On Thursday, the Reserve Bank of India (RBI) declared a 25 percentage point hike in the risk weightage assigned to consumer credit exposure for commercial banks and NBFCs, elevating it from 100 to 125 per cent.
The circular issued by the central bank specified that the increased risk weights apply to consumer credit exposure of commercial banks, encompassing personal loans, raising it by 25 percentage points to 125 per cent. Notably, this increase excludes housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery.
Previously, consumer credit had a fixed risk weight of 100 per cent. For NBFCs, the RBI's decision entails that their consumer credit exposure, categorized as retail loans excluding certain segments like housing loans, educational loans, vehicle loans, loans against gold jewellery, and microfinance/SHG loans, will now attract a risk weight of 125 per cent, up from the earlier 100 per cent.
The RBI's review also led to adjustments in the risk weights associated with credit card receivables for scheduled commercial banks and NBFCs. These exposures will now incur risk weights of 150 per cent and 125 per cent for SCBs and NBFCs, respectively, marking a 25 percentage point increase.
Furthermore, the RBI emphasized the need for banks and NBFCs to reevaluate their sectoral exposure limits for consumer credit. It advised the implementation of board-approved limits for various sub-segments under consumer credit, particularly for unsecured consumer credit exposures. Additionally, the RBI emphasized treating top-up loans against depreciable movable assets, like vehicles, as unsecured loans for credit evaluation and exposure purposes.
This decision by the RBI aligns with earlier directives from the RBI Governor, who highlighted the rapid growth in specific consumer credit components. The Governor urged banks and NBFCs to fortify internal surveillance mechanisms, address potential risks, and establish necessary safeguards to mitigate risk accumulation. The RBI also underscored the mounting consumer credit growth and the increasing reliance of NBFCs on bank borrowings during interactions with major bank MD/CEOs in July and August 2023.
(With Agency Inputs)
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