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Shares of non-banking finance companies (NBFCs) rose sharply on Thursday after the Reserve Bank of India (RBI) eased banks’ lending norms for the sector. Experts said that it will help NBFCs to borrow from banks at a lower cost, as the spread over marginal cost of lending rate (MCLR) is expected to ease. However, the return to original risk weight is likely to help only higher-rated NBFCs while the situation could remain tight for low-rated NBFCs, experts added.
“It will improve the overall credit flow to NBFCs as cost of capital will automatically come down for banks. While the MCLRs won’t be affected, but the spread which you charge over the MCLR would come down,” said Madan Sabnavis, chief economist at Bank of Baroda.
Major NBFC players such as L&T finance, Bajaj Housing Finance, Shriram Finance among others saw an uptick in share prices, with L&T Finance rising around 4.5%, while Shriram Finance gained about 5.7% on the Bombay Stock Exchange.
On Tuesday, the RBI slashed the risk weights of bank loans to NBFCs by 25 percentage points depending on the ratings. This move is expected to significantly improve credit flow to NBFCs, which in turn will enhance credit availability in the retail segment. This will come into effect from April 1.
At the system level, analysts project that the move could release approximately Rs 40,000 crore of capital, enabling Rs 4 lakh crore in additional credit availability and increasing loanable capacity by 200 bps. Further, lower risk weights for exposure to NBFCs could improve the capital ratios of banks by almost 38 basis points at a system level.
The rationale behind the RBI’s relaxation is that banks’ exposure growth to NBFCs saw a sharp drop-off, from 30% year-on-year before November 2023 to just 6.6% in December 2024 — a four-year low. Simultaneously, the MFI sector has faced significant stress, with industry loan books declining by 11% year-to-date. The RBI has aimed to facilitate lending to these sectors, potentially reversing the recent credit contraction.
“The percentage increase in risk rate was higher for a AAA rated NBFC because it went from 20% to 45% and for A rated NBFC went from 50% to 75%. Effectively the benefit will be higher for the AAA rated NBFC because the reduction in risk rate and hence the release of capital will be higher for AAA rated,” said Anil Gupta Senior Vice President, Financial Sector Ratings ICRA
Along with this recent change in risk weight, easing in other provisioning measures such as deferment of proposed liquidity covergae ratio framework and project finance are expected to improve the bank credit growth in FY26 compared to FY25.
Shares of non-banking finance companies (NBFCs) rose sharply on Thursday after the Reserve Bank of India (RBI) eased banks’ lending norms for the sector. Experts said that it will help NBFCs to borrow from banks at a lower cost, as the spread over marginal cost of lending rate (MCLR) is expected to ease. However, the return to original risk weight is likely to help only higher-rated NBFCs while the situation could remain tight for low-rated NBFCs, experts added.
“It will improve the overall credit flow to NBFCs as cost of capital will automatically come down for banks. While the MCLRs won’t be affected, but the spread which you charge over the MCLR would come down,” said Madan Sabnavis, chief economist at Bank of Baroda.
Major NBFC players such as L&T finance, Bajaj Housing Finance, Shriram Finance among others saw an uptick in share prices, with L&T Finance rising around 4.5%, while Shriram Finance gained about 5.7% on the Bombay Stock Exchange.
On Tuesday, the RBI slashed the risk weights of bank loans to NBFCs by 25 percentage points depending on the ratings. This move is expected to significantly improve credit flow to NBFCs, which in turn will enhance credit availability in the retail segment. This will come into effect from April 1.
At the system level, analysts project that the move could release approximately Rs 40,000 crore of capital, enabling Rs 4 lakh crore in additional credit availability and increasing loanable capacity by 200 bps. Further, lower risk weights for exposure to NBFCs could improve the capital ratios of banks by almost 38 basis points at a system level.
The rationale behind the RBI’s relaxation is that banks’ exposure growth to NBFCs saw a sharp drop-off, from 30% year-on-year before November 2023 to just 6.6% in December 2024 — a four-year low. Simultaneously, the MFI sector has faced significant stress, with industry loan books declining by 11% year-to-date. The RBI has aimed to facilitate lending to these sectors, potentially reversing the recent credit contraction.
“The percentage increase in risk rate was higher for a AAA rated NBFC because it went from 20% to 45% and for A rated NBFC went from 50% to 75%. Effectively the benefit will be higher for the AAA rated NBFC because the reduction in risk rate and hence the release of capital will be higher for AAA rated,” said Anil Gupta Senior Vice President, Financial Sector Ratings ICRA.
Along with this recent change in risk weight, easing in other provisioning measures such as deferment of proposed liquidity covergae ratio framework and project finance are expected to improve the bank credit growth in FY26 compared to FY25.
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