The latest move by the Reserve Bank of India (RBI) to regulate the growth of consumer-oriented credit by charging a risk weight of 125% on consumer credit exposure of NBFCs has raised many questions about the business of these lenders.
In this context, FIDC, the representative body of NBFCs in India has written to the central bank to reassess the sharp increase in risk weights assigned to bank loans to NBFCs.
Importantly, the body has asked the RBI to restore the risk weighting on bank loans to NBFCs.
“We would request the RBI to kindly restore the risk weight of bank loans to NBFCs where the majority of the loan book of the NBFCs consists of MSME loans, vehicle loans and other categories of loans which have been excluded from the said circular ,” it said in its letter.
Speaking in detail to ETBFSI on the matter, FIDC’s Raman Aggarwal said, “The increase in the risk weight of bank credit to NBFCs is a surprising move. Every bank credit to NBFCs will carry an additional risk weight of 25%, which would mean , that the funds given as vehicle loans or MSME loans will also be affected. But RBI said in its circular that its intention is not to affect these loans.”
“So, we have asked RBI to increase the risk weight only for the funds that are extended as consumer loans and not for every sector. The unsecured loan of the NBFCs will be adversely affected by the increase in risk weight by the RBI,” he added. .
FIDC welcomed RBI’s move to regulate the growth of consumer-oriented credit and also the move to differentiate this from credit meant for industrial and commercial growth and for the purpose of creating productive assets.
“This, we believe, would redirect credit flow towards capital expenditure and help in greater degree of financial flow towards meeting working capital needs especially of the MSME and self-employment sectors,” it said.
However, it asked the RBI to reassess the sharp increase in risk weights allocated to bank loans to NBFCs. While we understand the Bank’s objective to regulate credit flow to the consumer sector, this measure inadvertently also has the potential to sharply reduce credit flow to MSMEs, self-employed and other sectors that depend on credit from NBFCs.
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 coming out of the Covid impact and looking ahead to increase capital expenditure through modernization and expansion of production capacity.