RBI's Exposure Issues
Some may find exposure unwelcome. Vijay Mallya, for instance, has made himself grievously underexposed since he left the shores of India, invisible save for a single picture taken in the bar of his English villa. Others may find exposure enticing. The congregation of underclad Europeans and Americans on beaches in summer may have something to do with the sun's luxurious touch; but surely, it cannot be unrelated to the exposure of visual attractions otherwise obscured by clothes.
Bankers too are human and obsessed with exposure; but they mean exposure in another sense, namely the degree of concentration of their loans. Concentration is the opposite of dispersion: the greater the proportion of loans given to a small proportion of borrowers, the greater the concentration. Banks inevitably run the risk that their borrowers will default; if they do, getting them to repay is quite tough. So ideally, a banker would like to find a borrower he can trust, and lend him all the money he has. But that, the Reserve Bank would say, constitutes the sin of overexposure. It concentrates the risk too much; if the single borrower fails to repay, the bank loses all the money. The bank may reply that the opposite too is true: that if the borrower services the loan religiously, the bank loses nothing at all. But somehow, central bankers disapprove of concentration; and in an argument between a bank and its regulator, the bank can never win.
The sin must be as old as banks; but the first time regulators took note of it was probably in the 1980s, when it came up for discussion in the meetings of central bankers called by the Basel Committee on Bank Supervision. BCBS summarized the conclusions then reached in a paper it issued in 1991 on measuring and controlling large credit exposures. It was mainly about making the concepts of large borrowers and large exposure less ambiguous; since borrowers would try and evade exposure controls by borrowing in different names, BCBS wanted banks to uncover such tricks and add together debts of related entities. It said that a bank should keep a watch on any loan exceeding a tenth of its capital, and not let a loan exceed a quarter of its capital.
It went on revising and recirculating the guidelines from time to time. The Reserve Bank, which was involved in the discussions, set limits in 2013 of 15 per cent to a single borrower and 40 per cent to a connected group. These figures went up to 20 and 50 per cent for oil companies, and another 5 per cent if the oil companies disclosed it in their annual reports. The 20 and 50 per cent applied also to loans to infrastructure projects. Clearly, obliging the government came before controlling concentration.
Around the same time, BCBS brought out an extensive document proposing the contours for regulating large bank loans; and after discussing it with central banks, it issued a standard for measuring and controlling large loans in April 2014. Basically, it set a limit of a quarter of a bank's capital on exposure to any group of connected counterparties, and a lower limit of 15 per cent if the exposure was to global systematically important banks, presumably because they were more risky and less under the control of individual central banks. Significantly, the 2014 standard abolished the different standards for loans to individual and group borrowers, and BCBS said that the standard would become mandatory after five years - that is, in 2019.
That has led the Reserve Bank to announce that exceptions granted to central government agencies such as NABARD and Food Corporation would have to end by 2019. What will end first? The exemptions, or the resolve of the Reserve Bank? The latter seems more likely, unless the government shows more resolve to discipline itself.
The writer is a senior economist and was chief consultant in the Finance Ministry from 1991 to 1993
