Lower risk weight to help NBFCs raise funds at competitive rates

The Reserve Bank of India Thursday revised the risk weight requirement for high-street lenders funding nonbanking finance companies (NBFC), paving the way for a cut in borrowing costs and increased financing to many of the country’s last-mile financiers.

RBI has reduced the risk weight for rated exposure from the existing 100 per cent to weights linked to their respective external ratings, in a manner similar to that for corporates. This will enable stronger and well-rated NBFCs to raise more funds at competitive rates.

“With a view to facilitating the flow of credit to well-rated NBFCs, it has now been decided that rated exposures of banks to all NBFCs, excluding Core Investment Companies (CICs), would be risk-weighted as per the ratings assigned by the accredited rating agencies,” RBI said in a statement on development and regulatory policies. “Exposures to CICs will continue to be riskweighted at 100 per cent.”


The central bank guidelines will be published by end-February.

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.

“The 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,” said Karthik Srinivasan, senior VP, Icra. “While this can also result in reduced borrowing rates and incremental credit supply for NBFCs, this will depend on the willingness of banks to do so.”

Assuming half of banks’ total exposure to NBFCs is to the category not covered by differential risk weights, the capital requirements of banks against these exposures can come down by Rs 12,500 crore. This amount, in turn, can be used for incremental lending or improving the capital ratios at the lenders. This is equivalent to a 0.125 per cent improvement in capital adequacy ratios at high-street banks, said Srinivasan.

RBI has decided to harmonise major categories of NBFCs engaged in credit intermediation, asset finance companies, loan companies and investment companies into a single category.

“This is hugely positive for highly rated loan companies such as Muthoot Finance, Muthoot Capital, Manappuram, Shriram City Union and Bajaj Finance,” said Digant Haria, an analyst at Antique Broking. “Given the low capital adequacy of PSU Banks, they were keen to lend to highly rated HFCs and AFCs due to the 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 per cent risk weights.”