A Sigh of Relief

A step in the right direction are the final guidelines on risk weightage of non-banking finance companies (NBFCs) - benefitting both banks and NBFCs.

Post-modification, banks can assign risk weights to their rated NBFC exposures, depending on ratings assigned by credit rating agencies (CRAs).

At present, banks' NBFC exposure - rated and unrated - attracts 100 per cent risk weight. Reduced risk weightage will free up capital for banks to use for incremental lending or improving their own capital ratios. This could also lead to a marginal reduction in the cost of borrowing for the better-rated NBFCs.

Meanwhile, the Reserve Bank of India has hiked risk-weightage for non-rated NBFC loan exposure above Rs 200 crore to 150 per cent. The move will push banks to nudge all NBFCs to get rated, thus encouraging information flow within the system. However, given the recent misses on ratings by CRAs, all this would amount to nothing if they fail to capture the right picture of NBFCs.