Context:
RBI has reversed the increase in risk weights prescribed for commercial bank loans to NBFCs (Non Banking Financial Companies) effective from April 1, 2025.
The intent behind the move was to ease credit flow to the stressed NBFCs that were suffering from funding constraints, liquidity deficits, and a sudden increase in stress on their small ticket and microfinance loans.
Background
- RBI had raised risk weights by 25 percentage points for bank loans extended to NBFCs and
- Certain consumer credit segments (personal loans, credit cards).
- The risk weight hike caused lending by banks to NBFCs to slow, and credit growth fell to 6.7% in 2024 (from 15% in 2023).
- YTD growth until December 2024 has been 4.8% (against 13.2% in the previous year).
Impact Due To Rollback
- On Banks
- 9% of total banking credit is given to the NBFCs.
- Lowering risk weights frees capital for higher lending capacity.
- On NBFCs
- Banks are a key source of funding (~₹13 trillion in exposure).
- The move supports credit flow, alleviating stress in microfinance and small ticket lending.
- On the Financial Environment
- It pursues an agenda consistent with the recent infusion of liquidity initiated by RBI under Sanjay Malhotra.
- This includes repo rate cut, bond buying, and various relaxed regulations like ECL, LCR, and project finance.
The RBI’s rollback of the risk weights is a decision in favor of growth and will respond to the liquidity position of the NBFCs while enabling the sector to expand its credit.
The action is also consistent with the RBI’s broader initiative to support financial sector stability for stimulating economic growth.
