Non-banking financial companies (NBFCs) and microfinance institutions (MFIs) got a significant relief on Tuesday, with the Reserve Bank of India (RBI) reducing the risk weights on bank loans to them from 125% to 100%. However, the central bank has retained the risk weights for unsecured loans. The news rules will come into effect from April 1.
The risk weights were increased in November 2023 due to the sharp rise in unsecured loans and increased dependency of NBFCs on bank borrowings. RBI’s move made it more expensive for banks to lend to NBFCs and MFIs, as they were required to set aside more capital for such loans.
Consequently, the credit to NBFCs and microfinance institutions slowed significantly. Bank lending to NBFCs grew at its slowest pace in four years, rising just 6.7% in 2024 to Rs 16.22 lakh crore as of December, down from 15% growth in 2023, according to RBI data.
The rollback of tighter norms comes after Sanjay Malhotra took charge as RBI governor in December. RBI, under his stewardship, has already deferred proposals to increase the capital that banks set aside for new project loans and liquidity they hold for digital deposits. In addition, the apex bank has also proposed to remove foreclosure charges for individuals and micro, small and medium enterprises in a recent consultation paper.
According to the RBI, microfinance loans considered as part of consumer credit will not be subject to these higher risk weights and will attract 100% risk weight instead.
“It is further clarified that microfinance loans which are not in the nature of consumer credit may be classified under regulatory retail portfolio (RRP) provided that the banks put in place appropriate policies and standard operating procedures to ensure fulfilment of the qualifying criteria,” RBI said in the circular.
Loan disbursements by microfinance institutions shrunk to over two-year low in the December quarter at Rs 220.9 crore, 36% lower than the year-ago period. The number of new loans disbursed has registered a de-growth of 29%, according to the 52nd edition of Micrometer, a publication of the Microfinance Industry Network, that was released on Tuesday. The asset under management of the MFIs was Rs 1.42 lakh crore as of December 31, 2024, lower by 0.1% a year ago and by 6.5% a quarter ago.
“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,” said AM Karthik, senior vice-president, financial sector ratings, Icra.