The RBI has aligned the risk weights for bank exposures to all categories of NBFCs other than Core Investment Companies with their credit ratings.
Chennai: The borrowing rates for NBFCs may come down and the credit flow will improve with the RBI deciding to link risk weight with the credit ratings for most non-banking finance companies. The RBI has also tried to lower the complexities concerning different types of NBFCs. Overall, the positive sentiments is expected to support the troubled NBFC sector.
The RBI has aligned the risk weights for bank exposures to all categories of NBFCs other than Core Investment Companies with their credit ratings. This will facilitate credit flow to better rated NBFCs, lowering their cost of bank borrowings and, in turn, for end-consumers, particularly borrowers of micro finance institutions.
Reduction in risk weights for NBFCs is good for both banks and NBFCs. It is expected to free up the equity capital of banks against their exposures to NBFCs, which can be used 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, it will depend on banks’ willingness to do so, said A M Karthik, Assistant Vice President, Icra
“Earlier, risk weight based on external credit rating was applicable for housing finance companies, asset finance companies and infrastructure lending companies. While lending to other NBFCs, risk weight had to be 100 per cent,” said Karthik Srinivasan, Group Head-Financial Sector Rating, Icra.
Banks' exposure to NBFCs is estimated at Rs 5.7 lakh crore, and of this if 50 per cent exposure of banks is to NBFCs in other categories, a 50 per cent reduction in their risk-weights will release Rs 12,500 crore from banks’ capital requirements. This in turn can be used for incremental lending or improvement of their capital ratios, said Karthik.
“This may improve credit flow from the banking sector to better-rated NBFCs,” said Bekxy Kuriakose, Head–Fixed Income, Principal Mutual Fund.
The NBFCs also hope that the repo rate reduction will be transmitted by the banks. “The rate cut comes as a much-needed shot in the arm for India’s NBFCs. While the cut in policy rate will benefit business and industry across the board, the proposal to reduce risk weights on bank exposure to better rated NBFCs will help reduce their cost of funds even further, said V P Nandakumar, MD and CEO, Manappuram Finance
The RBI has also decided to harmonise the three separate categories of NBFCs ---Asset Finance Companies, Loan Companies and Investment Companies, which together constitute almost 99 per cent of NBFCs in terms of numbers--by creating a merged category called NBFC-Investment and Credit Company (NBFC-ICC).