What changed
The November 2023 circular had increased risk weights on SCB exposures to NBFCs by 25 percentage points for those rated below 100%. This circular restores those risk weights to the original external rating-based levels as per the Basel III Master Circular, effective April 1, 2025.
What it means for you
Banks will see lower capital requirements on loans to most NBFCs, freeing up capital for other lending. This reversal signals RBI's confidence in NBFC sector health and may improve bank profitability on such exposures. Exclusions for HFCs and priority sector NBFC loans remain unchanged.
What you must do
- Update internal risk-weight models to reflect external rating-based weights from April 1, 2025.
- Review capital adequacy projections to account for reduced capital charge on NBFC exposures.
- Communicate the change to credit and risk teams for loan pricing adjustments.
- Ensure compliance with all other unchanged instructions from the November 2023 circular.
Who it affects
All Scheduled Commercial Banks (including Small Finance Banks), NBFCs (excluding HFCs and priority sector NBFCs), Bank risk management and credit departments
When does the new risk weight rule take effect?
The restoration of risk weights to external rating-based levels is effective from April 1, 2025.
Does this apply to all NBFC exposures?
No, it excludes loans to housing finance companies and NBFC loans classified as priority sector, which remain under existing instructions.
What was the previous risk weight increase?
The November 2023 circular had added 25 percentage points to risk weights for NBFC exposures where the external rating-based risk weight was below 100%.