RBI's Decision on Bank Loan Risk Weights
The Reserve Bank of India (RBI) has reversed its previous decision to increase the risk weights on bank loans to non-banking financial companies (NBFCs). This move aims to release substantial capital for banks and stimulate loan growth.
Background and Changes
- The risk weight for bank loans to NBFCs was increased by 25 percentage points in November 2023.
- This was applicable when the external risk weight of NBFCs was below 100%.
- As a result, bank loans to highly-rated NBFCs (AAA, AA, and A) saw a sharp increase in risk weight.
Impact on Loan Growth
- Bank loan growth to NBFCs dropped significantly from 15% year-on-year to 6.7% by December 2024.
- Overall bank credit growth fell from 20% to 11.2% in the same period.
Restoration of Lower Risk Weights
- Anil Gupta from Icra stated that restoring lower risk weights will enhance credit flow to NBFCs and positively impact their capital ratios.
- Banks will need to set aside less capital for such loans, freeing up resources.
Microloan Risk Weights
- For microloans categorized as regulatory retail or business loans, the risk weight will be 75%.
- Microloans classified as consumer credit will have a 100% risk weight instead of the previous 125%.
- This change removes the confusion created by the November 2023 circular and clarifies the risk weight criteria for microloans.
Consequences for the NBFC Sector
- Prior increases led NBFCs to seek alternative funding sources due to declining bank borrowings.
- The change is seen as a positive shift for the NBFC sector, addressing limited funding options amid adverse dollar movements affecting external commercial borrowings (ECBs).
