The Reserve Bank of India (RBI) has made headlines with its recent announcement to reduce risk weights on bank lending to non-banking financial companies (NBFCs) from 125% to 100%, effective April 1, 2025. This pivotal decision signifies the RBI's more accommodating regulatory stance aimed at enhancing credit flow within the financial sector, particularly benefiting institutions like Bandhan Bank and IndusInd Bank, which have substantial exposures to microfinance.
The change reverses the previous tightening measure imposed in November 2023, where the capital requirements for banks lending to the NBFC sector were increased. Easing these restrictions is viewed as part of the RBI’s broader strategy to stabilize and invigorate economic growth by boosting the availability and reduced cost of credit. Analysts suggest this move allows banks to lend more freely to NBFCs, which are significant players, especially in the microfinance segment of the economy.
Specifically, Bandhan Bank saw its shares surge by over 8% following the announcement, reflecting market optimism. Similarly, IndusInd Bank experienced positive trading activity, with its shares also climbing moderately. This uptick can be attributed to analysts' projections indicating substantial improvements to the Common Equity Tier 1 (CET1) capital ratios for these banks. According to Macquarie, Bandhan Bank’s CET1 ratio is expected to improve by 2.5 percentage points, achieving 16.3%, and IndusInd Bank’s ratio is predicted to rise from 15.2% to 15.8%. Such enhancements signal stronger capital positions and increased lending capacity for these institutions.
Brokerage firm Nuvama emphasized the significance of this easing, describing it as part of the RBI’s overall “easing spree.” They highlighted three key regulatory relaxations: cutting the risk weights for microfinance institution loans to 75% from 125%, restoring pre-November 2023 risk weights to lenders, and granting fresh branch expansion approvals to Muthoot Finance. Nuvama pointed out, “We expect Bandhan Bank and RBL Bank to benefit the most among banks with microfinance-heavy portfolios,” indicating confidence about the future performance of these banks fueled by increased lending potential.
On the other hand, Nomura characterized the RBI's rollback as beneficial for enhancing capital ratios across banks with significant microfinance exposures. They noted the overall easing stance by the RBI, alongside liquidity measures, is expected to bolster credit growth within the Indian economy as it slowly recovers from the impacts of previous tightening measures.
Market analysts also weighed in on individual NBFCs, predicting lower cost of funds and improved access to capital for companies such as Cholamandalam Investment and Finance Co. (CIFC). Nuvama highlighted CIFC as the biggest beneficiary since it stands to gain from the reduction in risk weight, providing it the opportunity to negotiate more favorable borrowing rates. Following these changes, regulators and financial analysts stipulated improved investor sentiment and confidence for coming financial cycles, particularly aiding NBFC earnings.
Despite the optimistic outlook, some analysts cautioned against overly aggressive lending practices. While banks have the regulatory green light, concerns remain about the inherent risks tied to unsecured loans, which have seen growth tempering from 25% to 10%. The RBI’s cautious approach might lead banks to be selective, focusing on high-creditworthy borrowers to mitigate risks associated with potential defaults.
Additional details indicate the expected growth may take time to materialize, especially for banks dealing heavily with microfinance. Persistent stress within the segment could hinder the quick recovery of lending practices, thereby maintaining cautious lending trends among financial institutions. But the overarching tone remains hopeful, with various brokerages forecasting gradual recovery supported by eased regulatory frameworks.
To sum it up, the RBI’s recent adjustments to risk weights mark a significant shift aimed at revitalizing lending to NBFCs and reflect the central bank's commitment to supporting the overall economy. Analysts agree this regulatory move will likely improve the credit landscapes for banks, particularly those closely linked to the microfinance sector, creating avenues for both growth and stability amid changing market dynamics.