Higher Provisioning and Risk Weights Framework of RBI


The Reserve Bank of India (RBI) on May 12, 2016 proposed to raise provisioning and risk  weights for fresh loans given to highly leveraged companies.firm with significantly more debt than equity is considered to be highly leveraged. 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.

This would ensure more supply of corporate paper in the market at a time when public sector banks, most of whom are capital starved, will have limited room to fund big-ticket loans. Regulators have to also work to increase investor base for corporate securities (bonds, debentures, etc).

However, putting a hard monetary ceiling on total loans, in the absence of a deep corporate debt market, might destabilise the credit intermediation process, RBI said.

"This may hamper credit growth in an already subdued economic environment and adversely impact the business cycle. It would also be difficult for banks to prune their existing exposures to corporates at short notice. Under the framework, if a bank is found lending beyond the normally permitted limit, it has to set aside standard asset provision of three per cent on the incremental exposure and an additional risk weight of 75 per cent above the applicable risk weight for the exposure to the specified borrower. 

Wednesday, 18th May 2016, 09:51:14 AM

Add Your Comment:
Post Comment