The Reserve Bank of India (RBI) has reduced the risk weight on bank finance, providing significant relief to non-banking financial companies (NBFCs)
and small loan lending institutions. This decision will allow banks to lend more money, as they now need to keep aside less capital as security for consumer loans.
Impact on Lending and NBFCs
In November 2023, the RBI had increased the risk weight on lending, which slowed down loan distribution for NBFCs and microfinance institutions.
Previously, if an NBFC had a risk weight below 100% based on its external rating, the RBI raised the risk weight for commercial banks lending to NBFCs by 25%.
Now, the RBI has rolled back this change, restoring the previous risk weight levels. This move will boost lending and improve financial flexibility for both banks and NBFCs.
Key Changes in RBI’s Circular
The RBI’s latest circular announced that risk weight on microfinance loans has also been revised.
Previously, in November 2023, the risk weight on consumer loans (such as personal loans) was raised to 125%, but housing, education, vehicle, and gold loans were excluded.
With this update
1) Microfinance loans, like consumer loans, will no longer have a higher risk weight. Instead, they will have a standard risk weight of 100%.
2) Certain microfinance loans that meet specific criteria can now be classified under the Regulatory Retail Portfolio (RRP), allowing for better credit treatment.
3) Loans provided by Regional Rural Banks (RRBs) and Local Area Banks (LABs) will also have a risk weight of 100%.
Conditions for Banks
Banks must ensure they have the right policies and procedures in place to meet eligibility criteria for these loans.
This step aims to maintain financial stability while supporting increased lending.
By restoring the previous risk weight levels, the RBI has made it easier for banks to provide loans, benefiting NBFCs, microfinance institutions, and borrowers alike.
