Why RBI's large exposure rule is giving banks a headache now
At a time when private sector capital expenditure remains weak and government spending dominates, banks say RBI's lending cap rule is limiting their ability to push credit to marquee borrowers.
A six-year-old Reserve Bank of India (RBI) rule meant to keep a check on banks’ lending to large corporate groups is once again causing heartburn for lenders.
The framework, last revised in 2019, limits how much banks can lend to a company and to a group of connected companies. The rule aims to avoid overexposure to any group and concentration of resources. Banks need to keep single-company exposure at 20% of their capital base, and a group of connected companies at 25%.
The sticking point is how RBI calculates the exposure. “RBI uses the higher of committed (sanctioned) credit lines or outstanding loans to arrive at exposure. Therefore, even if those loans remain undisbursed and unused, they add to the corporate exposure," said a senior banker at one of India’s largest lenders. “This is leading to us being cautious about lending to some companies that are close to the limit."
According to the banker, a clutch of banks is close to the 25% ceiling for the top one or two conglomerates, leading to a renewed push to tweak the rule.
The banker said that in a project loan, credit is disbursed based on meeting particular milestones and is therefore released in tranches. However, the entire sanctioned loan is counted as exposure as per current rules.
An email sent to RBI on Friday remained unanswered till press time.
The banking industry has raised its concerns at a time when private capital expenditure remains sluggish, with government spending on infrastructure leading the way.
Some banks have publicly said that private capex lacks animal spirits. Sashidhar Jagdishan, chief executive of HDFC Bank, told analysts on 19 July that the bank is “not seeing anything great on the capital, private capex side as yet".
Despite the push from banks to ease the exposure rules, the regulator is firm on its stand. “You cannot separate sanctions from outstanding. Just because the loan has not been used so far does not mean it will not be in future," said an RBI official on condition of anonymity.
Bank loans to large companies stood at ₹27 trillion at the end of July, 0.9% higher than the same period last year, but 3% lower than end-March, per data from RBI.
Expert take
Experts said the interpretation of exposure as all loans that have been sanctioned and not just outstanding is a feature, not a bug. The idea is that once a bank sanctions a limit, technically, a borrower can draw it any time, subject to some very broad conditions being met, such as no default, among others.
“Effectively, term loans are committed and can be availed at any time- with no or negligible right with the bank to refuse such drawdown. That is unlike a working capital facility, which is recallable on demand and can be cancelled at any point in time by the bank," said Utsav Johri, partner, JSA Advocates & Solicitors.
Johri said that although a borrower may not have drawn down the loan, it has the ability to do so at any point in time. Therefore, the term exposure denotes the sanctioned limits or outstanding, whichever is higher.
- RBI counts sanctioned but undisbursed loans as exposure, which restricts banks’ lending flexibility even if funds aren’t drawn.
- Several large lenders are already near the 25% group exposure ceiling for top conglomerates, choking fresh lending capacity.
- The regulator may not relax rules, arguing that sanctioned credit remains a live commitment.
- RBI’s push is aimed at forcing corporates toward the bond market
Typically, committed term loans have an availability period — a time within which the borrower can draw down the loan — from 30 to 180 days or is linked to project milestones. Once the availability period expires, the unused amount automatically gets cancelled.
“To ensure that the banks have enough headroom within the large exposure limit and only the outstanding is calculated towards the exposure, the banks need to ensure that the unutilised commitments are cancelled," said Johri.
Others agree.
Pururaj Bhar, partner, Cyril Amarchand Mangaldas said that these limits are meant to control the extent of how much companies can borrow from the banking system, with RBI pushing corporates to look at the bond markets.
“Internationally, large projects use diverse funding sources, but in India, bank finance remains the primary option, a trend RBI wants to change," said Bhar.
While banks were the primary source of borrowing for companies, their share in the overall scheme of things is on a decline. In FY25, bank loans accounted for 51.3% of the overall financial resources that flowed to companies, down from 62.9% in FY24 and 66.8% in FY23, according to RBI data.
“Unfortunately, we still do not have a relatively robust bond market in India, which creates a chicken-and-egg problem. You want banks to reduce lending to large corporates who are leveraged in large projects and thus boost the bond market. But the bond market is not yet deep enough to absorb it," said Bhar.
topics
