This move comes as a long-standing demand from NBFCs, which had faced increased funding costs after the central bank raised risk weights by 25 percentage points in November 2023.
The previous measure had applied to all exposures of Scheduled Commercial Banks (SCBs) to NBFCs where the external rating risk weight was below 100%.
In a separate circular, the RBI has also excluded microfinance loans from the higher risk weights applicable to consumer credit, offering further relief to lending institutions. However, all other risk weights remain unchanged from the November 2023 decision.
The increase in risk weights last year was driven by concerns flagged by then RBI Governor Shaktikanta Das in the October 2023 monetary policy review. He had warned about the rapid rise in certain components of consumer credit and urged banks and NBFCs to strengthen internal surveillance and mitigate potential risks.
Currently, consumer credit from commercial banks and NBFCs attracts a risk weight of 100%, which was raised to 125%. This increase had led to higher borrowing costs, pushing NBFCs to diversify funding sources. The risk weight hike applied to personal loans but excluded housing, education, and vehicle loans, as well as loans secured by gold jewellery.
For NBFCs, the increase in risk weight extended to retail loans, excluding housing, education, vehicle loans, loans against gold jewellery, and microfinance/self-help group (SHG) loans.
With the latest decision, the NBFC sector is expected to see some relief in borrowing costs, improving their lending capabilities while addressing the regulator’s broader concerns on financial stability.
