RBI tightens norms for consumer credit, raises risk weight on unsecured personal loans

The Reserve Bank of India (RBI) on Thursday tightened norms for consumer credit as it asked banks and NBFCs to assign a higher risk weight for unsecured personal loans, a move aimed at making the lenders more cautious on such advances.

Risk Weight on Unsecured Consumer Loans Raised

The risk weight on unsecured consumer loans has been raised by 25 percentage points. The new regulations, however, will not be applicable on housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, the Reserve Bank said in a circular.

Higher Risk Weight Means More Funds Set Aside

A higher risk weight means that lenders need to set aside more funds as a safety net for consumer loans, which could make the such credit more expensive. In simple words, a higher risk weight restricts banks lending capacity.

Move Comes After RBI Governor's Concerns

The move comes within a month of RBI Governor Shaktikanta Das flagging concerns over a high growth seen in consumer credit segment. In the circular, the RBI said, 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 per cent.

Credit Card Receivables Also Affected

A similar raise has been effected in case of credit card receivables, as per the circular on Regulatory measures towards consumer credit and bank credit to NBFCs non-banking financial companies. Now, the risk weights on credit card exposures have been increased by 25 percentage points to 150 per cent and 125 per cent for banks and NBFCs, respectively.

Bank Credit to NBFCs Also Impacted

On bank credit to NBFCs, the circular said the risk weights on such exposures of banks too has been increased 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 per cent.

RBI Asks Regulated Entities to Review Exposure Limits

The RBI also asked all the entities regulated by it to review their extant sectoral exposure limits for consumer credit and put in place, if not already there, Board approved limits in respect of various subsegments under consumer credit. In particular, limits shall be prescribed for all unsecured consumer credit exposures, the circular said.

Top-Up Loans Treated as Unsecured Loans

Further, all top-up loans extended by regulated entities against movable assets which are inherently depreciating in nature, such as vehicles, should be treated as unsecured loans for credit appraisal, prudential limits and exposure purposes.

RBI Governor's Earlier Warning

Recently, RBI Governor Shaktikanta Das flagged the high growth in certain components of consumer credit and advised banks and NBFCs to strengthen their internal surveillance mechanisms, address the build-up of risks and institute suitable safeguards, in their own interest. The high growth seen in consumer credit and increasing dependency of NBFCs on bank borrowings were also highlighted by the governor during the interactions with MD/CEOs of major banks and large NBFCs in July and August, respectively.

The RBI's move to tighten norms for consumer credit is aimed at making lenders more cautious on such advances and to prevent a build-up of risks in the financial system. The move is likely to make consumer credit more expensive and may also impact the growth of the consumer credit segment in the coming months.