The Reserve Bank of India (RBI) has announced a major change in loan regulations, making it easier for banks to lend to Non-Banking Financial Companies (NBFCs). This move is expected to improve credit flow in the financial system and support economic growth. Let’s break down the key changes, why they matter, and who stands to benefit.
What Has Changed?
The RBI has decided to reduce the risk weight on bank loans to NBFCs from 125% to 100%, starting April 1, 2025. Risk weight is a measure that determines how much capital a bank must set aside for a loan. A lower risk weight means banks need to keep less capital in reserve, freeing up funds for lending.
This is a reversal of a decision from November 2023, when the RBI had increased risk weights on consumer credit (such as personal loans and loans to NBFCs) from 100% to 125% due to concerns over rapid loan growth. However, since then, growth in unsecured loans has slowed from 25% to just 10%, prompting the RBI to ease the restrictions.
Why Is RBI Doing This?
After the 2023 rule change, bank lending to NBFCs declined, as the RBI had encouraged NBFCs to diversify their funding sources and reduce dependency on banks. However, with the slowdown in unsecured loan growth, the RBI now sees an opportunity to boost credit availability without raising financial risks.
By lowering the risk weight, the central bank aims to:
Ease funding pressure on NBFCs
Encourage banks to lend more freely
Support economic activity while maintaining financial stability
Who Benefits?
Banks
The biggest winners from this change are banks, particularly those with high exposure to NBFCs and microfinance institutions (MFIs). For example:
Bandhan Bank’s Common Equity Tier 1 (CET1) ratio—a key measure of financial strength—will increase from 13.8% to 16.3% (a 2.5 percentage point boost).
IndusInd Bank’s CET1 ratio will rise from 15.2% to 15.8%.
According to experts from Macquarie, banks with high exposure to NBFCs will see their CET1 ratios improve by 0.2% to 2.5%, depending on their lending patterns. Since banks provide around 50% of NBFC funding, this move will make it easier for NBFCs to access credit.
NBFCs and Microfinance Institutions (MFIs)
For highly rated NBFCs (such as Bajaj Finance and SBI Cards), this change could reduce borrowing costs slightly, as banks may offer better lending rates.
Analysts from CLSA believe this decision will boost investor confidence in microfinance institutions (MFIs) and help them recover quickly. In fact, CLSA recently upgraded its rating for Bandhan Bank, reflecting a positive outlook.
Public and Mid-Sized Private Sector Banks
Banks with significant exposure to NBFCs and MFIs—especially medium-sized private banks and public sector banks—will benefit the most. In contrast, large private banks with already strong capital reserves will see a smaller impact.
What Analysts Are Saying
Financial experts see this as a positive and balanced move by the RBI. With unsecured loan growth slowing, the RBI can afford to ease restrictions without increasing financial risks.
Macquarie predicts that well-rated NBFCs may get slightly lower interest rates on their loans, making borrowing cheaper.
Morgan Stanley believes medium-sized private and PSU banks will be the biggest gainers.
Some experts expect that in the future, the RBI may further reduce risk-weighted assets (RWA) for these loans, bringing additional relief to the sector.
Final Thoughts
By lowering the risk weight for NBFC loans, the RBI is taking a measured approach to boosting credit flow while ensuring financial stability. This change is expected to help banks, NBFCs, and microfinance institutions, ultimately making loans more accessible and affordable.
With this new policy taking effect in April 2025, the financial sector is set to become more flexible and resilient, benefiting both lenders and borrowers alike.
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