Regulatory Measures Imposed on Consumer Credit and Bank Credit to NBFCs

Certain consumer credit components have experienced significant growth and there is increased dependency of NBFCs on bank borrowings. In light of the above, the Governor of the Reserve Bank of India (RBI) has recommended that banks and non-banking financial companies (NBFCs) improve their internal surveillance systems, mitigate any potential risks, and establish suitable safeguards for their own advantage. Hence, RBI vide circular dated 16 November, 2023 bearing reference number RBI/2023-24/85DOR.STR.REC.57/21.06.001/2023-24 has issued the below mentioned directions to be followed by all Commercial Banks (including Small Finance Banks, Local Area Banks, and Regional Rural Banks) and Non-Banking Financial Companies (including HFCs):

  • The risk weights for consumer credit exposure of commercial banks shall be enhanced. This shall apply to both existing and new loans, such as personal loans. However, it does not include housing loans, education loans, vehicle loans, and loans secured by gold and gold jewelry. The risk weights shall be increased by 25 percentage points, bringing them to 125%.
  • The risk weight for the consumer credit exposure of NBFCs (both outstanding and new) categorised as retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery, and microfinance/SHG loans, shall be 125%.
  • The risk weights assigned to credit card receivables of scheduled commercial banks (SCBs) and non-banking financial companies (NBFCs) will be raised by 25 percentage points. This means that the risk weight for SCBs will be increased to 150%, while for NBFCs it will be increased to 125%.
  • Exposures of SCBs to NBFCs, excluding core investment companies, are assigned risk weights based on the ratings given by accredited external credit assessment institutions (ECAI). The risk weights on exposures of SCBs shall be increased by an additional 25 percentage points, in addition to the existing risk weight associated with the given external rating. This shall apply to all cases where the current risk weight assigned to NBFCs based on their external rating is below 100%. Loans to Housing Finance Companies (HFCs) and loans to Non-Banking Financial Companies (NBFCs) that meet the criteria for being classified as priority sector loans, as per the existing instructions, will be excluded for this purpose.
  • The regulatory entities (REs) shall review their existing sectoral exposure limits for consumer credit. Board-approved limits for different sub-segments within consumer credit shall also be established by REs.
  • Top-up loans provided by REs against movable assets that naturally decrease in value, like vehicles, will be considered as unsecured loans for credit evaluation, prudential limits, and exposure purposes.

These instructions shall come into effect immediately.