India non-bank body appeals to cenbank to review recent risk weight increase

MUMBAI (Reuters) – A representative body of non-banking financial companies (NFBCs) has requested the central bank to re-evaluate the sharp increase in risk weights assigned to bank loans to NBFCs, according to a letter sent to the regulator on Thursday and seen by Reuters.

The Reserve Bank of India last week increased the risk weights, or the capital that banks need to set aside for every loan disbursed, for banks and NBFCs by 25 percentage points to 125% on retail loans.

“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 sent to the RBI by the Finance Industry Development Council showed.

This would also increase the cost of funds to critical sectors at a time when the micro, small and medium enterprises (MSME) as well as self-employed segments are emerging from the pandemic impact, FIDC said.

“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 MSME loans, vehicle loans and other categories of loans that have been excluded from the purview of the aforesaid circular,” the letter added.

(Reporting by Swati Bhat and Siddhi Nayak; Editing by Savio D’Souza)