The financial stocks are surging ahead. The Nifty Bank rose as much as 0.75% to a high of 48,972.55 level, intra-day. Not just that, even if we see the 1-month gains on the Bank Nifty, it delivered nearly 2% gains compared to 1.29% decline seen in the Nifty. What’s particularly fuelling the rally today is the Reserve Bank of India’s decision to bring down risk weight on bank loans to NBFCs to pre-2023 levels.
As a result of the decision, AU Small Finance Bank was the top gainer on Nifty Bank, up 6.7%. Stocks like IndusInd Bank, Axis Bank, HDFC Bank, IDFC First Bank also saw brisk gains. Even on the benchmark indices, bank stocks are among the top gainers led by HDFC Bank along with Bajaj Finance, ICICI Bank, Shriram Finance, and Axis Bank.
RBI move to enhance liquidity and reduce the cost of funds
The surge in share price of banking, small finance banks, and NBFCs came after the lender of last resort, RBI, in its new guidelines trimmed risk weights on lending to NBFCs. Plus, it lowered the risk weight for lending to the microfinance sector as well. “Midcap banks, with exposure to MFIs and strong underperformances, could see a short-term rally, while NBFCs could see some easing in cost of funds (CoF),” said Anand Rathi Research in a note. “Overall, we believe the combination of liquidity infusion, rate cut and now reduced risk weights signal a more favourable regulatory and business environment for lenders.”
This move by the RBI is expected to boost the slowing credit growth by improving funding to NBFCs. The move is also expected to enable NBFC to extend more affordable credit to underserved communities.
RBI MFI relaxation: Expect improved CAR
Given worries about rising stress in small-ticket MSME and banks, the move is expected to be beneficial to the larger NBFCs. CIFC, SBI Cards, FiveStar, LTF and MMFS benefit in that order. According to Nuvama, “CAR shall improve 280–300 bps for Bandhan as the best case, 40bp for RBL, 25bp for IDFC and 15bp for AU Small Finance Bank considering relaxation for both MFI and NBFC. The relaxation on MFI is positive for banks’ CAR while relaxation in NBFC is positive only for NBFCs not banks. For banks, NBFC relaxation will be margin negative and RAROC neutral.”
Why is the RBI rollback a big positive for Bandhan Bank, RBL?
While most small banks and NBFCs are expected to clock CAR improvement after this move, Bandhan Bank and RBL are likely to benefit most. This is because, “Banks that have a high exposure to NBFC include IDFC First, ICICI and BoB. Lower risk weight on NBFC loans shall result in a lower CoF for NBFCs especially those that have a high share of bank borrowings. Given increasing risks in the sector, we do not see banks going aggressive like before on NBFC lending even with this relaxation,” explained Nuvama Institutional Equities
RBI move to boost financial inclusion
The increase in risk weights led to slowing credit growth for the system and NBFCs overall. Larger NBFCs diversified their borrowing mix, however, the mid-sized and smaller ones faced challenges on the funding side. This is exactly why analysts believe that this rollback will help improve funding access for NBFCs and boost financial inclusion. According to industry observers, this “recalibration strikes a balance between risk management and supporting inclusive economic growth.”
The Nifty 50 was trading almost flat at 22,530 while the Sensex was up merely 18 points or 0.01% at 74,610. The Nifty Midcap 100 fell 662 points or 1.33% to the 49,041 level.