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In a move that will facilitate better credit flow to some well-rated non-banking financial companies (NBFCs), the Reserve Bank of India has decided that rated exposure of banks to NBFCs would be risk-weighted. In simple terms, higher the risk-weight of a loan category, more the chances of an NBFC getting credit from a bank.
Final guidelines, soon
While the final guidelines for this will be issued by end of this month, banking experts have hailed the move, and expect the capital requirement of banks against these exposure to reduce by more than ₹12,000 crore, which can further be used for incremental lending.
At present, banks’ exposure to NBFCs is estimated at ₹5.7 lakh crore, of which exposure to asset finance companies (AFCs), infrastructure finance companies (IFCs) and infrastructure debt funds (IDFs) is already risk-weighted, based on their ratings.
The central bank said in its sixth bi-monthly monetary policy review meeting that it will risk-weight the exposure of banks on rated, as well as unrated NBFCs, including infrastructure lending, asset finance, and housing finance companies at 100 per cent. The ratings will be similar to those assigned by the rating agencies for corporates.
Consolidation
According to banking experts, the move by the banking regulator will help segregate the good NBFCs from the poor ones, and can also lead to consolidation in the sector.
It will also enable better price discovery, lower capital requirement, and facilitate credit flow from banks.
Khushru Jijina, MD, Piramal Capital and Housing Finance, said: “NBFCs will benefit from the RBI’s decision to link bank risk weights on NBFC exposure to the rating of such instruments. This will improve the flow of bank credit to the better-managed NBFCs, helping segregate the men from boys.”
AM Karthik, Vice-President, ICRA, said: “The reduction in the risk weights for NBFCs is expected to free up the equity capital for banks against their exposure to NBFCs, which the banks can use for incremental credit growth or improvement in their capital ratios. While this can also result in reduced borrowing rates and incremental credit supply for NBFCs, this, however, will depend on banks’ willingness to do so.”
Dharmesh Kant, Head, Retail Research, IndiaNivesh, said: “(It’s a) double bonanza for NBFCs’ low cost of funds.” He added that the move will boost consumption on account of low inflation and high disposal income.
This provides the much-needed respite to the NBFCs that have been under stress after being hit by higher borrowing costs in the wake of the ₹90,000-crore default by IL&FS in October last year
Udaya Kumar, MD and CEO, CreditAccess Grameen, said: “After enhancing the exposure cap from 10 per cent to 15 per cent in October 2018, by allowing exposure of banks to NBFCs based on risk-weighted loans as per the rating assigned by accredited rating agencies, the RBI has given another helping hand for well-rated NBFCs.
“This policy change could potentially encourage banks increase their lending to NBFCs. Further, the reduction of cost of funds by 25 bps, and expected boost in consumption on account of projected low inflation, could bring stability to the NBFC sector, particularly those that cater to the rural mass market.”
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