NBFC Stocks React to RBI’s Eased Risk Weight Norms

Market Performance

Shares of major Non-Banking Financial Companies (NBFCs) increased following the Reserve Bank of India's (RBI) decision to adjust risk weight norms.

• L&T Finance surged 6.4%
• Cholamandalam Investment and Finance Company increased by 5.12%
• Shriram Finance rose by 4.55%
• Mahindra & Mahindra Financial Services climbed 3.9%
• Bajaj Finance recorded a 2.43% gain
• Muthoot Finance and Manappuram Finance also observed positive movement, gaining over 3% and 2%, respectively.

RBI Policy Update

The RBI has revised the additional 25% risk weight previously applied to bank loans to NBFCs based on their ratings. However, the risk weight on personal loans and credit card outstandings remains at 125%, maintaining the November 2023 regulatory tightening on these segments.

Impact on Lending

With reduced risk weight requirements, banks are now required to hold fewer capital reserves against loans given to NBFCs. This change is expected to enhance banks' lending capacity, potentially improving liquidity flow to NBFCs and microfinance institutions.

Previously, the increase in risk weight had contributed to a slowdown in lending for NBFCs, as higher capital requirements limited the availability of funds. The recent decision is anticipated to alleviate some of these constraints.

Industry Response and Financial Overview

Sector Trends

Due to the November 2023 risk weight adjustments, lending to NBFCs and microfinance institutions slowed. The 25% increase affected institutions with risk weights based on external ratings below 100%. However, with the recent revision, funding flow to NBFCs is expected to improve.

Summary

The RBI's decision to reverse the additional 25% risk weight on bank loans to NBFCs will likely create a more favourable lending environment. While risk weight on personal loans and credit card outstandings remains unchanged, the revised norms could improve funding accessibility for NBFCs. The market reaction has been positive, with major NBFC stocks seeing notable gains. Moving forward, the industry outlook will depend on liquidity flow, cost of borrowing, and overall economic conditions.