More Stories

Informist, Thursday, Feb. 27, 2025

MUMBAI – The Reserve Bank of India's decision to reverse the hike in banks' risk weights for loans to non-banking finance companies and microfinance under consumer credit is not expected to result in any meaningful improvement in credit growth for these segments as lenders remain wary of asset quality pressures. According to analysts, while a reduction in risk weights does release more capital for banks to boost lending, a mix of tight liquidity conditions, weakness in consumer incomes, and rising stress in microfinance portfolios is likely to keep lenders cautious.

"We believe banks are unlikely to accelerate growth in a hurry, given underlying asset quality issues following the imposition of MFIN (microfinance industry network) guardrails and the recent state government ordinance in the state of Karnataka," Emkay Global Financial Services said in a note.

Late Tuesday, the RBI restored the risk weights applicable on banks' exposure to non-bank lenders to the pre-November 2023 levels. On Nov. 16, 2023, the central bank had announced a raft of measures to clamp down on robust credit growth in certain segments, including unsecured personal loans. While the reversal of the 25-percentage-point hike in risk weight is effective Apr. 1, the central bank's move to reduce the risk weight to 100% from 125% for microfinance loans in the nature of consumer credit was effective immediately.

As per the latest RBI data, bank credit to non-banking finance companies was up just 6.7% on year as of Dec. 27, down from 21.5% as of Nov. 17, 2023.

"Though the signalling from the central bank and easing flow of funds from the banking system are supportive of the NBFC sector, the outlook for the sector remains contingent on the growth in credit demand and asset quality, where we continue to see stable-to-slight moderation in growth in FY25E (estimate for the financial year 2024-25) and H1FY26E (estimate for Apr-Sept)," Emkay Global added. Nomura economists Sonal Varma and Aurodeep Nandi appeared to be in agreement, cautioning that policy transmission will take more time, given the current tight financial conditions and heightened level of bad loans in the microfinance segment.

"That said, policies are moving in the right direction. India is finally taking a more coordinated policy approach--fiscal, monetary, liquidity, macroprudential--to support growth, especially with the aim to boost consumer demand. However, our leading indicators suggest the economy remains in a cyclical downturn, so further policy support will be needed to stabilise growth," Varma and Nandi said.

Meanwhile, Emkay Global thinks that while the RBI did not reverse the increase in some other risk weights, such as those for personal loans and credit cards, the move could be coming soon. "This, along with the expected easing of stress in microfinance and the credit card/personal loan segments over the next 1-2 quarters, should be positive for banks/small finance banks with higher exposure to such loans," the brokerage said.  End

Reported by Christina Titus 

Edited by Rajeev Pai

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000 

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2025. All rights reserved.