Restoration of risk weights
FinTech BizNews Service
Mumbai, February 26, 2025: In terms of Paragraph 2.B of the circular ‘Regulatory measures towards consumer credit and bank credit to NBFCs’ dated November 16, 2023, the risk weight on the exposures of SCBs to NBFCs1 was increased by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs was below 100 per cent.
On a review, it has been decided by the RBI to restore the risk weights applicable to such exposures and the same shall be as per the external rating, as specified in Paragraph 5.8.1 of the ‘Master Circular – Basel III Capital Regulations’ dated April 1, 2024, as amended from time to time. The above instructions shall come into effect from April 01, 2025. All other instructions of the circulars ibid remain unchanged.
Ajit Velonie, Senior Director, Crisil Ratings, has shared useful insights on Restoration of risk weights.
“The restoration of risk weights to once again being based on external rating, for Bank lending to NBFCs, is a welcome move benefiting both banks and NBFCs. Lending to NBFCs constitutes 9% of overall banking system credit. Revision in risk weights to the pre-Nov’23 levels will free-up capital for banks and provide additional headroom for credit growth to them. On the other hand, for NBFCs, banks have been a significant source of funding which was seeing a secular uptrend till the Nov’23 circular, which had increased risk weights on bank lending to higher rated NBFCs. Post implementation of the circular, bank lending to NBFCs stood almost flat at ~Rs.13 lakh crore for three quarters till Sep’24 seeing some revival only in the recent Dec’24 quarter. Restoring risk weights to the pre-Nov’23 levels could lead to additional credit flow from banks to NBFCs and thus increase funding availability for the NBFC sector”.
