The Reserve Bank of India, in a new directive to all banks, has allowed the banks to lend more money to state-owned oil companies. This new development comes in the light of many companies finding themselves cash-strapped because of surging crude prices and their inability to pass on the burden to consumers.

The banks, as directed by the RBI, 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. Most of the banks had touched their single borrower exposure limit to oil companies, and the RBI took the new decision, following a representation from banks.

The RBI has allowed banks higher exposure limits, even though oil companies are viewed as very sound borrowers because of government ownership. This is due to the cash-crunch they are facing as the government subsidy has been in the form of oil bonds.

Since the oil companies have a strong influence in the bond markets as well, so the RBI 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.

Before the RBI ruling, only the State Bank of India (SBI) was in a position to lend to them without breaching its exposure limits, as the fund-requirement of oil companies run into several billion dollars every month. Following its rights issue this year, the bank has a net worth of Rs 50,000 crore. This value 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.