Would Large Exposure Framework, LEF effectively nip the NPAs/NPLs in the bud?

The narrative that non-state actors contribute to stressed assets (NPAs/NPLs :: English / Hindi) via their infrastructural forays and are as complicit in debilitating the banking health in the country as their public counterparts (excuse me for the liberty of giving budgetary allocations the same stature) is slightly misplaced on one important count: accessibility to market mechanisms. The former are adventurous with their instrumentals (yes, more often than not resulting in ignominy, but ingenuous in escaping for a better invention of monetary and fiscal instruments), while the latter are hand-held devices suffocated by Governmental interference and constrictions. The key point lies in the fact that former and not the latter enjoy as well as enjoin connectography, the key pillar to globalised financial in- and out-flows. Turning on to LEF, which I personally feel has enough teeth to sink into narrowing the risk exposure, but, sharpness of the teeth is still speculatively housed in the orbit.

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Although regulatory mechanisms are on an uptick, these efforts are not yielding results to be optimistic about, and even if they are, they are only peripheral at best. Deterrents to prevent large exposure of banks’ bad accounts are marred by lenient approach towards: inadequate tangible collaterals during credit exposure enhancements; promoter-equity contribution financed out of debt borrowed by another bank, leading to significant stress of debt servicing; and short-term borrowings made by corporations to meet working capital and current debt servicing obligations exerting severe liquidity pressures on account of stress build-up in their portfolios. These are cursory introductions to the necessity of Large Exposure Framework (LEF) by the Reserve Bank of India (RBI). This framework confines banking sector’s exposure to highly leveraged corporates by recommending an overarching ceiling on total bank borrowing by the corporates. The idea is to secure other external sources of funding for corporates other than banks by introducing a cap on bank borrowings. With the introduction of this cap, corporates would have to fend for their working capital by tapping market sources. How well this augurs for mitigating NPAs is yet to be scrutinised as the framework will take effect from next financial year. But, the framework has scope for recognising risks, whereby banks would be able to draft additional standard asset provisioning and higher risk weights for a specific borrower no matter how leveraged the borrower is. The issue of concentrated sectoral-risk would get highlighted, even if the single and group borrower exposure for each bank remains within prescribed limits. The framework thus limits relentless lending to a borrower reducing risks of snowballing NPAs by throwing open avenues of market capitalisation on one hand and more discernment regarding sectors vulnerable to fluctuating performances. The efficacy will only have to stand the test of time.

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