RBI Move on Group Exposure Will Hurt Banks: Moody's

Bangalore: State Bank of India and ICICI Bank are among those that would be affected if the Reserve Bank of India implemented its proposed guidelines on banks exposure to their group entities, global credit rating agency Moody said. Last week, the Reserve Bank released draft guidelines to limit banks exposure to their own group non-financial and financial entities. According to Moody, the proposed rules would hurt companies that depend on parent banks for capital and brand support, particularly those with large international operations, or those that operate insurance, securities or asset management businesses that need capital and liquidity support to meet their business needs. If the RBI adopts them, the new guidelines would be credit positive for India banks, but credit negative for group companies that rely on parent banks for capital and brand support, Moody Investors Service said in a report. It said the affected banks included ICICI Bank, State Bank of India, Bank of India, Bank of Baroda and Kotak Mahindra Bank.

The guidelines would lead these banks to re-examine the financial support they provide to group businesses as anything exceeding the stipulated limits would be detrimental to their standalone capital calculations and thus their business growth, Moody said. The rules, it said, would benefit Indias banks because they would reduce their concentration and contagion risks from group activities. The guidelines, if implemented, would limit to 5 percent of paid-up capital and reserves a banks exposure to a single group non-financial entity, while the maximum exposure to regulated financial services companies would be 10 percent. However, Moody said that for the time being, these draft guidelines did not help the banks in any way to cope with their immediate asset quality challenges owing to the difficult environment.