After repeated warnings over unsecured credit this year, the Reserve Bank of India has swooped down on banks and NBFCs’ growing exposure to unsecured credit by raising risk weights on consumer credit to 125% from 100%, making such loans expensive.
“As per extant instructions applicable to commercial banks, consumer credit attracts a risk weight of 100%. 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%,” an RBI circular said.
The risk weights on consumer credit exposure have also been hiked to 125%.
“In terms of extant norms, NBFCs’ loan exposures generally attract a risk weight of 100%. On a review, it has been decided that the consumer credit exposure of NBFCs (outstanding as well as new) categorised as retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans, shall attract a risk weight of 125%,” it said.
Credit card receivables
Credit card receivables of scheduled commercial banks (SCBs) attract a risk weight of 125% while that of NBFCs attract a risk weight of 100%. “On a review, it has been decided to increase the risk weights on such exposures by 25 percentage points to 150% and 125% for SCBs and NBFCs respectively,” the circular said.
Bank credit to NBFCs
In terms of extant norms, exposures of SCBs to NBFCs, excluding core investment companies, are risk weighted as per the ratings assigned by accredited external credit assessment institutions (ECAI). “On a review, it has been decided to increase the risk weights on such exposures of SCBs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100%. For this purpose, loans to HFCs, and loans to NBFCs which are eligible for classification as priority sector in terms of the extant instructions shall be excluded,” it said.
Strengthening credit standards
The regulated entities (REs) shall 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 under consumer credit as may be considered necessary by the Boards as part of prudent risk management. In particular, limits shall be prescribed for all unsecured consumer credit exposures, it said, adding that the limits so fixed shall be strictly adhered to and monitored on an ongoing basis by the Risk Management Committee.
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.
The new directives except for credit cards come into effect immediately while for credit cards, the implementation date is no later than February 29, 2024.
