A Reserve Bank of India (RBI) decision reversing its 2023 increase in risk weights on bank loans to non-banking financial companies (NBFCs) took effect on 1 April 2025. Under the change, announced in a circular on 25 February 2025, banks' exposures to NBFCs once again attract risk weights in line with the NBFCs' external credit ratings, without the additional 25-percentage-point charge imposed in 2023.
On 16 November 2023 the RBI raised risk weights on bank loans to NBFCs by 25 percentage points above the rating-based level in all cases where the risk weight implied by an NBFC's external rating was below 100 per cent. The increase therefore applied to bank exposures to NBFCs rated AAA, AA and A. The 2023 measures followed concerns raised by the then governor, Shaktikanta Das, in the October 2023 monetary policy review about rapid growth in certain components of consumer credit.
BANK LENDING TO NBFCS HAD SLOWED
Bank credit to the sector slowed after the 2023 increase. According to RBI data, banks' year-on-year loan growth to NBFCs fell to 6.7 per cent by December 2024 from 15 per cent a year earlier, while overall bank credit growth slowed to 11.2 per cent from 20 per cent over the same period. Lower risk weights reduce the amount of capital banks must hold against such loans.
MICROFINANCE TREATMENT CLARIFIED
In a separate circular, effective immediately on 25 February, the RBI also set out the treatment of banks' microfinance loans in the nature of consumer credit, which had been subject to a 125 per cent risk weight. Microfinance loans classified as consumer credit now carry a risk weight of 100 per cent, while microfinance loans that are not in the nature of consumer credit and meet the regulatory retail criteria may carry 75 per cent.
All other risk weights set in November 2023 remain unchanged, including the higher weights on consumer credit extended by banks and NBFCs, which continue to exclude housing, education and vehicle loans and loans secured by gold jewellery.