Shares in banking and housing finance companies outperformed broader markets on Friday after the Reserve Bank announced a reduction of risk weightage for housing loans up to Rs 75 lakh.

The RBI on Thursday evening cut risk weights on home loans given by banks (up to Rs 75 lakh) from 50 per cent to 35 per cent. RBI’s move will free up more capital to lend as banks will have to set aside lower funds towards capital adequacy ratio for home loans up to Rs 75 lakh.

The additional capital will improve the Tier-1 (core capital) of most banks by 10-25 basis points, Nomura said. Tier-1 capital is the money that the bank has in its coffers to cover risks for activities like lending and trading.

Within capital-constrained public sector banks, the impact should be the highest for State Bank of India, Nomura added.

“The RBI’s decision will give a fillip to PSU banking stocks, which have been under lot of pressure,” said Ajay Bodke of Prabhudas Lilladher.

The weightage reduction currently applies only to banks, but analysts expect the National Housing Bank, which is the regulator for housing finance companies, to also adopt these. As a result, HFCs also rallied sharply.

LIC Housing Finance shares jumped over 3 per cent, while HDFC traded with nearly 1.5 per cent gains.

Analysts said lenders may look to pass on the benefits of risk weightage reduction to borrowers. Lenders can cut rates by up to 30 basis points without compromising return on equity, said CLSA.

As of 10.45 a.m., the Bank Nifty traded 1.3 per cent higher, outperforming the Nifty, which was up 1 per cent. Private lender ICICI Bank traded 3.12 per cent higher, while SBI traded with 1.6 per cent gains.