RBI lowers risk weights for NBFCs, MFIs loans to boost credit flow

The Reserve Bank of India (RBI) on Tuesday reduced risk weights for bank loans to non-banking financial companies (NBFCs) and microfinance institutions, aiming to increase credit flow and boost lending capacity. Lower risk weights allow banks to set aside less capital as a safety buffer, enabling them to lend more. The move follows a slowdown in lending by NBFCs and microfinance institutions after the RBI raised risk weights by 25 percentage points in November 2023.The earlier decision impacted consumer loans, including personal loans but excluding housing, education, and vehicle loans.
With the latest revision, risk weights for loans to NBFCs will return to previous levels, enhancing their access to bank credit. Additionally, microfinance loans categorized as consumer credit will now attract a 100% risk weight, while those meeting specific criteria may qualify under the regulatory retail portfolio (RRP) category. Loans by regional rural banks (RRBs) and local area banks (LABs) will also have a 100% risk weight.
According to official data from the Microfinance Institutions Network (MFIN), the microfinance loan portfolio declined by 3.53% year-on-year in the third quarter of the fiscal, amounting to Rs 3,85,348 crore. The RBI’s decision is expected to provide relief to the sector and stimulate credit flow to a broader set of borrowers.
Industry experts welcomed the move, noting that it would ease current liquidity challenges and promote credit flow to underserved segments. Anil Gupta, Senior Vice President at ICRA, reportedly stated that this change is timely, given the slowdown in credit to NBFCs and tighter market liquidity. A.M. Karthik, also from ICRA, added that the decision would benefit NBFCs' capital ratios and support overall economic growth by boosting retail credit.
This policy change comes as the RBI defers new capital and liquidity rules, coinciding with the appointment of Sanjay Malhotra as the new governor.

(Business Correspondent)