MUMBAI, July 15: The Reserve Bank of India has laid down credit exposure norms for term lending institutions. The exposure limit for a single borrower has been capped at 25 per cent of their capital (equity plus free reserves). In the case of group borrowers, the credit exposure limit has been fixed at 50 per cent.

In respect of existing credit facilities which are in excess of the prescribed ceilings, the institutions have been directed to reduce the excess advances by June 1998. The Reserve Bank has also asked the institutions to "bring such instances to the notice of their board of directors".

This is the first time the RBI has prescribed credit exposure limits for term-lending institutions. In May 1989, the bank had laid down exposure norms for scheduled commercial banks. For non-banking finance companies, the limits were fixed in June 1994. "On a review of the credit exposure position prevailing in different term lending institutions, it has been now considered advisable to prescribe credit exposure limits for term lending institutions also in respect of their lendings to individual/group borrowers," a recent RBI directive said.

The capital base for exposure limits will be paid-up equity plus free reserves. Reserves created by way of revaluation of fixed assets should not be included as part of capital funds, the central bank's directive said.Term lending institutions have been instructed to place "an annual review of the implementation of exposure management measures before the board of directors before the end of July 1997". From the next year onwards, the deadline for the review has been advanced by a month to June.

The new norms have already come into force in respect of fresh credit limits to individuals and group borrowers, institutional sources said.

The central bank has also directed the institutions to fix internal limits for aggregate commitments to specific sectors like textiles, chemicals and engineering "so that the exposures are evenly spread over various sectors". While fixing the limits, the institutions should take into consideration the "performance of different sectors and the perceived risks".

Although the new norms will be applicable to all borrowers, the Reserve Bank has made an exception in regard to public sector undertakings.

"In so far as PSUs are concerned, only single borrower exposure limit would be applicable", the RBI directive said. In other words, PSUs will not be clubbed as a group even though they are owned by the government. Instead, the institutions will stick to the 25 per cent exposure limit to individual PSUs.

As in the case of commercial banks, the exposure of the term lending institutions will include funded and non-funded credits, underwriting and other similar commitments. The sanctioned limit or outstandings, whichever is higher, will be considered for arriving at the exposure limit. However, in respect of non-funded credit limits, only 50 per cent of such limits or outstandings, whichever is higher, will be taken into account for the purpose.

The new exposure norms have been laid down with a view to ensuring better risk management and avoiding concentration of credit risks. "The new norms are part of a prudent credit management system and not a substitute for efficient credit appraisal, monitoring and other safeguards," the RBI directive said.

Commercial banks have identical credit exposure limits to individual borrowers and groups. For non-banking finance companies, the exposure limit is pegged at a lower level-15 per cent of net-owned funds for a single borrower and 25 per cent for groups.

"Even though the Reserve Bank has for the first time stipulated exposure norms for institutions, we have internally been following the norms -- 25 per cent for single borrower and 50 per cent for groups. We have also put in place industry-wise exposure limits," a senior executive of the Industrial Development Bank of India said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.