RBI tightens norms on consumer loans, raises risk weight on credit exposure

Personal loan and Credit Cards loan may become costly

In an effort to contain high growth in consumer credit, the Reserve Bank of India has increased the risk weights for consumer credit including credit card and personal loan exposure of commercial banks and finance companies.

As a consequence, banks and non-banking finance companies will have to set aside a higher amount of capital for outstanding as well as new exposures. The above instructions shall come into force with immediate effect, RBI said in a communication to Regulated Entities.

The risk weight for consumer credit exposure of commercial banks and NBFCs has been raised by 25 percentage points to 125 per cent. The credit card receivables of banks will attract a risk weight of 150 per cent as against 125 per cent and for NBFCs, a risk weight of 125 per cent up from 100 per cent. However, the risk weight hike decision will not apply to housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery. The microfinance and Self-Help Group (SHG) loans by NBFCs are excluded from the decision.

As for bank credit to NBFCs, risk weights will rise by 25 percentage points over and above the existing risk weight. This is applicable in cases where the extant risk weight as per external rating of NBFCs is below 100 per cent. However, the core investment companies and loans to HFCs, and loans to NBFCs which are eligible for classification as priority sector are excluded from the risk weight decision.

Karthik Srinivasan, Senior Vice President & Group Head - Financial Sector Ratings, ICRA, said the increase in risk weights for consumer loans is in line with expectations, though an increase in risk weight for lending by banks to non-banks was unexpected.

These announcements are expected to result in higher capital requirements for the lenders and hence an increase in lending rate for the borrowers. These higher lending rates by banks to non-banks could also spill over to corporate bonds by way of higher yields and widening of credit spreads for non-banks, he added.

The retail credit, especially credit cards and other personal loans, have shown a sharp rise in offtake. The credit card outstanding rose by 30 per cent year on year (YoY) basis to Rs 2.17 trillion in September 2023. The other personal loan pool grew by 22.7 per cent YoY to Rs 12.14 trillion in September 2023. The credit to NBFCs also expanded by 26.3 per cent to Rs 14.19 trillion in September, according to RBI data.

RBI said the REs should review their extant sectoral exposure limits for consumer credit and put in place, if not already there, board-approved limits in respect of various sub-segments. The limits so fixed should be strictly adhered to and monitored on an ongoing basis by the Risk Management Committee of the board.

All top-up loans extended by REs against movable assets which are inherently depreciating in nature, such as vehicles, shall be treated as unsecured loans for credit appraisal, prudential limits, and exposure purposes.

On October 6, 2023, RBI Governor Shaktikanta Das had flagged the high growth in certain components of consumer credit.

He had also asked banks and financial companies to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards, in their own interest. The high growth seen in consumer credit and increasing dependency of NBFCs on bank borrowings were also highlighted by the Governor in the interactions with chief executives and heads of major banks and large NBFCs in July and August 2023, respectively.