NBFCs Seek Risk-Weight Rejig Amid Rising RBI Scrutiny

Large Non-Banking Financial Companies (NBFCs) classified under the Upper Layer have requested the Reserve Bank of India (RBI) to revise (reduce) risk weights on certain loan categories, particularly retail loans, citing stricter regulatory scrutiny and higher capital requirements.

Key Issue

• Retail loans account for about 90% of NBFC industry Assets Under Management (AUM).
• NBFCs currently face higher risk weights than banks on similar loans, which increases their capital requirements.

Difference in Risk Weights: Banks vs NBFCs

Retail Loans (Vehicle loans, MSME loans, loans against property, gold loans)

Corporate Loans

This difference raises the capital cost for NBFCs, making lending less competitive.

Reasons for NBFC Demands

1. Increased Regulatory Scrutiny
   • RBI supervision of large NBFCs is now almost at par with universal banks.
2. Higher Capital Requirements
   • NBFCs must maintain higher capital adequacy ratios.
3. Expected Credit Loss (ECL) Model
   • NBFCs follow stricter provisioning norms, increasing financial pressure.
4. Need for Harmonisation
   • NBFCs want risk weights aligned more closely with those for banks.

Additional Demands by NBFCs

1. Dedicated Refinance Window

• Similar to the National Housing Bank (NHB) facility for Housing Finance Companies.

2. Permission to Accept Public Deposits

• RBI has not allowed large NBFCs to accept deposits for decades.

Funding Challenges

• Institutional investors like EPFO and PFRDA mainly invest in government securities.
• Investments in NBFC bonds (NCDs) are largely limited to AAA or AA rated NBFCs.
• Mutual funds also avoid lower-rated NBFC debt, making fundraising difficult for A or BBB rated NBFCs.

Key Concept: Upper Layer NBFCs

Under RBI’s Scale-Based Regulation (SBR) Framework, NBFCs are classified into:

1. Base Layer (NBFC-BL)
2. Middle Layer (NBFC-ML)
3. Upper Layer (NBFC-UL) – large and systemically important NBFCs
4. Top Layer (NBFC-TL) – if risks increase significantly