion paper said.
“As the core portion of the working capital requirement is needed continuously/over a long period, corporates may finance this core portion by issue of medium-term corporate bonds (popularly known as Medium Term Notes (MTN)) of maturity of, say, 3 to 5 years. As working capital loans are generally secured by current assets of the borrowers, banks and corporates may mutually decide the issues of sharing securities/collaterals with the investors of such bonds,” it said.
Also, large corporate borrowers enjoying term loan limits above a certain threshold from the banking system should necessarily meet a certain minimum extent of their term/project loan requirements from corporate bond market, it felt.