RBI reduces the risk weight associated with bank financing for non-banking financial companies (NBFCs) and microfinance loans
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This decision is expected to release additional funds and enhance credit availability.
The Reserve Bank announced on Tuesday a reduction in risk weights associated with bank financing to non-banking financial companies (NBFCs) and microfinance loans. This decision is expected to release additional funds and enhance credit availability. By lowering the risk weight, lenders are required to allocate fewer resources as a buffer for consumer loans, which suggests an expansion in their lending potential.
Both non-banking financial companies (NBFCs) and microfinance institutions have experienced a decline in their lending activities following the central bank’s decision to tighten lending regulations by increasing the risk weight in November 2023.
The risk weight applied to commercial banks’ exposures to NBFCs was raised by 25 percentage points, in addition to the existing risk weight linked to the respective external ratings, in instances where the current risk weight based on the external ratings of NBFCs was below 100 percent. This would be effective from April 1.
The Reserve Bank of India (RBI) stated in a circular that, following a review, it has been determined to reinstate the risk weights associated with these exposures. In a separate circular, the RBI announced that it has reassessed the risk weights concerning microfinance loans.
It has been determined upon review that microfinance loans classified as consumer credit will be exempt from the higher risk weights outlined in the aforementioned circular and will therefore be assigned a risk weight of 100 percent.
“On a review, it has been decided that microfinance loans in the nature of consumer credit shall also be excluded from the applicability of higher risk weights specified in the circular ibid and shall accordingly, be subject to a risk weight of 100 per cent, says the RBI circular.
The central bank has further elucidated that microfinance loans, which do not fall under the category of consumer credit and meet specific criteria, may be categorized within the regulatory retail portfolio (RRP). This classification is contingent upon banks implementing suitable policies and standard operating procedures to ensure compliance with the qualifying criteria.
Additionally, the Reserve Bank of India (RBI) indicated that microfinance loans provided by regional rural banks (RRBs) and local area banks (LABs) will be subject to a risk weight of 100 percent.
According to the Microfinance Institutions Network (MFIN) data for the third quarter of the fiscal year, the microfinance portfolio has experienced a year-on-year decline of 3.53 percent, totaling Rs 3,85,348 crore.
“It is a welcome move in view of the current headwinds faced by the sector; this shall to an extent provide some relief to the players and facilitate credit flow to a broader set of players than what was witnessed in the recent past,” informs an official.
In light of the considerable deceleration in bank credit to non-banking financial companies (NBFCs) during the current fiscal year, coupled with overall tighter market liquidity, the Reserve Bank of India (RBI) has reinstated its previous decision to elevate the risk weight associated with bank credit to NBFCs. This measure aims to prioritize the flow of credit to underserved segments to foster growth. As of the last quarter of the fiscal year, the portfolio has experienced a year-on-year decline of 3.53 percent, totaling Rs 3,85,348 crore, the official added further.
