HOME > MARKETS > ECONOMY NEWS
  ECONOMY NEWS
ECONOMY
Steps to increase credit flow to NBFCs could raise banks’ risks: Fitch
Aug-16-2019

Global rating agency Fitch in its latest report has warned that the recent steps by the Reserve Bank of India (RBI) to encourage banks to increase lending to non-banking finance companies (NBFCs) and retail borrowers may rise risks for the sector. The RBI, earlier this month, announced three major steps to encourage banks to lend more to liquidity starved NBFCs--an increase in the single-exposure limit to 20 percent of tier 1 capital (from 15 percent); priority lending status for credit to NBFIs for on-lending to finance agriculture, small businesses and home-buyers; and a reduction in the risk weight for consumer loans (except credit cards) to 100 percent from 125 percent.

The agency said averting a significant slowdown would help borrowers and therefore the stability of the financial system, but the measures could push up banks' risk if these steps lead banks to accept higher credit risk than they previously had the appetite for. It further stated that these initiatives are designed to help keep credit flowing to the real economy amid growing signs of a slowdown. The constant nudging of banks to lend more to NBFCs is in contrast to the global trend of authorities trying to break the linkages between banks and NBFCs, it noted that it increases the potential of risks in NBFCs spilling over to banks, exacerbated by the limited capacity of the capital markets to provide extra funding to NBFCs.

The NBFC sector has been under significant funding pressure as investors shy away following the default of IL&FS last September and the resultant troubles at Dewan Housing early this year. NBFC disbursements have declined steeply as a result, with knock-on effects to other sectors, particularly consumption. Reduced availability of financing has contributed to the slowdown in the auto sector, with vehicle sales in July falling 31 percent, the worst in two decade.

  RELATED NEWS >>