RBI Ups Consumer Loans’ Risk Weights

GS Paper III Indian Economy

Context:

Recently, the Reserve Bank of India raised risk weights on consumer loans, credit card exposures, and loans to non-bank financiers by 25 basis points.

Concerns of High Growth: RBI’s response to abnormally high growth in unsecured lending portfolios of banks and NBFCs.
Sharp Rise: Unsecured loans, especially personal loans and credit cards, surpassed overall bank credit growth by approximately 15% in the past year.

consumer loans

The RBI increased the risk weights for banks and NBFCs by 25 percentage points to 125% on retail loans.
- Risk Weights: The capital that banks need to set aside for every loan.
Applicable Loans
- Banks: New risk weight applies to personal loans.
- NBFCs: Applies to retail loans, excluding housing, education, vehicle loans, and loans secured by gold and gold jewellery.
Specific Changes
- Credit Card Exposures: Risk weights increased by 25 percentage points to 150% for banks and 125% for NBFCs.
Additional Guidelines
- Board-Approved Limits: Requirement for all banks and NBFCs to establish board-approved limits for unsecured consumer credit exposures.
- Treatment of Top-Up Loans: Top-up loans against depreciating movable assets (e.g., vehicles) are considered as unsecured loans for credit appraisal and exposure purposes.