Bank loans to NBFCs under RBI scanner

Annual inspections by the Reserve Bank of India (RBI) of banks have commenced. With FY23 financial statements under the scanner, what catches the eye of the regulator are the loans made by banks to non-bank finance companies (NBFCs).

With the share of NBFC corporate bank loans as a percentage of the loan book increasing to 13-16 per cent for the top 20 players – a jump of 200-250 basis points – the RBI is making sure of the impact of these loans on balance sheets. Banks from an asset quality perspective.

higher savings

To put things into context, loans to non-bank financial institutions are “secured” categories by banks because they are often backed by liquid collateral, including receivables.

However, with the increasing proportion of non-bank financial firms, particularly those in the non-residential sector such as business loans and personal loans that are often unsecured, there is a debate between banks and the regulator on how to handle these loans.

If the regulator is not satisfied with the benefits offered by the banks, the regulator may insist that the banks take contingency provisions against the loans lent to the NBB borrowers. “The question is whether such a provision will be insisted on in FY23 financial statements or banks will get some break to implement higher provisions in the current FY24 financial statements,” said one person familiar with the matter.

Safe or not?

Are loans to non-bank financial companies really secured – that’s the debate, according to high-ranking sources.

For banks, these loans can be secured, but the end use of these loans goes towards building unsecured books. In this case, even if loans to non-bank financial companies are backed by hard collateral, they may not be recoverable in practice. “This is the RBI’s concern,” said a person familiar with the matter.

Bankers say that controversy has been going on for a while, but the scale it took in the annual FY23 inspection caught them by surprise. “It’s in the early stages of the talks and in a quarter or so, the outcome will be known,” said the person.