NBFC Stocks Soar Up to 12% as RBI Eases Lending Norms – Big Boost for Bandhan Bank & Cholamandalam!

NBFC stocks surged by up to 12% after the RBI eased risk-weight norms on bank loans to the sector. CreditAccess Grameen jumped 12%, while Bandhan Bank gained nearly 8%, with L&T Finance, Cholamandalam Finance, and RBI Bank seeing gains of 5-6%. The new RBI policy, effective April 1, 2025, reduces the risk weight on bank lending to NBFCs from 125% to 100%, reversing the tightening measures imposed in 2023. Additionally, microfinance loans are now exempt from higher risk weights, benefiting banks with significant MFI exposure.

Brokerages predict improved capital ratios, with Bank of Baroda gaining 45 basis points and SBI, HDFC Bank, and Kotak Bank up by 30 basis points. This move is expected to lower borrowing costs for NBFCs like Bajaj Finance, Shriram Finance, and Mahindra Finance, making credit more accessible. Investor sentiment toward the sector is expected to improve, leading to stronger earnings and better credit flow in the long run.

NBFC Stocks Soar Up to 12% as RBI Eases Lending Norms – Big Boost for Bandhan Bank & Cholamandalam!

Shares of non-banking financial companies (NBFCs), including CreditAccess Grameen and Bandhan Bank, surged on Thursday, February 27, following the Reserve Bank of India’s (RBI) decision to ease risk-weight norms on bank loans to NBFCs. CreditAccess Grameen jumped 12% to ₹958, while Bandhan Bank gained nearly 8%. Other NBFCs, including L&T Finance, RBI Bank, and Cholamandalam Finance, saw gains of around 5%, with AU Small Finance Bank, Shriram Finance, Aditya Birla Capital, M&M Finance, and Poonawalla Fincorp rising between 3% and 4%.

The RBI’s new policy, effective April 1, 2025, reduces the risk weight on bank loans to NBFCs from 125% to 100%, reversing the tightening measures introduced in November 2023. Additionally, the exemption of microfinance loans from higher risk-weight classification is expected to provide further support to financial institutions.

Brokerage firms provided varied insights on the move. Citi projected improvements in CET-1 ratios for several banks, with Bank of Baroda gaining 45 basis points, Federal Bank and PNB benefiting by 35-40 basis points, and SBI, HDFC Bank, and Kotak Bank seeing a 30 basis point boost. ICICI Bank, AU Small Finance Bank, and IndusInd Bank could see gains of around 20 basis points, while Axis Bank and RBL Bank might experience a smaller impact of less than 20 basis points.

For banks with higher exposure to microfinance institutions (MFIs), the rollback will partially offset previous negative impacts, with Bandhan Bank previously facing a 360 basis point hit, IDFC First Bank 100 basis points, IndusInd Bank 75 basis points, and RBL Bank 45 basis points.

Morgan Stanley viewed the move as a positive step, expecting it to reduce borrowing costs and enhance funding accessibility, thereby strengthening investor sentiment and boosting NBFC earnings over time.

The firm highlighted PNB Housing, Shriram Housing, and Bajaj Finance as preferred stocks. Nomura echoed similar sentiments, noting that the decision will enhance credit flow from banks to NBFCs while immediately improving capital ratios. It identified Bandhan Bank, IndusInd Bank, and AU Small Finance Bank as primary beneficiaries, maintaining a “neutral” stance on Bandhan and IndusInd while assigning a “reduce” rating to AU Small Finance Bank.

With this regulatory relief, NBFCs such as Mahindra & Mahindra Finance, Cholamandalam, Bajaj Finance, and Shriram Finance are now in a stronger position to negotiate lower borrowing rates, particularly if the RBI introduces interest rate cuts in the near future. Analysts anticipate that Non-Banking Financial Companies (NBFCs) will experience significant improvements in their earnings as they benefit from enhanced funding conditions and increased credit flow. The recent decision by the Reserve Bank of India (RBI) to ease risk-weight norms on bank loans to NBFCs is expected to provide a major boost to the sector.

This regulatory move, effective from April 1, 2025, reverses the tightening measures introduced in November 2023, which had increased risk weights on consumer credit and NBFC lending from 100% to 125%. By restoring the risk weight back to 100%, the RBI aims to improve liquidity and make lending to NBFCs more cost-efficient for banks.

As a result of this decision, NBFCs such as Cholamandalam Investment & Finance Company, Bajaj Finance, Shriram Finance, and L&T Finance have already witnessed a surge in their stock prices, reflecting positive investor sentiment. The rollback is expected to lower borrowing costs for NBFCs, which in turn will allow them to extend more credit to retail and corporate borrowers. This move is particularly beneficial in a scenario where interest rate cuts are anticipated, further easing financing conditions for the sector.

Brokerage firms have responded positively to the RBI’s decision. Citi has projected that the policy change will boost the Common Equity Tier 1 (CET-1) ratios of various banks, with Bank of Baroda seeing a potential 45 basis point increase, while Federal Bank and Punjab National Bank could gain between 35 and 40 basis points. Similarly, larger banks like the State Bank of India (SBI), HDFC Bank, and Kotak Bank are expected to see a 30 basis point improvement in their CET-1 ratios.

For banks with significant exposure to microfinance institutions (MFIs), this relief will partially unwind the adverse impact of previous risk-weight hikes. For example, Bandhan Bank had faced a 360 basis point capital impact, IDFC First Bank 100 basis points, IndusInd Bank 75 basis points, and RBL Bank 45 basis points. With the rollback, these banks are expected to regain some of their lost capital efficiency.

Morgan Stanley has emphasized that this move will ease access to funding, benefiting not just NBFCs but also end borrowers. Lower risk weights will reduce capital requirements for banks, enabling them to lend more freely to NBFCs at competitive rates. This is expected to stimulate growth in the consumer finance and microfinance sectors. Among NBFCs, Morgan Stanley has highlighted PNB Housing, Shriram Housing, and Bajaj Finance as the top beneficiaries of this regulatory change.

Nomura has echoed these sentiments, noting that the move will immediately strengthen capital ratios for banks with high MFI exposure. The firm maintains a “neutral” rating on Bandhan Bank and IndusInd Bank but has a “reduce” rating on AU Small Finance Bank due to other financial challenges it faces. However, the broader NBFC sector is set to benefit from improved credit access and lower financing costs, allowing these firms to expand their loan books more aggressively.

Overall, the RBI’s decision marks a significant shift in its regulatory stance, aligning with its broader efforts to support economic growth and financial stability. By alleviating capital constraints on banks and easing funding conditions for NBFCs, the move is likely to drive credit expansion, enhance profitability in the financial sector, and support broader economic activity in the coming quarters.

Analysts remain optimistic that this will lead to sustained earnings growth for NBFCs, reinforcing their role as key players in India’s financial ecosystem.