RBI Reduces Risk Weights for Banks Lending to NBFCs and MFIs

Current Context: On February 25, 2025, the Reserve Bank of India (RBI) unveiled a pivotal policy adjustment by lowering risk weights for bank lending to Non-Banking Financial Companies (NBFCs) and Microfinance Institutions (MFIs), effective April 1, 2025.

• This decision rolls back a November 2023 increase aimed at reining in unsecured lending, signaling a shift to bolster credit flow amid slowing growth and liquidity challenges.
• With NBFC credit expansion dropping to 6.7% in 2024 and the MFI sector grappling with a 3.5% portfolio decline, the move reflects the RBI’s intent to support these critical financial intermediaries while navigating risks, under Governor Shaktikanta Das’s balanced approach.

Highlights

• Restoration for NBFCs: Risk weights revert to pre-November 2023 levels (e.g., 20% for AAA-rated, 100% for unrated), easing borrowing costs for well-rated NBFCs.
• MFI Relief: Microfinance loan risk weights reduced from 125% to 100%, with potential eligibility for 75% under the regulatory retail portfolio, boosting the struggling sector.
• Economic Context: Addresses a ₹1.5 trillion liquidity deficit, slowing NBFC credit growth (6.7% in 2024), and MFI portfolio shrinkage (₹3.9 trillion) with rising delinquencies (6.4%).
• Strategic Aim: Enhances lending capacity to underserved segments, supporting economic inclusion amid tight financial conditions.
• Cautious Optimism: While a relief for banks and borrowers, lending may remain selective due to persistent asset quality concerns in both sectors.

Question:

Q.1 What is the revised risk weight for AAA-rated NBFCs after the RBI’s latest policy change?
a) 125%
b) 100%
c) 50%
d) 20%

Answer: d) The policy restores pre-November 2023 risk weights, reducing them for NBFCs based on their ratings. For AAA-rated NBFCs, the risk weight returns to 20%, which lowers their borrowing costs and improves credit flow.