RBI Withdraws 2016 Circular
RBI Eases Lending Norms for Large Corporate Borrowers: The Reserve Bank of India (RBI) has withdrawn its 2016 circular that restricted how much the banking system could lend to a single corporate borrower. The earlier rule aimed to reduce concentration risk, where large loans to a few corporates could threaten financial stability. This withdrawal is part of RBI’s broader goal to simplify lending norms and promote economic growth.
Static GK fact: The RBI, established in 1935, functions as India’s central bank and regulator of monetary and credit systems.
Background of the 2016 Rule
The 2016 guidelines were implemented to curb overexposure of banks to big corporates. The system-wide lending caps were:
- ₹25,000 crore for FY18
- ₹15,000 crore for FY19
- ₹10,000 crore from FY20 onwards
These thresholds were designed to ensure that defaults by large borrowers would not destabilize the financial system.
Reasons for Withdrawal
According to the RBI, the share of corporate lending in total bank credit has fallen by nearly 10% since 2016. This indicates that banks have diversified portfolios and reduced dependency on large borrowers.
RBI Governor Sanjay Malhotra stated that the move aligns with the central bank’s aim to rationalize regulations, ensuring financial stability while allowing credit expansion in line with India’s growth trajectory.
Static GK Tip: The RBI Governor serves a tenure of three years, extendable by reappointment under the RBI Act, 1934.
Large Exposure Framework Continues
Even though the overall system limit is withdrawn, the Large Exposure Framework (LEF) will continue to operate at the individual bank level. Under the LEF:
- A bank’s exposure to a single borrower cannot exceed 20% of its Tier 1 capital.
- Exposure to a group of connected borrowers cannot exceed 25%.
These norms ensure prudent risk management while allowing more flexibility for banks.
Managing Future Risk
The RBI clarified that if system-level concentration risks arise in the future, it will use macroprudential tools—broad policy measures that safeguard the financial system as a whole. Such tools can include counter-cyclical capital buffers or sectoral lending caps to maintain balance between credit growth and systemic stability.
Market Reaction and Outlook
Bankers believe that the immediate effect of the withdrawal will be limited. Corporate credit demand remains subdued due to low private capex, availability of alternative funding sources, and healthy cash reserves of large firms.
However, in the medium term, analysts expect the change to encourage bank credit growth. As per SBI Research, corporate borrowing from non-bank sources such as bonds and external commercial borrowings (ECBs) reached around ₹30 trillion in FY25. If even 10–15% of this returns to the banking system, it could lead to an additional ₹3–4.5 trillion in bank lending.
Static GK fact: The State Bank of India (SBI) is the largest commercial bank in India, founded in 1955, with over 22,000 branches nationwide.
Static Usthadian Current Affairs Table
RBI Eases Lending Norms for Large Corporate Borrowers:
| Topic | Detail |
| Regulatory body | Reserve Bank of India |
| Withdrawn circular year | 2016 |
| Previous system-wide limit | ₹10,000 crore from FY20 onwards |
| Large Exposure Framework (LEF) limit for single borrower | 20% of Tier 1 capital |
| LEF limit for group borrowers | 25% of Tier 1 capital |
| Reason for withdrawal | Diversified corporate exposure and reduced risk |
| RBI Governor | Sanjay Malhotra |
| Estimated additional credit flow | ₹3–4.5 trillion |
| Key analytical source | SBI Research |
| Future risk management tool | Macroprudential measures |
