PSU banks may breach caps on 10% exposure in large loans
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 a 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 go to meet regulatory requirement and provisioning. And the remaining will go to fund low risk weight loans such as retail assets. There is a real possibility of private sector banks and nonbanking 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 specialised monitoring agencies for loans above ₹250 crore and ensure proper due diligence. They have also been asked to scrutinise 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 ₹25,000 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.
Again, starting April 1, 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).
Analysts tracking banks said the centre wants to ensure 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 PSU banks are under RBI watch.
Excess capacities in sectors such as iron and steel, as well as power, has dampened demand for large loan proposals, an analyst said.