Shares of IndusInd Bank, Bandhan Bank, and various non-banking financial companies (NBFCs) witnessed a significant rally on Thursday, climbing as much as 8% in intraday trading. The surge came after the Reserve Bank of India (RBI) announced a reduction in risk weights on bank loans extended to NBFCs.
This regulatory adjustment is expected to enhance liquidity and boost lending activity in the financial sector, as it effectively lowers the capital requirements for banks when lending to NBFCs. Market participants viewed the move as a positive development that could ease funding constraints for NBFCs and support credit growth.
The RBI’s decision is part of its broader efforts to streamline regulations and support financial institutions, particularly at a time when liquidity and capital adequacy remain key concerns for lenders. Investors reacted positively to the announcement, driving strong buying interest in banking and NBFC stocks throughout the trading session.
Shares of Bandhan Bank, IndusInd Bank, and major non-banking financial companies (NBFCs) saw strong gains in Thursday’s trading session following the Reserve Bank of India’s (RBI) decision to lower risk weights on bank lending to NBFCs.
Bandhan Bank witnessed a sharp increase, surging 7.8% to reach ₹145.8 on the Bombay Stock Exchange (BSE). Meanwhile, IndusInd Bank recorded a more moderate rise of 1.7%, climbing to ₹1,062.05. Among NBFCs, Bajaj Finance, one of the sector’s leading players, advanced 2.4% to ₹8,699.4, reflecting positive investor sentiment after the RBI’s announcement.
The central bank’s decision, announced on Tuesday, involves reducing the risk weights on bank loans to NBFCs from 125% to 100%, with the new rule set to take effect from April 1. This move effectively lowers the capital requirements for banks when extending credit to NBFCs, making it easier for financial institutions to lend to the sector.
The adjustment reverses a previous measure introduced in November 2023, which had raised the risk weights to 125% as part of a tightening strategy. That earlier decision had increased the capital banks needed to set aside for loans to NBFCs, leading to concerns about tighter liquidity and higher borrowing costs for the sector. The latest policy change is seen as a relief for NBFCs, potentially boosting credit flow and improving financing conditions within the industry.
The Reserve Bank of India’s (RBI) recent decision to lower risk weights on bank loans to non-banking financial companies (NBFCs) signals a more accommodative regulatory approach, aimed at improving liquidity and supporting credit expansion in the financial sector. This policy shift is expected to facilitate greater lending to NBFCs, potentially easing borrowing costs and enhancing access to credit.
The move is particularly beneficial for banks with a strong presence in the microfinance sector, such as IndusInd Bank and Bandhan Bank. In addition to reducing the overall risk weight on bank lending to NBFCs, the RBI has also exempted microfinance loans from the higher risk weight requirements. This exemption means that banks providing loans to microfinance institutions (MFIs) or directly offering microfinance loans will face lower capital requirements, making it easier for them to extend credit to small borrowers and underserved communities.
By making these adjustments, the RBI is effectively reversing some of the earlier tightening measures imposed in November 2023, which had led to higher capital requirements for banks lending to the NBFC sector. The latest decision reflects a more growth-oriented stance and could help strengthen credit flow to segments of the economy that rely heavily on microfinance and NBFC-driven lending.
Under the Reserve Bank of India’s (RBI) revised regulatory framework, all microfinance loans issued by regional rural banks (RRBs) and local area banks (LABs) will now be subject to a risk weight of 100%. This adjustment aligns with the central bank’s broader strategy of easing capital requirements and enhancing credit flow to the microfinance sector.
Market analysts anticipate that the RBI may introduce further refinements to its risk-weight framework in the coming months as it continues to fine-tune its regulatory approach to maintain financial sector stability. By making these adjustments, the central bank aims to strike a balance between ensuring financial prudence and supporting credit expansion, particularly in sectors that rely heavily on bank funding.
Brokerage firm Nuvama described the move as part of the RBI’s ongoing “easing spree”, pointing to three key regulatory relaxations:
1. A reduction in risk weights on microfinance institution (MFI) business loans of banks from 125% to 75%, which significantly lowers capital requirements for banks engaged in microfinance lending.
2. The reversal of the earlier increase in risk weights on bank loans to NBFCs, effectively easing funding conditions for the sector.
3. The RBI’s approval for fresh branch expansions by Muthoot Finance, a leading gold loan financier, signaling regulatory flexibility in allowing NBFCs to grow their physical presence.
These measures collectively reflect the RBI’s proactive stance in adjusting financial regulations to support lending activity while ensuring the stability of the banking and NBFC ecosystem.
According to brokerage firm Nuvama, the recent regulatory changes by the Reserve Bank of India (RBI) are expected to have a notable impact on banks and non-banking financial companies (NBFCs), particularly those with significant exposure to the microfinance sector.
Among banks, Bandhan Bank and RBL Bank are projected to be the primary beneficiaries, given their substantial microfinance loan portfolios. The reduction in risk weights on microfinance institution (MFI) business loans will lower their capital requirements, potentially improving their ability to extend credit in this segment.
In the NBFC space, Cholamandalam Investment and Finance Company (CIFC) is seen as one of the biggest beneficiaries. The relaxation in risk weights on bank lending to NBFCs is likely to reduce the cost of funds for companies like CIFC, which rely on bank borrowings for a significant portion of their funding needs. Lower capital requirements for banks could translate into cheaper credit availability, benefiting well-established NBFCs with strong fundamentals.
However, despite these regulatory relaxations, Nuvama cautioned that banks may remain selective when it comes to lending to mid-sized NBFCs, given the increasing risks in the sector. Factors such as asset quality concerns, rising interest rates, and liquidity management challenges could continue to influence lending decisions, prompting banks to prioritize larger, well-capitalized NBFCs over smaller, riskier players.
According to brokerage firm Nomura, the Reserve Bank of India’s (RBI) rollback of higher risk weights on bank loans to non-banking financial companies (NBFCs) is expected to enhance credit flow from banks to NBFCs while also strengthening capital ratios for lenders. This change is particularly beneficial for banks with significant exposure to the NBFC sector, including State Bank of India (SBI), Federal Bank, and Bank of Baroda.
Nomura estimates that the relaxation in risk weights could lead to an improvement in Common Equity Tier-1 (CET-1) capital ratios—a key measure of a bank’s financial strength. For banks with substantial NBFC exposure, CET-1 ratios could rise by 39 to 74 basis points. Meanwhile, for banks with higher exposure to microfinance loans, the improvement could be even more pronounced, ranging from 49 to 155 basis points. This enhancement in capital adequacy may provide banks with greater lending capacity, potentially boosting credit flow to these sectors.
However, despite this regulatory relief, Nomura remains cautious about the near-term recovery of microfinance lending. The brokerage noted that persistent stress in the microfinance segment—including concerns about asset quality and repayment capacity—may delay a strong rebound in lending activity.
That said, Nomura believes the RBI’s overall easing stance, which includes recent liquidity measures and the possibility of an interest rate cut, could help support broader credit growth in the economy. These factors, combined with the revised risk-weight norms, are expected to create a more favorable environment for lending in the financial sector over time.