Shares of NBFCs, MFIs rally up to 15% as RBI reduces risk weight on loans

CreditAccess, L&T Fin, RBL Bank, Poonawalla Fincorp, Five-Star Business Finance, Ujjivan SFB, Shriram Finance, Cholamandalam, M&M Financial, AU SFB and Bandhan Bank were up in the range of 4% - 15%.

Shares of Non Banking Finance Companies (NBFCs) and Micro-Finance Institutions (MFI) rallied up to 15 per cent on the BSE in Thursday's intra-day trade after the Reserve Bank of India (RBI) reduced risk weight on MFI loans and loans to NBFCs.

 

Shares of CreditAccess Grameen rallied 15 per cent to Rs 997 on the BSE in intra-day trade today. The stock of MFI had underperformed the market, with its market value halved to Rs 750 as of January 27, 2025, from its 52-week high of Rs 1,553 hit on June 7, 2024. At 10:34 am; CreditAccess was quoting 10 per cent higher at Rs 948.30, as compared to flat BSE Sensex at 74,601.

 

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Among other stocks L&T Finance, RBL Bank, Poonawalla Fincorp, Five-Star Business Finance, Ujjivan Small Finance Bank, Shriram Finance, Cholamandalam Financial Holdings, Mahindra & Mahindra Financial Services, Home First Finance Company India, AU Small Finance Bank, Bandhan Bank, Aditya Birla Capital and Cholamandalam Investment and Finance Company were up in the range of 4 per cent to 6 per cent. 

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The Reserve Bank of India (RBI), recently, announced a significant policy reversal, restoring the risk weights on exposures of Schedule Commercial Banks (SCBs) to NBFCs, as well as MFI, to their original levels. The RBI decided to roll back the additional 25 percentage points risk weight it had imposed on bank loans to NBFCs in November 2023. Starting April 1, 2025, banks will go back to assigning risk weights based on NBFCs’ external credit ratings, as per Basel III regulations.

 

RBI has initiated several regulatory measures in recent months to support the sector and enhance the operating performance of lenders. This includes a reduction in the repo rate, undertaking of several liquidity-enhancing operations, deferment of LCR, ECL, and project-financing regulations, and the lifting of supervisory restrictions on KMB and many others.

 

The rollback of additional risk weight on bank loans to NBFCs will ease capital requirements for banks, boosting credit flow to the shadow banks. This may lower NBFCs’ borrowing costs thereby aiding margins, ICICI Securities said in a note.

 

The restoration of risk weights to pre-November 2023 levels will help alleviate this pressure, especially as the profitability of many mid-sized banks is already under pressure due to asset quality concerns in unsecured segments. As a result, banks are expected to witness an improvement in their CET-1 ratios, as they will require less capital against these loans. Stronger capitalization will enhance banks’ ability to absorb potential assets quality shocks and support recovery in business growth, said Motilal Oswal Financial Services.

 

The reversal in risk weights on MFI loans from 125 per cent to 100 per cent/75 per cent will help reduce risk weighted assets (RWAs) for banks, supporting capital adequacy levels. Universal banks like Bandhan, IndusInd Bank, IDFC First Bank, RBL Bank, and some small finance banks (SFBs) with significant exposure to the microfinance sector will be the key beneficiaries, the brokerage firm said.