The Reserve Bank of India (RBI) on Wednesday unveiled more measures to enhance credit flow to the cash-starved non-banking financial companies (NBFC) sector.
The central bank has decided to raise a bank’s exposure limit to a single NBFC to 20 per cent of Tier-I capital of the bank as a step towards harmonisation of the counterparty exposure limit to single non-banking financial company with that of the general limit.
The limit was 15 per cent earlier while other sectors enjoyed the 20 per cent limit.
The hike will enable banks to increase the credit flow to big NBFCs.
In another measure, the Reserve Bank has decided to allow bank lending to registered non-banking financial companies (other than micro-finance Institutions) for on-lending to agriculture (investment credit) up to Rs 10 lakh, micro and small enterprises up to Rs 20 lakh and housing up to Rs 20 lakh per borrower (up from Rs 10 lakh at present) to be classified as priority sector lending.
Measures come at a time when NBFC lending is down
Apart from lowering interest rates to spur credit demand, the Reserve Bank of India’s announced two additional steps to improve bank lending to Non Banking Financial Companies (NBFCs). The measures are pertinent at a time when lending activity by many NBFCs have declined significantly, resulting in demand slowdown for a range of items including cars, tractors, white goods among others.
The Reserve Bank of India has also reduced risk weight for consumer credit (except credit card receivables), including personal loans, to 100 per cent as against a risk weight of 125 per cent or higher, if warranted by the external rating of the counterparty.
Last year, Infrastructure Leasing & Financial Services Limited (IL&FS) defaulted on repayment, sending the entire financial sector into a turmoil. Most of them suffered from asset-liability mismatches and used short-term money for long-term funding. The Reserve Bank has already indicated that it would review the regulatory framework for the financial sector.
The government also announced temporary support to NBFCs and housing finance firms through public sector banks (PSBs).
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