The on-going liquidity crunch faced by non-banking finance companies (NBFCs) has made the Reserve Bank of India (RBI) to take further measures to increase credit flow to the sector.
The central bank has decided to increase the cap on a bank’s exposure to a single NBFC to 20% of its tier-I capital from 15% now.
Further, RBI has decided to give ‘priority sector’ tag for banks lending to NBFCs, for on-lending to farm, small and medium enterprises and housing sector.
Banks have been allowed to lend to the NBFCs for on-lending to the agriculture sector up to ₹10 lakh, up to ₹20 lakh to micro and small enterprises, and for housing, up to ₹20 lakh per borrower. These will be classified as priority sector lending.
This will improve the available sources of funding, especially for new-age mid and small-sized NBFCs, at a relatively lower cost, while improving banks’ ability to meet their priority sector lending targets.
“Permitting banks to on-lend through NBFCs for priority sector lending would make this transmission faster and more efficient,” Umesh Revankar, MD and CEO, Shriram Transport Finance Ltd., said.
RBI Governor Shaktikanta Das also batted for mutual fund and insurance companies, who are creditors of stressed NBFCs, to be part of the resolution process, and said inter-regulatory discussions were going on in this regard.
“It is necessary to look at the whole liability of the entity comprehensively. So, we have had inter-regulator meetings, and IRDAI has taken a decision to enable the insurance companies to be a part of the inter-creditor agreement. Our discussions with other regulators are going on,” Mr. Das said.
In the resolution process of mortgage lender Dewan Housing Finance Corporation Ltd. (DHFL), where insurance and mutual funds have sizeable exposure, banks want other creditors to be a part of the resolution process.
Mutual funds are awaiting approval from the markets regulator for becoming a part of the bank-led resolution plan.
In a bid to encourage banks to extend loans to retail consumers segments such as individual vehicle loans and personal loans, amid a sharp slowdown in demand, the central bank has decided to lower the risk weight for consumer loans, excluding credit cards.
The risk weight, which was 125% as prescribed in 2004, will now become 100%. As a result, banks will need to set aside lower capital for these loans.
Ratings agency ICRA said with personal loans of ₹6 lakh crore outstanding as on June 2019, a 25-percentage point reduction in risk weight may also reduce the capital requirements of banks by ₹12,500 crore and add 14 bps to their capital ratios.