Large exposure rule begins to squeeze corporate lending

Framework limits how much banks can lend to a company and to a group of connected companies

- Shayan Ghosh

The sticking point is how the RBI calculates the exposure.

(MIN)

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.

The framework, last revised in 2019, limits how much banks can lend to a company and toa 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, anda 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 toa renewed push to tweak the rule.