RBI report finds Banks breaching Exposure Limits

Source:RBI,28th march,2010

With seven instances of banks exceeding the permissible exposure to large corporate groups, of 40% of their net worth, credit concentration has emerged as a key risk.

The Reserve Bank’s Financial Stability Report, released points to another 37 instances where the level of funding by banks was between 30% and 40% of the their respective net worth.

As per RBI prudential norms on credit risk, the exposure ceiling limits are 15% of capital funds in the case of a single borrower and 40% of capital funds in the case of a borrower group. The capital funds for the purpose will comprise Tier-I and Tier-II capital as defined under capital adequacy standards.

However, bankers observe that if the credit risk of the concerned corporates is good, it is not a serious concern yet. Said S Raman, executive director, Union Bank of India, “Risk concentration is always a risk but if the quality of corporate you lend money is good, it may not be an issue.”

Those banks that may have lent to their large corporate clients must have taken special permission, as a temporary measure. Going forward, RBI would want them to bring down their exposure,” said a top functionary of a large state-owned bank, who requested anonymity. HSU Kamath, executive director, Canara Bank, said, “I don’t find any case of concern in such exposures. It depends on which sectors the exposures have been made to. Normally, in such cases, banks don’t have exposures to sensitive sectors like capital goods, NBFCs and real estate.” “Though it is not known which banks have lent more than the permissible amounts to their top borrowers, it is likely to be smaller banks with lower net worth,” added Raman, who feels that at the end of the day, lending to large corporates depends on the bank’s individual perception.

The banking regulator, however, is of the opinion that loan syndication and loan sales would be useful in distributing the exposure more evenly.

According to a section of bankers, the regulator might be looking for increased participation of banks in syndicated loans, which helps mitigate risk concentration. Said Canara Bank’s Kamath, “It’s true that loans being sold down will help banks reduce exposure” Observes Rana Kapoor, managing director & CEO, Yes Bank: “The fact that so many banks are breaching the norms is an important indicator and it shows diversification of risk in the banking system is required.”