Large exposure rule begins to squeeze corporate lending

A six-year-old Reserve Bank of India (RBI) rule meant to keep a check on banks’ lending to large corporate groups is once again causing heartburn for lenders. The framework, last revised in 2019, limits how much banks can lend to a company and to a group of connected companies. The rule aims to avoid overexposure to any group and concentration of resources. Banks need to keep single-company exposure at 20% of their capital base, and a group of connected companies at 25%.  “Effectively, term loans are committed and can be availed at any time- with no or negligible right with the bank to refuse such drawdown. That is unlike a working capital facility, which is recallable on demand and can be cancelled at any point in time by the bank,” said Utsav Johri, Partner, JSA Advocates & Solicitors. Read more