In a relief for non-banking finance companies (NBFCs), the Reserve Bank of India has rolled back the higher risk weight assigned for bank loans to NBFCs in 2023. The central bank also lowered risk weight requirements for loans extended by banks to microfinance firms.
In November 2023, the regulator had hiked risk weight on lenders’ consumption loans, credit card exposures and bank loans to NBFCs by 25 per cent to 125 per cent, flagging concerns about the high growth of lenders’ personal loans portfolio and sharp hike in banks’ exposure to NBFCs. This tightened credit availability for NBFCs, leading them to seek a review from the new RBI Governor, Sanjay Malhotra.
Boost for NBFCs
George Alexander Muthoot, MD at Muthoot Finance, said the RBI’s action revoke its earlier order gives a clear message to banks: to continue funding NBFCs as they serve the last mile.
“With the reduction in risk weights, more funds will be available with banks to on-lend to NBFCs. After a while, in the next cycle of lending, maybe banks’ loan rates could also reduce for NBFCs,” he said.
“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,” he added.
Analysts say restoration of risk weights will likely increase the credit flow from banks to NBFCs, while being immediately beneficial for their capital ratios. With improved credit flow to NBFCs, the overall credit flow to the retail segment is also expected to improve thereby supporting overall economic growth. “This change with deferment of proposed LCR framework are expected to improve the bank credit growth in FY26 compared to FY25,” said Anil Gupta, Senior Vice-President, Financial Sector Ratings, ICRA.
Gupta says after November 2023, the banks had to apply 125 per cent risk weight on the loans extended to microfinance borrowers, whereas it continued to remain at 75 per cent for microfinance institutions. Since the microfinance loans of banks will now be classified under regulatory retail limit, the risk weight on these loans will also decline to 75 per cent, thereby improving their capital ratios as well as their appetite for growth in this segment.
However, given the recent asset quality challenges in micro loan segment, the growth may remain muted in near-term, he said.
“This RBI decision provides a much-needed breather to NBFCs and MFIs, making bank loans more viable again. However, banks will likely focus on lending to stronger, higher-rated entities. Meanwhile, NBFCs that have successfully accessed bond markets may continue diversifying their funding sources rather than relying solely on banks,” said Venkatakrishnan Srinivasan, Founder at Rockfort Fincap LLP.
Change of guard
Lowering risk weights is among the first major decisions taken by the new RBI Governor Sanjay Malhotra. He had met with heads of NBFCs earlier this month, who requested the regulator to re-consider higher risk weights, and set up a dedicated financing window for NBFCs and allow large NBFCs to accept deposits, due to severe funding crunch.
Malhotra also said the central bank will give enough time for lenders to implement changes in the liquidity coverage ratio framework and project loans circular.
This move indicates the comfort of the Regulator with the NBFCs in these asset classes. While most banks had sufficient equity to take care of additional capital requirement, the increase in risk weight has made them cautious to NBFCs in this space. Today’s move is likely to provide comfort and thus lead to lower borrowing costs for NBFCs in non PSL segments such as unsecured personal loans, wholesale loans etc.–Sanjay Agarwal, Senior Director, CAREEdge Ratings.
