RBI Eases Risk Weights For Bank Lending To NBFCs

The Reserve Bank of India lowered on Tuesday the risk weights of bank loans to non-banking financial companies to 100% from 125% in a move that will be a relief for the NBFCs, according to a circular.

The move comes after the RBI increased the risk weight on the exposures of banks to the NBFCs in November 2023.

After a review, the central bank has decided to restore the risk weights applicable to such exposures, which will come into effect from April 1.

Bank credit to the NBFCs had slowed significantly as the RBI nudged non-bank lenders to diversify their borrowings amid an increasing risk from interconnectedness in the banking system.

"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," A M Karthik, senior vice president of financial sector ratings at ICRA, said.

The restoration of lower risk weights for better-rated NBFCs will improve the credit flow from banks to the NBFCs, while being immediately beneficial for their capital ratios, Karthik said.

As of December, bank credit grew over 11% year-on-year and that of bank credit to the NBFCs rose nearly 7%, the RBI data showed. It was 20% and 15% in the same period a year ago respectively.