Three Shots in the Arm by RBI

Recognizing the importance of timely availability of credit to small enterprises and individuals towards
catalysing consumption and private investment cycles of the economy, RBI announced policy
measures to encourage bank lending to NBFCs. While RBI has been slashing policy rates over the past
months and the system held INR 2 Trillion of liquidity, this hasn’t traversed through the system owing
to lack of investor / lender confidence and weakening sentiments. We believe that yesterday’s policy
measures will help in building much needed confidence alongside bringing rates down to effect
transmission.

The RBI’s measures serve as a shot in the arm for well governed NBFCs, while at the same time
directing flow of credit to sectors that are essential to the economy. We analyse the implications of
these initiatives and confidence boosting measures for the NBFC sector.

Increase in Bank’s exposure limit to a single NBFC pegged at 20% of the Tier-I capital, up from 15%
• Increasing the lending limits to a single NBFC and HFC is expected to give more leeway to
banks for lending to large NBFCs without breaching limits.
• This is also expected to help smaller banks, including small finance banks, that were
constrained by their own net worth, increase exposure to time-tested NBFC clients.
• The move is expected to have a trickle-down effect in channelling liquidity across the sector.
Large NBFCs would be able to deploy additional funds to increase their lending to mid-small
NBFCs, which had slowed down over the last two quarters.

PSL Categorisation of Bank Lending to NBFCs and HFCs

• RBI’s decision to normalise PSL categorisation of bank lending to registered NBFCs (other than
MFIs) for on-lending to Agriculture (up to Rs 10 lakhs) MSME (up to Rs 20 lakh) and housing
(up to Rs 20 lakh) would encourage lending to balance sheets of NBFCs that cater to such
sectors that are an economic priority in spirit.
• The move addresses concerns on both access of funds and the cost of funds for well governed
mid and small sized NBFC/HFCs where banks are comfortable taking balance sheet exposure.
• This move would encourage more suppliers of capital to such sectors, eventually shifting
power over to the borrower and bringing in efficiency.

Reduction in Risk Weight for Consumer Credit

• The risk weight for consumer credit (excluding credit cards) reduced from 125% to 100%.
Consumer credit is a fast upcoming asset class for banks and NBFCs

• This move will potentially benefit direct assignment of consumer loans from NBFCs to banks
and enable flow of credit to NBFCs in this space. While direct assignments and securitisations
have sharply increased since the events of September 2018, consumer loans were so far
largely excluded.