Stocks like Bandhan Bank, RBL Bank, IndusInd Bank, IDFC First Bank have seen sharp intra-day gains after the Reserve Bank of India rolled back the increased risk weights on bank loans to Non-Banking Financial Companies (NBFCs) and Microfinance Institutions (MFIs). This move is expected to ease capital requirements for banks and NBFCs, potentially boosting lending in these sectors.
Nuvama on MFI Relaxation: Bandhan, RBL, and CIFC among key beneficiaries
According to a report by Nuvama, the relaxation in risk weights will benefit MFI-heavy banks, especially Bandhan Bank and RBL Bank. The reduced risk weight for NBFC loans will also lower the cost of funds for these companies, with Cholamandalam Investment and Finance Company being the biggest beneficiary.
“With norms being eased so much, the probability of the RBI approving Sumant Kathpalia’s (CEO of IndusInd Bank) reappointment for three years has improved,” the brokerage noted in its report.
Among banks, those that had raised risk weights on MFI loans to 125% such as Bandhan Bank, RBL Bank, IDFC First Bank, and IndusInd Bank (IIB) will see improvements in capital adequacy ratios.
As per the brokerage house, Bandhan Bank’s CAR could improve by 280–300 basis points. RBL Bank could see a 40-basis point boost. IDFC First Bank’s CAR may improve by 25 basis points. AU Small Finance Bank’s CAR could rise by 15 basis points.
However, the brokerage also cautioned that while the relaxation on MFI loans is a positive for banks capital adequacy, the NBFC-related relaxation will be margin-negative and RAROC-neutral for banks.
Motilal Oswal on MFI Relaxation: RBI rollback to help ease pressure on banks
The brokerage house Motilal Oswal highlighted that the earlier increase in risk weights on bank loans to NBFCs (announced in November 2023) had put pressure on banks’ Common Equity Tier-1 (CET-1) ratios. The rollback will now help alleviate that pressure, particularly benefiting banks that already have thin capital buffers.
“The reversal in risk weights on MFI loans from 125% to 100%/75% will reduce RWAs (Risk-Weighted Assets) for banks, supporting capital adequacy levels,” added the brokerage house in its report.
The brokerage expects Bandhan Bank, IndusInd Bank, IDFC First Bank, and RBL Bank to benefit the most from this move.
The improved capital position will enhance return on equity (RoE) and reduce the immediate need for banks to raise fresh capital.
Furthermore, the brokerage house noted out that while the regulatory change will ease funding conditions, banks are unlikely to aggressively increase lending to NBFCs due to concerns over elevated credit-to-deposit (CD) ratios, asset quality issues, and margin pressures.
JM Financial: Bandhan Bank, Ujjivan Small Finance Bank, among biggest beneficiaries
According to a report by JM Financial, some of the biggest beneficiaries of this move include Bandhan Bank, Ujjivan Small Finance Bank (SFB), and Equitas SFB, alongside select NBFCs such as Five-Star Business Finance and L&T Finance.
The brokerage in the report added, “Following the increased risk weights on NBFC exposure, banking credit growth to NBFCs had reduced from 22.1% YoY in October 2023 to 6.6% YoY by December 2024. This is likely to normalise hereon.”
For banks with a strong focus on MFIs, the rollback is a game changer. Bandhan Bank, Ujjivan SFB, and Equitas SFB are expected to see improvements in their Tier-I capital ratios.
According to the brokerage, Bandhan Bank’s Tier-I capital could rise by 1.7% to 15.5%. Ujjivan SFB is expected to see a 5.5% increase, the biggest gain among the three. Equitas SFB should see a 1.0% rise in its Tier-I capital.
Stock Performance
Looking at today’s stock performance, Bandhan Bank shares are currently trading up over 2% at Rs 138.38 per share.
In intraday trading, RBL Bank is also up nearly 4% at Rs 164 per share.
Furthermore, IndusInd Bank is trading at Rs 1,051.30, up over 1%, while IDFC First Bank is witnessing a marginal increase of nearly 1%.