Benchmark stock market indices opened on a strong note on Thursday, driven by a surge in banking and financial stocks following the Reserve Bank of India's (RBI) latest policy measures. The central bank’s announcement of regulatory relief for non-banking financial companies (NBFCs) and small borrowers significantly improved sentiment in the financial sector, providing much-needed support amid ongoing market volatility. These measures are expected to ease liquidity concerns and encourage lending activity, boosting economic growth in the process.
The RBI’s decision to roll back stricter capital requirements introduced last year has been a major boost for NBFCs and lenders, as it reduces the capital they need to set aside for small personal loans. By easing these rules, the RBI aims to support credit flow in the economy while ensuring financial stability. One of the key changes includes lowering the risk weight on consumer microfinance loans by 25 percentage points, restoring it to 100%. This move is expected to particularly benefit microfinance institutions, which cater to small borrowers who often struggle to access credit through traditional banking channels.
Risk weights play a crucial role in determining how much capital banks must hold against their loans. In 2023, the RBI had raised the risk weight for unsecured retail loans from 100% to 125% due to concerns over the rapid expansion of small personal loans. However, housing loans were exempted from this change, while microfinance loans faced stricter capital requirements. With the latest revision, microfinance loans will now enjoy the same capital treatment as before, a move that is expected to ease lending constraints for small borrowers. This regulatory change is likely to provide a much-needed boost to the sector, enabling NBFCs to extend more credit to individuals and small businesses, thereby stimulating consumption and economic activity.
Additionally, the RBI has decided to restore the risk weight for bank loans given to NBFCs based on their credit ratings, reversing a move from last year that had made borrowing more expensive for these companies. In 2023, the central bank had raised capital requirements for banks lending to NBFCs, leading to increased borrowing costs and tighter liquidity in the sector. By reversing this decision, the RBI is allowing NBFCs to access funds at lower costs, which could translate into more affordable credit for businesses and consumers. This move is expected to strengthen the financial ecosystem by ensuring that NBFCs can continue playing a key role in providing credit to underserved segments of the economy.
Market analysts have welcomed the RBI's measures, noting that they will provide significant relief to the NBFC sector while supporting economic growth. The decision to recalibrate risk weights is seen as a balanced approach that considers both financial stability and credit expansion. Analysts believe that these measures will also improve investor sentiment in the banking and financial sectors, leading to increased confidence and potentially driving further stock market gains.
Dr. HP Singh, Chairman and Managing Director of Satin Creditcare, emphasized the positive impact of the move on liquidity and borrowing costs. "The RBI’s decision to revert the risk weight on bank loans to NBFCs to pre-2023 levels is a significant and welcome step for the sector. This will increase liquidity and lower borrowing costs, enabling NBFCs to provide more affordable loans to underserved communities," he stated. Singh further explained that while the previous increase in risk weight was introduced to ensure financial prudence, the latest revision strikes a balance between risk management and economic growth.
Aditya Gaggar, Director of Progressive Shares, highlighted the strong technical momentum in certain NBFC stocks, indicating potential further gains in the near term. "On the stock front, NBFC stocks such as Bajaj Finance, Bajaj Finserv, and Cholamandalam Holdings are exhibiting strong technical strength and could see continued upside," he noted. Investors have already responded positively to the RBI’s policy measures, with banking and NBFC stocks witnessing increased buying interest.
With the RBI’s latest policy actions providing relief to NBFCs, market participants are optimistic about improved liquidity conditions and lending activity. The financial sector is expected to benefit from increased credit flow, which could have a cascading effect on various industries reliant on loans and financing. As investors assess the long-term impact of these regulatory changes, market experts advise keeping a close watch on lending trends and credit demand in the coming months.
The broader market outlook remains cautiously optimistic, with global factors such as U.S. economic data, interest rate trends, and trade policies also influencing investor sentiment. Domestic investors will be closely monitoring upcoming macroeconomic indicators, corporate earnings, and the RBI’s future policy stance to gauge the overall trajectory of the financial sector and the stock market.
