RBI eases norms for bank lending to well-rated NBFCs

  • RBI also announced harmonization of different categories of NBFCs
  • NBFCs have been hit by higher borrowing costs in the wake of default by IL&FS

The RBI today eased norms for maintaining risk weights on bank lending to non-banking finance companies or NBFCs. This move was welcomed by analysts as it will allow banks to lend more to stronger NBFCs. The RBI also announced harmonization of different categories of NBFCs to provide them with higher flexibility in their operations. Many NBFC shares surged after the policy announcement. Shares of L&T Financial Holding, Manappuram Finance and Muthoot Finance climbed 6% after the RBI announcement.

NBFCs have been hit by higher borrowing costs in the wake of default by IL&FS and some of its arms. If a category of loan carries a higher risk weight, then banks have to set aside more capital.

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“Under extant guidelines on Basel III capital regulations, exposures/claims of banks on rated as well as unrated non-deposit taking systemically important non-banking financial companies…have to be uniformly risk-weighted at 100%. With a view to facilitating flow of credit to well-rated NBFCs, it has now been decided that rated exposures of banks to all NBFCs, excluding core investment companies (CICs), would be risk-weighted as per the ratings assigned by the accredited rating agencies, in a manner similar to that for corporates," the RBI said in a statement. 

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RBI will issue detailed guidelines in this regard by the end of February 2019.

RBI today in its policy review cut repo rate by 25 basis points to 6.25% while switching to a neutral policy stance that makes some analysts hopeful of further rate cuts this year.

Welcoming RBI’s policy announcements, Rupa Rege Nitsure, chief economist at L&T Financial Services said: "Based on the evolving dynamics of inflation, demand and growth, this is the perfect policy response in the current circumstances. Aligning NBFCs' (non-banking financial companies') risk weights to cost of bank borrowings will go a long way in correcting the distortions."

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The RBI also moved towards harmonization of various NBFC categories. At present, there are twelve such categories. “It has now been decided to harmonise major categories of NBFCs engaged in credit intermediation, viz., Asset Finance Companies (AFC), Loan Companies, and Investment Companies, into a single category. The proposed merger of existing categories would reduce to a large extent the complexities arising from multiple categories and also provide the NBFCs greater flexibility in their operations. It will cover 99% of the NBFCs by number," the RBI said.

RBI will issue guidelines in this regard by the end of this month. 

With agency inputs

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