RBI increases risk weight by 25% on consumer credit exposure of banks, NBFCs

Reserve Bank of India

The Reserve Bank of India (RBI) on November 16 said that it has increased risk weight by 25 percent on consumer credit exposure of commercial banks and non-banking finance companies (NBFCs).

Consumer credit of commercial banks and NBFCs attracts a risk weight of 100 percent, which now has been revised to 125 percent.

This was done after RBI Governor Shaktikanta Das in the October monetary policy flagged the high growth in certain components of consumer credit and advising banks and NBFCs to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards, in their own interest.

The increase in the risk weights of consumer credit exposure of commercial banks (outstanding as well as new), includes personal loans, but excludes housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, circular said.

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

The central bank also increase the risk weight credit card receivables of schedule commercial banks and NBFCs by 25 percent.

Earlier, scheduled commercial banks (SCBs) attract a risk weight of 125 percent and NBFCs attract a risk weight of 100 percent. After revision, it will stand at to 150 percent and 125 percent for SCBs and NBFCs, respectively.

Further, it increase the risk weight on the exposures of SCBs to NBFCs 25 percent.

The central bank said that after the 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 percent.

"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," circular said.

The central bank said Registered Entities 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 subsegments under consumer credit as may be considered necessary by the Boards as part of prudent risk management.