The stock prices of Bandhan Bank Ltd and AU Small Finance Bank Ltd surged on February 27, 2024, following the Reserve Bank of India's (RBI) decision to lower risk weights for loans extended to non-banking financial companies (NBFCs) and microfinance institutions (MFIs). Bandhan Bank shares jumped nearly 7% to ₹144.70, and AU Small Finance Bank saw increases of over 4%, reaching ₹546.05. This positive movement reflects heightened investor sentiment sparked by the RBI's rollback of its previous risk weight adjustments made just months earlier.
The RBI announced this decision amid growing concerns over liquidity within the financial sector, aimed at revitalizing lending practices among banks. Specifically, the handling of risk weights by the RBI took effect on April 1, 2025, marking a significant shift intended to ease capital constraints for banks heavily involved with MFIs. Previously, the central bank had raised risk weights by 25 percentage points, tightening the lending environment and constricting access to funds.
Investment banking expert Nomura stated the RBI's latest policy shift is encouraging for banks like Bandhan and AU Small Finance, which have considerable exposure to microfinance lending. According to Nomura, the change will improve capital adequacy ratios, thereby allowing more substantial credit growth within the sector. This viewpoint was echoed by market watchers who viewed the ease of bank lending restrictions as likely to bolster liquidity significantly.
Key market data indicates positive trends for both banks. Bandhan Bank recorded substantial gains, closing at ₹144.70—marked by a remarkable increase of 6.92% (+₹9.36) from its previous close at ₹135.34. It traded within the day range of ₹140.02 to ₹146.38. Similarly, AU Small Finance Bank's trading statistics displayed favorable shifts, with its shares increasing by 4.16% (+₹21.80) from ₹524.25.
Market analyst Anil Singhvi has pointed out the strong potential for both banks, citing the RBI's policy shift as pivotal to their projected growth. Singhvi suggested buying futures for Bandhan Bank with stop losses set strategically, recommending targets at ₹138, ₹140, and ₹144. According to Singhvi, "This rollback opens up more opportunities for banks to lend aggressively," highlighting the forward momentum expected from the banking sector.
Singhvi’s outlook stated the vast potential laid out for both Bandhan Bank and other financial institutions like IDFC First Bank. He highlighted the advantages of reduced risk weights for those heavily tied to lending practices with NBFCs, predicting significant gains for these institutions as they manage more favorable lending scenarios.
Given the current market dynamics, Singhvi believes banking stocks are forming attractive opportunities amid the corrections seen recently. “The oversold conditions have increased chances of short covering,” he added, emphasizing the need for investors to look carefully at the banking sector's fundamentals.
Despite the positive sentiment around NBFCs and microfinance loans, it is important to note Nomura's caution about the RBI's unchanged stance on risk weights for personal loans and credit cards. This implies continued prudence when it pertains to unsecured lending, indicating the banking sector’s balance is only starting to tilt back favorably.
The general consensus among analysts suggests improved credit availability, bolstered liquidity, and stronger balance sheets for banks deeply embedded within microfinance lending. The above-mentioned conditions are expected to lead to upward stock performance, promising favorable returns for investors keeping their eyes on stocks such as Bandhan Bank and AU Small Finance Bank.
Looking forward, the anticipated benefits from the RBI's recent policy changes lay the groundwork for both Bandhan Bank and AU Small Finance Bank to not only recover but also to potentially thrive. With sustained investor interest and the banking sector showing signs of recovery, analysts assert the stocks of these banks are well-positioned for considerable upside over the next few months.