Reference:

• The Reserve Bank of India (RBI) has decided to reduce the risk weight on loans given by banks to Non-Banking Financial Companies (NBFCs) and Microfinance Institutions (MFIs).
• This decision will lower the cost of borrowing for NBFCs and MFIs and improve their financial stability.

Background:

• In November 2023, RBI increased the risk weight on consumer loans, including personal loans and bank loans to NBFCs, from 100% to 125%.
• This led to a slowdown in lending to NBFCs and MFIs.
• Now, RBI has decided to bring these risk weights back to their previous levels.

Key Points:

• Reduction in Risk Weight on NBFC Loans: RBI has restructured the risk weight on bank loans to NBFCs based on their external credit ratings, reducing capital requirements for banks and enabling them to lend more.
• Reduction in Risk Weight on Microfinance Loans: Similar to personal loans, the risk weight on microfinance loans has been reduced from 125% to 100%, increasing the availability of funds for MFIs and enabling them to provide more loans.

Affected Parties:

• Banks: Improved capital position, enabling increased lending and financial strengthening.
• NBFCs and MFIs: Easier access to loans, improving financial health.
• Small Borrowers: Increased loan availability at lower interest rates.

Non-Banking Financial Companies (NBFC):

• Provide financial services like banks but do not have a banking license.
• Engage in lending, investment services, and other financial activities.

Features:

• Regulated by RBI: NBFC must adhere to RBI regulations and guidelines.
• Cannot Offer Banking Services: NBFCs cannot issue checks or open savings accounts.
• Financial Activities: Lending, investment, asset financing, insurance, and other financial services.
• Deposit Acceptance (In Some Cases): Certain NBFCs are allowed to accept public deposits but cannot offer demand deposits like banks.
• Primarily Loan Providers: NBFCs mainly offer personal, vehicle, housing, business, microfinance, and infrastructure finance loans.

Types of NBFCs:

• Deposit-Taking NBFCs (NBFC-D)
• Non-Deposit-Taking NBFCs (NBFC-ND)
• Housing Finance Companies (HFC)
• Microfinance Institutions (MFI)
• Infrastructure Finance Companies (IFC)
• Asset Finance Companies (AFC)

Difference Between NBFCs and Banks:

Major NBFCs in India:

• Bajaj Finance Limited
• Shriram Transport Finance
• Mahindra & Mahindra Financial Services
• Tata Capital
• Muthoot Finance

Microfinance Institutions (MFIs):

• Provide small loans (microcredit) to low-income groups and small entrepreneurs.
• Aim to promote financial inclusion among the poor and unorganized sectors.
• Primarily cater to women, rural areas, and small entrepreneurs.
• Offer loans with minimal documentation and easy access compared to traditional banks.
• Provide services beyond loans, such as savings, insurance, remittances, and financial literacy.

Types of MFIs:

1. NGO-MFI (NGO-Based MFIs):

• Self-help groups (SHGs) and cooperative societies.
• Non-profit organizations providing financial assistance to the poor.

2. NBFC-MFI (NBFC-Based MFIs):

• Regulated by the RBI and operate like MFIs.
• Serve both rural and urban areas with financial services.

3. Bank-Linked MFIs:

• Public and private banks offer specialized microfinance schemes.
• Regional Rural Banks (RRBs) provide small loans in rural areas.

Regulatory Authorities:

• Reserve Bank of India (RBI): Regulates NBFC-MFIs.
• NABARD (National Bank for Agriculture and Rural Development): Provides support to MFIs in rural areas.
• SEBI (Securities and Exchange Board of India): Regulates MFIs raising capital from the market.
• Ministry of Corporate Affairs (MCA): Governs non-profit MFIs.

Reserve Bank of India (RBI):