Banks' single group exposure cap high; review in 2014-15: RBI

Aug 21 2014, 23:34 IST
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Summarythe priority sector lending guidelines have not kept pace with the changing economic priorities, says RBI.

Hinting at tightening banks' single group exposure cap from current 40 per cent, RBI today said it will be reviewing this credit limit to gradually align it with the global group exposure practices and mitigate risks.

It also said that the priority sector lending guidelines have not kept pace with the changing economic priorities, and promised a review of the same during the year.

"Our current exposure limits to a group of borrowers is much higher at 40 per cent of capital funds (plus 10 per cent for infrastructure finance). It is proposed to review the exposure norms in 2014-15," the central bank said in its annual report.

It said the BCBS (Basel Committee on Banking Supervision), has set the 'single' and 'group of counter-parties' limit at 25 per cent of the tier-I capital of a bank, adding that its intention is to bring the Indian limit at par with the global practices gradually.

In a new addition, the RBI came up with a new section on 'Vision and Agenda' for the upcoming year, in the annual report wherein it has made these pronouncements.

"The tightening of exposure norms will also help in risk mitigation during cyclical downturns as banks' exposure under the framework will be more granular and diversified to a large number of unrelated counter-parties rather than being concentrated in a handful of large and related counter- parties," it said.

The group exposure limits are put in place to contain losses for a bank in the event of a sudden failure of a inter- connected group of parties.

On the stringent priority sector lending (PSL) requirements, under which a bank is mandated to have 40 per cent of its loan book to specifically identified weaker sections of the economy and the society, RBI said there is a need for a review of the guidelines.

"Priority sector guidelines have not kept pace with changing economic priorities and may lead to less efficient use of resources. During the course of the year, priority sector guidelines will be reviewed," it added.

On its core function of monetary policy making, the RBI welcomed government's budget announcement of putting in place a modern monetary policy framework.

"Implementation of the proposed new monetary policy framework could go a long way in building monetary policy credibility and anchoring inflation expectations," it said, adding monetary, fiscal and structural policies have to play complementary roles in containing

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