The business environment is expected to improve for non-banking financial companies (NBFCs) due to two recent developments: the Reserve Bank of India’s (RBI) 50 basis point rate cut and the easing of risk weight norms on unsecured lending. The RBI’s rate cut, which is its third reduction since February 2025, is expected to improve liquidity and boost bank funding to the sector. The central bank also slashed the cash reserve ratio (CRR) by 100 basis points, injecting Rs 2.5-lakh crore of durable liquidity into the system.
The easing of risk weight norms on unsecured lending is also expected to encourage banks to step up lending to NBFCs. In November 2023, the RBI had raised the risk weight on bank exposures to NBFCs by 25 percentage points to 125%, tightening credit and slowing fund flows to the sector. However, in February 2025, the central bank reversed this decision, restoring the original risk weight of 100% effective April 1.
Industry experts expect the liquidity surge and the easing of risk weights to result in more funds being available for NBFCs, particularly for retail lending. Parag Sharma, MD and CFO of Shriram Finance, said that the excess liquidity will lead to more lending by banks, resulting in more funds for NBFCs. Ashish Mehrotra, MD & CEO of Northern Arc Capital, noted that the RBI’s recent commentary suggests a moderation in stress levels within unsecured lending, which should further catalyse bank participation in well-structured NBFC-originated pools.
The rollback of additional risk weights and the RBI’s softer stance on unsecured retail loans and credit card outstandings are expected to aid lending to well-managed NBFCs. Several banks have already cut lending rates in response to the RBI’s 50 bps repo rate cut, which is expected to result in lower interest costs for borrowings. The full impact of the rate cut is expected to be visible in the coming quarters.
Overall, the developments are expected to improve the business environment for NBFCs, with more funds available for lending and lower interest costs. The transmission of lower rates is expected to happen faster for mid-sized NBFCs due to higher capital market-linked borrowings. Northern Arc Capital’s MD & CEO expects the net interest margins (NIMs) to likely rise by 70-80 bps in the near term due to the structure of their asset-liability franchise.