New Delhi: The Reserve Bank of India (RBI) announced the tightening of norms governing unsecured personal loans for both banks and non-banking financial companies (NBFCs). Under the revised norms, the RBI has increased risk weights by 25 percentage points.
However, these measures will not be applicable to specific consumer loans like housing, education, and vehicles. Loans backed by gold and gold jewellery will also maintain their 100 percent risk weight, indicating no change in the regulatory stance for such secured loans.
The adjustment in risk weights essentially mandates banks to set aside a larger financial buffer for unsecured personal loans. In simpler terms, a higher risk weight constrains the lending capacity of banks, as it requires more financial reserves to cover potential losses.
Recently, RBI Governor Shaktikanta Das raised concerns about the rapid growth in specific areas of consumer credit while interacting with Managing Directors/Chief Executive Officers of major banks and NBFCs. He advised banks and NBFCs to enhance their internal surveillance systems, manage risks, and implement safeguards for their own benefit.
The RBI, in a circular, clarified, “On a review, it has been decided to increase the risk weights in respect of consumer credit exposure of commercial banks (outstanding as well as new), including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, by 25 percentage points to 125 percent.”
In addition to the adjustment in risk weights for consumer credit exposure, the central bank has also raised risk weights on credit receivables. Banks will now face a 25 percentage point increase, bringing the risk weight to 150 percent, while NBFCs will see their risk weights climb to 125 percent.
