The Reserve Bank of India (RBI) has taken a slew of measures that could benefit a couple of banks and NBFCs. First, the central bank reduced risk weights on MFI business loans of banks to 75 per cent from 125 per cent and to 100 per cent on MFI consumption loans. Second, it restored risk weights on loans to NBFCs to pre-November 2023 levels. These were increased by 25 per cent in 2023. The apex bank also allowed Muthoot Finance to open 115 branches.
The MFI relaxation may benefit MFI-heavy banks other than SFBs. It would benefit Bandhan Bank and RBL Bank the most, Nuvama said.
"The NBFC relaxation shall benefit NBFCs by lowering their cost of funds. Cholamandalam Investment and Finance Ltd may benefit the most. With norms being eased so much, probability of the RBI approving Sumant Kathpalia’s (CEO of IndusInd Bank) re-appointment for three years has improved," Nuvama said in a note.
Nuvama said the rollback in risk weights for MFIs should benefit all MFI-heavy banks, but not small finance banks (SFBs) because other than AU Small Finance Bank Ltd (SFB), no SFB had raised risk weights on MFI loans to 125 per cent. AU SFB had done it only on 20 per cent of MFI loans that were consumption loans not on other loans. Other SFBs had not hiked risk weights.
Banks that had hiked risk weights included Bandhan Bank, RBL Bank, IDFC First and IndusInd Bank. These banks are expected to see improvement in CAR, but Bandhan Bank and RBL Bank are likely to benefit the most, Nuvama said.
"Banks that have a high exposure to NBFCs include IDFC First, ICICI and Bank of Baroda (BoB). Lower risk weight on NBFC loans shall result in a lower CoF for NBFCs, especially those that have a high share of bank borrowings. Given increasing risks in the sector, we do not see banks going aggressive like before on NBFC lending even with this relaxation," Nuvama said.
Lending to Priority sector and to housing finance companies was already exempt from higher risk weights. Most NBFC MFIs had switched to the pass-through certificates (PTC)/ direct assignment (DA) route to get funding. Given challenges in the sector, banks are seen giving preference to this route over direct lending.
Nuvama said there is some rising stress in small-ticket MSME and banks may continue with their cautious approach. Therefore, this change is more beneficial to the larger NBFCs.
"CIFC, SBI Cards, Five-Star, LTF and MMFS benefit in that order. In our view, CAR shall improve 280–300 bps for Bandhan Bank as the best case, 40 bps for RBL Bank, 25 bps for IDFC Bank and 15 bps for AU SFB considering relaxation for both MFI and NBFC. The relaxation on MFI is positive for banks’ CAR while relaxation in NBFC is positive only for NBFCs not banks. For banks, NBFC relaxation will be margin negative and RAROC neutral," Nuvama said.