The Reserve Bank of India (RBI) plans to impose stricter limits on how much a bank can lend to a single corporate group, a move aimed at curbing risk in the banking sector at a time when bad loans are on the rise.
Currently, banks are allowed to lend up to 40 percent of their core capital to a single corporate group. The ceiling can rise to a maximum 55 percent including infrastructure loans and bank board approvals in what are deemed "exceptional circumstances".
The RBI said in its annual report released on Thursday it planned to review the cap during this fiscal year that started on April 1 to gradually align it with a 25 percent ceiling set by global standard-setter Basel Committee on Banking Supervision.
Two straight years of less than 5 percent economic expansion have led to a surge in bad loans for Indian lenders. As of March, more than 4 percent of banks' total advances were categorised as bad loans, compared with 2.9 percent two years earlier.
"It is a move towards controlling the concentration risk, so you don't want to be over-exposed to a particular group," said Nitin Kumar, a banking analyst at Quant Capital in Mumbai.
Kumar said lowering the cap to 25 percent would not have any adverse impact on banks and borrowers, as a breach in the current cap is rare. "It's more of a prudential measure," he said.
The RBI said the tightening of exposure norms will help in risk mitigation and banks' exposure will be more granular and diversified.
Finance Minister Arun Jaitley said in New Delhi on Thursday that the government was working to tighten up risk management in the banking sector, giving a vital boost to confidence.
"Because there is what you call concentration risks and other things coming in... these type of measures may have to be brought in," said M. Narendra, who last month retired as chairman of state-run Indian Overseas Bank.
Narendra said the 25 percent cap should exclude lending for infrastructure. "India still has a gap in infrastructure," he said.