In a major development for the NBFC sector, the Reserve Bank of India (RBI) has directed to increase the risk weight on loan exposure to 125%. Previously, it attracted a risk weight of 100%.
In a review, it was decided that the consumer credit exposure of NBFCs – outstanding as well as new – categorized as retail loans, excluding housing loans, education loans, vehicle loans, loans against gold jewelery and microfinance/SHG loans, will attract. risk weight of 125%, the central bank said in a circular published on Thursday.
Also, the apex bank has increased the risk weightage on the credit card receivables of NBFCs to 125% from earlier 100%. Meanwhile for the SCBs to 150% from earlier 125%.
In its circular RBI referred to Governor’s statement on October 6, where he flagged the high growth of some components of consumer credit and advised banks and NBFCs to strengthen their internal surveillance mechanisms, address the accumulation of risks, if any, and establish appropriate safeguards. , in his own interest.
It is worth emphasizing that high growth in consumer credit and increasing dependence of NBFCs on bank loans was also highlighted by Governor in the interactions with MD/CEOs of major banks and large NBFCs in July and August 2023.
With this move by RBI, loans from NBFCs are likely to be costlier for borrowers. An increase in the risk weights for lenders directly affects their capital adequacy ratio, as they have to set aside higher capital against such loans eventually making the loans more expensive for borrowers.
Risk weights of bank credit to NBFCs have increased
Another key announcement that the RBI has made in terms of credit exposure is to increase the risk weights on exposures of SCBs to NBFCs by 25% points, above the risk weight associated with the given external rating, in all cases where the existing risk weightage in terms of external rating of NBFCs is below 100%.
It should be noted that SCBs’ exposures to NBFCs, excluding core investment companies, are risk weighted as per the ratings assigned by accredited external credit rating institutions (ECAIs).
RBI highlighted that the REs should review their existing sectoral exposure limits for consumer credit and put, if not already there, Board approved limits in respect of various sub-segments under consumer credit as may be considered necessary by the Boards as part of prudent risk management.
Limits must be prescribed for all unsecured consumer credit exposures. 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.