Relaxation of risk weights unlikely to spur growth in absence of demand

The rationalisation of risk weights on loans proposed by the Reserve Bank of India (RBI) under the Basel-III norms will release a significant amount of capital for banks. However, since banks are already sitting on excess capital, the proposed guidelines are unlikely to spur much growth unless credit demand picks up, industry experts say.

 

According to Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital, while there are some relaxations in risk weights for segments such as mortgages, India is also moving towards IFRS-based Expected Credit Loss (ECL) provisioning norms, which will strengthen banks’ balance sheets.

 

He added that although the new Basel-III rules will release capital, banks in India are currently sitting on excess capital, with CET1 ratios around 14.7 per cent, well above the regulatory requirement of 8–9 per cent. As a result, the near-term impact on growth is likely to remain limited unless credit demand improves, Ganapathy said.

 

The proposed rationalisation of risk weights under the Basel-III framework marks a broad-based reduction across multiple asset classes. For mortgages, the differentiation based on ticket size has been largely removed, resulting in a general decline in risk weights across categories.

 

In the case of MSMEs, where risk weights were earlier set at 100 per cent, they will now vary in line with credit ratings — ranging between 75 and 85 per cent — a move expected to encourage higher capital deployment from banks. Similarly, for corporates and NBFCs, risk weights have been reduced across several rating buckets.

 

In project finance, fully operational projects will now attract a lower risk weight of 80 per cent, down from 100 per cent, a move that benefits power financiers in particular.

 

Additionally, for credit cards, the risk weight for transactor books has been cut from 150 per cent to 75 per cent.

 

“We expect Common Equity Tier-1 (CET1) ratios to improve on account of lower risk weights across various loan products, which should largely offset the adverse impact from the implementation of ECL norms,” said Ankit Bihani, equity research analyst at Nomura Financial Advisory and Securities (India). He added that CET1 ratios for large banks are likely to improve by 60–120 basis points. One basis point is a hundredth of a percentage point.

 

System credit growth has remained subdued, with total credit rising 10.4 per cent year-on-year as of September 19, according to the latest RBI data. Despite several measures taken by the central bank to improve the flow of credit into the economy, credit growth in FY26 is expected to remain muted at 11–12 per cent.

 

Acknowledging the slower credit growth, RBI Governor Sanjay Malhotra earlier this month said bank credit growth, while lower than last year, continues to be healthy and supportive of real economic activity.

 

“I would like to emphasise that as other sources of funding gradually but steadily increase their footprint, the overall flow of financial resources to the economy is a more pertinent measure for assessing funds to productive sectors. The total flow of resources from non-bank sources to the commercial sector increased by Rs 2.66 trillion in 2025–26 so far, more than offsetting the decline of Rs 48,000 crore in non-food bank credit,” he said.