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Business News/ Industry / Banking/  RBI push to de-risk banking sector chokes flow of funds to large PSUs
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RBI push to de-risk banking sector chokes flow of funds to large PSUs

In January this year, HPCL signed a debt syndication agreement with a consortium of nine lenders led by SBI for its refinery project in Barmer
  • Lenders seek exemption from RBI to relax the large exposure framework requirements for state-run firms
  • Outstanding bank loans to industries grew by only 2.7% on a year-on-year basis in September to ₹27.74 trillion. On a year-to-date basis, these loans were 3.8% lower than in March 2019. (Photo: Mint)Premium
    Outstanding bank loans to industries grew by only 2.7% on a year-on-year basis in September to 27.74 trillion. On a year-to-date basis, these loans were 3.8% lower than in March 2019. (Photo: Mint)

    Mumbai: A Reserve Bank of India (RBI) regulation meant to reduce concentration risk for banks is gradually choking the flow of funds to some large public sector enterprises, especially the oil marketing companies that have substantial debt requirements to meet capital expansion commitments, said two people aware of the development.

    Lenders have sought an exemption from the central bank to relax the large exposure framework requirements for public sector companies, said these two people who spoke on condition of anonymity. The RBI is yet to respond to their request, they said.

    “There are cases where funds have been sanctioned but the company is unable to draw it because of the regulations. As the exposure limit is based on 20% of a bank’s capital base, a possible solution seems to be for banks to raise more funds or (wait for) the upcoming mergers (of state-run banks to grow their capital base)," said one of the people mentioned above.

    A refinery project of Hindustan Petroleum Corp. Ltd (HPCL) in Barmer district of Rajasthan and a few upcoming second-generation (2G) ethanol or bio-refineries are currently incomplete as banks have their hands tied by the new norms.

    In January this year, HPCL, a unit of Oil and Natural Gas Corp. (ONGC), signed a debt syndication agreement with a consortium of nine lenders led by the State Bank of India (SBI) for its refinery project in Barmer. The total cost of the project is 43,129 crore. HPCL holds a 74% stake in the refinery, while the Rajasthan government owns the rest.

    Two-thirds of the project is being funded through loans and the remainder through promoters’ equity. The company has already achieved financial closure by tying up for a 28,753-crore loan from lenders. This project comprises a 9-million tonne a year oil refinery and a 2-million tonne per annum petrochemical unit.

    “While the loans have been sanctioned by the banks, HPCL is unable to draw down the funds as lenders are near the end of their exposure limits and do not have further headroom," said the second person quoted above. The large exposure framework, effective 1 April 2019, seeks to reduce concentration risk in the banking industry, already saddled with bad loans. It aims to align with the standards on supervisory framework for measuring and controlling large exposures issued by the Basel Committee on Banking Supervision. As of September, gross non-performing assets (NPAs) of all banks was more than 9.5 trillion. What has worsened the issue is the merger of ONGC and HPCL last year, resulting in exposures in two separate entities being clubbed as one. Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and HPCL, did not reply to emails sent on Friday.

    A senior executive from an oil marketing company said there is liquidity in the system but the companies are unable to tap it because of certain regulations.

    All these entities are exceptions and only a few such companies are there with such large requirements and RBI’s objective is to de-risk large exposures of banks, said former RBI deputy governor R. Gandhi. “These entities are to raise capital and debt directly from the market. They have good ratings and can raise funds at competitive terms. Further, the merger of banks into international-size can also help take care of these large requirements. These merged banks will have higher net-worth and, therefore, would be able to sanction larger limits to these entities," he said.

    Meanwhile, RBI had last October allowed OMCs to raise up to $10 billion through the external commercial borrowing (ECB) route for working capital needs. However, this does not cover loans required for capital expenditure or capex. Companies did not avail much of the ECB facility as lending rates are better domestically, said the OMC executive quoted above.

    In a 16 October note, Soumya Kanti Ghosh, group chief economic adviser, SBI said recent stake sales by the government as a part of the disinvestment programme has resulted in some central public sector undertakings (CPSUs) becoming a part of connected counterparties and hence there might be little headroom for bank lending to individual CPSUs.

    “In fact, even if such lending were to happen it would result in additional bank capital or higher risk weights resulting in elevated rates," said Ghosh. It is, however, pertinent to add that public sector companies are not alone in their struggle for funds. Outstanding bank loans to industries grew by only 2.7% on a year-on-year basis in September to 27.74 trillion. On a year-to-date basis, these loans were 3.8% lower than March 2019. Credit has to flow and move and while there is 2 trillion in the system, banks and the financial sector are sitting on extra credit, said R. Shankar Raman, chief financial officer, Larsen and Toubro, at the company’s second-quarter earnings on 23 October. “It is important that they get diverted. NPAs are part and parcel of any credit delivery system but that cannot be allowed to paralyse the flow of money," he said.

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    ABOUT THE AUTHOR
    Shayan Ghosh
    Shayan Ghosh is a national editor at Mint reporting on traditional banks and shadow banks. He has over 12 years of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
    Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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    Published: 25 Nov 2019, 06:51 AM IST
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