Consumer Loans Become Costlier For Lenders As RBI Raises Risk Weights

The Reserve Bank of India raised risk weights on consumer credit extended by banks and non-bank finance companies, effectively making such lending costlier for lenders.


Consumer loans will attract a credit risk weight of 125%, compared to 100% earlier, the regulator said in a circular issued on its website on Thursday. Consumer credit in this context will include personal loans but exclude home loans, education loans, vehicle loans and gold loans.

In the case of NBFCs, too, consumer loans will attract a risk weight of 125%. These loans will include retail loans but exclude housing, educational, vehicle, and microfinance loans, along with lending against gold jewellery.

Credit card receivables for banks will attract a risk weight of 150%, while those by NBFCs will attract a risk weight of 125%, compared to 125% and 100% previously.

A higher risk weight implies a higher capital charge against such loans, making them more expensive for lenders to extend.

RBI has tightened rules for consumer lending amid concerns about rising risk. On Oct. 6, while delivering the monetary policy statement, RBI Governor Shaktikanta Das flagged the high growth in certain components of consumer credit, advising banks and non-banking financial companies to strengthen their internal surveillance mechanisms and address the buildup of risks.

The RBI has also raised the risk weights for bank loans to NBFCs by 25 percentage points in all cases where the present risk weight is lower than 100%. For this purpose, loans to housing finance companies and NBFCs, which are eligible for classification as priority sectors, shall be excluded.

The RBI also called for renewed risk measures at all lenders, asking them to introduce sectoral exposure limits for consumer credit and board-approved limits for various sub-segments, especially unsecured consumer loans.

“The limits so fixed shall be strictly adhered to and monitored on an ongoing basis by the Risk Management Committee,” the RBI circular said.

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

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