NBFCs cheer RBI's move to reverse higher risk weights, but analysts don't see aggressive lending just yet

NBFCs

After the Reserve Bank of India (RBI) on February 25 reduced risk-weighted assets (RWAs) on loans to non-banking financial companies (NBFCs) and microfinance institutions (MFIs), analysts said they anticipate a significant improvement in credit flow and capital adequacy for banks.

Led by CreditAccess Grameen, a market leader in the MFI space that saw its share price rise 12 percent, stocks such as Shriram Finance and Bajaj Finance rose 5.67 percent and 2.44 percent, respectively, in Thursday's trade, cheering the change in the regulatory dispensation.

Analysts at Motilal Oswal Financial Services estimated that banks in their coverage universe could see an increase of 20–250 basis points (bps) in common equity tier 1 (CET-1) capital ratios due to the policy shift, explaining why AU Small Finance Bank and Bandhan Bank stocks also rose, by 6.1 percent and 6 percent, respectively, on Thursday.

At the broader system level, they project that the move could release approximately Rs 40,000 crore of capital, enabling Rs 4 lakh crore in additional credit availability and increasing loanable capacity by 200 bps.

Meanwhile, analysts at Macquarie said that the RBI may extend similar RWA relaxations to unsecured loans, such as personal loans and credit cards, if credit growth in these segments stabilises in coming months.

As banks fund nearly 50 percent of the liability requirements of non-banks either through direct lending or debt subscription, the new measure could ease credit flow for NBFCs, leading to selective reductions in interest rates for well-rated entities, the analysts at Macquarie said.

The rationale behind the RBI's relaxation is that banks’ exposure growth to NBFCs saw a sharp drop-off, from 30 percent year-on-year before November 2023 to just 6.6 percent in December 2024. Simultaneously, the MFI sector has faced significant stress, with industry loan books declining by 11 percent year-to-date.

By easing RWAs, the RBI has aimed to facilitate lending to these sectors, potentially reversing the recent credit contraction.

The relaxation of RWAs will have the greatest positive impact on banks with high exposure to the MFI sector, such as IndusInd Bank and Bandhan Bank, the analysts said.

However, while the move benefits financial institutions, Motilal Oswal analysts cautioned that it may not be enough to trigger aggressive lending, as the central bank has not yet restored RWAs for unsecured loans such as personal loans and credit cards, which saw their growth drop from 25 percent to 10 percent over the same period.