Latest News | RBI Lowers Risk Weight on Bank Finance to NBFC, Microfinance Loans
Get latest articles and stories on Latest News at LatestLY. The Reserve Bank on Tuesday lowered risk weights for bank finance to NBFCs and microfinance loans, a move that will unlock more funds and boost credit.
Mumbai, Feb 25 (PTI) The Reserve Bank on Tuesday lowered risk weights for bank finance to NBFCs and microfinance loans, a move that will unlock more funds and boost credit.
A lower risk weight means that lenders need to set aside less funds as a safety net for consumer loans, implying an increase in their lending capacity.
Both NBFCs and microfinance institutions have witnessed a slow down in their lending after the central bank tightened lending norms by raising the risk weight in November 2023.
The risk weight on the exposures of commercial banks to NBFCs was increased by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs was below 100 per cent.
"On a review, it has been decided to restore the risk weights applicable to such exposures...," the RBI said in circular.
In another circular, the RBI said it has reviewed risk weights on microfinance loans.
In November 2023, the risk weights on consumer credit, including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, too was increased to 125 per cent.
"On a review, it has been decided that microfinance loans in the nature of consumer credit shall also be excluded from the applicability of higher risk weights specified in the circular ibid and shall accordingly, be subject to a risk weight of 100 per cent," RBI said in another circular.
The central bank further clarified that microfinance loans which are not in the nature of consumer credit and fulfil certain criteria may be classified under regulatory retail portfolio (RRP) provided that the banks put in place appropriate policies and standard operating procedures to ensure fulfilment of the qualifying criteria.
Also, microfinance loans extended by regional rural banks (RRBs) and local area banks (LABs) shall attract a risk weight of 100 per cent, the RBI said.
As per the MFIN data for the third quarter of the fiscal, the portfolio has declined by 3.53 per cent on year on year basis, amounting to Rs 3,85,348 crore.
"It is a welcome move in view of the current headwinds faced by the sector; this shall to an extent provide some relief to the players and facilitate credit flow to a broader set of players than what was witnessed in the recent past," Anil Gupta, Senior Vice President Co Group Head - Financial Sector Ratings, ICRA, said.
Given the significant slowdown in bank credit to NBFCs in the current fiscal, tighter market liquidity in general and, to prioritise credit flow to the underserved segment for growth, the RBI has restored its earlier decision of increasing the risk weight of the bank credit to NBFCs, Gupta said.
The restoration of lower risk weights for better-rated NBFCs will improve the credit flow from banks to NBFCs while being immediately beneficial for their capital ratios, A M Karthik Senior Vice President, Financial Sector Ratings ICRA, said, adding that with improved credit flow to NBFCs, the overall credit flow to the retail segment is expected to improve thereby supporting overall economic growth.
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