The Reserve Bank of India (RBI) has partially reversed its stricter rules on bank loans and has made it easier for small borrowers and non-bank lenders to get loans. These actions come after Sanjay Malhotra took over as the new RBI governor during a time of slowing economic growth.
Key Points:
– In 2023, the RBI had raised the risk weight for both banks and non-bank financial companies (NBFCs) to 125% for retail loans, due to concerns over a rise in small personal loans. Microfinance loans were included in this increase, while certain categories like housing loans were exempted.
Now, since microfinance loans from banks will fall under regulatory retail limits, the risk weight on these loans will be reduced to 75%.
– The RBI has deferred proposals to raise capital requirements for new project loans and to increase liquidity requirements for digital deposits.
– In November 2023, the RBI had raised the risk weight for loans to NBFCs, but the new change returns the rules to the previous system based on the NBFC’s creditworthiness.
It has made easier for banks to lend to non-bank financial companies (NBFCs). The capital requirement for these loans will now depend on the credit rating of the NBFC, making it more flexible.
Impact of the changes:
– These changes will help banks, NBFCs, and small borrowers by reducing the capital banks need to keep aside. This makes it easier for banks to lend to microfinance borrowers and NBFCs.
– With these changes, banks and NBFCs may have more funds available for lending, which could boost credit flow to small businesses and individual borrowers in the near future.
Anil Gupta, Senior Vice President at ICRA, explained that the restoration of lower risk weights for better-rated NBFCs will improve credit flow from banks to NBFCs and benefit their capital ratios. This is expected to increase overall credit availability to the retail segment, supporting broader economic growth. Gupta also noted that these changes, combined with the deferral of the Liquidity Coverage Ratio (LCR) framework, could lead to stronger bank credit growth in FY26 compared to FY25.