Reduced Risk Weights Unlikely To Boost Immediate Funding For NBFCs: Fitch

Fitch Ratings has indicated that the recent reduction in risk weights for banks’ lending to non-bank financial companies and the microfinance sector is not expected to lead to a swift increase in bank funding for these segments.

The Reserve Bank of India had introduced regulatory easing measures that could provide some relief to NBFCs and microfinance sectors. However, banks are likely to remain cautious in their lending practices due to broader liquidity constraints and a focus on managing risk and funding costs.

This move by the RBI partially reverses a previous tightening measure from November 2023, which had increased risk weights on banks and NBFCs, lending to unsecured retail credit and bank loans to NBFCs.

The latest update maintains the higher risk weights on unsecured personal loans, but exempts bank lending to microfinance borrowers from these increased risk weights. Additionally, the extra 25 percentage point risk weight on bank loans to NBFCs will be removed.

Fitch estimates that these changes will improve banks’ regulatory capital ratios by about 30 basis points. Larger NBFCs with strong credit profiles may seek to renegotiate their funding terms with banks, due to the reduced risk charges. However, smaller and mid-sized NBFCs, which rely more heavily on bank funding, may only see benefits if banks become more willing to take on higher-risk lending, which Fitch considers unlikely.

The microfinance sector could see some advantages if the risk-weight adjustments lead to increased bank lending to microfinance borrowers and microfinance-focused NBFCs. This could help ease liquidity pressures and improve asset quality in the sector. However, banks’ willingness to lend to this sector may be limited by their own asset-quality challenges, particularly for mid- to small-sized private banks involved in microfinance lending.