RBI raising risk weights on NBFCs not to have major impact on Clix Capital’s borrowing: CFO

The Reserve Bank of India’s decision last week to increase risk weights on non-bank lenders by 25 percentage points is unlikely to have a significant impact on Clix Capital’s borrowing costs, said its CFO Gagan Aggarwal.

“We are still assessing the impact, and in touch with our bankers. Our initial read is that this can have a slight impact from a borrowing perspective for all such lenders including us as banks’ capital requirements could increase with this move, and to manage that they may have to increase the cost. So, our incremental borrowing cost in the second half of this financial year may move up but we don’t see a significant impact, the increase would not be significant. Our profitability and growth momentum stand quite strong,” Aggarwal exclusively told ETCFO.

Clix Capital’s blended cost of borrowing stood at about 10.1% in the H1 FY24, and the NBFC, which in the first six months of this fiscal raised Rs 2,400 crore, plans to raise another Rs 2,100 crore in the H2 FY24, the CFO said.

The RBI, last week, increased the risk weights on NBFC exposures by banks by 25 percentage points over and above the risk weight associated with the given external rating. This is applicable in all cases where the risk weight as per the external rating of NBFCs is below 100%.

Risk weights define the capital that a bank needs to allocate for the loan exposure it takes.

The equity capital required for a loan is 8%, which means for every Rs 100 of a loan, a bank needs to allocate an equity capital of Rs 8, provided the risk weight on such a loan is 100%.

If a company is rated 'AAA' then risk weight is 20%, for 'AA' 30%, 'A' 50%, and 'BBB' 100%. With an increase of 25% risk weight is for 'AAA' 45%, 'AA' 55%, 'A' 75%, and 'BBB' no change. A Rs 100 loan to 'AAA' rated NBFC thus will now require Rs 8 x 45% or Rs 3.6 as compared to Rs 8 x 20% or Rs 1.6 earlier. It is to be noted that Clix Capital is rated ‘A’.

The rationale

“Increase in risk weight to NBFCs is driven by high growth witnessed in bank credit to NBFC sector," said Anil Gupta, VP-Financial Ratings, ICRA.

"With the proposed changes the loans from banks to NBFC will become costly. Second, the capital position of banks will decline so they may slow down credit growth. Third, as banks become costly, NBFCs may issue more bonds, which can diversify the Risks for the system as bonds are more widely held,” Gupta assessed the implications of the RBI's move.

Clix's CFO does not foresee a significant change in the NBFC’s funding mix. Banks’ borrowing constitutes 60% of Clix's funding, while 20% comes from Non-Convertible Debentures or NCDs and 20% from securitisation. Clix issued about Rs 150 crore through its first external commercial borrowing instrument in May, however, the CFO does not foresee another ECB issuance any time soon, he said.

Clix Capital is an NBFC, co-founded by industry veterans Pramod Bhasin and Anil Chawla in 2016. The NBFC primarily operates in education, healthcare, and MSME financing, and is backed by AION Capital Partners Ltd, which is a private equity fund that is an affiliate of Apollo Global Management.

Clix’s AUM crossed the Rs 5,000 crore mark in H1FY24, a growth of 26% over the same period last year, while the NBFC’s net profit was at Rs 30 crore, a growth of 200% from a year-ago same period.