The central bank has restored the risk weights on bank loans to NBFCs to the levels before they were hiked in November 2023. The RBI then raised risk weights on banks’ exposure to NBFCs by 25 percentage points, over and above the risk weight associated with the given external rating.
The revised risk weights will be effective 1 April 2025.
“Significant slowdown in bank credit to NBFCs in the current fiscal, tighter market liquidity in general and, to prioritise credit flow to the underserved segment for growth, the RBI has restored its earlier decision of increasing the risk weight of the bank credit to NBFCs,” A.M. Karthik, senior vice president, Financial Sector Ratings Icra, said, calling it a “welcome move” given the current headwinds faced by the sector.
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The restoration of lower risk weights is expected to provide some relief to industry players, especially better-rated NBFCs, and facilitate more credit flow to a broader set of players, according to industry experts.
Average banking system liquidity is estimated to be in a deficit of ₹1.5 trillion as of 20 February 2025, slightly better than ₹2 trillion in January 2025, according to a note by CareEdge Ratings, which said that while RBI measures have helped improve liquidity, “overall conditions remain tight” and further measures are needed to ease liquidity and support the transmission of RBI rate cuts. The central bank cut the policy repo rate by 25 basis points on 7 February 2025.
RBI has announced a slew of measures to infuse durable liquidity into the banking system, including higher amount of open market purchases of bonds, long-term variable rate repo auctions and foreign currency buy/sell swap auctions, infusing a total of at least ₹3.2 trillion into the system, the report said.
Lower weights for micro-loans
RBI eased the risk weights for some microfinance loans by removing them from the classification of higher-risk weight-carrying loans. The apex bank excluded microfinance from the list of some consumer credit segments that attract higher risk weights such as personal loans and credit cards, as announced in November 2023.
Accordingly, banks’ microfinance loans, including for regional rural banks and local area banks, will now be subject to a risk weight of 100%, effective immediately.
Further, loans that meet the regulatory criteria can now be considered as retail claims for regulatory capital purposes and included in a regulatory retail portfolio (RRP), attracting a risk weight of 75%. However, certain claims, like consumer credit, including personal loans, will continue to be excluded from being categorised as RRP.
“It is further clarified that microfinance loans which are not in the nature of consumer credit and fulfil all the four criteria…may be classified under RRP provided that the banks put in place appropriate policies and standard operating procedures to ensure fulfilment of the qualifying criteria,” the RBI release said.
“Post November 2023, banks had to apply 125% risk weight on the loans extended to microfinance borrowers, whereas it remained at 75% for NBFC-MFIs. Since the microfinance loans of banks will classify under the regulatory retail limit, the risk weight on these loans will also decline to 75%, thereby improving their capital ratios as well as their appetite for growth in this segment,” said Anil Gupta, senior vice president, Financial Sector Ratings Icra. “However, given the recent asset quality challenges in this segment, the growth may remain muted in the near term.”
The relaxed norms for microfinance loans come at a time when the sector is experiencing a prolonged period of stress, led by the rising number of delinquencies in small-ticket loans across several states.
Read more: Banks seek more measures to support lending rate cuts
A report released today by industry body Micro Finance Industry Network (MFIN) showed that portfolio quality, measured by loans that are due for over 31-180 days was at 6.4% as of December 2024, significantly higher than 2.0% a year ago. As a result, the overall portfolio of the microfinance industry de-grew 3.5% on year in Q3 FY25 to ₹3.9 trillion. The loan amount disbursed was lower by 20.0% on year, and the number of new loans disbursed was 29.0% lower.
On 10 February 2025, Mint did a story on microfinance companies facing the threat of a funding squeeze. Banks and non-bank lenders have slowed lending to them amid the increasing risk of further defaults and ratings cuts.
Bank credit to NBFCs slowed to 6.7% in 2024 from 15.0% in 2023, as per latest RBI data. The year-to-date figure (as of December 2024) for FY25 was at 4.8%, also much lower than 13.2% in the year ago period.
