RBI’s Draft LCR Guidelines May Further Squeeze Bank Lending to NBFCs

RBI’s Draft LCR Guidelines May Further Squeeze Bank Lending to NBFCs

The Reserve Bank of India’s (RBI) proposed guidelines on the Liquidity Coverage Ratio (LCR) under Basel-III norms, expected to take effect in April next year, could make it harder for lower-rated non-banking financial companies (NBFCs) to secure affordable credit from banks. The draft guidelines are likely to favor lending to NBFCs with AAA or AA ratings, leaving smaller and lower-rated NBFCs facing greater challenges in accessing funds.

Industry sources indicate that the already reduced credit flow to NBFCs may decline further due to these new rules. "With tighter lending norms already in place, the new LCR guidelines will exacerbate the issue," said an official from a smaller NBFC.

Under the new norms, banks will need to assign an additional 5% run-off factor for retail deposits facilitated via internet and mobile banking. This adjustment means banks will need to hold more high-quality liquid assets, ultimately reducing their capacity to lend. The reduced availability of funds may force NBFCs to borrow at higher rates, further squeezing their profit margins.

As of June 2024, bank lending to NBFCs has already dropped to 8.5%, down significantly from 36% in October 2022. Earlier this year, the RBI had asked banks to increase the risk weightage on loans to NBFCs by 25 basis points, resulting in a notable reduction in lending.

With declining credit from banks, NBFCs have increasingly turned to the debt market, raising Rs 73,820 crore since August 1. However, smaller NBFCs continue to face stiff competition from their higher-rated counterparts in this space. Additionally, some NBFCs are now tapping into the overseas market, benefiting from a 50 basis point cut by the US Federal Reserve, which has made external commercial borrowing cheaper than domestic options.