Banks' coporate exposure: RBI's caution may further squeeze cash-strapped infra firms

The caution from the Reserve Bank of India (RBI) regarding the build-up of concentration risks for banks while lending to interconnected companies and the proposal to curb such exposure wouldn’t impact the loan growth in the near term. The apex bank has mooted to curb banks’ loan exposure to related parties to 25 percent of the net worth. This will effectively push large corporate houses to move towards the corporate debt market to raise funds, a trend which is already visible in the recent years . But, debt-ridden infra companies would still have to be dependent on bank funds since their ability to tap the bond market is limited. When the new rules come into effect, the companies may not find it easier to tap bank funds as fewer lenders will be participating in large-ticket deals. The RBI’s proposals, outlined in a discussion paper, would apply to banks only by 2019. The four-year window is given for banks to adjust their exposure to companies in the same group to the 25 percent limit. At present, banks have a total 55 percent limit while lending to a group (40 percent to group and 15 percent to individual borrower). The new proposals wouldn’t hurt the overall loan growth in the immediate future primarily because of the fact that even now banks have hardly utilised their existing headroom to lend to corporations. [caption id=“attachment_2135449” align=“alignleft” width=“380”] To be sure, the central bank’s caution is quite warranted to avert any crisis-situation. Reuters[/caption] According to an RBI study on the 20 largest group exposures of 10 largest banks, as on June 30, average exposure of banks to groups of connected counter-parties is 10.60 percent of their capital Funds as against the (currently) permissible limit of 40 percent of capital Funds. Further, the average exposure of banks under study to the groups of connected counter-parties is 14.75 percent of their current Tier I Capital as against the proposed large exposure limit of 25 percent of Tier I Capital. Only in 10 percent of cases, the group exposures exceeded the proposed limit of 25 percent of Tier I Capital, i.e. 20 out of 200 cases. This clearly means, for now, banks are left with sufficient unutilised headroom to lend to connected parties. To be sure, there has been no serious large-ticket corporate lending in the last 2-3 years on account of the economic slowdown due to absence of fresh projects in a slowing economy. If there is a demand revival, banks wouldn’t hesitate to lend a helping hand to good quality corporations. But, where the problem can happen is with funding of long-gestation infrastructure projects of cash-starved companies. But, in the long-term, if the corporate debt market fails to acquire depth, to meet the massive fund requirements of companies, banks’ participation in the growth story would remain critical for infra companies, said Vaibhav Agrawal, vice president, research at Angel Broking Ltd. Also, banks with relatively smaller net worth have limited headroom to participate in large corporate transactions. Their ability to participate in infra funding story will heavily depend on how successfully banks can ramp up their capital base in the coming years. State Bank of India (SBI), the country’s largest lender, has a net worth of Rs 1.3 lakh crore as on December 2014. This would mean the bank can lend up to Rs 32,137 crore loan to a borrower group, which is a fairly decent headroom for a large ticket transaction. But when it comes to relatively smaller lenders, say Vijaya Bank, the tier-I capital funds, as of end September, stands at Rs 6,187 crore. This would put its lending limit at Rs 1,546 crore. For even smaller banks like DCB Bank, which has a net worth of Rs 1,232 crore until September, the new rules would mean it cannot lend more than Rs 300 crore to a single group. In other words, the ability of such banks, which figure at the bottom when ranked in the descending order of the size of their net worth, to participate in large infrastructure deals would be limited, unless they significantly ramp up their capital base using the four-year window. To be sure, the central bank’s caution is quite warranted to avert any crisis-situation due to concentration of significant amount of funds going to a single borrower. Remember, the RBI’s prudential, overcautious stance has always worked to safeguard the system. This is one reason why Indian banks have largely escaped the ripple-effects of the 2008 global financial crisis. But the caution comes at a price. “(This is) more caution in an (already) difficult environment,” said the chairman of a small state-run bank, when asked about the impact of the fresh RBI proposals. If someone stands to lose something from the overcautious approach of the central bank, it will be infra companies, which will then have fewer funding options left to tap. _(_Data support from Kishor Kadam)