Under the existing norms, the exposures included in the retail portfolio of banks are assigned a risk weight of 75% if they meet certain criteria, including the low value of individual exposures.
Small businesses and individual borrowers have reason to cheer as the Reserve Bank of India on Friday allowed banks to lend more to these segments. This move could lead to lenders lowering their interest rates for certain categories of loans.
RBI permitted banks to lend up to ₹7.5 crore to individual retail and small business borrowers and still be eligible for a 75% risk weight norm, which stipulates the minimum amount of capital to be set aside by banks before making a loan. The limit was at ₹5 crore earlier and allowing a higher threshold for availing the risk-weight benefit will give an impetus to banks.
Under the existing norms, the exposures included in the retail portfolio of banks are assigned a risk weight of 75% if they meet certain criteria, including the low value of individual exposures. The increase in exposure limit could lead to a rise in the much-needed credit flow to the small business segment.
“The regulatory changes for retail loans are quite timely and will encourage banks to go for higher retail lending as we head into the festive season," said Amitabh Chaudhry, chief executive, Axis Bank.
Small businesses and retail borrowers are perhaps the worst hit by the covid-19 pandemic, crimping their ability to repay existing debt. The central bank has in the past supported these sectors by allowing a repayment moratorium and debt recasts. The government has proposed to waive off compound interest for micro, small and medium enterprise (MSME) and individual borrowers between April and September, although a final decision is yet to be announced.
Experts believe that the move will be beneficial for banks and borrowers alike. While borrowers might expect a lower rate of interest on some loans, lenders will be able to conserve capital, not so readily available for banks.
While this move will not provide relief on capital requirements for banks on their existing loan portfolio, the reduced risk weights will enable them to lower their lending rates on fresh loans, improving credit demand and consumption, said A.M. Karthik, vice-president, Icra.
To be sure, the transmission of repo rate cuts to small borrowers have been significantly higher than other sectors, as pointed out by RBI. According to RBI, there has been a significant improvement in transmission to all new loans sanctioned since October 2019 when the new floating rate loans to these two sectors were mandatorily linked to an external benchmark.
Meanwhile, RBI also allowed housing finance companies to co-originate priority loans with banks, which so far were restricted to non-banking financial companies (NBFCs). This measure is expected to boost the flow of credit to the underserved segments of the economy.
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