RBI reduces risk weights on bank loans to NBFCs, MFIs

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Subscribe to enjoy similar stories. Amid cries of deficit liquidity in the banking system and funding crunch for several small lenders, the Reserve Bank of India on Tuesday reduced the risk weights on bank loans to non-banking finance companies and microfinance loans. The central bank has restored the risk weights on bank loans to NBFCs to the levels before they were hiked in November 2023.

The RBI then raised risk weights on banks’ exposure to NBFCs by 25 percentage points, over and above the risk weight associated with the given external rating. The revised risk weights will be effective 1 April 2025. The RBI’s decision to roll back its November 2023 hike in risk weights for NBFC loans has been driven by the significant slowdown in bank credit to NBFCs in FY25, tighter market liquidity, and to prioritise credit flow to the underserved segment for growth, A.

M. Karthik, senior vice president, Financial Sector Ratings, Icra, said. “It is a welcome move in view of the current headwinds faced by the sector; this shall to an extent provide some relief to the players and facilitate credit flow to a broader set of players than what was witnessed in the recent past," he added.

Read more: Microlenders went on a lending frenzy. Their moment of reckoning has arrived. The restoration of lower risk weights is expected to provide some relief to industry players, especially better-rated NBFCs, and facilitate more credit flow to a broader set of players, according to industry experts. Average banking system liquidity is estimated to be in a deficit of ₹1.5 trillion as of 20 February 2025, slightly better than ₹2 trillion in January 2025, according to a note by CareEdge Ratings, which said that while RBI measures have helped improve