Is it just me, or does removing restrictions on lending to large borrowers, seem like a terrible idea? What if we find ourselves looking back a decade from now, to one of the biggest financial implosions of a company that grew too big on the backs of unfettered access to funds, which it pulled off by staying with the limits of each bank, but pretty much tapping every bank in existence for a loan?
What’s happening can be understood in two layers of risk control.
First, at the bank level, each bank still has to comply with the Large Exposure Framework, which limits lending to a single borrower at 20% of Tier 1 capital and to a connected group at 25%. That continues to act as the main safeguard against concentration risk within an individual bank.
Second, at the system level, the 2016 rule that capped total lending by the entire banking system to a large corporate at ₹10,000 crore has now been removed. Instead of that blanket ceiling, the RBI will rely on what it calls macroprudential tools to manage risk if lending to certain corporates or sectors becomes excessive.
It helps to take an example to understand this. Suppose banks start pouring credit into Adani, Reliance, or a hot sector such as data centres or renewables. Each bank may stay within its own 20–25% limit, so individually they are fine. But collectively, the system becomes heavily exposed to the same few borrowers. Under the old rule, lending would have hit the ₹10,000 crore system cap and been forced to stop. Under the new setup, RBI allows credit to keep flowing, but if the build-up looks risky, it can raise the risk weights on those exposures. That immediately increases the capital banks must hold for those loans, making them costlier and cooling the rush in a more targeted way.
The trade-off is timing. This flexible approach gives RBI more precision but also depends on its ability to act fast. If the central bank reacts late, the herd may already have taken on too much exposure. The framework is smarter and less restrictive, but it demands sharper monitoring and quicker decisions.
Thanks. This helps explain what it happening. I'm still wondering though on why or how this is a good thing - removal of the 10K crore cap just means that exposure can get riskier, and we don't really have a great reputation for avoiding the kind of scams that happen when risky borrowers go overboard.
Times have changed since 2016. With data-driven decision-making, AI-based credit models, and tighter transparency rules, the system is far better equipped today. It’s time to align with global best practices, this capital unlocking can channel funds toward critical sectors and scale them at a lower cost of capital for larger corporate.
No idea of what you are talking about food inflation! My morning “Coffee” (Arabica) has seen a ~50 % increase year-on-year🥸
Only if coffee was the only component of our food basket :)
Is it just me, or does removing restrictions on lending to large borrowers, seem like a terrible idea? What if we find ourselves looking back a decade from now, to one of the biggest financial implosions of a company that grew too big on the backs of unfettered access to funds, which it pulled off by staying with the limits of each bank, but pretty much tapping every bank in existence for a loan?
Maybe this helps
What’s happening can be understood in two layers of risk control.
First, at the bank level, each bank still has to comply with the Large Exposure Framework, which limits lending to a single borrower at 20% of Tier 1 capital and to a connected group at 25%. That continues to act as the main safeguard against concentration risk within an individual bank.
Second, at the system level, the 2016 rule that capped total lending by the entire banking system to a large corporate at ₹10,000 crore has now been removed. Instead of that blanket ceiling, the RBI will rely on what it calls macroprudential tools to manage risk if lending to certain corporates or sectors becomes excessive.
It helps to take an example to understand this. Suppose banks start pouring credit into Adani, Reliance, or a hot sector such as data centres or renewables. Each bank may stay within its own 20–25% limit, so individually they are fine. But collectively, the system becomes heavily exposed to the same few borrowers. Under the old rule, lending would have hit the ₹10,000 crore system cap and been forced to stop. Under the new setup, RBI allows credit to keep flowing, but if the build-up looks risky, it can raise the risk weights on those exposures. That immediately increases the capital banks must hold for those loans, making them costlier and cooling the rush in a more targeted way.
The trade-off is timing. This flexible approach gives RBI more precision but also depends on its ability to act fast. If the central bank reacts late, the herd may already have taken on too much exposure. The framework is smarter and less restrictive, but it demands sharper monitoring and quicker decisions.
Thanks. This helps explain what it happening. I'm still wondering though on why or how this is a good thing - removal of the 10K crore cap just means that exposure can get riskier, and we don't really have a great reputation for avoiding the kind of scams that happen when risky borrowers go overboard.
Times have changed since 2016. With data-driven decision-making, AI-based credit models, and tighter transparency rules, the system is far better equipped today. It’s time to align with global best practices, this capital unlocking can channel funds toward critical sectors and scale them at a lower cost of capital for larger corporate.
IMO Benefit outweigh the drawback
Great article team...
Thanks Abhishek!