RBI restores risk weights on bank exposures to NBFCs to pre-November 2023 levels, ET BFSI
The Reserve Financial institution of India (RBI) on Tuesday rolled again the 25-percentage-point improve in risk weights on financial institution exposures to Non-Banking Monetary Firms (NBFCs), successfully restoring them to ranges decided by exterior credit ratings.
This revision, outlined in a round issued on February 25, 2025, will take impact from April 1, 2025, the central financial institution stated in a press release.
In November 2023, the RBI had raised the chance weights on bank lending to NBFCs by 25 share factors, besides in instances the place the chance weight was already 100 per cent or larger.
In its newest overview, the RBI has determined to revert to the unique framework, the place the chance weight on such exposures will as soon as once more align with exterior credit score rankings. This rollback applies to all Scheduled Commercial Banks (SCBs), together with Small Finance Banks, however excludes Regional Rural Banks and Funds Banks.
The restoration of decrease danger weights for higher rated NBFCs will enhance the credit score stream from banks to NBFCs, whereas being instantly helpful for his or her capital ratios. With improved credit score stream to NBFCs, the general credit score stream to the retail phase is anticipated to enhance thereby supporting total financial development.Anil Gupta Senior Vice President, Monetary Sector Scores ICRA
This transformation with deferment of proposed LCR framework are anticipated to enhance the financial institution credit score development in FY26 in comparison with FY25, stated Anil Gupta.
RBI Governor Sanjay Malhotra earlier in February said that LCR norms have been deferred till thirty first March 2026 atleast.
“Two months is just too quick a window. Banks can be given sufficient time, implementation can be phased, and rules gained’t kick in from the primary day. There’s time till no less than March 31, 2026,” stated RBI Governor Sanjay Malhotra. He added that the influence evaluation of the Liquidity Protection Ratio (LCR) framework carried out by the RBI is being revised based mostly on suggestions from numerous stakeholders.
Gupta additional added that submit November 2023, the banks needed to apply 125 per cent danger weight on the loans prolonged to microfinance borrowers whereas it continued to stay at 75 per cent for NBFC-MFIs. For the reason that microfinance loans of banks will classify below regulatory retail restrict, the chance weight on these loans may even decline to 75 per cent, thereby bettering their capital ratios in addition to their urge for food for development on this phase. Nonetheless, given the latest asset high quality challenges on this phase, the expansion could stay muted in near-term.All it is advisable to know in regards to the revision of danger weights:
1. What was the sooner regulation on danger weights for NBFC exposures?
As per the November 16, 2023 round, the RBI had mandated a 25-percentage-point improve in danger weights on financial institution exposures to NBFCs the place the chance weight, based mostly on exterior credit score rankings, was under 100%.
2. What would be the new danger weight relevant to NBFC exposures?
The chance weights will now be based mostly fully on the exterior credit standing of the NBFC, as per the provisions outlined in Paragraph 5.8.1 of the ‘Grasp Round – Basel III Capital Laws’ dated April 1, 2024.
3. When will the revised danger weight framework come into impact?
The revised framework can be efficient from April 1, 2025.
4. Which entities are lined below this round?
The round applies to Scheduled Industrial Banks (SCBs), together with Small Finance Banks (SFBs). It doesn’t apply to Regional Rural Banks (RRBs) and Funds Banks.
5. Are all NBFC exposures lined below this danger weight rollback?
The rollback excludes the next classes of loans:
- Loans to housing finance firms.
- Loans to NBFCs that qualify as precedence sector lending.
6. Why did the RBI initially improve the chance weight in November 2023?
The rise was a part of regulatory measures on client credit score and financial institution lending to NBFCs, geared toward making certain monetary stability by controlling danger publicity.
