NBFC body urges RBI to re-evaluate risk weight norms for bank loans

The central bank raised the risk weight on consumer loans of banks and NBFCs by 25 percent on November 16.

Finance Industry Development Council (FIDC), a representative body of non-banking financial companies (NBFCs) in India, has requested the Reserve Bank of India (RBI) to re-evaluate the revised risk weights on bank loans.

“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 micro, small and medium enterprise (MSME) loans, vehicle loans and other categories of loans that have been excluded from the purview of the circular,” the representative body wrote in the letter on November 23.

It further said the revised norms have the potential to sharply reduce flow of credit to MSMEs, self-employed and other sectors.

“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 letter said.

The central bank raised the risk weight on consumer loans of banks and NBFCs by 25 percent on November 16.

Earlier, banks attracted a risk weight of 125 percent and NBFCs 100 percent. After RBI’s latest move, the same will stand at 150 percent and 125 percent for banks and NBFCs, respectively.

Consumer loans include credit cards, some personal and retail loans. A jump in risk weight means lenders have to set aside higher capital against these loans. Data from the latest sectoral credit growth showed that bank credit to NBFCs stood at Rs 14.19 lakh crore in September 2023, compared to Rs 11.24 lakh crore a year back.