Skip to main content

Firms with heavy debt may face credit squeeze

Proposed framework to progressively reduce the total exposure of banks to heavily indebted companies likely come into effect from financial year 2017-18
The Reserve Bank of India (RBI) on Thursday proposed to raise provisioning and risk weights for fresh loans given to highly leveraged companies. This is to discourage banks from lending to such companies, which are said to have caused a high concentration of credit risk in the banking sector.
RBI said it would bring a framework to progressively reduce the total exposure of banks to such corporate entities by revising down the normal borrowing limit of a company, irrespective of the group's size. The framework will likely come into effect from financial year 2017-18.
According to the framework, if the aggregate credit limit sanctioned by the banking system is more than Rs 25,000 crore at any time during financial year 2017-18, the company will be termed a special borrower. The threshold for the special borrower category would be reduced to Rs 15,000 crore in FY19 and Rs 10,000 crore from April 2019. If banks have to lend beyond 50 per cent of these limits in any year, they would have to provide more capital.
However, corporate entities could get a rate relief for their loans as banks could be given exemptions on interest rates to compensate for the additional provisioning and risk-weighted assets as a result of this framework.
Firms with heavy debt may face credit squeeze While banks have single company exposure limits set by their boards, generally 25 per cent of a bank's networth, there is no limit of how much a corporate entity can borrow from the banking system. As a result, these firms - mainly in the power/infrastructure, housing finance and steel sectors - have caused very large exposures to banks, RBI said in a discussion paper on its website.
"Many large corporates are excessively leveraged and banking sector's aggregate exposure towards such companies is also excessively high. This poses a collective concentration risk to the banking sector, even when the single and group borrower exposures for each bank remain well within the prescribed limits," RBI said.
The discussion paper is an extension of a similar release issued in March 2015, where the central bank said large companies should tap the markets to raise money through bonds once a cut-off level of borrowing is hit.
Abhishek Bhattacharya, co-head, bank and financial sector rating at India Ratings, said RBI's move comes when concentration risks are building up. As a prudent step, banks have been given a three-year transition period to move to the new regime.
This would ensure more supply of corporate paper in the market at a time when public sector banks, most of whom are capital starved, will have limited room to fund big-ticket loans. Regulators have to also work to increase investor base for corporate securities (bonds, debentures, etc), Bhattacharya said.
  RBI's data analysis on 77,036 borrower companies with sanctioned credit limits of Rs 1 crore and above point towards a high concentration of credit risk at the systemic level. RBI said its rule of limiting single borrower exposure linked to a bank's core capital might "not by itself be sufficient to contain the risk the banking system is exposed to."
However, putting a hard monetary ceiling on total loans, in the absence of a deep corporate debt market, might destabilise the credit intermediation process, RBI said.
"This may hamper credit growth in an already subdued economic environment and adversely impact the business cycle. It would also be difficult for banks to prune their existing exposures to corporates at short notice," it said.Under the framework, if a bank is found lending beyond the normally permitted limit, it has to set aside standard asset provision of three per cent on the incremental exposure and an additional risk weight of 75 per cent above the applicable risk weight for the exposure to the specified borrower.For the time being, banks will be allowed to invest in the bonds issued by the companies, but any extra bonds beyond the prescribed limit should be sold in the market completely in three years ending March 2021. By March 2019, banks should sell at least 30 per cent, by 2020 60 per cent and by 2021 they should sell all excess bonds beyond the permissible limits, RBI said.
Business standard New Delhi,13th May 2016

Comments

Popular posts from this blog

New income tax slab and rates for new tax regime FY 2023-24 (AY 2024-25) announced in Budget 2023

  Basic exemption limit has been hiked to Rs.3 lakh from Rs 2.5 currently under the new income tax regime in Budget 2023. Further, the income tax slabs in the new tax regime has been changed. According to the announcement, 5 income tax slabs will be there in FY 2023-24, from 6 income tax slabs currently. A rebate under Section 87A has been enhanced under the new tax regime; from the current income level of Rs.5 lakh to Rs.7 lakh. Thus, individuals opting for the new income tax regime and having an income up to Rs.7 lakh will not pay any taxes   The income tax slabs under the new income tax regime will now be as follows: Rs 0 to Rs 3 lakh - 0% tax rate Rs 3 lakh to 6 lakh - 5% Rs 6 lakh to 9 lakh - 10% Rs 9 lakh to Rs 12 lakh - 15% Rs 12 lakh to Rs 15 lakh - 20% Above Rs 15 lakh - 30%   The revised Income tax slabs under new tax regime for FY 2023-24 (AY 2024-25)   Income tax slabs under new tax regime Income tax rates under new tax regime O to Rs 3 lakh 0 Rs 3 lakh to Rs 6 lakh 5% Rs 6

Jaitley plans to cut MSME tax rate to 25%

Income tax for companies with annual turnover up to ?50 crore has been reduced to 25% from 30% in order to make Micro, Small and Medium Enterprises (MSME) companies more viable and also to encourage firms to migrate to a company format. This move will benefit 96% or 6.67 lakh of the 6.94 lakh companies filing returns of lower taxation and make MSME sector more competitive as compared with large companies. However, bigger firms have shown their disappointment since the proposal for reducing tax rates was to make Indian firms competitive globally and it is the large firms that are competing globally. The Finance Minister foregone revenue estimate of Rs 7,200 crore per annum for this for this measure. Besides, the Finance Minister refrained from removing or reducing Minimum Alternate Tax (MAT), a popular demand from India Inc., but provided a higher period of 15 years for carry forward of future credit claims, instead of the existing 10-year period. “It is not practical to rem

Don't forget to verify your income tax return in August: Here's the process

  An ITR return needs to be verified within 120 days of filing of tax return. Now that you have filed your income tax return, remember to verify it because your return filing process is not complete unless you do so. The CBDT has reduced the time limit of ITR verification to 30 days (from 120 days) from the date of return submission. The new rule is applicable for the returns filed online on or after 1st August 2022. E-verification is the most convenient and instant method for verifying your ITR. However, if you prefer not to e-verify, you have the option to verify it by sending a physical copy of the ITR-V. Taxpayers who filed returns by July 31, 2023 but forget to verify their tax returns, will get the following email from the tax department, as per ClearTax. If your ITR is not verified within 30 days of e-filing, it will be considered invalid, and may be liable to pay a Late Fee. Aadhaar OTP | EVC through bank account | EVC through Demat account | Sending duly signed ITR-V through s