RBI Reverses Bank Lending Curbs On NBFCs in Swift Policy Shift

The Reserve Bank of India has reversed its decision to impose higher risk weights on bank lending to non-banking financial companies in just over a year—an unusually swift policy shift. The move had curbed excessive risk-taking and NBFCs’ reliance on bank funding. Now, with discipline restored, the RBI is ensuring credit flow remains unimpeded.

This follows new governor Sanjay Malhotra’s push to revive economic growth. Earlier this month, he led the MPC in seizing a window in the growth-inflation mix to push through a 25-basis-point repo rate cut—the first in five years.

The November 2023 hike in risk weight was meant to curb consumer credit growth and reduce NBFCs’ overdependence on banks. Lenders responded swiftly and NBFCs diversified funding sources and unsecured credit growth slowed. By reversing the measure, the RBI acknowledges that the market has adjusted.

Banks, which had pulled back on lending to NBFCs following the risk weight hike, saw their loan growth to these entities slump from 15% in December 2023 to just 6.7% a year later. With risk weights now back to previous levels for better-rated NBFCs, banks are expected to regain some lending appetite. This also frees up bank capital, which had been constrained by higher provisioning requirements.

However, capital availability alone will not ensure increased lending. Liquidity remains tight, and banks will continue assessing risk exposure cautiously. The real question is where incremental credit will flow towards productive sectors or consumption-driven lending. Even with restored risk weights, banks may remain hesitant to ramp up exposure without clearer signs of demand.

The RBI has also fine-tuned its stance on microloans, setting risk weights at 75% for those under regulatory retail or business categories and 100% for those classified as consumer credit—down from the uniform 125% risk weight previously imposed. This adjustment reflects an effort to support banks with significant microfinance portfolios while maintaining regulatory caution.

Over the past year, NBFCs have reduced reliance on bank funding, turning to debentures and other sources. Yet, their role in the credit cycle remains critical. The RBI has often flagged concerns over their interconnectedness with banks but acknowledges that this linkage sustains credit flow. This RBI-Bank-NBFC dance is intrinsic to the financial system—its rhythm may change, but it never stops.

This is not a stimulus but a structural recalibration, ensuring NBFCs remain funded without amplifying systemic risks. Unsecured lending still carries high-risk weights, reflecting ongoing regulatory caution.

The reversal sustains credit flow rather than spurring demand. Policymakers remain focused on sustainable credit expansion over immediate growth acceleration. The coming months will test whether this move translates into meaningful lending or remains a recalibration without a broader impact.