The changed norms will make extending unsecured personal loans costlier for lenders.
Key Highlights
- RBI has increased the risk weight on exposure to consumer credit by 25 basis points for banks.
- The risk weight on exposure to retail loans by NBFCs has been increased to 125 per cent.
- The risk weight on exposure to credit card receivables has also been increased.
The Reserve Bank of India (RBI) tightened the noose on banks and NBFCs and increased the risk weight on unsecured personal loans.
In a notification released Thursday, the Central Bank mentioned that from now on, consumer credit of banks (which includes personal loans) would attract a risk weight of 125%, and loans categorised as retail loans by NBFCs would also attract a risk weight of 125% instead of the existing 100% risk weight for both the financial institutions.
In addition, RBI has also increased the risk weight of credit card receivables of banks from 125% to 150% and that of NBFCs from 100% to 125%.
Risk weight is the capital financial institutions have to keep aside as provisioning for loans to cover a possible default in future. Higher provisioning would make consumer credit costlier for lenders, thus dissuading them from extending unsecured personal loans.
The new norms would come into force immediately and would apply to both outstanding and new loans.
As per the notification, the changes would not be applicable to housing loans, vehicle loans, loans taken for education, and loans secured with gold or gold jewellery.
Why did the RBI change the norms for personal loans?
The RBI Governor had pointed out in October that certain components of personal loans had recorded very high growth and had asked banks to increase their internal surveillance systems and keep safeguards in place to avoid build-up of risks.
In addition, it had mentioned that the Central Bank is proactively monitoring the situation for any stress in the system due to the ongoing trend.
Since financial institutions would now have to set aside more capital while extending unsecured personal loans, it would increase the interest rates being offered on these types of loans.
In a separate development, the RBI had mentioned in its September Bulletin that NBFCs have been relying on banks for their borrowing needs.
To address this issue, the RBI also increased the risk weight of the bank’s exposure to NBFCs by 25 basis points over and above the risk weight allotted to the NBFCs by a rating through an accredited external credit assessment institution (ECAI), wherever the risk weight associated with the rating is less than 100%.
However, this rule would not be applicable to NBFCs eligible under the priority sector lending and Housing Finance Companies (HFCs).
To avoid any risk build-up, the RBI has also asked the Regulated Entities (REs) to review their exposure to consumer credit and put limitations on certain sub-segments of consumer loans. The REs are further directed to adhere to the limitations decided and continuously monitor it through a Risk Management Committee.
