The Reserve Bank of India (RBI) made a significant announcement last week, signaling a revision in the risk weight assigned to consumer credit exposure for commercial banks and non-banking finance companies (NBFCs). This adjustment, elevating the risk weight from 100 percent to 125 percent, reflects the central bank’s proactive response to concerns articulated by RBI Governor Shaktikanta Das during the October monetary policy meeting. The key apprehension was centered around the swift expansion observed in specific components of consumer credit. In light of this, the RBI issued guidance to banks and NBFCs, urging them to fortify their internal surveillance mechanisms, address potential risks, and implement appropriate safeguards.
The revised risk weight applies to consumer credit, encompassing personal loans, for both commercial banks and NBFCs. Previously pegged at 100 percent, this weight has now been heightened to 125 percent. Notably, certain categories of loans are exempted from this adjustment, including housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery. For NBFCs, the increased risk weight is specifically relevant to retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery, and microfinance/self-help group (SHG) loans. Furthermore, credit card receivables for scheduled commercial banks and NBFCs are now subject to a 25 percent increase in risk weight.
Prior to these revisions, scheduled commercial banks (SCBs) carried a risk weight of 125 percent, while NBFCs had a risk weight of 100 percent. Following the adjustment, the risk weight for SCBs has been elevated to 150 percent, whereas for NBFCs, it remains at 125 percent. In an additional move, the RBI augmented the risk weight on exposures of SCBs to NBFCs by an extra 25 percent. This adjustment is applicable when the existing risk weight, determined by external ratings of NBFCs, falls below 100 percent. The circular explicitly excludes loans to Housing Finance Companies (HFCs) and loans to NBFCs eligible for classification as a priority sector according to existing instructions from this calculation.
In response to these regulatory changes, the RBI has directed Registered Entities to conduct a comprehensive review of their sectoral exposure limits for consumer credit. If not already in place, these entities are mandated to establish board-approved limits for various subsegments within consumer credit. This directive is considered a pivotal element of prudent risk management practices, aligning with the RBI’s objective of ensuring that banks and NBFCs actively mitigate potential risks associated with consumer credit, thereby fostering a resilient and stable financial environment.