GOVERNMENT OF INDIA
Ministry of Finance
UNSTARRED QUESTION NO. 63
ANSWERED ON FEBRUARY 24, 2015
Risk for Concentration of Net Worth in Banking System
63. SHRI RAJEEV CHANDRASEKHAR:
Will the Minister of FINANCE be pleased to state:
(a) whether Government is aware that in 2012, there was a Credit Suisse Report which stated that 10 corporations were responsible for nearly 98 per cent of the networth in our banking system;
(b) the reasons for such concentration of risk within the banking system;
(c) whether steps are being taken by the Reserve Bank of India (RBI) to prevent such concentration of risk; and
(d) if so, the details thereof and if not, the reasons therefor
THE MINISTER OF STATE IN THE MINISTRY OF FINANCE
(SHRI JAYANT SINHA)
(a) & (b): As per RBI Master Circular on Exposure norms, dated 1st July, 2014, a bank’s exposure to a single borrower can go up to 25 per cent of the bank’s total capital while its group exposure limit can go up to 55 per of its total capital. Financial Stability Report (FSR), December, 2013, of RBI has stated that these are on higher side by international standards and suggests review of the same to enhance stability of the banking sector. However, the report also states that the current level of NPAs do not pose a systemic concern as the CRAR of the banking system is above the prescribed levels and many projects are just delayed, not unviable.
FSR further states that there are five sub-sectors; infrastructure (which includes power generation, telecommunications, roads, ports, airports, railways [other than Indian Railways] and other infrastructure), iron and steel, textiles, mining (including coal) and aviation services which contribute significantly to the level of stressed advances. The share of these five sub-sectors in total advances is the highest for public sector banks.
However, it also needs to be recognised that some of the major corporate groups are key drivers of growth of the Indian economy. Keeping the group borrower limit at the level of single borrower limit would severely constrain the availability of bank finance, which could hamper the growth of the economy. The Basel Committee on Banking Supervision (BCBS) has issued the final standards on large exposures in April 2014, under which the exposure limits for ‘single’ and ‘group of counterparties’ are kept at 25 per cent of Tier I capital. This limit is due to come into effect from January 1, 2019. It is proposed to review the RBI’s exposure norms to gradually align them with the revised global standards.
(c) & (d): RBI released guidelines dated 30 January, 2014 for “Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy” suggesting various steps for quicker recognition and resolution of stressed assets. This Framework provides for centralised reporting and dissemination of information on large credits; early formation of a lenders’ committee with timelines to agree to a plan for resolution; incentives for lenders to agree collectively and quickly to a plan – better regulatory treatment of stressed assets if a resolution plan is under way, or accelerated provisioning if no agreement can be reached; improvement in current restructuring process; Independent evaluation of large value restructurings mandated, with a focus on viable plans and a fair sharing of losses (and future possible upside) between promoters and creditors; more expensive future borrowing for borrowers who do not co-operate with lenders in resolution and more liberal regulatory treatment of asset sales.
The intention of this Framework is not to encourage a particular resolution option, e.g. restructuring or recovery, but to arrive at an early and feasible resolution to preserve the economic value of the underlying assets as well as the lenders’ loans.