Indian non-bank lenders to tweak funding mix after RBI relaxes banks' lending norms

The RBI partially reversed tighter rules for bank loans to NBFCs, trimming risk weight requirements for banks on consumer microfinance loans by 25 percentage points to 100% and effectively reverting to the earlier risk weight requirements.

Mumbai: Indian non-banking financial companies (NBFCs) are likely to tweak their funding pattern in the upcoming financial year, as the Reserve Bank of India's relaxation of some lending norms could nudge banks to increase funding to this segment.

The RBI partially reversed tighter rules for bank loans to NBFCs, trimming risk weight requirements for banks on consumer microfinance loans by 25 percentage points to 100 per cent and effectively reverting to the earlier risk weight requirements.

This will "free up capital for banks, allowing them to lend more to NBFCs," said George Alexander Muthoot, managing director, Muthoot Finance, adding that this will also make bank funding more attractive for NBFCs.

NBFCs had resorted to short-term commercial papers (CP) for their cash needs as funding from lenders tightened following the implementation of the previous rule, leading to their share of overall CP issuance jumping. The lending firms' share of CPs has remained around 40 per cent or higher in the last seven quarters, up from less than 30 per cent in previous quarters, according to data from Crisil Intelligence.

Bhushan Kedar, director - fixed income research at Crisil Intelligence anticipates the trend changing.

"For NBFCs, the funding mix is expected to undergo change in the next year, and they would want to tap loans, especially with expected rate cuts, to widen their funding pool... The funding mix will change, and it could change more for some companies, depending on banks' preferences."

Indian lenders would begin by lending more to large and highly-rated names, before moving towards the lower-rated firms as the year progresses, a banker said requesting anonymity as he was not authorised to speak to media.

However, the shift in NBFCs' borrowing mix may not be immediate. "It may take some time before banks resume lending to NBFCs at previous levels. It could take six to nine months, depending on how RBI guides banks on NBFC lending," said Kishore Lodha, chief financial officer at UGRO Capital.