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Mumbai: The Reserve Bank of India’s directives, which raise risk weights on bank loans to finance companies and necessitate them to divest some of their investments in Alternate Investment Funds, will not adversely impact the credit ratings of non-banking finance companies.

Last month RBI asked banks and finance companies to exit all investment in Alternate Investment Funds that have invested in companies that are debtors to the investing lenders. This directive came close on the heels of RBI’s move to curb bank loans to NBFCs.

“We do not anticipate the ratings of NBFCs to be adversely affected by the RBI directive to liquidate investments in AIFs where the lenders have exposure, said Sanjay Kumar Agarwal, senior director, CareEdge ratings speaking to TOI. CareEdge rates the largest number of NBFCs, which provides the rating agency with a comprehensive view of the developments in this segment.

“The AIF route was instrumental for NBFCs in funding real estate projects with uncertain timelines. In the AIF, lenders tend to have exposure because there is a need for an initial investor with liquid resources.However, investments in such AIFs were existing assets are funded were considered as stressed assets for rating purposes,” said Agarwal.

He added that the RBI directive will not significantly impact capital adequacy, as most of the large NBFCs maintain capital adequacy significantly above the threshold. “For the purpose of rating, we focus on the gearing ratio, which is more conservative than capital adequacy,” said Agarwal.

According to Agarwal, the RBI’s measures are not a response to any stress in NBFCs. These non-banking finance companies demonstrated significant growth last year after facing strain for nearly five years due to the crisis in the sector, primarily caused by the collapse of DHFL and IL&FS, followed by the subsequent Covid-19 pandemic.

“The RBI has explicitly stated that the increase in risk-weightage on loans by Banks to highly rated NBFCs was due to the high rate of growth in the sector. We view it as a proactive measure, as we are not observing any signs of stress. Even if some borrowers face challenges, the companies are well-positioned to make provisions,” Agarwal added.

  • Published On Jan 5, 2024 at 09:08 AM IST

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