The RBI has raised risk weight by 25 per cent on consumer credit exposure of banks and NBFC.
The RBI has raised risk weight by 25 per cent on consumer credit exposure of banks and NBFCs; the move is expected to raise lending rates for borrowers
Flagging high growth in certain components of consumer credit, the Reserve Bank of India (RBI) on Thursday tightened norms related to unsecured lending portfolios of commercial banks and non-banking financial companies (NBFCs). It has raised risk weight by 25 per cent on consumer credit exposure of banks and NBFCs. The move is expected to raise lending rates for borrowers.
Till now, consumer credit attracted a risk weight of 100 per cent, which has now been revised to 125 per cent.
“On a review, it has been decided to increase the risk weights in respect of consumer credit exposure of commercial banks (outstanding as well as new), including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, by 25 percentage points to 125,” the RBI said in a circular on Thursday.
Risk weight is the capital that banks need to set aside for every loan.
The RBI on Thursday also increased risk weights on credit card exposures by 25 percentage points each to 150 per cent for banks and 125 per cent for NBFCs.
Karthik Srinivasan, senior vice-president & group head (financial sector ratings) at, ICRA, said, “The increase in risk weights for consumer loans is in line with expectations, though an increase in risk weight for lending by banks to non-banks was unexpected. These announcements are expected to result in higher capital requirements for the lenders and, hence, an increase in lending rates for the borrowers. These higher lending rates by banks to non-banks could also spill over to corporate bonds by way of higher yields and widening of credit spreads for non-banks.”
Last month, RBI Governor Shaktikanta Das said the central bank was closely monitoring some fast-growing personal loan categories for signs of nascent stress.
During interactions with MD/CEOs of major banks and large NBFCs in July and August 2023 also, Das highlighted high growth seen in consumer credit and increasing dependency of NBFCs on bank borrowings.
