Lower risk weights mean banks can allocate fewer reserves for consumer loans, thus increasing their lending capacity and boost credit 

FPJ News Service mumbai

The Reserve Bank on Tuesday lowered risk weights for bank finance to NBFCs and microfinance loans. The decision will unlock more funds and boost credit, and lower risk weights will allow banks to allocate fewer reserves for consumer loans, thus increasing their lending capacity. Both NBFCs and microfinance institutions have witnessed a slowdown in their lending after RBI tightened lending norms by raising the risk weight in 2023.

The risk weight on the exposures of commercial banks to NBFCs was increased by 25 bps (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. “It has been decided to restore the risk weights applicable to such exposures,” RBI said.

The RBI has also 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. 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 central bank further clarified that microfinance loans which are not in the nature of consumer credit and fulfil certain criteria may be classified under regulatory retail portfolio provided that the banks put in place appropriate policies and standard operating procedures to ensure fulfilment of the qualifying criteria. Also, microfinance loans extended by regional rural banks (RRBs) and local area banks (LABs) shall attract a risk weight of 100 per cent, the RBI said.