Context:
Risk weights on microfinance loans were clarified by the Reserve Bank of India (RBI), thus decreasing the capital requirements on banks. 75% Risk weights have now been imposed on loans considered under the regulatory retail portfolio or business loans. Earlier, this slab was confusing and was considered under 125%. Consumer credit microloans, which do not fall under regulatory retail, will now carry a 100% risk weight instead of 125%.
Bank Funding Impact On NBFCs
- The move is well accepted for the NBFC sector, as it frees bank capital for lending, states Ajit Velonie, Senior Director, Crisil Ratings.
- The borrowings of NBFCs from banks have already gone down from 47% in the pre November 2023 to 45% as they moved towards capital markets and ECBs.
- With rising hedging costs for ECB due to dollar volatility, the space for alternate funding was becoming even more constricted.
Clarification to Resolve: Bank’s Uncertain Stand
- The confusion set in by the November 2023 RBI guideline left the banks agitated under the misunderstanding of being made to increase risk weights while the NBFCs had been spared of any alteration on the microloan risk weights.
- Some banks were being forced by the RBI supervisors to raise risk weights leading to conflictive treatment among institutions.
- “That ambiguity has now been removed,” said a risk officer at a mid sized commercial bank.
The RBI’s May announcement concerning microloan risk weights is a helpful relief to banks and NBFCs, which would allow an increased lending capacity while clinching regulatory certainty. Banks, with lesser capital constraints, would now be able to set aside a fair portion of their portfolio for lending microfinance, hence improving credit for small borrowers. This will stabilize the conditions under which NBFCs are funded and also support efforts towards financial inclusion in sectors that have remained underserved.
Source: Business Standard
