MC Explains: RBI tightens consumer loan norms for banks and NBFCs

Reserve Bank of India

The Reserve Bank of India (RBI) increased the risk weight on consumer loans advanced by commercial banks and non-banking finance companies by 25 percentage points. The consumer credit of banks and NBFCs attracts a risk weight of 100 percent, which has been revised to 125 percent, it said on November 16.

The central bank’s action follows an October 6 statement by governor Shaktikanta Das flagging high growth in certain types of consumer loans and advising banks and NBFCs to strengthen their internal surveillance mechanisms, address the build-up of risks, and institute suitable safeguards.

What does this mean for banks, NBFCs and borrowers? Here’s an explainer.

What is the latest action?

The central bank increased the risk weight on the consumer credit exposure of commercial banks and NBFCs by 25 percentage points. The risk weight of consumer credit of commercial banks and NBFCs has been revised to 125 percent from 100 percent. This means banks and NBFCs must set aside more capital while extending such loans.

Also read: SBI Cards, Bajaj Finance, HDFC Bank tumble up to 6% as RBI raises risk-weight on consumer loans

Which segments are included in consumer credit?

Consumer credit of banks – outstanding as well as new – includes personal loans. It excludes housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, according to the RBI circular.

On the NBFC front, the increase in risk weight has been extended to retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans.

Why was this action taken?

In his October monetary policy statement, RBI governor Shaktikanta Das had flagged the high growth in some types of consumer loans.

“Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress,” Das said. The RBI advised banks and NBFCs to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards.

MC Explains

What about credit card receivables?

The central bank increased the risk weight of credit card receivables of banks and NBFCs by 25 percentage points. The risk weight for bank credit card receivable has been increased to 150 percent from 125 percent earlier, and for NBFC, it stands at 125 percent from 100 percent previously.

Additionally, the RBI increased the risk weight on bank credit to NBFCs by 25 percentage points in all cases where the extant risk weight as per external rating of NBFCs is below 100 percent. In terms of extant norms, loans by banks to NBFCs, excluding core investment companies, are risk weighted as per the ratings assigned by accredited external credit assessment institutions.

What do experts say?

“On a prima facie basis, the banking system would have to evaluate capital requirement as per the new risk weights versus growth dynamics even while many banks, especially the large private sector banks, are well capitalised,” said Shibani Kurian, senior executive vice president and head of equity research at Kotak Mutual Fund.

According to Karthik Srinivasan, senior vice president and group head - financial sector ratings, ICRA, this action will increase lending rates.

“These higher lending rates by banks to non-banks could also spill over to corporate bonds by way of higher yields and widening of credit spreads for non-banks,” Srinivasan said.

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How will this impact consumers?

Experts said the decisions are expected to result in higher capital requirements for lenders and hence higher rates for borrowers. This will impact overall interest rates on such loans and the EMIs of consumers, experts added.