The Reserve Bank of India (RBI) on Thursday proposed to raise provisioning and risk weights for fresh loans given to highly leveraged companies. This is to discourage banks from lending to such companies, which are said to have caused a high concentration of credit risk in the banking sector.
RBI said it would bring a framework to progressively reduce the total exposure of banks to such corporate entities by revising down the normal borrowing limit of a company, irrespective of the group’s size. The framework will likely come into effect from financial year 2017-18.
According to the framework, if the aggregate credit limit sanctioned by the banking system is more than Rs 25,000 crore at any time during financial year 2017-18, the company will be termed a special borrower. The threshold for the special borrower category would be reduced to Rs 15,000 crore in FY19 and Rs 10,000 crore from April 2019. If banks have to lend beyond 50 per cent of these limits in any year, they would have to provide more capital.
However, corporate entities could get a rate relief for their loans as banks could be given exemptions on interest rates to compensate for the additional provisioning and risk-weighted assets as a result of this framework.