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More and more corporates might be tapping the corporate bonds and commercial papers (CPs) market as the Reserve Bank of India (RBI)'s discussion paper on large exposures framework has invited comments on a proposal to make large corporates, enjoying working capital and term loan limits above a certain threshold, to meet a portion of both their short-term and long-term funding needs through the market mechanism.
Many corporates are already tapping the corporate bond and commercial market more than banks and this is evident from the fact that bank credit grew 9.5 per cent year-on-year in the fortnight ended March 20 while tentative data from PRIME Database show fund-raising by way of private placement of bonds grew 31.5 per cent in the last financial year.
"Earlier, there was a lot more room for banks to take exposure to a single corporate. Now RBI wants banks to reduce concentration risks. So corporates may resort more to corporate bonds and CPs to meet their funding requirements. Even in FY16, corporates may continue to raise more through corporate bonds and CPs," said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities. Manglunia added the central bank wants the corporate bond market to develop.
RBI has requested for suggestions and comments from stakeholders before issuing final guidelines.
The proposed large exposures framework will be fully applicable from the beginning of 2019.
"The proposed framework would help improve alternate sources of funding such as corporate bonds, CPs, etc. for the corporate sector. Improving alternate sources of funding for corporates would have some impact on credit growth, especially for public sector banks. However, on the positive side, it would de-risk their balance sheets," said Praveen Agarwal, Namesh Chhangani and Vikash Mundhra of Axis Capital in a note to clients on Monday.
RBI has proposed to tighten the norms for large exposure by capping a bank's exposure to 25 per cent of the tier-I capital while currently tier-II capital is also included. RBI also altered the definition of a group of connected counterparties and, under the proposed framework, a group will be identified on the criteria of control as well as economic interdependence as against only control criteria under the extant RBI exposure norms.
Under the proposed framework, at current levels of capital, banks will gain an average additional exposure headroom of 7.3 per cent of their tier-I capital over their current exposure limit of 15 per cent of capital funds for a single borrower.
