RBI to half risk weightage on asset finance companies

Non banking asset finance companies (AFC) will be able to lend more to commercial vehicle, construction vehicle handling equipment and infrastructure companies with the Reserve Bank of India (RBI) planning to reduce the risk weightage on them by up to 50%. Lowering of risk weightage would mean reduced provisioning by the lenders which in turn means availability of more funds to the companies. The ministry also wants RBI to bring down the risk associated with personal loans against gold and jewellery.

The finance ministry has forwarded a recommendation in this regard to the RBI and the central bank is expected to take a final call within a few weeks.

"We are in discussions with the RBI for relaxing the risk norms for the NBFC-AFC. There has been a few meetings between the RBI and ministry officials. RBI seems to be in agreement with the view of the ministry. However, we are still waiting for a formal response from the RBI in this regard," said an official in the finance ministry who did not wish to be named.

Under the present norms, the assets financed by NBFCs carry a uniform risk of 100% (regardless of whether the credit is secured or unsecured). Each lending institution (banks or NBFCs) have to allocate certain risk to the credit they extend. These companies have to make a provisioning according to the risk involved.

A 100% risk means that the institution would have to make a provisioning of the mandated proportion of loan in their books. This mandated proportion is called the capital to risk weighted asset ratio (CRAR) or capital adequacy ratio (CAR).

If the risk weight is low, NBFCs will be able to reduce the minimum capital requirement and extend more loans. The minimum money that is set aside is called the capital adequacy ratio (CAR).

"Various credit rating agencies have approved that commercial vehicles, cars and construction equipment have a much lower risk profile, as compared to other categories of assets. They are easily saleable and posses significant residual values and therefore deserve to be treated on a different footing from other assets," said a senior official of a NBFC, who also asked not to be named.

In a similar move, the central bank, had last year in November reduced the risk weight associated with claims secured by commercial real estate from 150% to 100% to infuse liquidity in real estate segment. After the second stimulus, various NBFCs had requested the government to revise the risk weight for assets financed by NBFCs and allow differential rate of interests.