The Reserve Bank of India’s (RBI) decision to increase risk weights on consumer credit, credit card receivables, and non-banking finance companies (NBFCs) is likely to have a significant impact on the banking industry and borrowers.
Banks will need to raise an additional Rs 84,000 crore in capital, or a 5% increase, to meet the new risk weight requirements. This will likely lead to higher lending rates for consumers.
The affected types of loans include personal loans, consumer durable loans, and microfinance loans. These loans make up around 9.8% of total outstanding loans, or Rs 14.8 lakh crore.
The RBI’s decision is intended to address the potential for financial stability risks in the consumer credit market. The central bank is concerned about the rapid growth of unsecured loans in recent years and the potential for defaults to rise in the event of an economic downturn.
The higher capital requirements and lending rates are likely to moderate the growth of unsecured loans. This could also lead to a wider spread between corporate bond yields and government bond yields.
NBFCs with a high proportion of unsecured retail loans in their portfolios will be particularly affected by the RBI’s decision. They may need to raise additional capital or find other sources of funding to meet the new requirements.
Overall, the RBI’s decision is likely to have a significant impact on the consumer credit market. Banks and NBFCs will need to adjust their lending practices to comply with the new regulations, and borrowers will face higher lending rates.