Mundra notes that the move could unlock ₹40,000 crore in capital, enabling ₹4 lakh crore in incremental lending, but cautions that the real impact will depend on whether funds flow into productive sectors rather than fuelling excessive consumption.
Reserve Bank of India (RBI) on February 25 restored risk weight for bank loans to NBFCs to 100% from 125% and removed higher risk weights for microfinance loans given by banks. In November 2023, the RBI had raised risk weights on consumer loans, including personal loans and bank lending to NBFCs, from 100% to 125%.
While the regulatory shift is a positive for NBFCs, the immediate impact may be muted due to tight liquidity and demand-side constraints, says Suresh Ganapathy, Managing Director and Head of Financial Services Research, India at Macquarie Capital.
For a meaningful credit revival, Ganapathy argues, demand-side factors—such as fiscal measures and tax incentives—will play a bigger role than regulatory tweaks.
Despite the RBI’s latest steps, a broad-based policy push for higher growth is still absent, according to Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services. He sees the move as a targeted relief measure for NBFCs and microfinance institutions, rather than a stimulus for overall credit expansion.
These are the edited excerpts of the interview.
Q: A huge set of policy announcements, but most important is the last one that the NBFC loans will now cost less. Do you have a confidence that Reserve Bank is going all out to improve credit growth or should we look at it as just an incremental step? Loan to NBFCs was growing at 30% in 2023 but has come down to 7%. How should we look at it?
Mundra: I don’t recall a series of event, it will be one of its points that the risk weight has been increased, and then they brought down within such a short window frame of the time. Normally, this kind of action is taken, it remains for quite some time and before the thing settle down. It means quite clearly the data point which are available to RBI, and also the data point which are publicly available there had been a deceleration. RBI, surely is looking to boost the growth.
I look at it like the first section was kind of a message to the lending community. Lending community has responded to that message, as we can see from the data point, and now the that action is reversed, so probably with the expectation that a message has been conveyed. Now this message would be kept in mind in the future behaviour of the lender and it is for the lending community to stick to the discipline which has been brought by this.
But coming back to the point, with this kind of change in risk weight, around ₹40,000 crore of capital would be released, which can translate into ₹4 lakh crore of incremental lending. Now if you look at the other measures of providing the liquidity, because if you have the capital, but if you don’t have the liquidity, then the end result would not be the same. It’s a combination that the capital is made available, liquidity is made available.
Key question would be, to my mind, whether this incremental lending would go to the productive sector, or it will go to boost the consumption. Nothing wrong in either way. But again, the lending going to productive sector is a more welcome situation. But then depends on what kind of demand is coming, what kind of confidence level that sector is looking at it.
Consumption growth is fine, only the precaution – it should not again result into making the people over indebted, which has its own set of problem. Then in the federal system, there could be actions by other players, which we have already seen. This is how I look at this big picture.
Q: Do you think we can see NBFCs as the biggest beneficiaries, their margins improve and their loan growth improves. Can we come to that conclusion?
Ganapathy: All these things will take time to play out. It is not going to be quite immediate, because of the fact that the liquidity in the current markets are still pretty tight. Nothing is going to happen before the end of this financial year. Then, of course, you start off on a week putting on April to June, because seasonally it is a pretty weak quarter, so all these things will take time.
The point which I would like to just drive across on this ₹40,000 crore and ₹4 lakh crore number, this is all notional calculation. At the end of the day, you have to understand that the system common equity tier-1 (CET1) was already running at 13-13.50%. This only adds an additional 20 basis points, theoretically. You can, anyways, go down to 12% and 11% and could have lent that money. The bigger problem is that of demand, and not of supply to be very honest.
At this point in time, the RBI is doing whatever it could do, from the supply side angle. We really need to see demand picking up and for that, we have to see what could be the implications of the tax cuts and how exactly the overall market response to that. Of course, at the margin, the NBFCs get the relief, but I would not really immediately pencil in growth numbers coming into the financial statements of either banks or NBFCs in the immediate view.
Q: At the moment, are not changing any of your EPS numbers for FY26 for any of these companies?
Ganapathy: None, because at the multiples have already gone up, I mean, the initial reaction to any such move usually tends to be a re-rating, and then the earnings are expected to come with a lag. Now, even despite all these measures which have been enacted, the growth outlook is still a little bit more patchy.
I am not an economist, of course you can speak to the economist who is going to speak on this matter, but the overall GDP projections are expected to remain broadly flat. 6.3% may go to 6.5-6.6% so unless and until we see a very clear visibility of growth coming back, we don’t want to press the gun and go ahead update the numbers.
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Q: Do you see all this as a concerted policy push towards growth, and therefore, are you changing your opinion, if not your actual number on growth, say three quarters down the line?
Gupta: I am not changing my growth projections as of now and I would also want to point out that, yes, if we look at the various steps that the RBI has taken, but we also need to understand that what happened recently is a part of the entire sequence. And you rightly pointed out that they have not touched the risk weightage on unsecured loans.
This is a very targeted measure. They want to provide, probably some relief to NBFCs and MFIs, which are too dependent on bank and especially for non-priority sector lending (PSL), the risk weights were never changed for the PSL borrowings. So it’s only for non-PSL and they are still keeping those unsecured risk weightage what they were revised to in November 2023. So it more looks like a targeted measure where they want to probably provide some relief for NBFCs and MFIs, not definitely to boost GDP growth or to boost the consumption led loans.
Overall it is possible that all these measures may allow some extra room to the NBFCs and MFIs to lend out more. But again, if anything, it would be only incremental, because I don’t think NBFCs were too tight on supply front. They did not have money to lend to the borrowers if there was any demand. Because again, when we spoke with our NBFCs analyst, he was very clear that when in November 23 these risk weights were increased, the impact on NBFCs’ cost of borrowings was not very significant. And if that is so now, when those risk weights have been reduced, the impact would again not be so significant. I would take it as a sign that credit growth is going to be much higher than what we were expecting.
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