The Reserve Bank of India (RBI) has taken a decision to reduce the risk weights on loans given to micro finance firms and NBFCs with an aim of enhancing the credit supply and supporting growth. A lower risk weight means that banks need to hold less capital as safety net against loans. This decision is likely to enhance much needed liquidity to micro finance firms who get their borrowers from the small sector and rural areas. In November 2023 the RBI had tightened the norms for lending by enhancing the risk weights on bank’s exposures to NBFCs and micro finance firms. This resulted in a decrease in credit flow and thus, in the lending operations. In particular, the central bank has raised the risk weight by 25 percentage points for bank exposures with assigned rating below 100 percent. After an evaluation, the RBI has now decided to bring back the original risk weights so that the micro finance firms can once again gain access to the crucial funds that they need. It is expected that the move will increase the availability of credit in the sector and facilitate the little businesses, self-employed, and low-income people. The RBI, in a separate circular, has also revisited the risk weights for microfinance loans to also support the recovery of the sector. Thus, the central bank has eased these norms to strengthen financial inclusion and to offer respite to the entities that have faced tough regulations over the past year. As the lending conditions are getting better, it is expected that the micro finance firms will pick up the momentum and this will be accretive to the millions of small borrowers in the country.
RBI Boost Micro Finance Firms' Growth
