A regulation made by the Reserve Bank of India (RBI) was meant to reduce the concentration risk for banks. In contrast, it is now restricting the flow of funds to some large public sector enterprises, especially the oil marketing companies that have high debt requirements to meet capital expansion commitments.
Lenders have requested an exemption from RBI to relax the large exposure framework requirements for public sector companies. However, RBI is yet to respond to this request.
Several companies have received the funds on their company accounts, but are unable to withdraw and put them to use due to the regulations. As per the rules, the exposure limit is 20% of a bank’s capital base. Therefore, a possible solution could be that the banks raise more funds or wait for the upcoming mergers of state-run banks to grow their capital base.
For example, a refinery project of Hindustan Petroleum Corporation Limited (HPCL) in Barmer, Rajasthan and a few other upcoming second-generation ethanol or bio-refineries are halted as banks have been helpless due to the new norms.
Further, HPCL had signed a debt syndication agreement in January 2019 with a consortium of nine lenders, led by the State Bank of India (SBI), for its refinery project in Barmer. The total cost of the project was estimated to be Rs.43,129 crore.
As per the plan, two-thirds of the project would be loaned, and the remaining project would be funded through promoters’ equity. It comprises a 9-million tonne a year oil refinery and a 2-million tonner per annum petrochemical unit.
Though the banks have sanctioned the loans, HPCL is unable to draw down the funds as lenders are near the end of their exposure limits.
The broad exposure framework, effective from 1 April 2019, was implemented to reduce concentration risk in the banking industry that is already overwhelmed by bad loans. It seeks to align with the standards on the supervisory framework for measuring and controlling significant exposures issued by the Basel Committee on Banking Supervision. The non-performing assets (NPA) of all banks was more than Rs.9.5 trillion as of September 2019.
As per the government, the entities are to raise capital and debt from the market directly. They have good ratings and are capable of raising funds at competitive terms. The merger of banks into international-size can help serve large requirements. Such merged banks will have higher net-worth and will be able to offer more substantial funds to these entities.
Also, RBI had permitted OMCs to raise up to $10 billion through external commercial borrowing (ECB) for working capital needs. However, this does not cover the loans required for capital expenditure. Companies did not utilise much of the ECB facility as the lending rates are reasonable domestically.
Furthermore, it is also pertinent that public sector companies are not struggling alone for funds. Credit is supposed to flow and move; while there is Rs.2 trillion in the system, the financial sector, including banks, are operating on extra credit. It seems essential that they get diverted.
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