RBI lowers risk weight on ECLGS 5.0 loans to support credit growth

The Reserve Bank of India (RBI) has announced a key relief measure for banks by easing the risk-weight treatment of loans covered under the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, a move that could strengthen lending activity, particularly to micro, small and medium enterprises (MSMEs).

In a notification issued on Tuesday, the central bank said that exposures backed by ECLGS 5.0 guarantees will attract a 0% risk weight for up to 75% of the guaranteed amount, provided banks expect to receive the claim settlement within 30 days of invoking the guarantee. The remaining portion of the exposure will continue to be assigned risk weights under the existing regulatory framework.

The revised norms have come into effect immediately through an amendment to the RBI's capital adequacy directions for commercial banks.

"The remaining exposure shall attract risk weight as per the extant guidelines," the RBI notified.

Risk weights play a crucial role in determining the amount of capital banks are required to maintain against their loan portfolios. A lower risk weight translates into lower capital requirements, thereby improving the ability of lenders to deploy funds and expand credit without raising additional capital.

The latest regulatory relief is expected to improve capital efficiency for banks participating in ECLGS 5.0. By reducing the capital burden on a substantial portion of guaranteed loans, lenders may gain additional room to support credit growth while maintaining regulatory capital ratios.

Analysts believe the move is particularly beneficial for banks with sizeable MSME loan books, as these institutions have been among the key participants in the government's credit guarantee programme. The relaxation could help such lenders optimise their balance sheets and improve the utilisation of available capital. Instead of relying on fresh equity fundraising, banks may now be able to channel more resources toward new lending opportunities.

The decision follows a circular issued by the National Credit Guarantee Trustee Company (NCGTC) in May regarding ECLGS 5.0, the latest version of the government-backed guarantee scheme.

The ECLGS programme was originally launched during the Covid-19 pandemic to help businesses facing financial stress due to economic disruptions.