Finance Industry Development Council (FIDC), a representative of non-banking financial companies (NBFCs), has asked the Reserve Bank of India (RBI) to re-evaluate the sharp increase in risk weights on banks’ loans to the sector.
It has also sought restoration of risk weights on NBFCs where majority of the lender’s loan book consists of MSME loans, vehicle loans and other categories of loans that have been excluded from the purview of the RBI circular.
“While we understand the purpose of the bank to regulate credit flow to the consumer sector, this measure inadvertently, also has the potential to sharply reduce flow of credit to MSMEs, self-employed and other sectors,” FIDC said in a letter sent to RBI on Thursday.
FIDC’s move comes after RBI increased the risk weight on NBFC exposure to unsecured retail loans to 125% from 100% earlier, last week.
Additionally, it increased the risk weights on bank loans to NBFCs by 25 percentage points to 125% in all cases where the extant risk weight rating of an NBFC is below 100%.
The move came as a jolt to NBFCs, as they heavily rely on bank borrowings for funding requirements.
Banks constitute 35-40% of overall borrowings of NBFCs. The increase in risk weights on bank loans to NBFCs mean that, the latter would now have to borrow from the bond market at higher rates.
While larger and higher rated NBFCs have relatively better access to the bond markets, their smaller peers would bear the brunt of the move in the medium term, say analysts.
“There is worry that those NBFCs that lend to key sectors would see a rise in cost of funds as a result of the RBI’s move and this would have a negative impact on the end borrower,” an FIDC board member told FE on condition of anonymity.
The letter added that the cost of funds to these critical sectors is also likely to increase sharply, especially at a time when the MSME and self-employed segments are emerging out of the Covid impact and are looking ahead to increase capital expenditure through modernisation and expansion of productive capacity.