31 May 2016
Principle Chief General Manager
Department of Banking Regulation
Reserve Bank of India
Central Office
Shahid Bhagat Singh Marg, Mumbai-400001.
Dear Sir,
Re: Comments on Discussion paper - ‘Framework for enhancing Credit Supply for Large Borrowers through
Market Mechanism’
At the outset, we, at Indian Association of Investment Professionals (IAIP 1), a member society of the CFA
Institute2 appreciate the opportunity to comment.
We applaud the regulator for its attempt to review the framework for credit supply to Large Borrowers through
Market Mechanism. Below are our key observations from the discussion paperA) The RBI is rightly focused on seeking to prevent build-up of concentrated exposures within the
banking system and to seek to impose punitive provisions that reduce the attractiveness of
concentrated exposures that carry an elevated degree of risk.
B) The proposals set out in the current discussion paper however exhibit several shortcomings that are
likely to penalise large enterprises purely for their scale of operations as opposed to the stated
objective of seeking to prevent build-up of concentrated exposures in the banking system to high
risk borrowers for the following reasons:
i)
The biggest shortcoming of the current proposal is that it penalizes size and not risk.
Exposures to large borrowers should draw penal provisions if they are deemed to be risky
not simply because they are large.
ii)
The proposal to trigger the imposition of penal provisioning requirements and risk weights
associated with the increase in bank financing beyond the 50% threshold would penalise
the entire banking system for the actions of the marginal lender whose facilities result in a
breach of the regulatory threshold.
iii)
The use of a fixed monetary value to classify a borrower as likely to pose a systemic risk to
banks may militate against a growing economy. The growth of the economy coupled with
monetary inflation would likely result in unintended consequences and penalise well
performing, competitive institutions that are able to gain scale at a national or global level.
iv)
The recommendation to rely upon “funded exposure” to measure exposure of the banking
system to a borrower is flawed. So called “unfunded exposure” also constitutes credit
1The Indian Association of Investment Professionals (“IAIP”)
is an association of over 900 local investment professionals.
The Association consists of portfolio managers, security analysts, investment advisors, and other financial professionals,
that; promote ethical and professional standards within the investment industry, facilitate the exchange of information
and opinions among people within the local investment community and beyond, and work to further the public's
understanding of the CFA designation and investment industry.
2CFA
Institute, the global association of investment professionals that sets the standard for professional excellence and
credentials, is a champion for ethical behavior in investment markets and a respected source of knowledge in the
global financial community. CFA Institute has more than 112,000 members in 138 countries, with membership in India
growing at a particularly strong pace. CFA Institute maintains relationships with a number of regulators in major
financial markets.
exposure for a lending institution and may eventually transform into so called “funded
exposure”. The use of this metric is likely to give rise to regulatory arbitrage with borrowers
resorting to use of so called “non-funded” exposure to avoid being covered under the
proposed large exposure designation.
v)
The proposed regulation does not appear to distinguish between financial and non-financial
borrowers. The RBI should clarify whether this is intended to cover inter-bank lending as
well as lending from banks to other financial institutions. Such a measure could impede flow
of liquidity at a systemic level.
C) The RBI may instead seek to draw inspiration from legislation issued by the Federal Reserve in
relation to leveraged lending to prevent build-up of risky loans within the US banking system. The
RBI may indeed wish to evaluate the use of the following criteria for identification of concentrated
exposures that may pose an elevated level of systemic risk to the banking system:
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Leverage
Debt Service Capacity
Sector
Stage in the lifecycle of the project
Tenor of exposure
D) It is important that RBI supplements its analysis of large exposures (referenced in section 1 of the
discussion paper) with a qualitative assessment of the high risk borrowers that have contributed to
the growth in non-performing assets in the banking system to suitably amend these prudential
guidelines.
The analysis is likely to suggest that the growth in non-performing assets corresponded with
increased lending by banks to:
 highly leveraged borrowers;
 exposures to cyclical or commodity sectors;
 exposures to greenfield projects or large expansionary capex projects;
 long tenor exposures not appropriately funded through matching liabilities on an aggregate
basis;
 Unduly optimistic assessment of debt service capacity over the lifecycle of a project.
E) RBI should also consider disclosing the analysis based on data extracted from the CRILC to enable
market participants to form a view on the likely impact of the proposed regulation on the potential
increase in supply in the corporate bond market and consequent impact on liquidity.
The paper is silent on the assessment undertaken by the RBI on the ability of the corporate bond
market to absorb the resultant increase in supply in the corporate bond market.
Conclusion:
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
The proposal as currently drafted is likely to result in restricting supply to credit to the economy from
the banking sector.
It is recommended that the RBI reassess the proposed guidelines related to large exposures to duly
take into account the risk associated with a large borrower. The regulatory framework should seek
to impose punitive measures based on an assessment of risk not on size.
Closing Remarks
We thank you for the opportunity to provide feedback on this discussion paper and shall be delighted to visit your
offices to discuss the same in detail.
If you or your staff have questions or seek further clarification, please do not hesitate to contact Vinay Bagri, CFA at
+91 98361 88553 at [email protected]
Sincerely yours,
Vinay Bagri, CFA
Chair – IAIP Advocacy Committee
Indian Association of Investment Professionals - Member Society of CFA Institute