NBFCs get breather as RBI restores risk weights on loans from banks

Consumer credit of commercial banks and NBFCs attracts a risk weight of 100 percent, which was revised to 125 percent.

The Reserve Bank of India (RBI) on February 25 has restored the risk weights on the exposures of schedule commercial banks (SCBs) to non-banking finance companies (NBFCs), which will come as a breather to the latter as the cost of funds may come down.

The restoration of the risk weights on the bank loans to NBFCs has been a quite long ask from the industry players amid rising borrowing cost.

Also, in a seperate cicular, the central bank has excluded microfinance loans from higher risk weights which is applicable to consumer credit. The central bank kept all other risk weights unchanged, which was increased on November 16, 2023.

The restored risk weights will be effective from April 1, 2025, as per notification.

In 2023, the RBI had increased risk weights by 25 percentage points on the exposures of SCBs to NBFC was (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs was below 100 per cent.

Consumer credit of commercial banks and NBFCs attracts a risk weight of 100 percent, which was revised to 125 percent. Due to the higher risk weights most NBFCs borrowing cost had gone up and they were forced to diversify their borrowing through other channels.

This was done after then RBI Governor Shaktikanta Das in the October, 2023 monetary policy flagged the high growth in certain components of consumer credit and advising banks and NBFCs to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards, in their own interest.

The increase in the risk weights of consumer credit exposure of commercial banks (outstanding as well as new), includes personal loans, but excludes housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, circular said.

On the NBFCs front, the increase in risk weight is extended to retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans.