RBI Eases Lending Norms for NBFCs and Microfinance Institutions
The Reserve Bank of India (RBI) has eased lending restrictions on non-bank financial companies (NBFCs) and microfinance institutions (MFIs) by lowering risk weights for bank credit. This move aims to boost lending capacity and support economic growth, reversing the slowdown observed after previous regulatory measures.
In November 2023, the RBI had increased risk weights for consumer credit exposures, including personal loans, by 25 percentage points to 125%, and similarly for NBFCs where existing risk weights were below 100%. These measures were intended to mitigate potential risks in rapidly growing credit segments.
However, these regulations led to a significant slowdown in bank lending to NBFCs, with growth declining to 4.8% between March and December 2024, compared to 13.2% during the same period in the previous fiscal year. Consequently, the RBI has decided to restore the previous risk weights, thereby reducing the capital banks need to set aside for loans to NBFCs and MFIs.
Anil Gupta, Senior Vice President and Co-Group Head of Financial Sector Ratings at ICRA, noted that this adjustment is expected to enhance credit flow to NBFCs and improve their capital ratios. The increased lending capacity is anticipated to bolster the retail segment and stimulate economic growth.
This policy change reflects the RBI’s responsive approach to evolving economic conditions, aiming to balance financial stability with the need to foster credit availability in the economy.
