In a significant policy shift, the Reserve Bank of India (RBI) on Thursday officially scrapped a set of guidelines that were nearly a decade old. These rules were originally designed to limit concentration risks within the banking sector and to encourage large corporate borrowers to seek funds from the market instead of relying solely on banks.
The End of a Regulatory Era
The central bank had initially proposed the revocation of these guidelines on 1 October 2024. This proposal targeted the withdrawal of the August 2016 framework formally known as 'Enhancing Credit Supply for Large Borrowers through Market Mechanism'. With Thursday's announcement, that repeal is now effective.
The RBI acknowledged in its statement that some stakeholders had expressed concerns. They feared that repealing the 2016 circular could negatively impact trading volumes in the corporate bond market. However, the regulator countered this view, stating that the corporate bond market has grown substantially over the years due to a variety of factors, including broad regulatory and institutional reforms.
"While the 2016 RBI Framework may have also contributed, it also entailed costs," the RBI noted in its response to industry feedback. "On balance, it has been decided that instead of a regulatory fiat, a market-driven framework would be more optimal in determining the source of funding for the borrowers."
Potential Boost for Bank Credit
When the framework was first introduced, it aimed to disincentivize banks from lending to specified large and highly-leveraged borrowers for their incremental funding needs beyond a certain threshold. It pushed these companies to explore market-based resources like bonds. The rules applied to borrowers with a credit limit from the banking system of ₹10,000 crore and above.
With its repeal, experts anticipate that banks will gain more room to lend to these large companies. A report by SBI Research in October 2024 highlighted the potential impact. Estimating incremental corporate borrowing—via bonds, commercial paper, and external commercial borrowings—at around ₹30 trillion in FY25, the report suggested that banks could potentially lend an additional ₹3 to ₹4.5 trillion. This would occur if even 10-15% of the corporate funding demand shifts back to the banking system.
RBI's Rationale: A Changed Financial Landscape
The RBI also addressed concerns from "certain quarters" that withdrawing the framework might increase future risks. The central bank clarified that the 2016 rules were introduced in a specific context when the banking sector was grappling with significant balance sheet challenges.
"The landscape has evolved significantly since then," the RBI asserted. It pointed to a strengthened regulatory framework and the maturation of stressed asset resolution mechanisms since the introduction of the Insolvency and Bankruptcy Code in 2016.
Supervisory oversight has deepened in both scope and sophistication, the bank stated. Furthermore, bank balance sheets have become more robust, with the overall exposure of banks to the specified large borrowers now constituting a much smaller share of their total loan book. This improved health of the banking sector provided the confidence needed to move towards a more market-driven approach.
