RBI Withdraws System-Level Lending Cap for Large Corporates

Context:

The Reserve Bank of India (RBI) has withdrawn its 2016 circular that restricted banks from lending beyond a specified threshold to a single large corporate or group at the systemic level, while maintaining the large exposure framework at individual bank level.

Key Highlights:

• Previous Circular:
  • Set credit exposure limits at the banking system level:
    • ₹25,000 crore in FY18 → ₹15,000 crore in FY19 → ₹10,000 crore from FY20.
  • Aimed to reduce concentration risk across the banking system.
• Current Framework:
  • Large Exposure Framework continues:
    • Single borrower: ≤20% of Tier-1 capital
    • Corporate group: ≤25% of Tier-1 capital
• Reason for Withdrawal:
  • Share of corporates in total banking exposure has fallen by ~10%, reducing systemic risk.
  • The circular is no longer necessary to ensure financial stability, and its removal eases compliance burdens.

Market and Banking Impact

• Corporate credit demand remains muted due to:
  • Slower capex cycle
  • Alternative funding sources (bond markets, ECBs)
  • Healthy cash reserves
• Some incremental lending may flow into:
  • Infrastructure
  • MSME sectors
• Potential funds returning to banks from bonds/ECBs: ₹3–4.5 trillion