RBI Eases Lending Norms For NBFCs, MFIs

By removing the 25-percentage-point increase imposed in November 2023, the RBI aims to encourage banks to resume lending to higher-rated NBFCs, providing a much-needed boost to these entities. While this measure offers a ‘breather’ and enhances access to bank funding, it does not fundamentally alter the credit risk landscape

Reserve Bank of India has taken a host of measures in its bid to revive bank lending to NBFCs, especially for higher-rated NBFCs.

First, risk weight has been restored for NBFCs. The 25-percentage-point risk weight increase imposed in November 2023 has been removed. Banks can now apply risk weights based on the external credit rating of NBFCs, as per Basel III norms.

Secondly, risk weight has been adjusted for microfinance loans. Microfinance loans that qualify as consumer credit will now attract a 100 per cent risk weight, rather than the previously imposed 125 per cent.

This move is expected to revive bank lending to these entities, especially for higher-rated NBFCs. However, lower-rated NBFCs and MFIs may still face challenges, as banks will continue to price their loans based on credit risk assessments. It seems that RBI’s rollback signals a normalization rather than a fundamental improvement in the credit risk profile of NBFCs and MFIs.

Credit risk remains entity-specific and dependent on asset quality, ALM mismatches, and overall financial stability. While this move makes bank funding more accessible, larger NBFCs may still prefer a diversified borrowing strategy. Many have already built strong relationships in bond markets (domestic and offshore) and may continue tapping ECBs for cost-effective funding.

Talking to Bizz Buzz, Venkatesh Srinivasan, Managing Partner, Rockfort Fincap, said, “This RBI decision provides a much-needed breather to NBFCs and MFIs, making bank loans more viable again.”

However, banks will likely focus on lending to stronger, higher-rated entities. Meanwhile, NBFCs that have successfully accessed bond markets may continue diversifying their funding sources rather than relying solely on banks, he said.

RBI had earlier increased the risk weights for SCBs lending to NBFCs by 25 basis points over the normal risk weights applicable according to the external risk ratings if the risk weights were below 100 per cent. This was earlier prescribed by RBI in the light of the substantial rise in unsecured loans given by NBFCs which takes loan from SCBs.

“In the light of the sudden rise in unsecured loans these incremental risk weights were necessary to moderate the growth of unsecured loans by NBFCs as RBI was not comfortable with such high increase in unsecured loans and thought it fit to moderate the growth by prescribing such higher risk weights,” said M Narendra, former CMD of Indian Overseas Bank.

The action of the RBI has served the purpose and later such high exposure to unsecured loans have been moderated and currently it is under control, he further added. Hence RBI has now reconsidered the earlier prescribed regulation and restored the risk weights at the level of risk weights as applicable to external rating. RBI depending upon the risks it perceives may change the risk weights depending upon the requirement.