RBI Confounded In Its Incrementalism Maze — Read Systematix' Analysis

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Systematix Research Report

The Reserve Bank of India's latest move to relax the risk weightage of bank lending to NBFC and microfinance companies (MFIs) by revoking the Nov-23 order does not come as a surprise. In its last monetary policy announcement, the RBI hinted at easing the regulatory stringency that has built up since 2023, as the central bank saw the cost of regulation outweighing the objectives of efficiency.

In the latest order, effective April 1, the risk weights for banks on lending to NBFCs and MFIs will be restored to the pre-Nov ’23 situation. Banks can now revert to weight determined as per the ratings assigned by accredited external credit assessment institutions (ECAI).

In Nov’23, given the exuberant retail lending, accentuated by aggressive lending to NBFCs and MFIs, RBI had sought to tighten the norm by increasing the risk weight by 25% for lending to such entities assigned based on the external risk assessment.

The relaxation is a fallout from the latest RBI’s assessment, as communicated in the post-policy Q&A that the purpose of the earlier tightening has lived its merit and the desired tapering in credit excesses has been achieved.

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