New Delhi: The Reserve Bank of India (RBI) has rejected a demand from banks to scrap higher risk weights for loans to government-backed entities such as Power Finance Corp. (PFC), Indian Renewable Energy Development Agency (IREDA) and IIFCL. In a letter sent earlier this month, the RBI said it cannot make an exception for any particular set of non-banking finance companies (NBFCs), said people familiar with the matter.
“We will discuss it with the government and other stakeholders and make a fresh representation after consultations if required,” a senior bank executive told ET.
Easier norms for such government-backed NBFCs are justified because they play a unique and vital role in the country’s economic development, particularly in sustained infrastructure growth aligned with the national agenda, he said.
The RBI didn’t respond to queries.
In November 2023, the regulator increased the risk weights for loans to NBFCs by 25 basis points, making bank borrowing more expensive for them. A basis point is 0.01 percentage point.
Risk weights determine the minimum amount of capital banks need to hold for a particular type of loan. An increase in risk weight would require greater capital allocation for a given loan, raising the cost of funds.
The higher risk weight for bank loans to NBFCs was among several measures announced by the RBI in November to curb the rapid growth in certain components of consumer credit.
Some of the NBFCs for which exemption was sought include Indian Railway Finance Corp. (IRFC), IREDA, PFC and REC, all rated AAA by rating agencies.
IIFCL chairman PR Jaishankar told ET this month that there’s a case to relax the norms for infrastructure NBFCs. Unlike those operating in the retail sector, they are not exposed to riskier loans and have strong underwriting standards.
“We feel there is a case for exemption, as it will help us bring down our cost of credit and help meet the burgeoning demand in the infrastructure sector,” he said.
A recent report by consulting firm Mazars said the NBFC sector saw a 20.8% increase in credit growth in the year to September 2023, driven mainly by a surge in personal (up 32.5%) and agricultural loans (up 43.7%).
A CareEdge Ratings note in January said banks have more than 50% of the total resources of NBFCs. Large NBFCs with asset sizes above Rs 25,000 crore accounted for nearly 80% of the resources mobilised from banks. “Hence, the RBI increased the requirement for capital for banks,” it said.
