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Banks can lend more to oil cos
May, 31st 2008

Banks have been allowed to lend more money to state-owned oil companies, which are finding themselves cash-strapped because of surging crude prices and their inability to pass on the burden to consumers.

The central bank has told banks that they can lend up to 25% of their capital funds to oil companies as against 20% earlier. This limit can be increased to 30% on board approval. Following a representation from banks, which had touched their single borrower exposure limit to oil companies, RBI has allowed banks higher exposure limits.

Though oil companies are viewed as very sound borrowers because of government ownership, they are facing a cash-crunch as the government subsidy has been in the form of oil bonds.

RBIs move to increase the limit also protects the bond markets. If banks refuse to lend more to the oil PSUs, the oil companies would be forced to undertake a distress sale of oil bonds, pushing up bond yields.

Given that the fund-requirement of oil companies run into several billion dollars every month, only the State Bank of India (SBI) is in a position to lend to them without breaching its exposure limits.

Following its rights issue this year, the bank has a net worth of Rs 50,000 crore. This does not include tier II bonds, which are also taken into account while computing exposure limits. Earlier this week, SBI borrowed Rs 13,000 crore under the repo option.

Bankers felt that the borrowing was to fund oil imports by public sector refining companies. In a circular issued here on Thursday, RBI said, On a review of the current situation in the oil sector, it has been decided to revise with immediate effect the above exposure limit to 25% of the capital funds, only in respect of oil companies who have been issued oil bonds (which do not have SLR status) by the government.

In addition to this, banks may, in exceptional circumstances, consider enhancement of the exposure to the oil companies up to a further 5% of capital funds.

Though prudential norms prescribed by RBI cap for any borrower is limited to 15% of a banks capital funds, an additional 5% (that is, up to 20%) is allowed for credit exposure to infrastructure projects. According to RBI definition, oil companies come under the ambit of the infrastructure sector.

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