The Reserve Bank of India’s (RBI) decision to reduce risk weights on lending by non-banking financial companies (NBFCs) to high-quality operational infrastructure projects is expected to improve capital efficiency, lower borrowing costs, and enhance competitiveness within the sector, according to CareEdge Ratings.
Infrastructure projects that have begun operations generally pose lower risks than those under construction. Existing capital adequacy norms already allow NBFCs to assign lower risk weights to operational projects under Public-private Partnerships (PPPs). The new principle-based framework seeks to extend this treatment to other operational projects, aligning risk weights more closely with their actual risk profile.
Draft regulations will soon be released for public consultation. The proposal aligns NBFC norms more closely with banks, which currently enjoy lower capital requirements for highly rated assets. By distinguishing between operational and under-construction projects, NBFCs will be able to allocate capital more efficiently, reduce financing costs, and expand their lending capacity.
CareEdge said the move also complements RBI’s new project finance guidelines effective from 1 October 2025, which strengthen risk management practices across banks and NBFCs. With NBFCs’ growing exposure to infrastructure lending—particularly in the power sector—the policy will likely promote more stable, long-term financing and attract institutional investors.
At present, NBFCs such as Infrastructure Debt Funds (IDFs) and Infrastructure Finance Companies (IFCs) can apply a lower risk weight of 50 per cent to loans backed by strong tripartite agreements. However, other wholesale NBFCs lending to similar high-quality assets do not enjoy this benefit. The proposed framework aims to bridge this gap, bringing uniformity and improving funding competitiveness.
NBFC-IDFs and NBFC-IFCs remain well-capitalised, with an average Capital Adequacy Ratio (CAR) of around 27 per cent and gearing of 5 times as of March 2025, comfortably above regulatory norms. Although the immediate impact may be limited due to their strong capital buffers, the move will allow these institutions to scale up lending over time, particularly in the infrastructure space.
The measure also ties lower risk weights to high-quality asset criteria, such as strong credit ratings, favourable debt service coverage ratios (DSCR), and sustained project revenues. These incentives encourage NBFCs to maintain robust asset quality while reducing systemic risk.
In the June quarter of FY2026, while infrastructure lending by banks dipped marginally by 0.46 per cent quarter-on-quarter, NBFC-IFCs expanded their asset base by about 2 per cent, underscoring their growing role in infrastructure financing.
The proposed regulatory framework is expected to align NBFCs’ treatment of operational infrastructure assets with that of banks, reducing regulatory arbitrage and ensuring consistent, risk-based capital allocation across India’s infrastructure financing ecosystem. |
