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The RBI’s revised policy, which will come into effect on April 1, 2025, lowers the risk weights, requiring banks to reserve less capital for loans to NBFCs
Bank Nifty Today
Bank Nifty ended its four-day losing streak and posted gains on February 27, buoyed by strong performances from major stocks like HDFC Bank, Axis Bank, IndusInd Bank, and IDFC First Bank. The rally followed the Reserve Bank of India’s (RBI) decision to reverse its previous move of increasing the risk weight on loans extended to non-banking financial companies (NBFCs). This reversal is expected to unlock significant capital for banks, enhancing their lending capacity.
Small finance banks also saw substantial gains following the announcement. Equitas Small Finance Bank, AU Small Finance Bank, Ujjivan Small Finance Bank, Jana Small Finance Bank, Utkarsh Small Finance Bank, and Suryoday Small Finance Bank surged up to 4 per cent in intraday trading.
The RBI’s revised policy, which will come into effect on April 1, 2025, lowers the risk weights, requiring banks to reserve less capital for loans to NBFCs. This move is set to improve banks’ lending ability and boost capital efficiency.
In November 2023, the RBI had raised risk weights for loans to NBFCs by 25 percentage points, particularly targeting loans to AAA-, AA-, and A-rated NBFCs. This adjustment led to a notable slowdown in bank loans to shadow lenders. Data from the RBI revealed that year-on-year loan growth to NBFCs had fallen to 6.7 per cent by December 2024, a sharp decline from 15 per cent the previous year, while overall bank credit growth also slowed to 11.2 per cent from 20 per cent.
Analysts at Nuvama Institutional Equities believe the RBI’s policy reversal will positively impact bank loan growth and improve liquidity in the system. They noted that, although banks will likely remain cautious in lending to mid-sized NBFCs and microfinance institutions (MFIs) due to asset quality concerns, the easing of regulations should support lending as the macroeconomic environment stabilizes.
The policy change is expected to benefit banks that were previously affected by the increased risk weights, such as Bandhan Bank, RBL Bank, IDFC First Bank, and IndusInd Bank. Bandhan Bank and RBL Bank are likely to see the most significant improvements in their capital adequacy ratios (CAR).
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