RBI Eases Loan Rules to Boost Credit for Small Borrowers
(RBI) Reserve Bank of India has relaxed some of its compact loan rules for small borrowers and non-bank lenders recently, this step taken due to change in economy as it’s falling down day-by-day. This move involves reversing proposals that would have forced banks to hold more capital for new project loans and hold more liquidity for digital deposits.
One of the major changes is reducing the risk of weight requirement for banks on consumer microfinance lending. The RBI has reduced the risk weight by 25 percentage points, down to 100%. Risk weights order about how much capital banks have to set aside against each loan they extend. The RBI raised this norm to 125% in 2023 for the retail loans over concerns regarding sudden spikes in the small personal loans. Microfinance loans have no relation towards this hike. After all these latest changes that microfinance loans again are at a capital requirement comparable to their prior levels. RBI did not show any motive behind this reversal, but they trying to attempt for reducing the burden of banker’s and borrowers.
Moreover, the RBI has also figure out the risk weights on the loans to non-banking finance companies (NBFCs). In November 2023, the RBI had increased the risk weightage of bank loans to NBFCs by 25 percentage points when the credit rating of the NBFCs prevail on banks to hold less than 100% in risk capital. The new revision goes back to the previous system, where the requirement for capital is based on the creditworthiness of the borrower.
These changes are designed to bring relief to banks, NBFCs, and small borrowers by reducing the capital requirement for loans. Banks will have greater freedom to lend to microfinance borrowers and NBFCs if there is reduced capital requirement, which can make borrowing more convenient for people and businesses.
The timing of these changes is interesting, coming after Sanjay Malhotra became the new RBI governor. The changes also reflect a more flexible stance in response to concerns about slowing economic growth, signaling the RBI’s willingness to adapt banking regulations to support credit flow. As a result, banks and NBFCs are likely to have more liquidity available for lending, potentially boosting credit access for small businesses and individual borrowers in the near future.