Increasing credit to NBFCs and retail borrows will be detrimental to the banking sector

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Mumbai, Ta. August 14, 2019, Wednesday

A recent report by the Reserve Bank encouraging banks to increase credit to non-banking finance companies (NBFCs) and retail borrows is likely to increase the risk in the banking sector.

Earlier this month, the Reserve Bank had increased the lending limit of NBFCs from their Tier 1 capital to 5% by banks, and announced a lending priority for lending to small businesses and residential buyers.

The RBI has reduced the risk weight for consumer loans to 6%. NBFCs are currently experiencing a heavy pull of liquidity in the country.

Global rating agency Fitch said the RBI, the first of its kind in the country, is geared towards supporting lending flows amid growing signs of slowdown.

Avoiding significant recessions would be helpful to borrows, but such measures could increase banks 'risk if banks' interest in financing increases, Fitch's report said.

The constant pressure on banks to provide financing to NBFCs is in stark contrast to the global trend in which attempts are made to break the alliance between banks and NBFCs, the report noted, and argued that the NBFC's potential risk could reach banks and NBFCs. Excess funding will deepen the limited capacity of the market.

The NBFC, which is considered a parallel banking system, has been under heavy stress following the IL&FS chapter last year as investors were moving away from it. As a result, NBFC's lending capacity has declined, which has been impacted by other sectors, particularly the consumption sector, the report said.

Due to the lack of money availability, the country's auto sector has slowed down and overall vehicle sales in July fell by more than 5%, down to a five-year low.


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