Banks Stay Cautious on NBFCs Despite Lower Risk Weights

Despite the Reserve Bank of India (RBI) restoring risk weights on bank loans to non-banking financial companies (NBFCs) back to 100%, banks remain cautious in extending credit to the sector. Fresh data shows a sharp slowdown in lending growth, reflecting both regulatory caution and changing funding strategies among NBFCs: The Economic Times reported.

Lending Growth Slows Sharply
According to RBI data, bank lending to NBFCs grew only 2.6% in the first four months of FY26, compared with 12.7% during the same period last year. This marks a continued deceleration in bank–NBFC credit flows, even as overall bank credit growth remains robust.

The total outstanding bank credit to NBFCs stood at ₹15.7 lakh crore at the end of July 2025, marginally higher than ₹15.3 lakh crore a year earlier. Consequently, the share of NBFCs in overall bank credit fell to 8.5% from 9.1% in the same period last year.

Risk Weights and Regulatory Impact
In November 2023, the RBI raised risk weights on NBFC loans to 125% amid concerns over surging unsecured credit, particularly in microfinance and personal loan segments. This measure was intended to curb banks’ exposure to riskier lending.

In February 2025, the RBI reversed the hike, restoring risk weights to 100%, hoping to ease funding pressures on NBFCs. However, the expected revival in credit flows has not materialised.

“Banks remain selective, particularly avoiding smaller NBFCs with high exposure to microfinance institutions (MFIs) and unsecured loans,” said Sanjay Agarwal, Senior Director at CareEdge Ratings. He added that with pressure on net interest margins (NIMs), banks may prefer to reduce low-yield exposures at the margin.

Shift Toward Capital and Offshore Markets
The slowdown in bank lending is also linked to strategic funding diversification by larger NBFCs. With domestic borrowing costs remaining sticky due to slower transmission of MCLR-linked loans, top-rated NBFCs have increasingly turned to capital markets and external commercial borrowings (ECBs).

In FY25, ECB registrations hit a record $61 billion, with NBFCs accounting for 43% of the total, a sharp jump from the historical 20–37% range. This has helped them lower borrowing costs and reduce reliance on bank loans.

“As larger NBFCs look to expand, they are raising substantial funds overseas,” said Prakash Agarwal, Partner at Gefion Capital. “For smaller NBFCs with weaker credit ratings, however, bank funding remains very difficult to access. Even housing finance companies, which are heavily dependent on banks, are experiencing slower growth.”

Outlook
The muted credit growth to NBFCs highlights a dual trend: large, well-rated NBFCs are strengthening their balance sheets through diversified, cheaper funding sources, while smaller players face funding constraints amid banks’ cautious approach.