RBI Increases Risk Weights on Consumer Credit Exposures by 25%

The Reserve Bank of India (RBI) issued a notification on November 16, 2023, increasing the risk weights on consumer credit exposure of commercial banks and Non-Banking Financial Companies (NBFCs) by 25 percentage points to 125%, with immediate effect.

Risk weights are assigned to assets based on the risks associated with the assets. This is to determine the capital that the financial institution must hold vis-à-vis risk-weighted assets, and ensure financial stability.

With respect to commercial banks, the risk weight assigned to personal loans has been increased from 100% to 125%. The new risk weight has not been extended to housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery. When it comes to NBFCs, the risk weight assigned to retail loans has been increased from 100% to 125%. This will not apply to housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance or SHG loans.

The risk weights applicable on credit card receivables of scheduled commercial banks (SCB) and NBFCs have been enhanced from 125% and 100% to 150% and 125% respectively.

If the risk weight on exposures of SCBs to NBFCs (apart from core investment companies) as per ratings assigned by accredited external credit assessment institutions is below 100%, the same will be increased by 25%. This measure has been put in place in view of the NBFCs’ increased dependency on bank borrowings. However, it will not apply to loans extended to NBFCs eligible for classification as priority sector. The new risk weight will also not apply to loans provided to housing finance companies.

The Regulated Entities (REs) are required to review their sectoral exposure limits for consumer credit and set up Board-approved exposure limits to be adhered to and monitored by the Risk Management Committee. The REs have been given time till February 29, 2024, to comply with these requirements.

The top-up loans provided by REs against movable assets which are inherently depreciating in nature have to be treated as unsecured loans for credit appraisal, prudential limits and exposure purposes.