RBI tightens norms for banks lending to overseas subsidiary of Indian companies
MUMBAI: The Reserve Bank of India has tightened norms for banks lending to overseas subsidiary of Indian companies by raising the provisions substantially against these loans. On Thursday, RBI said that banks can extend loan to overseas subsidiaries of Indian corporates but they have to make 2% of the loan amount as provision on such loans. For all other standard loans bank are required to set aside just 0.40% of the loan amount .
The higher provision is aimed at mitigating risk that may arise from complexity in the structure of the loan, location of different intermediary entities in different jurisdictions exposing the Indian company, and hence the bank, to greater political and regulatory risk. These higher provisions are in addition to country risk provision that is applicable to all overseas exposures.
According to Parag Jariwala, vice president institutional research -banking and financial services, Religare Capital “This is negative for banks having high overseas loan book. ICICI Bank (which is 20% of total loans) is most impacted. Among PSU banks, Bank of Baroda and Bank of India has highest overseas loans (around one-third of total loans).” On Thursday, the central bank said that banks may extend funded and non-funded credit facilities to the step-down subsidiaries of Indian companies including to those beyond the first level, to finance the projects undertaken abroad. However, RBI has said that overseas subsidiary should be directly controlled by the Indian parent company and it should hold at least 51% stake in the subsidiary
RBI has stipulated that all the step-down subsidiaries, including the intermediate ones, should be wholly owned subsidiary of the immediate parent company. The immediate parent, should be wholly or jointly, have control over the step-down subsidiary.