RBI Eases Risk Weight Norms: Boost for NBFC Stocks

RBI lowers risk weights for bank finance to NBFCs, microfinance loans to gain more capital and will transform credit in the sector. After this announcement, the NBFC shares surged up to 6%, such as Bajaj Finance, Shriram Finance, and Cholamandalam stocks among others.

Market Response

Shares of some NBFCs surged as follows:

• L&T Finance surged over 6.4%
• Cholamandalam Investment and Finance Company stock rose 5.12%
• The stock price of Shriram Finance rose by 4.55%
• Mahindra & Mahindra Financial Services gained 3.9%
• Bajaj Finance shares increased 2.43%
• Muthoot Finance share price climbed more than 3%
• Shares of Manappuram Finance were trading 2% higher

Background and Consequences of RBI’s Decision

Earlier, RBI had raised the risk weight on commercial banks’ exposures to NBFCs by 25% in November 2023. The RBI has now rescinded this notification and restored the original risk weights i.e., 100%. However, the risk weight hike to 125% on personal loans and credit card outstandings by NBFCs has not been revised.

The new decision will be applicable from April 1, 2025. The lower risk weight also means fewer funds need to be reserved by lenders as a safety net against consumer loans, which enhances their capability to lend. Restoration of risk weights is likely to be sentimentally positive for NBFCs and every NBFC may benefit from the measure.

NBFCs to Benefit

NBFCs with a considerably higher proportion of non-PSL bank borrowings, like Cholamandalam Investment and Finance Company, L&T Finance, Muthoot Finance, and Manappuram Finance, might be at an advantage over their peers, according to Motilal Oswal Financial Services.

Earlier Concerns and Slowdown

Both NBFCs and microfinance institutions had witnessed lending slowdown due to a tightening of lending norms by the central bank when it increased risk weight in November 2023. Bank credit to NBFCs had also moderated sharply as the RBI nudged non-bank lenders to broaden their source of borrowings. Banks’ year-on-year loan growth to NBFCs had dropped to 6.7% in December 2024, down from 15% in the year before. Bank credit growth overall had also decelerated to 11.2% from 20% in the same period.

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