India's central bank, the Reserve Bank of India (RBI) has asked the commercial banks in the country to reduce exposure to non-banking finance companies (NBFCs) to 7.5 per cent of their capital from current 10 per cent.
The central bank has set a deadline of six months for the banks to comply with the order. RBI has expressed concerns over the concentration risk in NBFC's business model as more than half of the their lending is against gold jewellery.
RBI said that the exposure limit may rise by 5 percentage point to a maximum 12.5% of banks' capital funds only if the additional exposure is due to funds on-lent by NBFCs to the infrastructure sector. The central bank has also asked the banks in the country to fix internal sub-limits on banks aggregate exposures.
The RBI had recently announced tightened rules for lending against gold by the finance companies in the country saying that it will increase risks to the banking system of India. The central bank has said that the financial companies having half their assets in gold must also have a minimum equity capital or tier-I capital of 12% by April 2014 and these companies can lend only upto the 60 per cent of the value of gold jewellery.
Such loans in the country have risen by the rate of more than 50 per cent in the last few years. The prices of gold have been rising in the country and thus many people worth out access to the banks used their gold to raise loans.
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