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RBI frees up Rs 19,000 crore for banks

Banks’ exposure to NBFCs is estimated at Rs 5.7 lakh crore, of which exposure to AFCs, IFCs and IDFs is already risk-weighted, based on their ratings

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To improve credit flow to the non-banking finance companies (NBFCs), Reserve Bank of India lifted the 100% risk weights on bank funding and will make it dependent on the credit rating of these firms. This is expected to free up to Rs 19,000 crore, according to an estimate by the Economic and Research wing of State Bank of India. Banks can use this amount for further lending requirements.

However, the operational guidelines will be issued to the banks at the end of this month. Risk weight is the capital that banks have to set aside as a buffer while lending to NBFCs. The risk weights on lending to group investment companies will continue to be at 100% of the loan.

"The decision to rationalise the risk weights for on lending to rated NBFCs will enable better price discovery, lower capital requirement and facilitate credit flow from the banks," said Rajnish Kumar, chairman State Bank of India (SBI).

RBI said in a release, "With the 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."

"Reduction in risk weights for NBFCs is expected to free up the equity capital for banks against their exposures 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 will depend on banks' willingness to do so," said A M Karthik, assistant vice president at credit rating firm Icra.

Banks' exposure to NBFCs is estimated at Rs 5.7 lakh crore, of which exposure to asset finance companies, infrastructure finance companies and infrastructure debt funds is already risk-weighted, based on their ratings. "Assuming a 50% exposure of banks' exposure to NBFCs in other category and a 50% reduction in their risk-weights, the capital requirements of banks against these exposures can reduce by Rs 12,500 crore, which, in turn, can be used for incremental lending or improvement their capital ratios. This is equivalent to a 0.125% improvement in capital adequacy ratios for banks," Karthik added.

Though bank lending to the NBFCs has been growing strong, most of it is to government-owned firms like Power Finance Corporation, National Housing Bank, NTPC and so on. As per RBI data, the year-on-year growth of bank credit to the NBFC sector was 55% to Rs 5,70,900 crore in the third quarter ended December, but a bulk of this is to government-backed NBFCs.

After IL&FS's failure to repay its debt market commitments last year, there is a general lack of confidence in lending to NBFCs, particularly to those in the housing finance sector where asset-liability mismatches are high as many of the companies are borrowing short-term funds to lend for long-term assets.

"The proposal to reduce the risk weights on bank exposure to better-rated NBFCs will help reduce their cost of funds even further. The rate cut comes as a much-needed shot in the arm for India's NBFCs," said V P Nandakumar, managing director and chief executive officer, Manappuram Finance Ltd.

LENDING HELP

  • Banks’ exposure to NBFCs is estimated at Rs 5.7 lakh crore, of which exposure to AFCs, IFCs and IDFs is already risk-weighted, based on their ratings
     
  • Though bank lending to the NBFCs has been growing strong, most of it is to government-owned firms like PFC
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