FIDC Requests RBI To Re-Evaluate Higher Risk Weights For Bank Loans To NBFCs
Spike in cost of funds is a concern, especially when the MSME and self-employed segments are recovering from Covid-19 impact.
The Finance Industry Development Council, the representative body for non-bank lenders, wrote to the Reserve Bank of India seeking a re-evaluation of the move to increase the risk weights of bank loans to NBFCs, according to a FIDC letter reviewed by BQ Prime.
"...this measure, inadvertently, also has the potential to sharply reduce the flow of credit to MSMEs, the self-employed and other sectors, which rely upon credit from NBFCs," the letter stated.
On Nov. 16, the RBI increased the risk weight on consumer credit by banks and NBFCs to 125%, compared to 100% earlier. For NBFCs, consumer loans include retail loans but exclude housing, educational, vehicle, and microfinance loans, along with lending against gold jewellery.
Similarly, credit card receivables for NBFCs will attract a risk weight of 125%, compared to an earlier 100%.
The FIDC underlined the concerns over a sharp increase in the cost of funds for unsecured personal loans and credit card receivables, "especially at a time when the MSME and self-employed segments are emerging out of the Covid impact."
In the letter seen by BQ Prime, the representative body requested the RBI restore the risk weight on bank loans to NBFCs, as the majority of the NBFCs' loan book consists of MSME loans, vehicle loans and other categories of loans.
In the last few days, analysts have flagged concerns about the growth of NBFCs going forward, as it would push the cost of borrowings higher and, in turn, make lending costlier. Banks' borrowings, which are a major source of funding for the NBFCs, constitute 41.2% of the total borrowings of the entities as of March 31, according to S&P Global Research.
"The cost of bank loans to NBFCs will rise incrementally," the firm said in a research note on Nov. 17.
According to analysts at Bernstein Research, the RBI's move is a "double whammy" for NBFCs as it would result in higher capital charges and borrowing expenses.
"Within the NBFCs, the larger ones are likely to see a greater cost of funds impact as the change in capital charge (from a 25 percentage point increase) would be greater for them versus the smaller NBFCs," Bernstein Research said.
