RBI's new risk-weight rules likely to spur co-lending by banks, NBFCs

Co-lending deals between non-banking financial companies (NBFCs) and banks are likely to rise after the Reserve Bank of India’s (RBI’s) decision to increase the risk weight on consumer credit, industry leaders and experts say. Smaller NBFCs, they add, may increasingly opt for co-lending as capital markets could become costlier for them.

“Smaller NBFCs will be more comfortable with co-lending because they are geography-specific in terms of industry or customers. Since they will have that specialisation and total localisation, they will prefer to do co-lending more aggressively. The larger players are also likely to participate, but they may not be that aggressive,” said Umesh Revankar, executive vice chairman, Shriram Finance, and chairman of Finance Industry Development Council. “Co-lending is going to get an overall impetus from both smaller and larger NBFCs,” he added.

The RBI recently decided to revise the risk weight norms for NBFCs to 125 per cent from 100 per cent. The regulator also increased the risk weight on bank loans to higher-rated NBFCs (A and above) by 25 percentage points.

“NBFCs have been growing in size and scale. The requirements of NBFCs at the higher end of the rating spectrum have been incrementally increasing. In this scenario, if bank lending starts to slow down, they are likely to go towards co-lending along with NCDs (non-convertible debentures),” said Jinay Gala, associate director, India Ratings & Research.

According to the RBI norms on co-lending, banks are permitted to co-lend with all registered NBFCs, including housing finance companies, based on a prior agreement. Co-lending banks will take their share of individual loans on a back-to-back basis in their books. NBFCs are required to retain a minimum of 20 per cent share of the individual loans on their books.

“There will be cost implications on NBFCs that are at the mid and lower end of the rating spectrum. As the risk weights go up, the money gets tighter and the pricing could go up. And incrementally, we see lower-rated NBFCs would be going more through co-lending channels, and securitisation, to balance out their overall liabilities. So, definitely, the avenues for NBFCs to diversify are technically limited.  And for smaller NBFCs, they are more dependent on bank funding to grow because for them, capital markets are costlier,” Gala said. 

According to India Ratings, banks account for 35-40 per cent of overall NBFCs borrowing and the share has been increasing in the recent past. The increase in the risk weight could increase the cost of funds for existing incumbents across the rating category

Kishore Lodha, chief financial officer, U GRO Capital, said their total borrowing from capital markets stood at 26 per cent, which they planned to increase to over 30 per cent on the back of a healthy pipeline of DFIs and domestic institutions through the route of NCDs. The company plans to increase co-lending to 50 per cent of the assets under management (AUM) from 45 per cent at present.