Bajaj Finance, Shriram Finance, Cholamandalam Investment and other NBFC stocks jumped up to 6% in early trade on Thursday after the Reserve Bank of India (RBI) lowered risk weights for bank finance to NBFCs and microfinance loans, a move that is likely to unlock more funds and boost credit.
L&T Finance share price rallied as much as 6.4%, Cholamandalam Investment and Finance Company shares spiked 5.12%, Shriram Finance stock price jumped 4.55%, while Mahindra & Mahindra Financial Services surged 3.9% and Bajaj Finance shares gained 2.43%.
Muthoot Finance share price rose over 3%, while Manappuram Finance shares gained 2%.
The RBI reversed the notification of November 2023 of the additional 25% Risk Weight applied on the earlier rating wise risk-weight on a bank loan. However, the risk-weight increase to 125% from 100% on personal loans and credit card outstandings by NBFCs has been kept unchanged.
A lower risk weight means that lenders need to set aside less funds as a safety net for consumer loans, implying an increase in their lending capacity.
Both NBFCs and microfinance institutions have witnessed a slow down in their lending after the central bank tightened lending norms by raising the risk weight in November 2023.
The risk weight on the exposures of commercial banks to NBFCs was increased by 25% (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs was below 100%.
RBI Circular Impact
Analysts believe that the latest RBI’s move will be sentimentally positive for the Non-Banking Finance Companies (NBFC) and every NBFC should benefit from this restoration of risk weights.
“Overall, we see this move (in addition to the 25 bps repo rate cut earlier) as an important signaling from the RBI that it is getting comfortable with growth in the NBFC sector after the moderation achieved as a result of its November 2023 actions. In terms of tangible impact, flow of funds to NBFCs from banks should improve hereon,” said Avinash Singh, Senior Research Analyst at Emkay Global Financial Services Ltd.
However, he believes that the cost of funds (CoFs) for NBFCs will not see material improvement from this move, as CoFs had not risen too meaningfully following the RBI’s November 2023 actions.
“Overall, outlook for the NBFC sector will continue to be driven by stable-to-slightly moderating Asset Under Management (AUM) growth and stable Net Interest Margins (NIMs), with sticky operating expenses and credit costs leading to slight moderation in RoAs in FY25 and H1FY26 vs FY24,” said Singh.
Based on the risk-reward proposition, he prefers Shriram Housing Finance and M&M Financial Services.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
