Bank Nifty snaps 4-day losing streak as RBI rolls back NBFC loan risk weight hike

Analysts at Nuvama believe that this policy reversal will have a positive impact on bank loan growth

Bank Nifty snapped its four-day losing streak and edged higher on February 27, driven by gains in heavyweight stocks such as HDFC Bank, Axis Bank, IndusInd Bank, and IDFC First Bank. The rally came after the Reserve Bank of India (RBI) reversed its earlier decision to increase the risk weight on bank loans to non-banking financial companies (NBFCs), a move that will free up significant capital for banks.

Small finance banks also saw strong gains in response to the announcement. Equitas Small Finance Bank, AU Small Finance Bank, Ujjivan Small Finance Bank, Jana Small Finance Bank, Utkarsh Small Finance Bank, and Suryoday Small Finance Bank surged by up to 4 percent in intraday trade.

The RBI's revised policy will take effect from April 1, 2025. Lower risk weights mean that banks will be required to set aside less capital for these loans, thereby improving lending capacity.

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Earlier, on November 16, 2023, the RBI had raised risk weights for bank loans to NBFCs by 25 percentage points—above the existing risk weight based on external ratings—whenever the original risk weight was below 100 percent. This led to an increase in capital requirements for bank loans to AAA-, AA-, and A-rated NBFCs.

Following this change, banks' loan growth to shadow lenders dropped sharply. According to RBI data, year-on-year bank loan growth to NBFCs fell to 6.7 percent by December 2024, compared to 15 percent in the previous year. Meanwhile, overall bank credit growth slowed to 11.2 percent from 20 percent during the same period.

Analysts at Nuvama Institutional Equities believe that this policy reversal will have a positive impact on bank loan growth and enhance system liquidity in the coming months.

"After a period of stringent regulations over the last year and a half, the RBI's easing stance is a welcome move for the sector. However, given concerns over deteriorating asset quality in certain segments, banks are unlikely to pursue aggressive lending to mid-sized NBFCs and microfinance institutions (MFIs). That said, as the macro environment stabilizes and system liquidity improves, the relaxed norms should support loan growth," the brokerage firm noted.

The firm also pointed out that banks that had raised risk weights—such as Bandhan Bank, RBL Bank, IDFC First Bank, and IndusInd Bank—are set to benefit. While all these banks will see an improvement in their capital adequacy ratios (CAR), Bandhan Bank and RBL Bank are expected to gain the most from the RBI’s latest decision.

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