RBI's risk weights seen as macro prudential step to support economic growth

This move will free up Rs 40,000 crore capital for banks translating into Rs 4 trillion additional loanable funds

The Reserve Bank of India’s (RBI’s) decision to relax risk weights on loans to non-banking financial companies (NBFCs) and microfinance institutions (MFIs) is being seen as a macroprudential measure to support economic growth. It will free up 20–30 basis points (bps), or ₹40,000 crore, in capital for the banking system at an aggregate level, translating into ₹4 trillion in additional loanable funds. However, given the tight liquidity situation, policy transmission could take some time, experts said.

 

In November 2023, the RBI increased the risk weights on bank loans to NBFCs from 100 per cent to 125 per cent. On Tuesday, the RBI decided to restore the earlier risk weights applicable to bank loans to NBFCs, effective April 1, and clarified that risk weights for microloans by banks will be 75 per cent or 100 per cent, depending on the nature of the loan, rather than 125 per cent.

 

According to Nomura, India is taking a more coordinated policy approach — fiscal, monetary, liquidity, and macroprudential — to support growth, especially with the aim of lifting consumer demand.

 

“Lower risk weights will release more bank capital and enable more lending to NBFCs and MFIs. Higher-rated NBFCs will be able to borrow from banks at a lower cost. However, we expect policy transmission to take more time,” it said, adding that banks are still struggling with tight liquidity conditions. Consumer incomes have moderated, and delinquencies have risen in the microfinance segment, which is likely to keep lenders more risk-averse for the time being.

 

Following the increase in risk weights in November 2023, banks’ loan growth to shadow banks fell sharply from a high of ₹30 per cent year-on-year (Y-o-Y) before November 2023 to 7 per cent Y-o-Y as of December 2024. The RBI aimed to reduce NBFCs’ dependence on bank funding so that these entities could diversify their borrowing sources.

 

After November 2023, NBFCs started tapping the domestic debt capital market and overseas bond markets to secure funds. As a result, banks’ overall exposure as a share of NBFCs’ borrowings moderated from 43.1 per cent at the end of March 2023 to 42.7 per cent at the end of March 2024, according to RBI data.

 

According to Suresh Ganapathy, head of financial services research, Macquarie Capital, the RBI’s decision to restore earlier risk weights at an aggregate system level would imply a release of 20–30 bps of Common Equity Tier I, or ₹40,000 crore in capital. With a 10x leverage, this would translate into ₹4 trillion in credit or, simplistically, 200 bps of additional loanable capacity.

 

“Banks fund almost 50 percent of NBFCs’ requirements (including subscribing to debt papers). The relaxation in risk-weighted assets for bank loans to NBFCs will ease credit flow, and we also expect some reductions in interest rates on a selective basis for well-rated NBFCs,” Macquarie Capital said in a report.

 

Echoing similar views, Ajit Velonie, senior director, Crisil Ratings, said restoring risk weights to pre-November 2023 levels could lead to additional credit flow from banks to NBFCs and increase funding availability for the NBFC sector.

 

However, experts cautioned that banks will likely focus on lending to stronger, higher-rated entities. NBFCs that have successfully accessed bond markets may continue diversifying their funding sources rather than relying solely on banks. Lower-rated NBFCs and MFIs may still face challenges, as banks will continue to price their loans based on credit risk assessments.

 

“Banks have already limited their lending to NBFCs. Though changes in risk weight may reduce lending costs to some extent, the overall impact on the sector will be moderate,” said Ajay Manglunia, managing director and head of fixed income, InCred Capital Financial Services.

 

Separately, experts suggest that over the past two months, under the leadership of new RBI Governor Sanjay Malhotra, the central bank has become more accommodative, which bodes well for the financial sector.

 

“Over the past two months, under the aegis of the new RBI governor, we have seen frequent liquidity infusions, open market operations conducted after several years, a 25-bp rate cut, and the postponement of various regulations like expected credit loss (ECL), project finance, and liquidity coverage ratio (LCR). Now, we also see a relaxation in risk weights. We think this bodes well for the financial sector and places more emphasis on consumption and growth,” Macquarie Capital said in its report.

 

According to Nomura, the countercyclical easing signals come against the backdrop of other easing measures announced earlier this month — the implementation of LCR norms being deferred until “at least March 2026” from the scheduled April 1, 2025, and the proposed tightening related to ECL and project finance also being pushed to the back burner.  EXPERT VIEW 

• Lower risk weights will release more bank capital and enable more lending to NBFCs and MFIs
• Higher-rated NBFCs will be able to borrow from banks at a lower cost
• Policy transmission may take more time
• Banks still struggling with tight liquidity conditions, which may keep lenders more risk averse