The financial stocks are surging ahead. The Nifty Bank rose as much as 0.75% to a high of 48,972.55 level, intra-day. Not just that, even if we see the 1-month gains on the Bank Nifty, it delivered nearly 2% gains compared to 1.29% decline seen in the Nifty. What’s particularly fuelling the rally today is the Reserve Bank of India’s decision to bring down risk weight on bank loans to NBFCs to pre-2023 levels.
As a result of the decision, AU Small Finance Bank was the top gainer on Nifty Bank, up 6.7%. Stocks like IndusInd Bank, Axis Bank, HDFC Bank, IDFC First Bank also saw brisk gains. Even on the benchmark indices, bank stocks are among the top gainers led by HDFC Bank along with Bajaj Finance, ICICI Bank, Shriram Finance, and Axis Bank.
RBI move to enhance liquidity and reduce the cost of funds
The surge in share price of banking, small finance banks, and NBFCs came after the lender of last resort, RBI, in its new guidelines trimmed risk weights on lending to NBFCs. Plus, it lowered the risk weight for lending to the microfinance sector as well. “Midcap banks, with exposure to MFIs and strong underperformances, could see a short-term rally, while NBFCs could see some easing in cost of funds (CoF),” said Anand Rathi Research in a note. “Overall, we believe the combination of liquidity infusion, rate cut and now reduced risk weights signal a more favourable regulatory and business environment for lenders.”
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This move by the RBI is expected to boost the slowing credit growth by improving funding to NBFCs. The move is also expected to enable NBFC to extend more affordable credit to underserved communities.
RBI MFI relaxation: Expect improved CAR
Given worries about rising stress in small-ticket MSME and banks, the move is expected to be beneficial to the larger NBFCs. CIFC, SBI Cards, FiveStar, LTF and MMFS benefit in that order. According to Nuvama, “CAR shall improve 280–300 bps for Bandhan as the best case, 40bp for RBL, 25bp for IDFC and 15bp for AU Small Finance Bank considering relaxation for both MFI and NBFC.
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