NBFC Body Urges RBI to Re-Evaluate Risk Weights on Unsecured Loans

Finance Industry Development Council (FIDC), a representative body of Non-Banking Financial Companies (NBFCs), has urged the Reserve Bank of India (RBI) to re-evaluate the steep rise in risk weights on bank loans.

As per FIDC, the move inadvertently has the potential to significantly reduce the flow of credit to Micro, Small and Medium Enterprises (MSMEs), self-employed and other sectors whose functioning is dependent on credit from NBFCs. 

Previously, banks attracted a risk weight of 125% and NBFCs 100%. After the apex bank’s latest move, the same will stand at 150% and 125% for banks and NBFCs, respectively.

Typically, risk weight relates to the capital required by banks, which is to be set aside for disbursed loans. Higher risk weight, as a safeguard against expected losses, translates into making credit more likely to be expensive.

The RBI on November 16, 2023, had raised risk weight for bank lending towards consumer credit, including personal loans from 100% to 125%, NBFCs’ consumer loans from 100% to 125%, credit card receivables from 125% to 150% and for NBFCs’ credit card receivable from 100% to 125%.

Generally, consumer loans comprise credit cards and a few personal and retail loans. A rise n risk weight translates into lenders having to set aside higher capital against these loans. As per the latest sectoral credit growth data, bank credit to NBFCs stood at Rs 14.19 lakh crore in September 2023, compared to Rs 11.24 lakh crore in 2022.

A significant number of NBFCs were aiming to tap the MSME segment, considering the rise in competition from banks in vehicle, gold and home loans. 

The fresh unsecured business loans by NBFCs increased by 24% on a year-on-year (YoY) basis to Rs 33,915.3 crore, data by FIDC and CRIF High Mark highlighted as of March 31, 2023.

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