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This article is more than 2 year old.

RBI eases risk weight norms to facilitate credit flow to well-rated NBFCs

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The top bank has also decided to harmonise three major categories — asset finance companies (AFC), loan companies, and investment companies — of NBFCs engaged in credit intermediation into a single category, to be known as NBFC investment and credit company (NBFCICC).

RBI eases risk weight norms to facilitate credit flow to well-rated NBFCs
The Reserve Bank of India (RBI), while announcing its sixth bi-monthly monetary policy, said that it will facilitate credit flow to well rated non-banking financial companies (NBFCs).
"The rated exposures of banks to all non-banking financial companies (NBFCs), excluding the Core Investment Companies (CICs), to be risk-weighted as per ratings assigned by accredited rating agencies similar to that for corporates as compared to 100 percent specified earlier," RBI said in an statement, adding that the exposures to CICs will continue to be risk-weighted at 100 percent.
The top bank has also decided to harmonise three major categories — asset finance companies (AFC), loan companies, and investment companies — of NBFCs engaged in credit intermediation into a single category, to be known as NBFC investment and credit company (NBFCICC).
For the purpose of risk weights, RBI has classified NBFCs into three categories such as:
  • HFC, AFC, IFC: Risk weight to be assigned based on credit rating
  • Loan companies: Risk weight of 100 percent irrespective of credit rating
  • Investment companies: Risk weight of 100 percent irrespective of credit rating
  • This has now been revised as follows:
    • HFC, AFC, IFC: No change
    • Loan companies: Risk weight based on credit rating
    • Investment companies: No change
    • The decision taken by the RBI will be positive for highly rated loan companies like Muthoot Finance, Muthoot Capital, Manappuram, Shriram City Union, Bajaj Finance, etc. Given the low capital adequacy of PSU banks, they were keen to lend to highly rated HFCs and AFC due to benefit of lower risk weights. On the other hand, PSU Banks were not too keen to lend to even highly rated loan companies due to 100 percent risk weights.
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      RBI cut the repo rate as well as reverse repo rate by 25 basis points for the current fiscal. The repo rate now stands at 6.25 percent  while the reverse repo rate stands at 6 percent.
      One basis point is a hundredth of a percentage point.
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