Public sector banks seek relaxation on risk weight for NBFC loan purchases

Public-sector banks (PSBs) have sought a relaxation in risk weight for retail loans they will buy from non-banking financial companies (NBFCs) under a partial credit guarantee scheme backed by the government.

Banks have to set aside capital for loan exposures based on the risk weight linked to an asset class. 

Senior public-sector bankers said the government was finalising a scheme under which it would give a partial guarantee for losses on such loans. 

This is not a bailout package but a commercial arrangement to assistance. 

This scheme is backed by the government and risk weights should be lower for such loans. The pool would carry at least the ‘AA’ rating and the risk of a hit to banks is going to be negligible, said bankers on the sidelines of a conclave on the Parital Guarantee Scheme by Edelweiss Group.

Sunil Srivastava, senior advisor, Edelweiss Financial Services Group, said there was a direct assignment of loans with credit enhancement, which negated the risk of default. Hence, there is scope to prescribe a lower risk weight for such loans.

The Budget for 2019-20 came up with a Rs 1 trillion partial guarantee scheme for PSBs to buy highly rated pooled assets of financially sound NBFCs.

NBFCs, including housing finance companies (HFCs), came under stress following a series of defaults by the group companies of IL&FS in September last year.

To help the sector come out of the stress, the government announced support for fundamentally sound NBFCs in getting assistance from banks.

It is about two months now that the finance ministry came up with the scheme. The initial timeframe for the scheme is six months. The modalities are being worked out so it would be advisable to extend the tenure of the scheme till March next year.

This scheme is expected to ease credit flow in the last mile for micro and small enterprises and retail clients.