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Event update: Monetary Policy – Impact on financials

RBI has cut the repo rate by 25bps to 6.25%. Further MPC has also decided to change the monetary stance from calibrated tightening to neutral. The policy text suggests scope for more rate cuts as inflation targets have been slashed. Key measures for financials include 1) Relaxation of ECB framework for resolution applicants of IBC cases, 2)  relaxation of risk weights for NBFCs. 3) Changing the definition of bulk deposits  We believe the relaxation of risk weights for NBFCs will bring down risk weights from 100% to 20-50% for NBFCs other than AFCs and IFCs, depending on their credit rating.

Key measures for financials:

• RBI will issue guidelines to allow use of foreign borrowings by the bidders who apply for IBC companies. These borrowings will be through the approval route
• Bank lending to NBFCs will be risk weighted based on the rating of the NBFC. The current rule is to risk weight NBFCs other than AFCs / IFCs at 100%. Because Asset Finance Companies / Infra Finance Companies /HFCs are already risk weighted as per their credit ratings, this change does not benefit/affect the likes of MMFS/Chola/SHTF/Magma/HDFC or  the infra finance companies. It only helps companies who do lending other than asset/ infra financing like Bajaj (rated AAA), Manappuram (rated AA), SCUF (AA), Muthoot Finance (AA) , Muthoot Capital (A), MAS Financial (A).  The likes of Bajaj are already borrowing at fine rates so may not benefit much. The smaller companies will.
• Risk weights for AAA will drop from 100% to 20% (but the likes of Bajaj are already borrowing at fine rates), AA will fall from 100 to 30% and for A will drop from 100 to 50%.

Here’s the current risk weighting requirement for lending to NBFCs which will change now: Claims on corporates, exposures on Asset Finance Companies (AFCs) and Non-Banking Finance Companies-Infrastructure Finance Companies (NBFC-IFC), shall be risk weighted as per the ratings assigned by the rating agencies registered with the SEBI and accredited by the Reserve Bank of India. The following table indicates the risk weight applicable to claims on corporates, AFCs and NBFC-IFCs