Large exposure rule begins to squeeze corporate lending

A six-year-old Reserve Bank of India (RBI) rule meant to keep a check on banks' lending to large corporate groups is once again causing heartburn for lenders.

- Shayan Ghosh

The framework, last revised in 2019, limits how much banks can lend to a company and to a group of connected companies.

The rule aims to avoid overexposure to any group and concentration of resources. Banks need to keep single-company exposure at 20% of their capital base, and a group of connected companies at 25%.

The sticking point is how RBI calculates the exposure.

"RBI uses the higher of committed (sanctioned) credit lines or outstanding loans to arrive at exposure. Therefore, even if those loans remain undisbursed and unused, they add to the corporate exposure," said a senior banker at one of India's largest lenders. "This is leading to us being cautious about lending to some companies that are close to the limit." According to the banker, a clutch of banks is close to the 25% ceiling for the top one or two conglomerates, leading to a renewed push to tweak the rule.

The banker said that in a project loan, credit is disbursed based on meeting particular milestones and is therefore released in tranches. However, the entire sanctioned loan is counted as exposure as per current rules.

An email sent to RBI on Friday remained unanswered till press time.