What the RBI’s risk-weight rejig could achieve, explained in charts
₹50,000) and reports of rising delinquencies among small borrowers all point to a strain on household finances. Since about 80% of annual household borrowing is from banks and the rest from NBFCs, the RBI action may address the household debt problem to the extent that it limits funding from these sources. Banks have always been central to our financial system, but the systemic importance of NBFCs has increased in recent years as they have caught up with banks on various metrics.
Meanwhile, bank exposure to NBFCs has grown as well. By March 2023, 41.2% of NBFC borrowing was from banks. RBI research shows that NBFCs are the largest borrowers in the system, followed by private-sector banks.
Mutual funds and public-sector banks dominate lending. Each entity is exposed to the other through loans, investments and deposits. Consider a large private bank that borrows from other banks and mutual funds, and lends to NBFCs, which in turn extend consumer credit.
Even relatively small delinquencies in NBFC portfolios would ripple through the entire system. This risk is shown by the rising share of NBFCs in total bilateral exposures. The recent RBI action aims to change the nature of interconnectedness by nudging NBFCs to diversify their funding sources and strengthen their asset quality.
NBFCs, fintech companies and small finance banks are relatively more exposed to unsecured loans, but some large banks have also built up substantial portfolios. However, these banks are not likely to be affected by the new risk weights as they are well-capitalized. There are a few outliers, such as RBL Bank, with a comparatively larger share of unsecured advances and lower capital ratios.
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