RBI scraps old lending curbs, downplays risk to corporate bond volumes

RBI Repeals 2016 Guidelines to Encourage Corporate Borrowing

The Reserve Bank of India (RBI) has repealed guidelines issued almost a decade ago aimed at reducing concentration risks in banks and pushing large borrowers to access the market for funding.

Background on the 2016 Framework

In 2016, the RBI introduced a framework to Enhance Credit Supply for Large Borrowers through Market Mechanism. The framework was designed to discourage banks from lending to large and highly-leveraged borrowers and encourage them to explore market-based resources for meeting their financing needs.

The framework applied to borrowers with a credit limit of ₹10,000 crore and above, who were required to raise funds from market instruments such as bonds, debentures, and redeemable preference shares, among others.

Concerns and Repeal of the Guidelines

• Stakeholders had raised concerns that repealing the 2016 circular could hurt corporate bond market volumes.
• The RBI, however, believes that the corporate bond market has grown significantly due to regulatory and institutional reforms.

“While the 2016 RBI Framework may have also contributed, it also entailed costs,” the regulator said in response to industry concerns.

The RBI has decided that a market-driven framework would be more optimal in determining the source of funding for borrowers, rather than a regulatory fiat.

Impact on Corporate Borrowing

Expert estimates suggest that the move could boost corporate bank credit, with potential incremental borrowing of ₹30 trillion in FY25.

According to a report by SBI Research, banks have the potential to lend an additional ₹3-4.5 trillion, even if 10-15% of the demand comes back to the banking system.

RBI's Response to Concerns

The RBI has addressed concerns that withdrawing the framework may increase risks going forward.

• The RBI notes that the banking sector has strengthened since the introduction of the 2016 framework.
• Regulatory frameworks have been enhanced, and supervisory oversight has deepened in both scope and sophistication.
• Bank balance sheets have strengthened, with the overall exposure of banks to specified borrowers as a share of their loan book much lower.

The RBI believes that the landscape has evolved significantly since the introduction of the 2016 framework, and the regulatory framework has been strengthened since then.