Non-banking finance companies (NBFCs), especially large sized ones, are expecting a fall in their cost of funds (CoF) after the Reserve Bank of India’s (RBI) move this week to rollback 25 per cent higher risk weight assigned on bank loans to NBFCs in late 2023, bankers say.
Raul Rebello, MD & CEO, Mahindra & Mahindra Financial Services, said lower risk weights on bank loans to NBFCs will enhance liquidity for the NBFC sector due to an increase in banks’ capital availability.
“This change is expected to improve funding costs for NBFCs thus strengthening financial inclusion objectives. We acknowledge the constructive engagement between the new RBI governor and NBFC leaders last week and remain committed to working within the evolving regulatory framework to support India’s credit ecosystem,” he said.
HP Singh, CMD, Satin Creditcare, shared similar views. “This adjustment is expected to enhance liquidity and reduce the cost of funds for the NBFCs, enabling them to extend more affordable credit to underserved communities. By revitalising the industry and promoting financial stability, this move acknowledges the crucial role of NBFCs and MFIs, in driving financial inclusion,” he said.
While the previous increase in risk weights was a prudent measure to uphold financial stability, this recalibration strikes a balance between risk management and supporting inclusive economic growth, he added.
- Also read: Relief for NBFCs: RBI cuts risk weight on bank loans
Microfinance loans
According to brokerage Nuvama, the relaxation given by the regulator on banks’ microfinance loans would aid capital position of micro loan heavy banks like Bandhan Bank, RBL Bank, IndusInd Bank, among others.
Lower risk weight on NBFC loans shall result in a lower CoF for NBFCs, especially those that have a high share of bank borrowings. Given increasing risks in the sector, the brokerage does not see banks going aggressive like before on NBFC lending even with this relaxation.
“This change is more beneficial to the larger NBFCs. CIFC (Cholamandalam), SBI Cards, Five-Star, LTF (L&T Finance) and MMFS (M&M Finance) benefit in that order. In our view, CAR (capital adequacy ratio) shall improve 280–300 bps for Bandhan as the best case, 40 bps for RBL Bank, 25 bps for IDFC First Bank and 15 bps for AU SFB considering relaxation for both MFI and NBFC,” it said.
- Also read: NBFCs seek liquidity support in first meeting with RBI Governor Malhotra
Regulator’s message
Experts point out that the RBI’s move, apart from aiding lenders’ capital base, also sends a clear message that they should start being less cautious in lending to NBFCs, which cater to underserved borrowers at last mile.
“Overall, the government and the RBI have sent a clear message that more funds must be extended to borrowers at lower-end of financial pyramid, who are largely catered by NBFCs. This move will eventually increase the purchasing power of the common man, particularly for middle class citizens,” said George Alexander Muthoot, MD, Muthoot Finance.
Analysts at brokerage Motilal Oswal say the RBI’s move highlights the regulator’s preference to support growth and sends a clear signal to lenders to avoid being overly cautious when lending to the NBFC and MFI segments.
“We note that over the past nine months, the MFI industry loan book has declined 11 per cent YTD, while bank loans to NBFCs have seen a decline in growth to 6.6 per cent YoY in Dec’25 vs 30% YoY growth in FY23 and 16 per cent YoY growth in FY24. We, thus, expect a recovery in both these segments in the coming quarters,” it said.