New Delhi [India]: The Reserve Bank of India (RBI) has demonstrated a more consultative approach under its new Governor, as seen in its recent decision to roll back the increase in risk weightage on loans to Non-Banking Financial Companies (NBFCs) and Microfinance Institutions (MFIs), according to a report by Nuvama Research.
The report highlighted that, during a media interaction on February 7, following the monetary policy announcement, the RBI Governor and Deputy Governor had stated that the central bank was unlikely to relax risk weights on NBFC loans due to interconnected risks. However, despite this initial stance, the RBI later eased risk weights on bank lending to NBFCs, likely influenced by recent meetings with top banking and NBFC executives.
Shift in RBI’s Approach
According to the report:
“The RBI under the new Governor is adopting a more consultative approach than earlier… The RBI relaxed risk weights on NBFC loans of banks. This possibly happened after the governor recently met CEOs of NBFCs and banks. The NBFCs would have asked for this relaxation.”
The rollback of risk weightage on MFIs will be particularly beneficial for banks with significant exposure to microfinance loans. However, the report noted that the impact on Small Finance Banks (SFBs) would be limited, as most of them had not increased risk weights on these loans to 125%.
For NBFCs, this relaxation is expected to lower the cost of funds (CoF), especially for those that rely heavily on bank borrowings. This move could provide relief to NBFCs, which have been facing higher funding costs due to earlier regulatory tightening.
Banks May Remain Cautious
Despite the regulatory relief, the report cautioned that banks may not aggressively increase lending to NBFCs as they did in the past, given the rising risks in the sector.
- The relaxation on MFI loans is positive for banks’ Capital Adequacy Ratio (CAR).
- The relaxation for NBFC loans is beneficial for NBFCs, but not for banks.
- For banks, the NBFC relaxation is expected to be margin-negative and neutral in terms of Risk-Adjusted Return on Capital (RAROC).
The RBI’s move signals its willingness to engage with industry stakeholders and respond to concerns, marking a shift towards a more flexible and consultative regulatory environment. However, the long-term impact on the financial sector will depend on how banks balance growth opportunities with risk management.