RBI's Consultative Shift: Easing Burden on NBFCs and MFIs

The Reserve Bank of India is adopting a consultative approach under its new Governor, easing risk weightage rules on loans to NBFCs and MFIs. This rollback reflects recent discussions between the central bank and financial executives, with potential impacts on banks' lending strategies and NBFCs' cost of funds.

The Reserve Bank of India (RBI) is showing signs of a significant policy shift under its new Governor, opting to employ a consultative strategy. This is evident from its decision to rollback the increase in risk weightage on loans to both Non-Banking Financial Companies (NBFCs) and Microfinance Institutions (MFIs), as highlighted in a report by Nuvama Research. The initial reluctance to relax these weights was mentioned in a February 7 media briefing following monetary policy announcements.

Yet, despite initial opposition, the RBI has eased risk weights on bank lending to NBFCs, likely following meetings between the Governor and key industry executives. The relaxation may have come at the request of banks and NBFCs, suggesting a more collaborative atmosphere under the new leadership. The adjustment is poised to reduce the cost of funds for NBFCs, particularly those heavily reliant on bank financing.

While the policy change will benefit banks with substantial microfinance exposure by improving their Capital Adequacy Ratio (CAR), the implications for Small Finance Banks (SFBs) are expected to be minimal. Nonetheless, the report cautions that the relaxation may not lead banks to aggressively increase NBFC lending, as previous risks and concerns remain pertinent. The RBI's move towards stakeholder engagement underscores a significant strategic shift, though the long-term effects on the broader financial landscape remain uncertain.