In the March edition of General Awareness, It is 1-2 March general awareness which covers RBI News. A key update is the RBI’s decision to ease bank capital requirements by rolling back the increased risk weights on loans to NBFCs. Effective from April 1, 2025, this move aims to boost credit flow, improve liquidity, and support better-rated NBFCs. It follows a decline in bank loan growth to NBFCs, prompting the RBI to reverse its earlier decision. This policy change is expected to provide relief to both banks and NBFCs, strengthening the financial ecosystem.
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RBI Eases Bank Capital Requirements with NBFC Risk Weight Rollback
The Reserve Bank of India (RBI) has announced a rollback of increased risk weights for bank loans to Non-Banking Financial Companies (NBFCs), effective from April 1, 2025. This move aims to enhance credit flow and support the financial sector.
The decision comes in response to a significant decline in bank loan growth to NBFCs, which fell from 15% in December 2023 to just 6.7% in December 2024. This slowdown has impacted overall bank credit expansion, prompting the RBI to revisit its earlier policy.
In November 2023, the RBI had raised risk weights by 25 percentage points for NBFCs rated AAA, AA, and A. This increased capital requirements for banks, making lending to NBFCs more expensive. By reducing risk weights, banks can now allocate less capital to such loans, improving liquidity and making credit more accessible to well-rated NBFCs.
With restricted access to bank loans, many NBFCs had turned to alternative funding sources such as capital markets and external commercial borrowings (ECBs). The RBI’s latest move is expected to ease these funding constraints and restore confidence in the lending ecosystem.
Additionally, the RBI has clarified the risk weights for microloans. The new guidelines set risk weights at 75% for regulatory retail loans and 100% for consumer credit, down from the previous 125%. This adjustment removes uncertainties and provides relief to banks, particularly those with large microfinance portfolios, including small finance banks.
Overall, the rollback of risk weights is expected to boost credit availability, strengthen financial stability, and support the lending ecosystem in India.
RBI’s ‘Regulations at a Glance’ Handbook: Key Highlights for Cooperative Banks
- The Reserve Bank of India (RBI) has released the Regulations at a Glance handbook, compiled by the Department of Regulation (DoR), which presents key banking regulations in a tabular format.
- This handbook provides an overview of regulations for cooperative banks, covering areas such as licensing, branch expansion, governance, credit risk management, interest rate policies, mergers, and resolution mechanisms.
- Urban Cooperative Banks (UCBs) must adhere to strict licensing norms, whereas State and Central Cooperative Banks (StCBs & CCBs) require NABARD’s recommendation for license approvals.
- UCBs meeting the Financially Sound and Well Managed (FSWM) criteria can expand branches under an automatic route, while StCBs and DCCBs need approval from both RBI and NABARD.
- The governance framework mandates compliance with the Banking Regulation Act, 1949 and RBI guidelines for directors, MDs/CEOs, and Chief Risk Officers (CROs) in large UCBs.
- Credit risk policies restrict cooperative banks’ investments in shares, bonds, and debentures, while securitization of standard assets is prohibited for RRBs and cooperative banks.
- Interest rate regulations ensure transparency, uniform pricing across branches, and compliance with rules for NRE/NRO deposits.
- Mergers and amalgamations of cooperative banks fall under the Banking Regulation Act (Amendment) 2020, with RBI overseeing both voluntary and compulsory amalgamations.
- Any amalgamation of UCBs and DCCBs-StCBs requires RBI approval to safeguard depositor funds and maintain financial stability.
- Under Section 45 of the Banking Regulation Act, the RBI has the authority to restructure or merge failing banks, supersede boards, revoke licenses, and appoint liquidators for cooperative and banking companies in coordination with state and central authorities.
- While the handbook simplifies regulatory understanding, official circulars, Master Directions, and notifications remain the ultimate sources for compliance.
RBI Announces Additional Liquidity Measures
- With mid-March outflows and GST payments likely to impact liquidity, banks are managing their balance sheets cautiously, rather than operating in a surplus, according to treasury officials.
- To address liquidity concerns, the RBI has conducted Open Market Operation (OMO) auctions worth ₹60,000 crore in three tranches and executed USD/INR buy-sell swaps of $5 billion and $10 billion in January and February.
- Short-term money market rates remain high, with 3-month Certificates of Deposit (CDs) at 7.55%, leading to a 150 basis points (bps) spread with overnight rates, affecting interest rate transmission.
- The RBI is actively intervening in the forex market to curb volatility arising from US tariff uncertainties, contributing to a 0.36% appreciation of the rupee to 86.96 against the US dollar.
- Despite RBI interventions, the rupee has depreciated by 4.09% in FY25 and by 1.55% in CY25 so far. However, recent gains have been supported by a weakening dollar.
- The US dollar index dropped by 0.6% to 104.9 due to economic concerns and new trade tariffs on imports from Mexico, Canada, and China.
- A potential RBI rate cut in April could impact the rupee’s long-term movement, with projections estimating it could reach ₹88-₹89 per dollar in the near future.