Recent policies to help delinquent borrowers have incentivised good borrowers to default, leading to a rise in NPLs that is threatening to overwhelm banks.
The SBV says banks may not allow borrowers to use long term savings books as collateral for loans if they have no plans to use the capital.
The move aligns bank exposure limits for NBFCs with limits applicable for other types of counterparties, but Fitch says it is unlikely to lead to significant credit flows to the sector.
The move will reduce the amount of capital banks need to set aside as provisioning for consumer loans, effectively reducing the cost of lending.
Under the new guidelines, payment banks, NBFCs, microfinance institutions and local area banks will be able to convert into small finance banks.
The move follows push back from some banks, saying that the higher capital buffer required of D-SIBs could raise funding costs and make them less competitive.
Foreign banks have to maintain sufficient capital in their India entities to increase their exposure to the country, rather than relying on guarantees from their overseas headquarters.
The CBIRC says some insurance companies have allowed their subsidiaries to use the insurers as “ATM machines”, causing “severe risks and social impact”.
Citi banking analyst Brendan Sproules says APRA and the RBNZ "are pursuing radically contrasting approaches to bank sector capital adequacy".
The cut is expected to free up 900 billion yuan in banking system liquidity for use in small and private enterprise lending.