Single borrower/ group exposure limit and priority sector lending target of banks explained

Update: The Reserve Bank of India (RBI) on Friday (May 22, 2020) raised the group exposure limit of banks to 30% from 25% for a temporary period till 30 June 2021. The limit will be restored to 25% after the deadline unless the RBI decides otherwise.

As a prudential measure, aimed at better risk management and avoidance of concentration of credit risks, it was decided in June 1997 by Reserve Bank of India to limit a term lending institution’s exposures to an individual borrower and group borrowers and credit exposure norms were prescribed for them. These norms are to be considered as a part of prudent credit management system and not as a substitute for efficient credit appraisal, monitoring and other safeguards. Exposure limit shall include credit exposure (funded and non-funded credit limits) and investment exposure (including underwriting and similar commitments). The facilities extended by way of equipment leasing, hire purchase finance and factoring services are also treated as credit ecposure. The sanctioned limits or outstandings, whichever are higher, shall be reckoned for arriving at the exposure limit. However, in the case of fully drawn term loans, where there is no scope for re-drawal of any portion of the sanctioned limit, banks may reckon the outstanding as the exposure.
The concept of ‘Group’ and the task of identification of the borrowers belonging to specific industrial groups is left to the perception of the banks/financial institutions. Banks/financial institutions are generally aware of the basic constitution of their clientele for the purpose of regulating their exposure to risk assets. The group to which a particular borrowing unit belongs, may, therefore, be decided by them on the basis of the relevant information available with them, the guiding principle being commonality of management and effective control. In so far as public sector undertakings are concerned, only single borrower exposure limit would be applicable.

RBI defines Large exposure (LE) as the sum of all exposure values of a bank to a counterparty or a group of connected counterparties if it is equal to or above 10 percent of the bank’s eligible capital base (i.e., Tier 1 capital). For details of exposures are excluded from the gambit of Large Exposure (LE) limit specified by RBI read “What is Large Exposures Framework (LEF)?“

The Reserve Bank of India (RBI) earlier on March 13, 2020, lowered the single borrower and group exposure limit for urban cooperative banks (UCBs) to 15% and 25% of tier I capital, respectively, to reduce concentration risks arising out of such large loans.  As per RBI Cir.No.44/13.05.00/2004-05 dated April 15, 2005,  Primary (Urban) Co-operative Banks (UCBs) were permitted to have exposures up to 15 percent and 40 percent of their capital funds to a single borrower and a group of borrowers, respectively. As per the said notification, the revised exposure limits shall apply to all types of fresh exposures and UCBs shall bring down their existing exposures which are in excess of the revised limits to within the aforesaid revised limits by March 31, 2023. However, where the existing exposure comprises only term loans and non-fund-based facilities, while no further exposure shall be taken on such borrowers, these facilities may be allowed to continue as per their respective repayment schedule / till maturity. All other extant instructions on the subject, including the definition of exposure, will remain unchanged, it said. While the revised exposure limits will apply to all fresh loans, UCBs should have at least 50% of their aggregate loans and advances of not more than ₹25 lakh, or 0.2%, of their Tier I capital, whichever is higher, up to a maximum of Rs.1 crore, per borrower. The circular further said that those UCBs which do not comply with these norms at present, need to conform by 31 March 2024.

Revised Priority Sector Lending Target:

On a review of the Priority sector lending target, RBI said that the overall PSL target for UCBs shall stand increased to 75 percent of ANBC or CEOBSE, whichever is higher. UCBs shall comply with the above target by March 31, 2024.In terms of earlier circular DCBR.BPD (PCB).Cir.No.07/09.09.002/2017-18 dated May 10, 2018, the overall priority sector lending (PSL) target for UCBs stood at 40% of the adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure (CEOBSE), whichever is higher. On a review, it has been decided that the overall PSL target for UCBs shall stand increased to 75 percent of ANBC or CEOBSE, whichever is higher. UCBs shall comply with the above target by March 31, 2024.