Lenders question RBI’s loan exposure definition
Several foreign and private lenders have questioned the definition of “loan exposure” in the Reserve Bank of India’s (RBI) recent circular that bars corporate borrowers from operating multiple current accounts.
While public sector banks (PSBs) stand to benefit the most from the changed regulations on current accounts announced by RBI last Thursday, foreign and private sector banks said more clarity is warranted on what constitutes a loan exposure.
“How do you define exposure? Whether it is funded or non-funded? What happens to your draft limit which is given for settlement transactions? What about forex settlement risk, whether that is defined as exposure?” asked a senior banker with a foreign bank.
RBI’s August 6 circular says borrowers with more than Rs 50 crore exposure to the banking system need to have an escrow mechanism and only banks managing such escrow can open current accounts. Companies with less than Rs 50 crore exposure to the banking system will have fewer restriction in opening such accounts. Senior bankers said PSBs, which collectively are the biggest lenders of working capital and term loans to corporates, tend to lose out to private peers both in domestic and foreign cash management business.
However, with RBI barring corporate borrowers from maintaining multiple current accounts, especially in banks with which they have little or negligible loan exposure, industry experts say PSBs will see a surge in cash management business, which in turn will also give PSBs access to cheaper funds.
But many lenders ask how settlements will happen in the case of opening a letter of credit or bank guarantee or a foreign exchange contract and how end-use monitoring will take place. They are also questioning whether PSBs will be able to provide the services attached to external commercial borrowing or export credit agency loans that foreign banks have been able to.
According to the new guidelines, RBI has asked banks to comply with new norms for existing current and overdraft accounts within three months. Most banks said that it would be a challenging task to realign all the accounts and relationships, and close current accounts in three months.