The Reserve Bank of India (RBI) has lowered the risk weight on bank finance, bringing significant relief to non-banking financial companies (NBFCs) and small loan lending institutions.
This decision will free up more money for banks, allowing them to provide more loans. Lowering the risk weight means banks need to keep aside less money as security for consumer loans, which increases their lending capacity.
In November 2023, RBI had tightened lending rules by increasing the risk weight, slowing down lending activities for NBFCs and microfinance institutions.
Previously, if the risk weight of an NBFC was below 100% as per its external rating, the RBI increased the risk weight on commercial banks’ exposure to NBFCs by 25%.
Key Changes in RBI’s Circular
In its latest circular, RBI announced, “After review, it has been decided to restore the risk weight applicable to such loans.” It also reviewed the risk weight on microfinance loans.
Earlier, in November 2023, the risk weight on consumer loans, including personal loans, was raised to 125%. However, loans for housing, education, vehicles, and gold were excluded from this increase.
Now, RBI has decided that microfinance loans, like consumer loans, will no longer be subject to the higher risk weight. Instead, they will have a standard risk weight of 100%.
Additionally, microfinance loans that are not consumer loans and meet specific criteria can be classified under the Regulatory Retail Portfolio (RRP).
Conditions for Banks
This change comes with conditions—banks must implement proper policies and procedures to ensure compliance with eligibility criteria.
Furthermore, microfinance loans provided by Regional Rural Banks (RRBs) and Local Area Banks (LABs) will also have a risk weight of 100%.
