RBI Eases Capital Rules, Unlocking ₹70,000 Crore for SME Lending — Here Are the Banks Best Positioned to Benefit

RBI Eases Capital Rules, Unlocking ₹70,000 Crore for SME Lending — Here Are the Banks Best Positioned to Benefit

The Reserve Bank of India has eased capital adequacy requirements on banks' lending to NBFCs, restoring risk weights to levels based on external credit ratings rather than the elevated norms imposed in late 2023. The move is estimated to free up roughly ₹70,000 crore in lending headroom across the banking system — and a significant chunk of that is expected to flow into MSME and small business credit.

For retail investors, the question is straightforward: which listed banks and NBFCs already have the infrastructure, the loan books, and the appetite to deploy this freed-up capital into SME lending? We went through annual reports and quarterly results to find out.

Bank of Baroda: The Public Sector Leader in MSME Credit

Bank of Baroda's MSME portfolio stands out among PSU banks. Per their FY25 annual report, the bank's MSME credit portfolio (excluding two-wheeler and other retail, including pool purchases) grew to ₹1,42,750 crore from ₹1,25,899 crore in FY24 — a 13.38% year-on-year increase. The bank has also invested heavily in digital infrastructure, with over 70 digital lending journeys now live and more than 26 lakh customers sanctioned through digital loan channels. Their integration with RBI's Unified Lending Interface and GST-based invoice financing ("GST Sahay") positions them to quickly scale SME disbursements as capital constraints ease.

Federal Bank: Granular Growth in Business Banking

Federal Bank's Business Banking segment — which covers MSME loans up to ₹10 crore for working capital and ₹20 crore for term loans — registered 11% growth in FY25, per their annual report. The bank disbursed nearly 12,000 business loans during the year, with 50% going to new-to-bank customers. The average ticket size sits at ₹73 lakh across roughly 37,000 accounts. Federal Bank also reported 35% growth in its commercial vehicle/construction equipment segment and 19% growth in microfinance — both adjacent to SME lending. The bank's FedOne digital platform for MSMEs and corporates, combined with supply chain financing that has crossed ₹1,000 crore in business financed, gives it strong distribution capability.

Ugro Capital: The Pure-Play MSME NBFC

Ugro Capital is one of the most direct beneficiaries of this policy shift. As a specialist MSME-focused NBFC, its entire business model depends on bank credit lines and co-lending partnerships. Per their FY23 annual report, the company crossed ₹6,000 crore in assets under management with monthly net disbursements exceeding ₹500 crore. By FY25, their off-book AUM proportion reached 42%, supported by a network of over 59 lending partners. Ugro's data-driven, sector-specific underwriting approach — covering eight focus sectors — means it can deploy incremental capital with established risk frameworks. Cheaper bank funding from eased capital norms should directly improve their borrowing costs and co-lending economics.

AU Small Finance Bank: MSME at Scale

AU Small Finance Bank has built one of the largest MSME loan books among small finance banks. Per their FY23 annual report, their SBL-MSME (Secured Business Loans to MSMEs) portfolio stood at ₹18,535 crore, up from ₹16,313 crore the previous year. The bank maintains a capital adequacy ratio of 20.1% — well above regulatory requirements — giving it significant room to accelerate lending. Their integrated approach combining vehicle finance, MSME loans, and deposit mobilisation across 2,000+ touchpoints in semi-urban and rural India means they reach SME borrowers that larger banks often miss.

Bandhan Bank: Moving Beyond Microfinance into Mid-Market

Bandhan Bank's transformation from a microfinance-heavy model to diversified commercial lending makes it an interesting play. Per their FY23 annual report, the bank's Mid-Market Group (MMG) fund-based book — secured loans above ₹5 crore to manufacturing, trading, and services businesses — reached ₹3,605 crore, nearly doubling from ₹1,871 crore the previous year. These are exactly the kind of MSME borrowers who benefit when bank capital rules ease, as they sit at the intersection of formal credit markets and growth-stage businesses that need working capital.

Why This Matters Now

Bank of Baroda's annual report notes that credit to services and personal loans had moderated sharply in FY25 precisely because of the elevated risk weights on bank lending to NBFCs. With those norms now restored, the constraint is removed. For banks with established MSME pipelines, the freed-up capital doesn't need to find new channels — it simply flows through infrastructure already built.

The MSME credit gap in India remains enormous. Banks with digital disbursement platforms, co-lending partnerships with NBFCs, and sector-specific underwriting frameworks are best positioned to deploy this capital profitably.

What Retail Investors Should Watch

The primary beneficiaries of the RBI's capital rule relaxation are banks with large, growing MSME portfolios (Bank of Baroda, Federal Bank, AU Small Finance Bank) and pure-play MSME NBFCs that depend on bank funding (Ugro Capital). Watch for two signals in upcoming quarterly results: (1) acceleration in MSME loan growth rates above the 11-14% range seen in FY25, and (2) improvement in net interest margins for NBFCs as their borrowing costs decline. The ₹70,000 crore headroom doesn't arrive overnight, but the banks that have been building SME infrastructure for years are the ones that can deploy it fastest.

Data sourced from company filings on NSE via Xaro.