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Small Finance Banks Seek Clarity from RBI on Microfinance Loan Risk Weightage
November 30, 2023
Small Finance Banks (SFBs) are facing uncertainty following the recent Reserve Bank of India (RBI) announcement that did not explicitly mention whether microfinance loans would be exempted from the newly issued higher-risk weightage norm. Microfinance loans form a significant portion of SFBs’ portfolios, with some exceptions like AU and Equitas.
Individual banks and the SFB collective have approached the RBI seeking clarification on the regulation, according to sources familiar with the matter. The confusion stems from the RBI’s clear exemption of microfinance and self-help group loans from higher capital allocation requirements for non-banking finance companies (NBFCs). However, the silence on the status of microfinance loans for banks, including SFBs, has left the industry in suspense.
In its circular dated November 16, the RBI stated, “It has been decided that the consumer credit exposure of NBFCs excluding microfinance/SHG loans, shall attract a risk weight of 125%.” However, the circular did not include microfinance in the exempted list for banks.
Concerns are rising among SFBs, as a managing director of a large SFB noted, “If higher risk weightage is required for microfinance loans, then we will be severely affected in the medium term.” While most SFBs currently maintain an excess capital adequacy ratio of over 20%, above the stipulated 15%, there may be a need for expedited medium-term capital raising plans if higher risk weightage is imposed. The banks await clarification from the regulator to address their doubts and plan accordingly.
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