The Reserve Bank of India (RBI), following up on its growth oriented focus in its last monetary policy meeting, has taken two related steps to relax lending restrictions to boost bank and consumer credit. First, it has reduced the risk weights on bank exposures to Non-Banking Financial Companies by 25 percentage points, going back to the pre-November 2023 position. At that time, the risk weight on the exposures to NBFCs was raised by 25 percentage points over and above the risk weight associated with the external rating. The latest move is yet another effort to reduce the cost of lending and reverse the credit slump in the wake of the November 2023 order.
Second, higher risk weight on personal credit, including personal loans, again introduced in November 2023, has been brought down to 100 per cent. This applies to a range of banking entities, including local area banks and regional rural banks. By way of context, the RBI at that time was worried about the strong growth in unsecured loans to individual borrowers — increasing risk and crowding out corporate credit. Lenders had taken to sharp practices to onboard customers. But the situation has changed since then. Following higher weights for loans to NBFCs, banks sharply cut back lending to this segment. From a CAGR of 28.7 per cent between September 2021 and September 2023, bank lending growth to NBFCs fell to 6.4 per cent in September 2024. Likewise, microfinance loans by banks are also reported to have slowed down this fiscal year, after a strong surge in the previous three years. According to CRISIL, bank lending to NBFCs stagnated around ₹13 lakh crore for three quarters till September 2024, with some revival seen in the December 2024 quarter.
With funding from banks becoming tighter, NBFCs had turned to commercial paper and non-convertible debentures, raising their costs. Some NBFCs have also raised resources through overseas borrowings, exposing them to foreign currency risk. Crucially, NBFC loans have shrunk in recent quarters. This is serious, as NBFCs are the primary source of finance for lakhs of small businesses. The latest reduction in risk weights is expected to spur banks to lend to the NBFC (facilitating on-lending) and the microfinance sector.
Other recent moves by the RBI, such as deferring the implementation of new liquidity coverage ratio norms and project finance rules by a year to April 2026, are expected to spur credit. The RBI, however, needs to maintain its vigil against evergreening of bad loans and other malpractices. Its latest Financial Stability Report points out that while the non-performing assets of NBFCs are falling, bad loan write-offs have increased; in fact, entities recording higher growth registered a sharp increase in write-offs. Delinquencies in microfinance loans too increased with interest rates moving up. The central bank will have to take selective action against errant NBFCs, even as it loosens the purse strings for the financial ecosystem at large.
