Banks still wary of lending to NBFCs despite restoration of risk weights

Despite a restoration of risk weights on their loans to non-banking finance companies (NBFCs), banks are still wary of lending to non-bank players that are focusing on unsecured personal loans and the microfinance segment.

Among the NBFCs, small and mid-sized players having lower credit ratings and with unsecured loan books are the ones facing major challenges in raising funds from banks.

In February this year, the Reserve Bank of India (RBI) had slashed the risk weights of bank loans to NBFCs by 25 percentage points depending on the ratings. In November 2023, the regulator had increased the risk weights on such exposures of banks by 25 percentage points in cases where the risk weight as per external rating of NBFCs was below 100 per cent.

“Banks are still reluctant to lend to NBFCs which are engaged in micro finance, consumer loans or personal loans,” said Shachindra Nath, founder and managing director, UGRO Capital Ltd, an NBFC specialising in MSME and small business financing.

He said UGRO continues to get funding from banks. The NBFC did not face any issues even when the risk weights were increased.

“You may not see a sharp uptick in the loan disbursement to NBFC because of the lowering of risk weights. Irrespective of risk weights, banks are continuously wary of NBFCs, especially mid and small-sized,” said Prakash Agarwal, Partner, Gefion Capital Advisors, a capital and strategy advisory firm.