RBI tightens corporate group exposure limits

The Reserve Bank of India (RBI) is set to introduce new individual and corporate exposure limits that will tighten bank exposure to company promoters and their groups, RBI Deputy Governor R Gandhi told Business Today. He added the new norms will align Indian standards with new international norms.

Currently, Indian banks can lend up to 15 per cent of their capital funds to an individual and 40 per cent (which can be enhanced by the company board to 50 per cent) of capital funds to a group of companies owned by the promoter.

But the new group exposure limits have done away with the distinction between a promoter in his individual capacity and his group. Instead, banks will now have to cap the combined exposure to 25 per cent of its capital.

"Besides, the 25 per cent limit will only apply to Tier I capital and not total capital. Existing guidelines apply to total capital", Gandhi said.

The RBI has been concerned about the deteriorating asset quality of domestic banks, particularly the public sector banks, some of whose non-performing assets (NPAs) are now reaching alarming levels.

The new norms, likely to come into effect from April 1 of fiscal 2019-20, have since been opened up for discussion in a white paper by the Reserve Bank of India.

In an additional step to tighten banks' exposure to the corporate sector, banks will now have to consider any "economic inter-connect" in its exposure to the individual or group as against the previous norm of including only majority equity holding that gave a promoter or group absolute control over another entity.

"Economic dependence is the international norm," says Gandhi. Hence, if a firm is economically dependent, exposure to that firm would also fall under the group exposure limits.

The new norms will substantially reduce banks' exposure and risks in advances to any individual promoter or his group and will prevent any possible 'gaming' of the banking system by any individual or group. Banks are being allowed a three-year window to restructure their loan books in accordance with the proposed limits.