RBI’s proposed LCR norms will further restrict banks’ lending to NBFCs – Banking and Finance News

The Reserve Bank of India’s (RBI) proposed draft guidelines on liquidity coverage ratio (LCR) under Basel-III norms, if implemented in its current form, is likely to make it difficult for low-rated non-banking financial companies (NBFCs) to get cheaper loans from banks.

The draft guidelines, which will come into effect in April next year, are expected to direct bank lending to NBFCs with AAA or AA rating.

“Things will get tougher for smaller NBFCs. With the stricter credit norms for NBFCs, credit from banks has come down. The new LCR norms will make the situation worse. We have given our feedback to the banking regulator,” said an official at one of the smaller NBFCs.

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Under the new LCR norms, banks will have to assign an additional 5% flow factor for retail deposits enabled by internet and mobile banking facilities. For banks, this means higher requirements to buy high-quality liquid assets. As a result, banks will have less funds to lend. This has created fear among NBFCs as funds will dry up for them, forcing them to borrow at higher rates, further squeezing their margins.

Due to the central bank’s stricter norms, banks’ credit to NBFCs has fallen to 8.5% by June 2024. Annual growth in banks’ credit to non-banking finance companies (NBFCs) has declined sharply from 36% in October 2022 to 8.5% by June 2024.

Earlier this year, the regulator had asked banks to moderate their lending to NBFCs by increasing the risk weight on these loans by 25 basis points to 125%. As a result, banks are reducing their lending to NBFCs.

Also, NBFCs have turned to borrowing to meet the festive demand due to reduced credit assistance from banks Sunday to raise funds. They have raised Rs 73,820 crore since August 1, according to Prime Database data. Among NBFCs, AAA or AA are increasingly entering the bond market, posing stiff competition to small and lower-rated NBFCs.

Since the rules have been tightened, NBFCs have been exploring other options. They are actively using the overseas market to raise funds. The 50 basis point cut by the US Federal Reserve is the cherry on the cake as it makes external commercial borrowing cheaper than raising funds domestically.