The central bank on Tuesday said banks can assign risk weights to exposures they have to non-banking financial companies (NBFCs) depending on ratings given to them by accredited credit rating agencies. At present, bank exposure (rated and un-rated) attracts 100 per cent risk weight.
The RBI also decided to harmonise categories of NBFCs and bring asset finance companies, infrastructure finance firms and infrastructure debt funds under one category. The central bank said this would cover 99 per cent of the NBFCs and the merger will reduce, to a large extent, the complexities arising from multiple categories and provide the NBFCs greater flexibility in their operations. Detailed norms, the RBI said, would be issued by the end of February.
The relaxation in risks weights is expected to make credit cheaper for better rated NBFCs. The leeway means banks will be required to hold less capital against loans to some of the better performing NBFCs. Similarly, the banks will have to set aside more capital if they are lending to NBFCs that do not have high ratings.
A M Karthik, assistant vice-president, ICRA, said: “The reduction in risk weights for NBFCs is expected to free up equity capital for banks against their exposures to NBFCs, which the banks can use for incremental credit growth or improvement in their capital ratios.” However this (giving more loans to NBFCs) will depend on banks’ willingness to do so, he said.
Currently, three categories of NBFCs — asset finance companies, infrastructure finance firms and infrastructure debt funds — have the flexibility to assign risk weights depending on the credit rating of the NBFCs.
Khushru Jijina, managing director of Piramal Capital, said, “NBFCs would benefit from the decision to link bank risk weights on NBFC exposures to the rating of such instruments. This would improve flow of bank credit to the better managed NBFCs, helping segregate the men from the boys.”
The RBI clarified that exposures to core investment companies would continue to be risk weighted at 100 per cent.
Banks have an estimated Rs 5.7 trillion of exposure to NBFCs. Bank credit to NBFCs has grown by 55 per cent (year-on-year) up to December 2018, according to data from the RBI. After the IL&FS group defaulted on its debt obligations, the NBFCs saw a period of tight liquidity. Moreover, the rates at which these NBFCs could raise funds from commercial paper also went up. During period of liquidity crunch, banks also bought retail loan portfolio from NBFCs to provide much needed resources to them.