MC Explains: What are the different risk weightage norms for bank loans

For other loans, the central bank has shared details in its Master Circular—Prudential Norms on Capital Adequacy—UCBs issued in 2014.

The Reserve Bank of India (RBI)on November 16 increased the risk weight on unsecured consumer loans for banks and non-banking financial companies (NBFCs). The new risk weight stands at 150 percent and 125 percent for banks and NBFCs, respectively.

But what are the risk weight norms for loans other than unsecured consumer and retail loans? Here’s an explainer.

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First, what is risk weight?

Banks and NBFCs sanction loans that are backed by collateral. But there is a risk that these loans may turn bad. Hence, banks need to typically hold or set aside a minimum amount of capital to face the eventuality of a default.
Here, risk-weighted assets (RWAs), in banking parlance, is a method used by lenders to calculate the capital adequacy ratio of a bank.

For other loans, the central bank has shared details in its Master Circular—Prudential Norms on Capital Adequacy—UCBs issued in 2014.

What is the risk weight for other loans?

For other loans, the central bank has shared details in its Master Circular—Prudential Norms on Capital Adequacy—UCBs issued in 2014.

Accordingly, banks’ advances to the real estate sector attract a risk weightage of between 50 percent and 100 percent. For example, for loans up to Rs 30 lakh with a loan to value (LTV) ratio of less than or equal to 75 percent, the risk weight is 50 percent. Loans above Rs 30 lakh with an LTV ratio of less than 75 percent invite a risk weight of 75 percent. Loans irrespective of the amount but with an LTV ratio of more than 75 percent invite a risk weight of 100 percent.

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LTV is a measure of risk that lenders arrive at using a preset formula before approving a loan.

Loans to commercial real estate and cooperative or group housing societies and housing boards and for any other purpose attract a risk weight of 100 percent each. For commercial real estate, the risk weight is 75 percent.

Advances to staff of banks, which are fully covered by superannuation benefits and mortgage of flat or house, attract a risk weight of 20 percent.
State government-guaranteed advances that have become non-performing assets attract a risk weight of 100 percent. And loans granted to public sector units (PSUs) attract a risk weight of 100 percent too.

And what is the latest revision?

The central bank raised the risk weight on consumer loans given by banks and NBFCs by 25 basis points. Earlier, banks attracted a risk weight of 125 percent and NBFCs 100 percent. After the RBI’s latest move, they will stand at 150 percent and 125 percent, respectively.

Impact of the new risk weight

Consumer loans include credit cards, and some personal and retail loans. A jump in the risk weight means lenders have to set aside higher capital against these loans.

Similarly, the revision is likely to compel banks and NBFCs to raise rates in certain segments and eventually lead to some pressure on their profits in the coming quarters.