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RBI Eases Risk, Exposure Rules, Banks can Lend More to NBFCs

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Reserve Bank of India Governor Shaktikanta Das gave a big push to retail lending by lowering risk weights for consumer lending and raising the bank exposure limits for non-banking finance companies which could directly boost borrowing capacities for top firms. Housing Development Finance Corp., Mahindra Financial and Chola are among the firms that could benefit from the RBI’s change of rule in regard to banks’ lending to NBFCs. Permission to classify bank lending to some NBFCs that lend to priority sectors as such would reduce the time taken for transmission which otherwise had to wait for securitisation. “This will reduce our capital requirements for these loans and increase our risk adjusted returns,” said PK Gupta, managing director at State Bank of India. “Some of these benefits can be passed on to the customer. It could have some impact on rates though we are yet to calculate it. The main reason this was done was because despite an expansion in these loans, delinquencies have not gone up.”

RBI’s raft of measures to support NBFCs come at a time when many mutual funds are averse to lending to the segment after defaults by Infrastructure Leasing & Financial Services and a few by Anil Ambani Group units. With many of the top NBFCs reaching their limits with banks, they were borrowing from markets which was turning out to be more expensive. RBI has decided to raise a bank’s exposure to a single NBFC to 20% of Tier-I capital of the bank from 15% earlier and it would be in sync with the rules for other industries. The total Tier 1 capital of the banking system is at ?10 lakh crore. “A 5% increase in single counterparty exposure will allow Banks to undertake additional exposure of ?50,000 crore and hence an overall exposure of ?2 lakh crore to a single NBFC,” said Icra, the local unit of Moody’s. There was more for smaller companies and agriculture.

“To augment the flow of credit to priority sectors that contribute significantly to exports and employment, it has been decided to allow bank lending to registered NBFCs, other than MFIs, for on-lending to agriculture,’’ said Governor Das. This could reduce the time taken for transmission of lower rates. “Direct lending to NBFCs for priority sector will remove delay in transmission of rate cut,” said Umesh Revankar, MD, Shriram Transport Finance. “This also would significantly improve the MSME functioning in the current environment and ultimately contribute to faster growth of economy. As the monsoon predication is very positive, the overall demand will pick up during Ganesh Chaturthi and would keep the momentum positive through the year.” Amid the ongoing slowdown in consumption, the reduction in risk weights may induce lenders to cut their lending rates, translating to lower EMIs for borrowers. “With personal loans of ?6 lakh crore outstanding as on June 2019, a 25 basis points reduction in risk weight may also reduce the capital requirements of banks by ?12,500 crore and add 14 basis points to their capital ratios,” said Icra.

The Economic Times, 8th August 2019
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