A security guard stands at the gate of the Reserve Bank of India (RBI) headquarters in New Delhi, India. (Photographer: Anindito Mukherjee/Bloomberg)

Monetary Policy: RBI Eases Risk Weight Norms, Allows Banks To Lend More To NBFCs

The Reserve Bank of India has tweaked its guidelines for maintaining risk weights on bank lending to systemically important non-banking finance companies in a manner that will allow more funds to flow to stronger NBFCs. Analysts, however, expect the move to have only a marginal impact on a small subset of NBFCs.

“With a view to facilitating flow of credit to well-rated NBFCs, it has now been decided that rated exposures of banks to all NBFCs, excluding core investment companies, would be risk-weighted as per the ratings assigned by the accredited rating agencies, in a manner similar to that for corporates,” the RBI said in its statement on developmental and regulatory policies.

The current guidelines required a uniform 100 percent risk weight on bank exposure to rated as well as unrated systemically important non-bank lenders that don’t take deposits. This will now change in a manner that banks have to set aside lesser capital for lending to higher rated NBFCs.

The RBI, however, clarified that exposure to core investment companies continues to be risk-weighted at 100 percent.

The central bank will release specific guidelines later this month.

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How Much Will It Help?

Bank loans to NBFCs as of December stood at a little over Rs 5 lakh crore, up 55 percent year-on-year, according to the monthly sectoral data provided by the RBI. Bank lending to non-bank lenders has become important as debt market funding has tightened and rates have risen since the collapse of Infrastructure Leasing and Financial Services in September 2018.

Since then, NBFCs have moved back to bank lines to support their lending activity.

The reduction in risk weights to NBFCs will free up equity capital that banks can use to either improve their capital ratios or increase lending, said Anil Gupta, vice president-financial sector ratings, ICRA Ltd. But the move isn’t guaranteed to help. “It’s possible that banks are not willing to take incremental exposures, therefore a fresh supply of credit to NBFCs is not likely to happen,” he said.

Pankaj Naik, associate director at India Ratings, shared that view.

Banks have sectoral caps on their lending exposure. So for those banks that have already hit those caps, I am not sure how much of this relaxation will help...Just because incremental exposure can be taken on NBFCs thanks to the relaxation, it does not necessarily mean that banks will utilise this opportunity. Lending will still depend on the fundamental risk-perception or underlying risk assessment by banks on individual NBFCs.
Pankaj Naik, Associate Director, India Ratings

Credit Suisse, in a note, added that about a third of the overall NBFC borrowings would be impacted.

“The change in risk weights for bank loans to NBFCs from a mandatory 100 percent to a ratings-based weight affects firms adding up to less than a third of overall NBFC borrowings, as several large categories were already eligible,” said Neelkant Mishra, strategist at Credit Suisse.

It may free up Rs 1.6 lakh crore of risk-weighted assets for banks, Mishra said.

Who Stands To Benefit

Gupta explained that housing finance companies, asset finance companies, infrastructure debt fund and infrastructure finance companies already get the benefit of their risk weights being attached to their ratings. As such, the move by RBI could be looked at as a harmonisation of rules across all NBFC segments, he said.

Should the decision push up bank lending to NBFCs, gold loan firms and microfinance companies could be among the beneficiaries.

In its report, Macquarie Capital noted that AAA, AA and A-rated NBFCs will have risk-weights of 20 percent, 30 percent and 50 percent, respectively, implying lower capital requirements for banks and possibly easier access to funds for NBFCs. The key beneficiaries will be gold finance companies, microfinance companies, according to Macquarie.

According to brokerage firm Antique Broking, the move by RBI is positive for highly rated loan companies like Muthoot Finance, Muthoot Capital, Manappuram, Shriram City Union, Bajaj Finance, etc.

“Given the low capital adequacy of PSU Banks, they were keen to lend to highly rated HFCs and AFC due to benefit of lower risk weights. On the other hand, PSU Banks were not too keen to lend to even highly rated loan companies due to 100 percent risk weights,” Antique Broking said in their report after the policy announcement.

Will Loan Pricing Improve?

The move to reduce risk weights for some categories of NBFCs is unlikely to improve borrowing rates for NBFCs immediately.

Gupta said that NBFCs are not in a bargaining position and hence lower rates are unlikely. Credit to NBFCs has been difficult to come by, which means that there won’t be an immediate transmission of reduced lending rates for these companies, Gupta added.

“Impact on NBFC loan rates and volumes may be marginal,” Mishra wrote.

Pankaj Naik, associate director at India Ratings, said NBFCs could see some relief on the pricing front as banks would need to set aside lesser amounts of capital. But he too was cautious about the benefits of the move.

RBI To Merge NBFC Categories

The regulator also proposed to merge some categories of non-bank lenders to ensure better diversification of business. It will harmonise major categories of NBFCs engaged in credit intermediation, such as asset finance companies, loan companies and investment companies into a single category called NBFC—investment and credit companies.

“The proposed merger of existing categories would reduce to a large extent the complexities arising from multiple categories and also provide the NBFCs greater flexibility in their operations,” the RBI statement said.

The RBI noted that 99 percent of all NBFCs will be covered under the merged category. Detailed guidelines will be issued later this month.

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