RBI Removes ₹10,000 Crore Lending Limit on Individual Corporate Borrowers

In a major regulatory update, the Reserve Bank of India (RBI) has withdrawn a 2016 circular that limited how much the banking system could collectively lend to a single large corporate borrower. This move marks a step towards liberalising bank lending norms while still maintaining safeguards against concentration risk through the Large Exposure Framework (LEF).

Background: The 2016 Circular

The 2016 guidelines were introduced to reduce concentration risk—the danger of too much lending to a single corporate entity.
Under the rule, banks across the system were restricted from collectively lending beyond certain thresholds to a single borrower:

• ₹25,000 crore in FY18
• ₹15,000 crore in FY19
• ₹10,000 crore from FY20 onwards

This limit aimed to prevent situations where large corporate defaults could threaten financial stability.

Why RBI Withdrew the Circular?

According to the RBI, the corporate sector’s share in total bank lending has fallen by nearly 10% since 2016. This indicates that banks have already diversified their portfolios and are less dependent on large corporate borrowers.

RBI Governor Sanjay Malhotra explained that the decision was part of the central bank’s broader goal to rationalise regulations—balancing financial stability with the growth needs of the economy.

Large Exposure Framework to Continue

While the old circular has been withdrawn, the Large Exposure Framework (LEF)—which limits exposure at an individual bank level—remains in place.

Under this framework:

• A bank’s total exposure to a single borrower cannot exceed 20% of its Tier 1 capital.
• For a group of connected borrowers, the limit is 25%.

This ensures that even though system-wide limits are removed, each bank still follows prudent exposure norms to maintain stability.

RBI’s Future Approach to Risk Management

The RBI noted that system-level concentration risks, if they arise in the future, will be managed using macroprudential tools. These are broader policy measures used to safeguard the overall financial system, not just individual institutions.

Bankers’ Reactions: Minimal Immediate Impact

Bankers across the sector believe the withdrawal will not cause a major change in lending trends.
Corporate demand for credit remains low due to:

• Slow private capital expenditure (capex),
• Availability of alternative funding sources, and
• Strong corporate cash reserves.

A senior banker at a public sector bank commented that while the move may bring some relief, lending patterns are unlikely to shift significantly until corporate investment demand rises.

Possible Positive Effects

According to SBI Research, the decision could eventually support bank credit growth. In FY25, corporate borrowing through bonds, commercial papers, and external commercial borrowings (ECBs) was around ₹30 trillion.
If even 10–15% of this returns to banks, it could translate into ₹3–4.5 trillion of additional lending, depending on risk pricing.

This suggests that, in the medium term, the move might redirect part of corporate financing back to the banking system.