Risks in India’s banking sector may rise as a result of the central bank’s recent steps encouraging banks to lend more to Non-Bank Financial Institutions (NBFIs) and retail borrowers, according to Fitch Ratings.
These initiatives — an increase in the single-exposure limit to 20 per cent of Tier 1 capital (from 15 per cent); priority lending status for credit to NBFIs for on-lending to finance agriculture, small businesses and home-buyers; and a reduction in the risk weight for consumer loans (except credit cards) to 100 per cent (from 125 per cent) — are designed to help keep credit flowing to the real economy amid signs of a slowdown.
This follows several other initiatives in recent months to boost lending, including harmonising risk weights on NBFI exposure, allowing banks to raise additional liquidity by selling excess government securities, and a partial credit guarantee from the government on banks’ asset purchases from NBFIs.
The global credit rating agency said averting a significant slowdown would help borrowers and therefore the stability of the financial system, but the measures could push up banking-sector risk if they lead banks to accept higher credit risk than they previously had appetite for.
Fitch observed that India’s constant nudging of banks to lend more to NBFIs is in contrast to the global trend of authorities trying to break the linkages between banks and NBFIs.
Source: The Hindu BusinessLine
