What changed
Previously, microfinance loans in the nature of consumer credit attracted a higher risk weight of 125% under the November 2023 circular. Now, such loans are excluded from that higher risk weight and will carry a risk weight of 100%. For RRBs and LABs, all microfinance loans now attract a uniform risk weight of 100%, replacing any earlier differential treatment.
What it means for you
Banks can now hold less capital against microfinance loans that are consumer credit, freeing up capital for further lending. This is a targeted relief for the microfinance sector, which faced higher capital costs since November 2023. However, loans not meeting retail portfolio criteria still face the 100% risk weight, so banks must ensure proper classification.
What you must do
- Review your microfinance loan portfolio to reclassify consumer credit microfinance loans from 125% to 100% risk weight.
- Update internal policies and standard operating procedures to ensure microfinance loans qualifying for retail portfolio meet all four criteria under Basel III Master Circular.
- Train credit and risk teams on the revised risk weight treatment for microfinance loans, effective immediately for both outstanding and new loans.
- Monitor compliance with the November 2023 circular's other provisions, as only microfinance consumer credit is excluded from higher risk weights.
Who it affects
All commercial banks including Small Finance Banks, Regional Rural Banks, Local Area Banks, Microfinance lenders and borrowers
Does this circular apply to payments banks?
No, payments banks are explicitly excluded from the scope of this circular.
What risk weight applies to microfinance loans that are not consumer credit?
If such loans meet all four criteria for retail claims under the Basel III Master Circular, they can be classified under the regulatory retail portfolio with a 75% risk weight. Otherwise, they attract a 100% risk weight.
From when are these new risk weights applicable?
The instructions are effective from the date of issue, February 25, 2025, and apply to both outstanding and new microfinance loans.