New RBI Risk Weight Norms May Hamper MSME Credit Flow: NBFCs

The Finance Industry Development Council (FIDC), representing non-banking financial companies (NBFCs), has urged the Reserve Bank of India (RBI) to reconsider the substantial hike in risk weights on bank loans to the NBFC sector. The council has also called for a review of risk weights on NBFCs, particularly those primarily engaged in lending to MSMEs, vehicle loans, and other categories excluded by the recent RBI circular.

Expressing concerns, FIDC emphasized that while understanding the RBI's intention to regulate credit flow to the consumer sector, the increased risk weights could inadvertently impede credit access to MSMEs, self-employed individuals, and other sectors. This appeal follows the RBI's recent decision to raise the risk weight on NBFC exposure to unsecured retail loans and increase risk weights on bank loans to NBFCs, affecting their borrowing costs.

Revised Risk Weight Norms

Recently, the RBI increased the risk weight on NBFC exposure to unsecured retail loans from 100 per cent to 125 per cent. Additionally, the risk weights on bank loans to NBFCs were raised by 25 percentage points to 125 per cent in cases where an NBFC's existing risk weight rating is below 100 per cent. The impact of these changes is particularly challenging for NBFCs, which heavily rely on bank borrowings for their funding needs, with banks constituting 35-40 per cent of their overall borrowings.

Analysts suggest that while larger and higher-rated NBFCs may have relatively better access to the bond markets, their smaller counterparts could face challenges in the medium term. There are concerns that NBFCs catering to key sectors may experience a hike in the cost of funds due to the RBI's move, potentially negatively affecting end borrowers.

Banks, NBFCs, And RBI’s Concerns

Flagging concerns, RBI Governor Shaktikanta Das emphasized the growing connectivity between banks and Non-Banking Financial Companies (NBFCs), urging banks to continually assess their exposure to NBFCs and the exposure of individual NBFCs to multiple banks. Das highlighted the increasing significance of NBFCs and the interconnectivity between banks and non-banks, stressing that NBFCs, as significant net borrowers, pose heightened exposure risks for banks. He cautioned against concentrated linkages, noting the potential for "contagion risks".

Das also acknowledged the evolving landscape of risks and opportunities, urging stakeholders to leverage emerging prospects. He underscored the critical role of financial stability as the cornerstone of a country's growth and emphasized the impact of price stability on various factors, including financial stability, emphasizing the essential nature of both elements.

Conclusion

In a forward-looking perspective, the Finance Industry Development Council's (FIDC) appeal to the Reserve Bank of India (RBI) to reconsider the elevated risk weights on bank loans to the non-banking financial company (NBFC) sector signals a call for a dynamic and adaptive financial landscape. As financial institutions grapple with evolving risk norms and regulatory adjustments, the emphasis on reviewing risk weights for NBFCs engaged in vital sectors like MSMEs and vehicle loans underscores the need for nuanced policies. A proactive and responsive financial sector will be vital in ensuring the continued strength and adaptability of India's financial ecosystem.