RBI Decision: With this move of the Reserve Bank, more money will be available to NBFCs and banks and they will be able to give more loans.
The Reserve Bank of India (RBI) has reduced the risk weight on bank finance, giving a big relief to non-banking financial companies (NBFCs) and small loan lending financial institutions. This move will make more money available to banks and they will be able to give more loans.
Lower risk weight means that banks will need to set aside less money as security for consumer loans and their lending capacity will increase. The central bank had tightened lending norms by increasing the risk weight in November 2023. After that, the pace of lending by both NBFCs and small loan lending (microfinance) institutions has slowed down.
In all cases where the existing risk weight as per the external rating of the NBFC was less than 100 percent, the risk weight on commercial banks’ loans to NBFCs was increased by 25 percent (over and above the risk weight associated with the given external rating).
What did RBI say in the circular?
RBI said in the circular, “After review, it has been decided to restore the risk weight applicable to such loans.” In another circular, RBI said that it has reviewed the risk weight on microfinance loans. In November 2023, the risk weight on consumer loans, including personal loans, was also increased to 125 per cent. It excluded loans taken on housing, education, vehicle and gold and gold jewellery.
RBI said, “After review, it has been decided that microfinance loans, like consumer loans, will also be excluded from the high risk weight specified in the above circular. Consequently, it will be subject to a risk weight of 100 per cent.” The central bank clarified that microfinance loans which are not in the nature of consumer loans and meet certain criteria can be classified under the Regulatory Retail Portfolio (RRP).
But this is conditional upon the banks implementing appropriate policies and standard operating procedures to ensure eligibility criteria. RBI said that along with this, microfinance loans given by Regional Rural Banks (RRBs) and Local Area Banks (LABs) will attract a risk weight of 100 per cent.
