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RBI Lowers Risk Weights for Banks Lending to NBFCs and MFIs.

Banking & Finance | Dated: 27 Feb 2025

In February 2025, the Reserve Bank of India (RBI) exercised its powers under Sections 21 and 35A of the Banking Regulation Act, 1949, to reduce the risk weights on loans by Scheduled Commercial Banks (SCBs) to Non-Banking Financial Companies (NBFCs) and Microfinance Institutions (MFIs). The risk weight on bank loans to NBFCs has been reduced by 25 basis points (bps), from 125% to 100%, based on ratings.

🎯 Key Highlights:

  • - This reduction is expected to facilitate better credit flow to NBFCs and enhance the availability of credit in the retail segment. The revised risk weight will be applicable from April 1, 2025.
  • - As per the Reserve Bank of India's directions, the risk weights for microloans provided by banks have been reduced to 75%, while loans for consumption purposes will have a reduced risk weight of 100%, down from the previous 125%.
  • - Additionally, microfinance loans extended by Regional Rural Banks (RRBs) and Local Area Banks (LABs) will now attract a risk weight of 100%. The revised risk weight for loans to Microfinance Institutions (MFIs) has been implemented with immediate effect.

💡 Other Important Facts:

  • (i) The Reserve Bank of India (RBI) has clarified that microfinance loans, which are not classified as consumer-type credit and meet certain criteria, will be categorized under the Regulatory Retail Portfolio (RRP). Additionally, banks are required to implement appropriate policies and Standard Operating Procedures (SOPs) to ensure compliance with the qualifying criteria.
  • (ii) The reduction in risk weights is expected to free up to Rs 40,000 crore in capital, allowing banks to extend loans of up to Rs 4 lakh crore to 'AAA-rated' companies.
  • (iii) In November 2023, RBI raised risk weights for bank loans to NBFCs to 125% to curb unsecured loans, including consumer credit, but excluding housing, education, and vehicle loans.

📚 Test Your Knowledge:

Which organization reduced the risk weights for loans to NBFCs and MFIs in February 2025?

Correct Answer: RBI

🚀 Quick Recap:

About RBI

  • Governor : Sanjay Malhotra
  • Headquarter : Mumbai