The Reserve Bank of India (RBI) has eased the risk-weightage norms for the banks for the rated loan exposure they have in non-banking financial companies (NBFCs). The move will not only free up more capital for the banks for lending, but also make it easier and cheaper for select NBFCs to receive funds from the banks. Non-transparency is a big challenge among mushrooming NBFCs. By these guidelines, RBI has put in a systemic incentive for NBFCs to be transparent and vie for good rating from the credit rating agencies.
Following are the key implications of RBI's final guidelines:
1) More capital for lending:
Following the new norms, banks can now assign risk weights to their rated NBFC exposures depending on ratings given to them by accredited credit rating agencies. Exposure to asset finance companies (AFCs), infrastructure finance companies (IFCs) and infrastructure debt funds (IDFs) is already risk-weighted based on their ratings.
At present, bank's NBFC exposure--rated and un-rated--attracts 100 per cent risk weight. The reduction in risk weightage will free up capital for the banks that they can use for incremental lending or improving their capital ratios. Assuming the risk weightage halves for borrowing from the banking system, then the Tier I capital relief could be to the tune of Rs 5000 crore for the banking system, says brokerage Motilal Oswal Securities in a note.
2) Lower borrowing cost for quality NBFCs:
Reduction in risk weightage could lead banks to lower the borrowing cost for well-rated NBFCs. It will a big relief for NBFCs marred by higher borrowing cost post Rs 90,000-crore default by IL&FS in August last year.
Satyam Kumar, co-founder & CEO, LoanTap, an NBFC start-up, sees borrowing cost to drop by anywhere between 75 bps to 200 bps for AA to AAA rated NBFCs. "The risk-weightage requirement for AAA-rated NBFCs will reduce to 20 per cent from 100 per cent earlier, for AA-rated NBFCs to 30 per cent, and for A-rated NBFCs to 50 per cent. It will continue to be 100 per cent for BBB-rated NBFCs," he says.
3) Systemic incentive to do better
Since borrowing cost will depend on the credit rating assigned to them, banks will push all NBFCs to get rated. This will encourage flow of information in the system, making it lucrative for NBFCs to lower their NPA level, and improve capital adequacy ratios. "Earlier, you reduced your cost of borrowing by looking forward to shorter term credit from commercial papers and one-year bonds from the markets. That incentive will not be very strong as short-term capital even from bank will come at lower rate if your rating is good," says Kumar.
4) Separating men from boys
The new norms will help segregate the good NBFCs from the poor ones as any unrated exposure of banks towards NBFCs, which owes banks Rs 200 crore or more will now attract 150 per cent risk weightage versus 100 per cent earlier, thus making it expensive for them to borrow from the banks, at the same time banks being reluctant to lend them.