RBI increases risk weights on consumer credit exposure of banks, NBFCs to 125% from 100%

A day after barring Bajaj Finance Ltd. from sanctioning and disbursing loans under its two lending products ‘eCOM’ and ‘Insta EMI Card’ with immediate effect, the Reserve Bank of India (RBI), which has been red flagging about the rising unsecured loan books of certain Regulated Entities (REs), on Thursday issued regulatory measures towards consumer credit and bank credit to Non Banking Financial Companies (NBFCs.) increasing risk weights by an additional 25 percentage points to 125%.

A day after barring Bajaj Finance Ltd. from sanctioning and disbursing loans under its two lending products ‘eCOM’ and ‘Insta EMI Card’ with immediate effect, the Reserve Bank of India (RBI), which has been red flagging about the rising unsecured loan books of certain Regulated Entities (REs), on Thursday issued regulatory measures towards consumer credit and bank credit to Non Banking Financial Companies (NBFCs.) increasing risk weights by an additional 25 percentage points to 125%.

“Please refer to Governor’s Statement dated October 6, 2023 flagging 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 RBI said in a circular.

“The high growth seen in consumer credit and increasing dependency of NBFCs on bank borrowings were also highlighted by Governor in the interactions with MD/CEOs of major banks and large NBFCs in July and August 2023, respectively. In this context, it has been decided to effect the following measures,” it added.

Currently, the consumer credit exposure of commercial banks attracts a risk weight of 100%.

“On a review, 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%” the RBI said in a circular.

In the case of the consumer credit exposure of NBFCs, loan exposures generally attract a risk weight of 100% and on a review, it has been decided that the consumer credit exposure of NBFCs (outstanding as well as new) categorised as retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans, shall attract a risk weight of 125%, the RBI circular said.

As per extant instructions, credit card receivables of scheduled commercial banks (SCBs) attract a risk weight of 125% while that of NBFCs attract a risk weight of 100%. On a review, it has been decided to increase the risk weights on such exposures by 25 percentage points to 150% and 125% for SCBs and NBFCs respectively.