Page 60 - Banking Finance April 2025

RBI CIRCULAR

3. The above instructions shall come into effect from 6. The above instructions have been issued in exercise of
April 01, 2025. All other instructions of the circulars the powers conferred by Sections 21 and 35A of the
ibid remain unchanged. Banking Regulation Act, 1949.

Review of Risk Weights on Microfinance Loans Reserve Bank of India (Prudential Regulations
February 25, 2025 on Basel III Capital Framework, Exposure
Norms, Significant Investments, Classification,
I. Commercial Banks (including Small Finance Banks
but excluding Regional Rural Banks and Local Area Valuation and Operation of Investment Portfo-
Banks) lio Norms and Resource Raising Norms for All
1. In terms of para 5.9.1 of ‘Master Circular on Basel III India Financial Institutions) Directions, 2023 -
– Capital Regulations’ dated April 01, 20241, as Amendment
amended from time to time, claims (including both
fund-based and non-fund based) that meet all the four February 17, 2025
criteria listed in paragraph 5.9.3 of the Master Circu-
lar ibid may be considered as retail claims for regula- 1. Please refer to paragraph 34.2 of the Reserve Bank of
tory capital purposes and included in a regulatory re- India (Prudential Regulations on Basel III Capital
tail portfolio (RRP), attracting a risk weight of 75 per Framework, Exposure Norms, Significant Investments,
cent. Para 5.9.2 of the Master Circular ibid disallows Classification, Valuation and Operation of Investment
certain claims like consumer credit, including personal Portfolio Norms and Resource Raising Norms for All
loans from being categorised under RRP. India Financial Institutions) Directions, 2023 issued on
September 21, 2023.
2. Further, in terms of circular ‘Regulatory measures to-
wards consumer credit and bank credit to NBFCs’ 2. On a review, it has been decided that investments
dated November 16, 2023, risk weights on consumer made by All India Financial Institutions (AIFIs), as per
credit, including personal loans, but excluding housing their statutory mandates, in long-term bonds and de-
loans, education loans, vehicle loans and loans secured bentures (i.e., having minimum residual maturity of
by gold and gold jewellery, was increased to 125 per three years at the time of investment) issued by non-
cent. On a review, it has been decided that financial entities shall not be accounted for the pur-
microfinance loans in the nature of consumer credit pose of the ceiling of 25 per cent applicable to invest-
shall also be excluded from the applicability of higher ments included under Held to Maturity (HTM) cat-
risk weights specified in the circular ibid and shall ac- egory, specified under the Directions ibid.
cordingly, be subject to a risk weight of 100 per cent.
3. Accordingly, the relevant instructions have been
3. It is further clarified that microfinance loans which are amended as detailed in Annex.
not in the nature of consumer credit and fulfil all the
four criteria specified in para 5.9.3 of the Master Cir- Applicability
cular ibid, may be classified under RRP provided that 4. This circular shall be applicable to the AIFIs regulated
the banks put in place appropriate policies and stan- by the Reserve Bank, viz. the Export-Import Bank of
dard operating procedures to ensure fulfilment of the India (EXIM Bank), the National Bank for Agriculture
qualifying criteria. and Rural Development (NABARD), the National Bank
II. Regional Rural Banks (RRBs) and Local Area Banks for Financing Infrastructure and Development
(LABs) (NaBFID), the National Housing Bank (NHB) and the
Small Industries Development Bank of India (SIDBI).
4. All microfinance loans extended by RRBs and LABs
shall attract a risk weight of 100 per cent. 5. This circular is issued in exercise of the powers con-
ferred under Section 45L of the Reserve Bank of India
5. The above instructions shall be applicable from the
date of issue of this circular in respect of outstanding Act, 1934.
as well as new microfinance loans. All other instruc- 6. These instructions shall come into force with effect
tions of the circulars ibid remain unchanged. from April 1, 2025.

54 | 2025 | APRIL | BANKING FINANCE