How RBI's decision is helping finance companies bounce back

NBFC lending to MSMEs expanded 42.4% year-over-year in 2022-23, while banks grew just 12.4%. This highlights how NBFCs bridge financing gaps with loan structures suited for small businesses.

Apr 15, 2025 - 09:38

How RBI's decision is helping finance companies bounce back

The Reserve Bank of India lowered risk weights on bank loans to non-banking finance companies when NBFC lending dropped significantly. This aims to rebuild bank confidence in extending credit during the economic slowdown. Easing capital requirements for banks lending to NBFCs represents a strategic step supporting liquidity flow within the financial sector.

A 0.25 percentage point cut in risk weights attracts banks to NBFC lending. Banks need less capital allocation against loans, reducing costs. Cheaper loans for NBFCs improve credit availability throughout India for retail borrowers and small businesses. NBFCs can increase loan disbursements without high-cost borrowing, making financial services accessible to more people.

Bank lending to NBFCs hit a four-year low of 6.7% in 2024, according to RBI data. November 2023's higher risk weights alongside tight credit conditions drove this decline. Credit supply contraction impacted NBFCs' funding ability across various sectors, especially MSMEs, consumer lending, and infrastructure financing. The revision should prompt banks to adjust lending strategies, addressing critical liquidity challenges. Restored confidence might encourage longer-tenure loans to NBFCs, enabling better financial planning and stability.

Within India's financial ecosystem, NBFCs have maintained consistent importance, growing at a compound annual growth rate (CAGR) of 14%, according to Care Ratings. From FY17 to FY24, these institutions held around 21-24% of the total credit share, while banks accounted for roughly 70% and All India Financial Institutions comprised around 5-7%. Financing demands will grow as India targets a $5 trillion economy, highlighting NBFCs' economic expansion role. Their penetration into semi-urban and rural markets bridges credit gaps for underserved communities.

Assets classes like Vehicle financing may gain from the RBI's decision. Crisil Ratings projects vehicle financing NBFC assets under management to reach Rs 8.1 lakh crore by March 2025, up from Rs 5.9 lakh crore in March 2023 - representing ~17% compound annual growth. This demonstrates sector resilience and expansion potential. Demand for vehicle loans, particularly commercial and electric vehicles, should rise with logistics and mobility sector growth. Lower NBFC borrowing costs will create competitive interest rates for borrowers, fostering industry growth.

Commercial loan demand expanded with increased economic activity. July-September 2023 saw 29% growth versus 2022. MSME credit demand at NBFCs grew fastest at 39%, constituting 14% of total credit demand. This underscores NBFCs' importance for smaller businesses. Given MSMEs' critical contribution to employment and GDP, credit access remains crucial. The RBI's move helps sustain momentum by improving financing options.

NBFC lending to MSMEs expanded 42.4% year-over-year in 2022-23, while banks grew just 12.4%. This highlights how NBFCs bridge financing gaps with loan structures suited for small businesses. Many MSMEs struggle to secure traditional bank loans due to strict credit assessment policies. NBFCs fulfill unmet demand efficiently through flexible underwriting methods and quicker loan disbursal.

The policy shift supports MSME lending, ensuring working capital and investment fund access. Microfinance asset quality concerns may moderate immediate growth, requiring regulatory monitoring. While increased liquidity helps, balancing growth with financial prudence prevents excessive risk-taking by NBFCs.

Risk weight reversal and deferment of the proposed Liquidity Coverage Ratio framework should improve bank credit growth in FY26 versus FY25. NBFCs regaining bank credit access strengthens financing capacity across sectors. Bank funding availability enables NBFCs to expand product portfolios including personal loans, home loans, and business financing. Increased credit supply creates ripple effects across industries like real estate, consumer goods, and automobile sales.

The finance sector anticipates recovery as credit conditions stabilize. Steady fund flows reinforce NBFCs' position, enabling growth across key economic areas. This adjustment accelerates NBFC recovery while enhancing its contribution to India's economic advancement. Consumer confidence improves when liquidity abounds, boosting credit market participation.

This policy change happens amid global economic uncertainties. NBFCs serve as intermediaries reaching underserved customer segments through physical branch-based distribution networks in semi-urban and rural areas, supporting nationwide financial inclusion. With more households and businesses requiring formal credit, NBFCs ensure equitable financial access. The RBI's decision strengthens its operational capacity for offering customized loan products.

Investors recognise new opportunities in financial services. Companies with strong asset quality and diverse funding sources benefit most. Reduced risk weights stabilize funding costs, potentially improving margins for well-managed NBFCs. Market confidence should improve, attracting investment inflows and boosting stock market performance for listed finance companies. Stronger NBFC players can explore growth through mergers, acquisitions, and expansions.

Retail consumers benefit from increased credit availability as NBFCs expand lending portfolios. These institutions serve millions with tailored products from housing loans to consumer durables financing. Improved liquidity enables more competitive interest rates and flexible repayment terms, making loans accessible to middle and lower-income borrowers.

NBFCs remain essential to India's developing financial infrastructure. The RBI's decision acknowledges their importance while implementing prudential growth measures. This benefits the overall economy while maintaining oversight, creating a resilient financial system supporting India's economic objectives. Balancing growth with financial discipline ensures sector robustness against future economic fluctuations.

As the financial ecosystem evolves, NBFCs will become even more significant. Recent regulatory changes reaffirm the RBI's commitment to a stable, growth-oriented financial landscape. Enhanced liquidity and eased credit constraints pave the way for stronger economic participation from businesses and individuals. Long-term impacts include sustained credit expansion, improved business viability, and enhanced financial inclusion across India.

Jitendra Tanwar, Managing Director & CEO of Namdev Finvest

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)