Speeding up credit flows – Opinion News #IndiaFinance

At a time when credit flows to businesses are slowing, it’s just as well that the Reserve Bank of India (RBI) has eased the risk weights on bank lending to shadow lenders and microfinance institutions (MFIs). In November 2023, the central bank had upped the risk weights for bank exposure to non-banking finance companies (NBFCs) by 25 percentage points, over and above the applicable weight as per the external rating. Now banks are no longer required to maintain the additional 25%. The central bank has also relaxed the risk weights for bank exposure to MFIs from 125% to 100% for consumer credit. For non-consumer loans, the weights could be 75% subject to some conditions. While loan disbursements may not get a big push until liquidity conditions are easier, the lower weights would leave banks with more capital to use later on. By one estimate, about `40,000 crore of capital will be freed up and this can be leveraged by about 10x.

The tighter lending norms was brought in on the grounds that unsecured lending was getting out of hand and was leading to a build-up of stress in the system. There was clear evidence of over-leveraging; a single borrower was simultaneously indebted to three or even four lenders, without the latter being aware of it. The result of the stricter norms was a sharp fall in the pace of bank lending to NBFCs; from nearly 19% in November 2023, it dropped to 6.7% in December 2024. To be sure, the larger and better-rated NBFCs were able to borrow from sources other than banks, mitigating some of the impact on their cost of funds. However, the smaller shadow lenders were definitely hurt by the move and these NBFCs should now be able to access funds more easily but the quantum of disbursements is unlikely to go up very meaningfully in the near term.

The point is that liquidity conditions today are very different from what they were a year back, having become even tighter in the last few months. Some of this is reflected in the much slower pace of loan growth, which is currently averaging 11-11.5% compared with a more robust 14-15% about a year back and 16%-plus at the peak. While the reversal of risk weights should help push up loan growth, the full impact of the move might not be felt until liquidity conditions turn easier. The lower risk weights suggest the central bank is comfortable with the moderation in consumer credit — down from 15-16% in 2023 to 10.5-11% currently.

Indeed, concerned about the slowing momentum in the economy, the RBI in general appears to be turning more lenient on macro-prudential regulation. For instance, the proposed liquidity coverage ratio norms are now not expected before “at least 2026”. The stricter conditions for project finance are also on the back burner while the new expected credit loss rules too are not likely anytime soon. For an economy looking to grow at 7% or more, credit flows need to be faster. The need of the hour is more loans to businesses and individuals at affordable terms. This would create jobs and spur consumption demand in turn boosting growth. In fact, while the raft of liquidity enhancers rolled out by the RBI should help, more action might be called for to enable banks to lend.