‘More forced lending to NBFCs can land banks in trouble’

Mumbai: The recent steps by the Reserve Bank to encourage banks to increase lending to non-banking finance companies and retail borrowers are likely to rise risks for the sector, warns a report. Earlier this month, the central bank announced three major steps to encourage banks to lend more to liquidity starved NBFCs--an increase in the single-exposure limit to 20% of tier 1 capital (from 15%); 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% from 125%.

Global rating agency Fitch said Wednesday these initiatives are designed to help keep credit flowing to the real economy amid growing signs of a slowdown. "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," the agency said.

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 and argued 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 parallel banking 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, it noted.

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