MUMBAI: The Reserve Bank on Thursday tightened norms for unsecured personal loans for banks and non-banking finance companies.
The revised norms, in which risk weights have been increased by 25 percentage points, will not be applicable on certain consumer loans, including housing, education and vehicle loans.
Moreover, the norms will not be applicable on loans secured by gold and gold jewellery. These loans will continue to attract a 100 percent risk weight.
A higher risk weight implies that banks have to set aside more money as a buffer when it comes to unsecured personal loans.
In simple words, a higher risk weight limits the lending capacity of banks.
Recently, RBI governor Shaktikanta Das flagged the high growth of certain components of consumer credit and advised banks and Non-Banking Financial Companies (NBFCs) to strengthen their internal surveillance mechanisms, address the accumulation of risks and institute appropriate safeguards, in their own interest.
The high growth seen in consumer credit and increasing dependence of NBFCs on bank loans was also highlighted by the governor during the interactions with MD / CEO of major banks and large NBFCs in July and August respectively.
“During a review, it was decided to increase the risk weights related 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 jewelry, at 25 percentage points to 125 percent,” the RBI said in a circular.
The central bank also increased the risk weights on credit receivables by 25 percentage points to 150 percent and 125 percent for banks and NBFCs, respectively.