The latest move by the Reserve Bank of India (RBI) to regulate the growth of consumption oriented credit by levying risk weight of 125% on consumer credit exposure of NBFCs has raised many questions on the business of these lenders.
In this context, FIDC, the representative body of NBFCs in India has written to the central bank to re-evaluate the sharp increase in risk weights assigned to bank loans to NBFCs.
Importantly, the body has requested the RBI to restore the risk weight on bank loans to NBFCs.
“We would request the RBI to kindly restore the risk weight on bank loans to NBFCs where majority of the NBFCs’ loan book consists of MSME loans, vehicle loans and other categories of loans that have been excluded from the purview of the aforesaid circular,” it said in its letter.
Talking in details with ETBFSI on the matter, FIDC’s Raman Aggarwal said, “The increase in the risk weight on bank credit to NBFCs is a surprise move. All bank credit to NBFCs will carry an additional risk weight of 25% which would mean that the funds which are given as loans for vehicles or MSME loans will also get affected. But RBI has in its circular said that its intend is not to affect these loans.”
“So, we have requested RBI to increase the risk weight only for the funds which are extended as consumer loans and not for every sector. The unsecured loan by the NBFCs will be poorly affected by the increase in risk weight move by the RBI,” he added.
FIDC welcomed RBI’s move to regulate the growth of consumption oriented credit and also the move to differentiate that from credit intended for industrial and commercial growth and for the purpose of productive asset creation.
“This we believe would redirect credit flow towards capital expenditure and aid in greater degree of funds flow towards meeting working capital needs especially of the MSME and self-employed sectors,” it said.
However, it requested the RBI to re-evaluate the sharp increase in risk weights assigned to bank loans to NBFCs. 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 which rely upon 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 emerging out of the Covid impact and are looking ahead to increase capital expenditure through modernization and expansion of productive capacity.
