RBI’s RWA Relaxation Boosts NBFCs, but Analysts Predict Cautious Lending

RBI’s Policy Shift to Ease Credit Flow

The Reserve Bank of India’s (RBI) decision to lower risk weights on loans to non-banking financial companies (NBFCs) and microfinance institutions (MFIs) on February 25 has been met with optimism by the financial sector. Analysts anticipate that this regulatory change will enhance capital adequacy for banks and improve credit flow. However, they remain cautious about expecting an immediate surge in lending.

Stock Market Reacts Positively to the Move

The stock market reflected investor enthusiasm following the RBI’s announcement. CreditAccess Grameen, a leading microfinance institution, saw its share price surge by 12 percent. Other major NBFC players, such as Shriram Finance and Bajaj Finance, also experienced gains of 5.67 percent and 2.44 percent, respectively. Similarly, AU Small Finance Bank and Bandhan Bank recorded stock price increases of 6.1 percent and 6 percent, respectively, as investors responded positively to the move.

Impact on Banks’ Capital Ratios and Loanable Capacity

Analysts at Motilal Oswal Financial Services estimate that the reduction in risk-weighted assets (RWAs) will boost common equity tier 1 (CET-1) capital ratios for banks in their coverage universe by 20–250 basis points (bps). The broader financial system is also expected to benefit significantly. It is projected that the relaxation could release approximately ₹40,000 crore of capital, which, in turn, may enable ₹4 lakh crore in additional credit availability. This is expected to enhance the overall loanable capacity of banks by 200 bps, creating new credit opportunities for NBFCs and MFIs.

Potential for Further RWA Relaxations

Analysts at Macquarie believe that if credit growth in unsecured segments stabilizes in the coming months, the RBI may consider extending similar RWA relaxations to personal loans and credit cards. Given that unsecured loans have seen a slowdown in growth—from 25 percent to 10 percent—further adjustments could provide additional stimulus to the sector.

Easing Credit Flow to NBFCs and MFIs

The RBI’s rationale for easing RWAs is based on a sharp decline in banks’ lending to NBFCs. Before November 2023, exposure to NBFCs was growing at 30 percent year-on-year. However, this slowed significantly to just 6.6 percent in December 2024. Meanwhile, the MFI sector has faced considerable stress, with its loan book contracting by 11 percent year-to-date. The regulatory change aims to mitigate these pressures and support credit growth in these crucial sectors.

Selective Rate Reductions for Well-Rated NBFCs

Banks provide nearly 50 percent of NBFC funding through direct lending or debt subscription. The revised RWA norms are expected to lower borrowing costs for well-rated NBFCs, leading to selective reductions in interest rates. However, not all non-bank financial institutions may benefit equally, as the policy shift is expected to favor those with strong credit profiles.

Impact on Banks with High MFI Exposure

The relaxation is expected to be particularly beneficial for banks with significant exposure to the MFI sector. IndusInd Bank and Bandhan Bank are among the financial institutions poised to gain the most from this policy change, given their substantial loan books in the microfinance space.

Cautious Lending Approach Expected

Despite the benefits, analysts caution that the relaxation alone may not be enough to trigger aggressive lending. The RBI has yet to restore RWAs for unsecured loans, including personal loans and credit cards, which have seen a marked slowdown in growth. Without broader risk-weight adjustments across various lending categories, banks may remain cautious about expanding their loan books.

The RBI’s decision to reduce RWAs on loans to NBFCs and MFIs is a significant step towards boosting credit flow and capital adequacy for banks. While financial institutions and investors have welcomed the move, analysts remain measured in their expectations, citing lingering credit risks and the absence of RWA relaxations for unsecured loans. The coming months will reveal whether this regulatory shift is sufficient to revive lending momentum or if additional policy measures are required.