On November 16, the Reserve Bank of India (RBI) announced a 25 percent increase in the risk weight assigned to consumer credit exposure for both commercial banks and non-banking finance companies (NBFCs).
Consumer credit from these institutions, initially assigned a risk weight of 100 percent, has now been adjusted to 125 percent.
This decision follows RBI Governor Shaktikanta Das’ October monetary policy address, where he highlighted the substantial growth in specific consumer credit components. He urged banks and NBFCs to reinforce internal surveillance mechanisms, address potential risks, and implement suitable safeguards in their best interests.
The augmented risk weight for commercial banks’ consumer credit exposure, encompassing personal loans but excluding housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery, is applicable to both outstanding and new loans.
For NBFCs, the increased risk weight pertains to retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery, and microfinance/self-help group (SHG) loans.
Furthermore, the RBI has raised the risk weight on credit card receivables for scheduled commercial banks and NBFCs by 25 percent. Previously, scheduled commercial banks and NBFCs carried risk weights of 125 percent and 100 percent, respectively. Post-revision, these figures stand at 150 percent for SCBs and 125 percent for NBFCs.
Additionally, the central bank increased the risk weight on scheduled commercial banks’ exposures to NBFCs by 25 percent. The RBI clarified that this adjustment applies in cases where the existing risk weight, based on external ratings of NBFCs, falls below 100 percent.
The circular also stated that loans to housing finance companies (HFCs) and loans to NBFCs eligible for classification as a priority sector would be excluded from this calculation.
The RBI emphasized that Registered Entities must review their existing sectoral exposure limits for consumer credit and establish Board-approved limits for various subsegments under consumer credit, as deemed necessary by the Boards for prudent risk management.