Mumbai: The Reserve Bank of India (RBI) has partially eased stricter loan regulations for microfinance and non-bank lenders, easing capital requirements for banks’ exposure to these segments.
The changes, announced in two separate circulars on Tuesday, mark a shift in the central bank’s regulatory stance following concerns about credit growth and liquidity constraints.
Key regulatory changes
The RBI has reduced the risk weight on consumer microfinance loans by 25 percentage points, bringing it down from 125 per cent to 100 per cent. This would effectively lower the capital banks must set aside for such loans, potentially improving credit availability for small borrowers from banks.
The central bank has reinstated its previous risk-weight framework for banks’ exposure to non-bank financial companies (NBFCs), meaning capital requirements will now be based on the NBFCs’ credit ratings.
This reverses the additional 25 percentage point risk weight imposed in November 2023 on NBFCs that previously required banks to set aside less than 100 per cent in risk capital.
In 2023, the RBI had raised risk weights for retail loans, including personal and microfinance loans, by 25 percentage points to 125 per cent, citing concerns over excessive lending and rising risks in the small-ticket loan segment. Housing loans were exempted from the higher capital requirement, but microfinance loans remained subject to the stricter rules.
Additionally, the RBI had increased capital requirements for NBFC lending to prevent overleveraging, ensuring banks maintained sufficient buffers against potential risks.
And now, the rollback
The rollback comes amid signs of a slowdown in economic growth, rising concerns about credit availability, and a leadership transition at the central bank. With Sanjay Malhotra taking charge as RBI Governor, the central bank appears to be adopting a more flexible approach to lending regulations.
By lowering capital requirements, banks will have more room to extend microfinance loans, which are crucial for financial inclusion and small businesses. Allowing banks to apply risk weights based on credit ratings will help NBFCs access funds at lower costs, supporting their lending operations.
The earlier tightening aimed to curb reckless lending, but with economic growth facing headwinds, the RBI appears to be recalibrating its approach to avoid excessive credit tightening.
These changes align with the RBI’s recent decision to defer proposals for higher capital requirements on new project loans and increased liquidity buffers for digital deposits, signaling a broader shift towards a more growth-supportive regulatory framework.
