The Reserve Bank on Tuesday lowered the risk weights for bank finance to NBFCs and microfinance loans, a move that will unlock more funds and boost credit.
A lower risk weight means that lenders need to set aside less funds as a safety net for consumer loans, implying an increase in their lending capacity.
Both NBFCs and microfinance institutions have witnessed a slowdown in their lending after the central bank tightened norms by raising the risk weight in November 2023.
The risk weight on the exposures of commercial banks to NBFCs was increased by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs was below 100 per cent.
In another circular, the RBI said it has reviewed risk weights on microfinance loans.
In November 2023, the risk weights on consumer credit, including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, too was increased to 125 per cent.
“On a review, it has been decided that microfinance loans in the nature of consumer credit shall also be excluded from the applicability of higher risk weights specified in the circular ibid and shall accordingly, be subject to a risk weight of 100 per cent,” the RBI said.