HomeLegal AdviceRBI Ups Consumer Loans’ Risk Weights

RBI Ups Consumer Loans’ Risk Weights

In an effort to curb the surging credit binge, the Reserve Bank of India (RBI) has raised risk weights on consumption loans, credit card exposures, and loans to non-bank financiers by 25 percentage points each. This move aims to slow down the rapid growth in these sectors by requiring higher consumption of capital. However, it comes with potential consequences for borrowers who may face increased costs, as lenders compensate for the heightened capital requirements.

The increase in risk weights particularly impacts personal loans, credit cards, and loans to non-banking financial companies (NBFCs). This adjustment, effective for both existing and new loans, may prompt lenders to either shift towards more secured loans or reduce the volume of unsecured loans. Interest rates on personal loans, for instance, could see an uptick.

Leading financial institutions, including HDFC Bank and SBI Cards & Payment Services, are expected to be significantly affected, leading to a contraction in common equity tier one (CET 1) ratios.

The RBI’s decision is a response to the exponential growth in consumer credit and the escalating reliance of non-banking financial companies on bank loans. The regulator has expressed concerns about the surge in unsecured loans, such as credit cards, which have outpaced overall credit growth. This move reflects the RBI’s commitment to maintaining financial stability and preventing unchecked lending practices.

The directive also calls for a review of sectoral exposure limits for consumer credit by banks and non-bank financiers. In the absence of internal limits, lenders are urged to establish board-approved limits on various sub-segments under consumer credit, with a specific focus on unsecured consumer credit exposures.

While this adjustment was anticipated for consumer loans, the unexpected increase in risk weight for lending by banks to non-banks has raised concerns about potential spillover effects on corporate bonds, impacting yields and credit spreads for non-banks.

The financial sector, including banks and NBFCs, has been proactively taking measures to mitigate risks associated with personal loans, particularly those below ₹50,000, given their unsecured nature. Institutions like Aditya Birla Finance are tightening underwriting processes and monitoring portfolios closely, while fintech non-banks like Mcapital are temporarily halting fresh unsecured loans.

As the RBI aims to strike a balance between sustaining credit growth and ensuring financial stability, the impact of these risk weight adjustments will unfold in the coming months, influencing lending strategies and customer borrowing costs across the financial landscape.

Monika Shanmugam