RBI to ease norms for banks’ corporate exposure via market securities, to repeal earlier framework

Mumbai: The Reserve Bank of India (RBI) on Wednesday proposed to withdraw its August 2016 framework on Enhancing Credit Supply for Large Borrowers through Market Mechanism.

The framework originally aimed to address concentration risk arising from aggregate credit exposure of the banking system to a single large corporate and encourage such large corporates to diversify their sources of funding.

“Upon review, considering, inter-alia, the changes evident in the profile of bank funding to corporate sector since the introduction of the guidelines, it is proposed to withdraw the guidelines,” the RBI said.

At a post-policy conference, RBI governor Sanjay Malhotra said the central bank is not worried about a resurgence in concentration risk given the introduction of other frameworks monitoring corporate exposure since then, and given the significant reduction in corporate credit exposure of banks over this period.

“My understanding is that the 2016 policy was more about mitigating risk and reducing or limiting exposure to large corporates at the banking system level, not at the bank level,” he said, adding that the framework is being done away with because it is unable to take care of the needs at the individual bank level.

“You have been seeing that the share of corporates in the total banking exposure has, in fact, come down over the years. I think in the last 10 years, it has reduced by about 10% or so; so the risks are not so many. That’s the primary reason we have proposed to remove this,” he added.

In a report, SBI Research said the move could boost corporate bank credit. Estimating incremental corporate borrowing, including via bonds, commercial paper and external commercial borrowings, at around ₹30 trillion in FY25, the report said that banks have the potential to lend another ₹3-4.5 trillion, even if 10-15% of the demand comes back to the banking system.

“While the Large Exposures Framework, since put in place for banks, addresses concentration risk at an individual bank-level, concentration risk at the banking system level, as and when considered as a risk, will be managed through specific macroprudential tools,” RBI said in its statement.

Deputy governor Rajeshwar Rao said these could include measures such as a sector-wide or consortium cap on banks’ exposure to a single entity, if needed.

The 2016 framework disincentivized lending by banks to specified large and highly leveraged borrowers for their incremental funding beyond a threshold, and also encouraged them to explore market-based resources for meeting their incremental financing needs. These included borrowers with credit limit from banking system of Rs.10,000 crore and above, including funds raised from banks via market instruments such as bonds, debentures, redeemable preference shares and any other non-credit liability, other than equity. The norms included banks making higher provisions and adopting higher risk weights for loans to entities with a certain exposure to bank credit.

“This shall release the provisions and capital requirements for the banks, which they will be carrying towards large exposure, and will be favourable for their profitability and capital ratios. It could, however, increase the credit flow towards lower-rated large borrowers,” said Anil Gupta, senior vice-president and co-group head, Icra.

In a draft circular issued late Wednesday evening, the RBI said that it has decided to withdraw the guidelines effective 1 April 2026 given more resilience in bank and corporate balance sheets.

“However, banks are advised to continue to monitor the risks emanating to them from their exposures to ultra-large borrowers who are excessively leveraged and have substantial borrowings from the banking system,” the circular said, adding that banks may put in place suitable monitoring and risk management framework for such counterparties.

The central bank has sought feedback and comments on the norms by 24 October.