RBI Grade B 2019 | SEBI GR A 2019

Finance
RBI NOTIFICATION
Risk Weights for exposures to NBFCs

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RBI NOTIFICATION

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 What does the notification say ?
• In reference to Master Circular on Basel III Capital Regulation dated July 1, 2015, presently claims on
rated as well as unrated Non-deposit Taking Systemically Important Non-Banking Financial Companies
(NBFC-ND-SI), other than Asset Finance Companies (AFCs), Non-Banking Financial Companies –
Infrastructure Finance Companies (NBFCs-IFC), and Non-banking Financial Companies – Infrastructure
Development Funds (NBFCs-IDF), have to be uniformly risk weighted at 100%.

• Exposures to AFCs, NBFCs – IFC, NBFCs – IDF and other NBFCs which are not NBFC-ND-SI, are risk
weighted as per the ratings assigned by the rating agencies accredited by the Reserve Bank of India.

• As indicated in the Statement on Developmental and Regulatory Policies dated February 07, 2019, it
has been decided that exposures to all NBFCs, excluding Core Investment Companies (CICs), will be risk
weighted as per the ratings assigned by the rating agencies registered with SEBI and accredited by the
Reserve Bank of India,

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 WHAT ARE RISK WEIGHTS
• A risk weight is the amount of capital that banks have to set aside after giving the loans. As it is based on
the risk perception of the particular asset, lenders have to set aside more money for loans with relatively
high risks.

• The exact amount of capital that banks have to set aside for the weights also depends on their capital
adequacy ratio, which now stands at 9 per cent.

• Risk-weighted assets are calculated by looking at a bank's loans, evaluating the risk and then assigning a
weight. All of the loans the bank has issued are weighted based on their degree of credit risk. For example,
loans issued to the government are weighted at 0.0%, while those given to individuals are assigned a
weighted score of 100.0%.

• The capital adequacy ratio, also known as capital-to-risk weighted assets ratio (CRAR), is used to protect
depositors and promote the stability and efficiency of financial systems around the world.

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 CAPITAL ADEQUACY RATIO

• The capital adequacy ratio is calculated by dividing a bank's capital by its risk-weighted assets.

• The capital used to calculate the capital adequacy ratio is divided into two tiers - tier-1 capital, which can
absorb losses without a bank being required to cease trading, and tier-2 capital, which can absorb losses in
the event of a winding-up and so provides a lesser degree of protection to depositors.

• Tier-1 capital, or core capital, consists of equity capital, ordinary share capital, intangible assets and audited
revenue reserves. Tier-2 capital comprises unaudited retained earnings, unaudited reserves and general loss
reserves.

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RBI CUTS BANK LOAN RISKS

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 Position Before Notification
Bank’s Exposure To

• Non-deposit Taking Systemically Important

Non-Banking Financial Companies (NBFC-ND- AFCs, NBFCs – IFC, NBFCs – IDF and other NBFCs
SI), other than which are not NBFC-ND-SI
• Asset Finance Companies (AFCs)
• Non-Banking Financial Companies –
Infrastructure Finance Companies (NBFCs-IFC) Risk weighted as per the ratings assigned
• Non-banking Financial Companies – by the rating agencies accredited by the
Infrastructure Development Funds (NBFCs-IDF) Reserve Bank of India.

Risk weighted at 100%

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 Position After Notification
Statement on Developmental and Regulatory Policies dated February 07, 2019

• It has been decided that exposures to all NBFCs, excluding core investment companies will be risk
weighted as per the ratings assigned by the rating agencies registered with Sebi and accredited by the
Reserve Bank of India, in a manner similar to that of corporates.

• Exposures to CICs will continue to be risk-weighted at 100%.

GOOD NEWS FOR NBFC SECTOR

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 IN SIMPLE WORDS
• Under the Basel guidelines followed by the domestic banks, there is a risk weight of 20 per cent for
AAA-rated corporates and 30 per cent for AA-rated corporates.

• For a company with a lower rating, the weight stands at 50 per cent. The same system will apply for
the NBFCs, as well.

• At present, the exposures of banks to certain categories of NBFCs such as housing finance companies
(HFCs), asset finance firms, infrastructure finance companies (IFCs) and infrastructure development
funds are already linked to their credit rating.

• CRUX: Risk weights on bank loans to companies will be valid for NBFCs, as well.

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 IMPACT OF THE MOVE
• The reduction in the risk weights for NBFCs is expected to free up the equity capital for banks against their
exposure to NBFCs, which the banks can use for incremental credit growth or improvement in their capital
ratios.

• RBI step will largely benefit “loan companies” as the risk weightage falls to 20-50 per cent from 100 per cent.

• This will not only improve credit flow to loan companies (bringing them on a par with AFCs, HFCs, IFCs), but
will also lower their borrowing cost, particularly for AA and below rated entities.

• While this can also result in reduced borrowing rates and incremental credit supply for NBFCs, this, however,
will depend on banks’ willingness to do so.

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 QUESTIONS FOR PRACTICE
QUESTION 1

Q. In its recent notification, RBI has decided that has been decided that exposures to
_______________, will be risk weighted as per the ratings assigned by the rating agencies registered
with SEBI and accredited by the Reserve Bank of India.

1. all NBFCs, including Core Investment Companies (CICs)

2. all NBFCs, excluding Core Investment Companies (CICs)*
3. to all NBFCs, excluding Lending Companies
4. None of the above

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 QUESTIONS FOR PRACTICE
QUESTION 2

Q. Which of the following is/are correct about Risk Weights for Banks?

1. A risk weight is the amount of capital that banks have to set aside after giving the loans.
2. Banks have to set aside more money for loans with relatively high risks.
3. The exact amount of capital that banks have to set aside for the weights also depends on their
capital adequacy ratio.
4. All of the above*

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 QUESTIONS FOR PRACTICE
QUESTION 3

Q. The correct formula for Capital Adequacy Ratio is:

1. (Tier 1 Capital + Tier 2 Capital) / Risk Weighted Assets*

2. Risk Weighted Assets / (Tier 1 Capital + Tier 2 Capital)
3. (Tier 1 Capital * Tier 2 Capital) / Risk Weighted Assets
4. None of the above

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 QUESTIONS FOR PRACTICE
QUESTION 4

Q. ____________ in computation of Capital Adequacy Ratio for Banks consists of equity capital,
ordinary share capital, intangible assets and audited revenue reserves.

1. Tier 1 Capital*
2. Tier 2 Capital
3. Both of the above
4. None of the above

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 QUESTIONS FOR PRACTICE
QUESTION 5

Q. RBI has recently announced reduction in the risk weights for NBFCs to be maintained by banks. The
move will lead to which of the following:

1. Incremental Credit Flow for NBFCs*

2. Reduced Credit Flow for NBFCs
3. Increase in Interest Rates for loans to NBFCs
4. None of the above

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SOLUTIONS

1. (2)
2. (4)
3. (1)
4. (1)
5. (1)

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 Query
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