RBI increases risk weights on personal loans to tighten regulations for banks and NBFCs

In an effort to make lenders more wary of issuing such advances, the Reserve Bank of India tightened standards for consumer lending on Thursday by requesting that banks and non-bank financial institutions (NBFCs) assign a greater risk weight for unsecured personal loans.

There has been a 25 percentage point increase in the risk weight for unsecured consumer loans.

However, the Reserve Bank said in a circular that the new rules would not apply to loans for housing, education, vehicles, or loans secured by gold or gold jewelry.

A greater risk weight may result in higher costs for consumer loans as lenders would need to reserve more money as a safety net. Put simply, banks’ ability to lend is limited by greater risk weights.

The action was taken less than a month after RBI Governor Shaktikanta Das expressed worries about the rapid expansion of the consumer loan market.

“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, have been decided to increase by 25 percentage points to 125 per cent,” the RBI stated in the circular.

According to the circular on “Regulatory measures towards consumer credit and bank credit to NBFCs (non-banking financial companies),” a similar increase has been made in the case of credit card receivables.

The risk weights on credit card exposures have now been raised to 15% for NBFCs and banks, and 25% for banks, an increase of 25 percentage points.

As of the end of September 2023, the bank credit outstanding to the personal loans category was Rs 48,26,833 crore, up over 30% from the same month in 2022.

Regarding bank credit to NBFCs, the circular stated that in all cases where the existing risk weight as per NBFCs’ external rating is less than 100%, banks’ exposure to such risks has also been increased by 25 percentage points (above and beyond the risk weight associated with the given external rating).

Additionally, the RBI requested that all of the organizations under its jurisdiction assess the sectoral exposure limitations they currently have in place for consumer credit and implement Board-approved restrictions, if they haven’t already, for the different subsegments of consumer credit.

The circular said that “limits shall be prescribed for all unsecured consumer credit exposures.”

For the purposes of credit evaluation, prudential restrictions, and exposure, any top-up loans made by regulated companies against moveable assets that naturally depreciate—like cars—should also be regarded as unsecured loans.

Governor of the Reserve Bank of India Shaktikanta Das recently noted the rapid increase in several consumer credit components and recommended banks and nonbank financial institutions (NBFCs) to fortify their internal monitoring systems, handle risk accumulation, and implement appropriate measures, all in their own best interests.

During his meetings in July and August with the MD/CEOs of major banks and significant NBFCs, respectively, the governor also brought up the high rate of increase in consumer credit and the NBFCs’ growing reliance on bank borrowings.