RBI tweaks banks' lending norms, pushes NBFCs to modify funding strategy
New Delhi, Mar 11, 2025
NBFCs may shift funding strategy as RBI eases bank lending norms, reducing risk weight on microfinance loans. Banks are likely to prioritise top-rated NBFCs before expanding credit
Indian non-banking financial companies (NBFCs) are expected to adjust their funding strategies in the upcoming financial year, driven by the Reserve Bank of India’s (RBI) decision to ease certain lending regulations. This move may encourage banks to increase their funding to NBFCs, news agency Reuters reported.
The RBI has rolled back some of the stricter rules on bank loans to NBFCs, reducing the risk weight on consumer microfinance loans by 25 percentage points to 100 per cent. This effectively restores the earlier risk weight framework.
The Reuters report quoted George Alexander Muthoot, managing director of Muthoot Finance, as saying that this adjustment will free up capital for banks, allowing them to lend more to NBFCs, making bank funding a more attractive option for these firms.
In response to tighter funding conditions following the previous regulations, NBFCs had turned to short-term commercial papers (CPs) to meet their liquidity needs. This shift resulted in their share of overall CP issuances rising significantly.
Data from Crisil Intelligence indicates that NBFCs’ share of CPs has remained at or above 40 per cent over the past seven quarters, compared to less than 30 per cent in earlier periods.
Bhushan Kedar, director of Fixed Income Research at Crisil Intelligence, expects a shift in this trend. He said, NBFCs are likely to modify their funding mix in the next financial year, focusing more on bank loans, especially if interest rates are lowered, to diversify their funding sources.
The extent of this change will depend on individual companies and banks’ lending preferences, he said. The report quoted a banker as saying that banks would initially prioritise lending to well-rated and larger NBFCs before extending credit to lower-rated firms as the year advances.
Despite this anticipated shift, an immediate transformation in NBFCs' borrowing patterns may not occur. It could take between six to nine months for banks to return to previous lending levels, the report cited Kishore Lodha, Chief Financial Officer at UGRO Capital as saying.
RBI asks NBFCs to curb perpetual credit lines
Last week, the RBI expressed concerns over the increasing reliance on perpetual credit lines by retail-focused NBFCs, cautioning lenders about the potential risks tied to these products, according to a report by NDTV Profit.
The central bank advised some lenders to slow down the issuance of these credit lines, which enable borrowers to access funds continuously without a fixed repayment schedule. The RBI is particularly wary of credit being extended without a clear assessment of a borrower’s repayment ability, citing risks to financial stability and prudent risk management.
This warning comes as flexible lending products gain traction in the retail segment. While such credit facilities provide convenient access to funds, they could pose financial risks if not adequately monitored.
A perpetual credit line enables borrowers to withdraw funds up to a pre-approved limit with flexible repayment options. They can make full or partial payments based on cash flow while continuing to pay interest without the account being classified as a non-performing asset.
The central bank’s primary concern is that borrowers may use these credit lines to settle existing dues, effectively recycling debt. According to sources cited by NDTV Profit, the RBI believes this structure could facilitate the evergreening of loans, potentially masking underlying financial stress.
[With Reuters inputs]
[The Business Standard]
