To prepare for any contingency, banking regulator Reserve Bank of India (RBI) has told banks to make some provisioning towards their exposure to top 20 conglomerates of India, reported Business Line.
This move is more to lean on the side of caution and should not be construed as any ‘warning signal’ from the regulator, said the report, citing sources.
“PSU banks and private banks are in a much better shape now than before. Therefore, the regulator felt that it would be good for the system if banks start taking prudential provisioning on business groups now,” said senior banker aware of the matter.
The banking regulator was reportedly mulling on these lines after the FY22 annual inspection, which concluded for most banks by September–November last year, but the decision to implement the need for prudential provisioning became imminent in the wake of ongoing collapses of banks in the US and Europe.
“Some of large corporations also have significant foreign debt exposure in the form of bonds and loans and it would be better to be step ahead of the curve to ensure that banks in India don’t suffer because of the global turmoil,” said another senior executive who didn’t want to be named, added the report.
Reliance Industries, Adani group and Vedanta are conglomerates to name a few, with heavy exposure to foreign debt.
With overall asset quality position and profitability of the banking system at a multi-decade best level, the RBI felt that now would be a good time to shore up some provisioning to meet any contingencies, another banker aware of the matter added, as per the report.
In the recently-concluded meeting with PSU bank chiefs, the finance ministry also asked PSU banks to identify stress points, including “concentration risks and adverse exposures”.
When asked whether the move would hurt the profits of banks significantly, most bankers replied in negative. They attribute this to the discretion they have to decide on the quantum of provisioning.
Since the top 20 conglomerates are standard assets for the banking system and the nudge by the regulator is more towards building a buffer, banks can decide on how much they would want to set aside if they have exposure to any of the 20 conglomerates, said the report.