Will RBI's revised rules aid NBFC credit flow?

The Reserve Bank of India (RBI)'s decision to ease rules on bank loans to non-banking financial companies (NBFCs) has been driven by a slowdown in credit flow to these entities, which have been facing a funding crunch amid systemic liquidity deficit and rising asset quality stress in small-ticket and microfinance loans, analysts said.

- Anshika Kayastha

On Tuesday, the central bank reversed the increase in risk weight—or the capital that banks must set aside for every loan to cover for potential losses on loans to NBFCs, in a move that's expected to make it easier for banks to boost on-lending, which was constrained by higher capital requirements.

"Lending to NBFCs constitutes 9% of overall banking system credit. Revision in risk weights to the pre-November 2023 levels will free up capital for banks and provide additional headroom for credit growth to them. On the other hand, for NBFCs, banks are a significant source of funding, which was seeing a secular uptrend till the November 2023," said Ajit Velonie, senior director, Crisil Ratings.