In a significant move impacting the microfinance sector, the Reserve Bank of India (RBI) has revised the risk weights applicable to microfinance loans. The revised guidelines, issued through a circular (RBI/2024-25/119), aim to balance financial stability while ensuring continued access to credit for micro-borrowers.
Under the new framework, microfinance loans extended by commercial banks and small finance banks that qualify as retail claims under the Basel III framework will continue to attract a risk weight of 75 percent. Consumer credit, including personal loans, was previously subjected to a higher risk weight of 125 percent as per the RBI’s November 2023 circular. However, microfinance loans have now been excluded from this category and will instead be subjected to a risk weight of 100 percent.
For regional rural banks and local area banks, all microfinance loans will uniformly attract a risk weight of 100 percent. The changes, effective immediately, apply to both outstanding and new microfinance loans. This move is expected to moderate capital requirements for banks extending microfinance loans, potentially easing credit availability for low-income borrowers. However, it also signals a more cautious approach towards managing systemic risks in the rapidly expanding microfinance segment.
The RBI’s directive underscores the growing importance of microfinance in India’s financial landscape while ensuring that risk management remains a priority for financial institutions. Industry experts believe that the recalibration of risk weights strikes a balance between fostering financial inclusion and maintaining prudential lending standards.
This regulatory revision has been enacted under Sections 21 and 35A of the Banking Regulation Act, 1949.