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The Reserve Bank of India (RBI) has adopted a more consultative approach under its new Governor, as reflected in its recent decision to roll back the increase in risk weightage on loans to Non-Banking Financial Companies (NBFCs) and Microfinance Institutions (MFIs), according to a report by Nuvama Research.
The report pointed out that, at a media interaction on February 7 following the monetary policy announcement, the RBI Governor and Deputy Governor had stated that the central bank was unlikely to relax risk weights on NBFC loans due to interconnected risks. However, despite this stance, the RBI later eased the risk weights on bank lending to NBFCs. The report said that this change was likely to be influenced by the recent meetings between the RBI Governor and top executives of banks and NBFCs, where the latter may have requested for relaxation. It said "The RBI under the new Governor is adopting a more consultative approach than earlier.....the RBI relaxed risk weights on NBFC loans of banks. This possibly happened after the governor recently met CEOs of NBFCs and banks. The NBFCs would have asked for this relaxation". The rollback in risk weightage on MFIs will be beneficial for banks that have significant exposure to microfinance loans. However, the report added that the impact on Small Finance Banks (SFBs) will be limited since most SFBs had not increased risk weights on these loans to 125 per cent. For NBFCs, the relaxation of risk weightage is expected to lower their cost of funds (CoF), particularly for those that rely heavily on bank borrowings. This move could provide much-needed relief to NBFCs, which have been facing increased funding costs due to the earlier tightening of regulations. However, the report cautioned that despite this relaxation, banks may not aggressively increase lending to NBFCs as they did in the past, given the rising risks in the sector. While the relaxation on MFI loans is positive for banks' Capital Adequacy Ratio (CAR), the relaxation for NBFC loans is beneficial only for NBFCs and not for banks. In fact, for banks, the NBFC relaxation is expected to be margin-negative and neutral in terms of Risk-Adjusted Return on Capital (RAROC). The RBI's move highlights its willingness to engage with stakeholders and respond to industry concerns, reflecting a shift toward a more consultative approach under the new leadership. However, the long-term impact on the financial sector will depend on how banks are balancing growth opportunities with risk management. (ANI)
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