After repeated warnings about unsecured credit this year, the Reserve Bank of India pounced on the growing exposure of banks and NBFCs to unsecured credit by raising consumer credit risk weights to 125% from 100%, making such loans expensive.
“According to existing instructions applicable to commercial banks, consumer credit attracts a risk weight of 100%. In a review, it was decided to increase the risk weights in relation to consumer credit exposure of commercial banks (outstanding as well as new), including personal loans, but excluding housing loans, education loans, vehicles and loans secured by gold and gold jewellery, by 25 percentage points up to 125%,” an RBI circular said.
The risk weights on consumer credit exposure were also raised to 125%.
“As per existing norms, the loan exposures of NBFCs generally attract a risk weight of 100%. In a review, it has been decided that the consumer credit exposure of NBFCs (outstanding as well as new) is categorized as retail loans, excluding housing loans. , education loans, vehicle loans , loans against gold jewelery and microfinance/SHG loans, will attract a risk weight of 125%,” it said.
Credit cards receivable
Credit card takers of scheduled commercial banks (SCBs) attract a risk weight of 125% while that of NBFCs attract a risk weight of 100%. “On 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,” the circular said.
Bank credit to NBFCs
As per extant norms, exposures of SCBs to NBFCs, excluding core investment companies, are risk weighted according to the ratings assigned by accredited external credit rating institutions (ECAI). “In review, it has been decided to increase the risk weights on such exposures of SCBs by 25 percentage points (above the risk weight associated with the given external rating) in all cases where the existing risk weight as per external rating of NBFCs is below 100%. For this purpose, loans to HFCs, and loans to NBFCs, which are eligible for classification as a priority sector under the existing instructions, will be excluded,” it said.
Strengthening of credit standards
The regulated entities (REs) will review their existing sectoral exposure limits for consumer credit and set, if not already there, Board approved limits in respect of various sub-segments under consumer credit as may be deemed necessary by the Boards as part of prudent risk management. In particular, limits will be prescribed for all unsecured consumer credit exposures, it said, adding that the limits thus set must be strictly followed and monitored continuously by the Risk Management Committee.
All collateral loans extended by REs against movable assets that are inherently depreciating in nature, such as vehicles, must be treated as unsecured loans for credit assessment, prudential limits and exposure purposes.
The new directives except for credit cards take effect immediately, while for credit cards, the implementation date is no later than February 29, 2024.