Speeding up credit flows

The easing of risk weights is a timely move; need of the hour is more affordable loans to businesses, individuals

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At a time when credit flows to businesses are slowing, it's just as well that the Reserve Bank of India (RBI) has eased the risk weights on bank lending to shadow lenders and microfinance institutions (MFIs). In November 2023, the central bank had upped the risk weights for bank exposure to non-banking finance companies (NBFCs) by 25 percentage points, over and above the applicable weight as per the external rating. Now banks are no longer required to maintain the additional 25%. The central bank has also relaxed the risk weights for bank exposure to MFIs from 125% to 100% for consumer credit. For non-consumer loans, the weights could be 75% subject to some conditions.

While loan disbursements may not get a big push until liquidity conditions are easier, the lower weights would leave banks with more capital to use later on. By one estimate, about ₹40,000 crore of capital will be freed up and this can be leveraged by about 10x.