NBFCs' contagion concerns

Reserve Bank of India's decision to increase risk weights on unsecured consumer loans and bank funding has dealt a double blow to non-banking financial companies

Non-banking financial companies (NBFCs) have recently been in the news for the wrong reasons. The Centre for Advanced Financial Research and Learning (Cafral) released a report highlighting a growing risk in bank financing for NBFCs and potential dangers in the digital lending landscape.

Subsequently, the Reserve Bank of India (RBI) decided to increase the risk weights on unsecured consumer loans from banks, NBFCs and credit card providers, as well as on bank loans to NBFCs. The RBI’s decision was prompted by a surge in consumer credit growth, a significant portion of which is unsecured, and increased bank lending to NBFCs.