India’s central bank has also exempted microfinance loans by banks from higher risk weight. The RBI, in November 2023, had increased risk weights on consumer credit, including personal loans and bank credit to NBFCs from 100% to 125%.
All microfinance loans extended by rural regional banks and local area banks would also attract a risk weight on 100%.
Here’s what brokerage firm Citi said on the announcements made by the RBI:
- The move will boost CET-1 ratio by over 45 basis points for Bank of Baroda and between 35 basis points to 40 basis points for lenders like Federal Bank and PNB, 30 basis points for SBI, HDFC Bank, and Kotak Bank, 20 basis points for ICICI Bank, AU Small Finance Bank and IndusInd Bank and less than 20 basis points for Axis Bank and RBL Bank
- Banks with higher MFI exposure like Bandhan Bank, IDFC First, IndusInd and RBL earlier took adverse impacts of 360 basis points, 100 basis points, 75 basis points and 45 basis points respectively and that will now unwind partially.
- NBFCs like Mahindra & Mahindra Finance, Cholamandalam, Bajaj Finance and Shriram Finance will now be in a better position to negotiate lower borrowing rates, particularly in a rate cut environment.
Morgan Stanley believes that this move will ease cost of and access to funding for borrowers and will also boost investor sentiment further, aiding most NBFC earnings over time. Among NBFCs, it prefers PNB Housing, Shriram Housing and Bajaj Finance.
Nomura wrote in its note that the move from the RBI should help improve credit flow from banks to NBFCs, while being immediately beneficial for their capital ratios.
The move should also provide relief to covered banks with a high MFI exposure like Bandhan Bank, IndusInd Bank and AU Small Finance Bank, Nomura said. While the brokerage has a “reduce” rating on AU Small Finance Bank, it has a “neutral” recommendation on the other two names.
