The Reserve Bank of India (RBI) on Thursday repealed guidelines issued almost a decade ago that were meant to curb concentration risks in banks and push large borrowers to borrow from the market.
The central bank first proposed the revocation of these guidelines on 1 October. It had then announced plans to withdraw its August 2016 framework on Enhancing Credit Supply for Large Borrowers through Market Mechanism.
On Thursday, the RBI said in a statement that some stakeholders had raised concerns that repealing the 2016 circular could hurt corporate bond market volumes.
However, it believes that the corporate bond market volumes have increased significantly over the years on account of several factors, including regulatory and institutional reforms.
“While the 2016 RBI Framework may have also contributed, it also entailed costs,” the regulator said in response to industry concerns.
“On balance, it has been decided that instead of a regulatory fiat, a market-driven framework would be more optimal in determining the source of funding for the borrowers.”
When first announced, experts hoped that banks would get more room to lend to these companies, which were so far being pushed to tap the debt markets beyond a certain threshold of loans.
In a report in October, 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.
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 ₹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.
RBI also said on Thursday that “certain quarters” have raised apprehensions that withdrawing the framework may potentially increase risks going forward.
In response, RBI said that the 2016 framework was introduced in a certain context when the banking sector was facing significant balance sheet challenges.
“The landscape has evolved significantly since then,” it said.
According to the central bank, the regulatory framework has been strengthened. Plus, the resolution frameworks for stressed assets have matured since the introduction of the Insolvency and Bankruptcy Code in 2016.
“Supervisory oversight has deepened in both scope and sophistication. Bank balance sheets have strengthened, with the overall exposure of the banks to such specified borrowers as a share of their loan book much lower,” it said.