Minimum exposure clause could limit lending by PSU banks
Mumbai: Private banks may gain market share at the expense of their public sector peers as a consequence of Wednesday’s decision mandating state-run banks to have minimum 10% exposure to a large loan to be part of the lenders’ consortium, since the weak capital position of many state-run banks will limit higher lending, bankers said.
Besides, if they take higher exposure, these banks could end up breaching various central bank rules on lending limits aimed to prevent concentration of bank loans in a few companies, and be forced to make higher provisions.
“Only a handful of public sector banks will remain in large corporate lending because capital position of most banks is stretched. Even those who will be eligible will exercise caution given the possibility of hitting exposure limits. Most of the recent capital infusion will be used for meeting regulatory requirement and provisioning. The remainder will be used for funding low risk weight loans such as retail assets. There is a real possibility of private sector banks and non-banking financial companies with better capital position gaining market share,” said a senior official of a state-owned bank on the condition of anonymity.
The government on Wednesday said banks must also tie up with specialized monitoring agencies for loans above Rs250 crore and ensure proper due diligence. They have also been asked to scrutinize group balance sheets and ring-fence cash flows.
Under current rules, in case of banking system’s exposure to a borrower over the normally permitted lending limit (NPLL), banks must set aside an additional 3% provision. (NPLL is defined as 50% of the incremental funds raised by the borrower over and above the aggregate sanctioned-based credit limit [ASCL]—currently Rs25,000 crore.) Higher lending to a single company to be in the lenders’ consortium in such a case will force a bank to make higher provisions. ASCL will come down to Rs15,000 crore and Rs10,000 crore respectively in the next two financial years. Taking an exposure of 10% to a single borrower could end up in breaching of this limit.
Again, starting 1 April 2019, banks’ exposure to a group of connected companies will be capped at 25% of the lenders’ core or Tier 1 capital. In the case of an individual company, this limit would be at 20% of Tier 1 capital.
On the positive side, the new rules could prompt lenders to insist on higher equity from promoters, learning from their current problem of bad loans. Some banks will also increase their focus on lending to micro, small and medium enterprises (MSMEs).
Banking sector analysts said the government wants to ensure that only large banks with better risk management are able to fund large loan projects, and the risk is limited to a few banks in case of default—especially in the current scenario where 11 of the 21 state-owned banks are under the Reserve Bank of India’s watch. Indian banks are sitting on a stressed loan pool of over Rs10 trillion. Excess capacities in sectors such as iron and steel, and power has dampened demand for large loan proposals, an analyst said.
“In the current environment of low capacity utilization and high leverage, demand for large-ticket borrowing continues to be low,” said Udit Kariwala, senior analyst (financial institutions) at India Ratings. “Over the next 2-3 years, as the credit cycle picks up, limited participation in large-ticket consortium bank lending could pose some challenges towards very large ticket bank borrowings. Bond market remains an option only for highly rated corporates. India doesn’t have an active yield curve for lower rated (below A category) entities. Additionally, the bond market in India is not matured and deep enough to underwrite long-tenor borrowing and projects with construction risk.”
He added that only four or five large banks in India would have the appetite to comfortably fund a single exposure in excess of Rs3,000-4,000 crore.
- Grasim Industries gets green nod for Rs1,800 crore expansion project
- IPOs worth Rs25,000 crore lined up in coming months
- PNB fraud, global cues spur Rs10,000 crore FPI sell-off in February
- Mehul Choksi claims innocence in PNB fraud with open letter
- Volkswagen settles US emissions lawsuit just before trial