The price of de-risking
The price of de-risking: The RBI’s move to cap banks’ exposure to large borrowers will yield results only if alternate funding avenues are opened up...
"In an attempt to nip the bad loan crisis in the bud, the Reserve Bank of India has sought to cap banks’ exposure to large borrowers, who account for over half of banks’ lending and an alarming 86 per cent of the bad loans in the system. Given that a large share of corporate debt in India is concentrated in a few highly leveraged companies, tightening bank exposure to a single or group of connected borrowers not only mitigates the potential risk of financial instability, but is also a step towards aligning Indian norms with international standards, set by the Basel Committee of Banking Supervision. The new norms, which are likely to be implemented by March 2019, will require Indian banks to substantially cut their exposure to group borrowers, which currently can go up to 55 per cent (for funding certain infrastructure projects) of the bank’s capital. According to the new framework, banks’ exposure to single and group borrowers should not exceed 20 per cent and 25 per cent respectively of their Tier I capital."