RBI risk weight: Larger banks to face impact of 80 bps on capital adequacy, NBFCs' cost of funds to rise by 20 bps

livemint.com:

NBFCs will attract a risk weight of 125 per cent, compared to 125 per cent and 100 per cent previously. In order to moderate over reliance of NBFCs on bank borrowings, RBI has also increased risk weights on bank lending to NBFCs for certain categories. Risk weights on bank lending to NBFCs are governed by external credit rating of the NBFC.

RBI has decided to raise risk weight on bank lending to those NBFCs where risk weights are below 100 per cent, by 25 percentage points. However, loans to housing finance companies (HFCs), and loans to NBFCs which are eligible for classification as priority sector shall be excluded in this. The central bank has increased the risk weight for consumer credit exposure, excluding housing, education, vehicle and gold-backed loans, to 125 per cent from 100 per cent earlier.

‘’The increase in the risk weights of consumer credit exposure of commercial banks (outstanding and new), includes personal loans, but excludes housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery,'' said RBI. Analysts said that the immediate impact of the RBI action to increase the risk weight on certain categories of unsecured loans, loans to NBFCs and credit card loans is that this will increase the capital requirements of banks, which, in turn, will increase their cost of capital. From the perspective of macro financial stability this is a welcome decision, according to analysts.