RBI strengthens norms for consumer loans

The Reserve Bank of India (RBI) has taken a decisive step to tighten norms governing unsecured personal loans for both banks and non-banking financial companies (NBFCs). This move comes as a response to the escalating risk associated with consumer credit exposure, particularly in the realm of personal loans.

According to a circular issued by the RBI, the primary motivation behind this decision is the elevation of risk weights for consumer credit exposure by commercial banks. Under the revised norms, risk weights have been augmented by 25 percentage points, reaching 150% for banks and 125% for NBFCs. Additionally, the risk weight for credit card receivables of scheduled commercial banks has been increased from 125% to 150%, and NBFCs now face a 125% risk weight.

However, it’s noteworthy that certain consumer loans related to housing, education, and vehicle financing have been exempted from these increased risk weights. Moreover, loans secured by gold and gold jewelry will maintain a risk weight of 100%.

The impact of these adjustments is significant. Higher risk weights necessitate banks to allocate more capital as a buffer specifically for unsecured personal loans. In simpler terms, the increased risk weightage implies that lenders must set aside more capital, thereby restricting the lending capacity of banks.

The timing of these measures aligns with recent advisories from RBI Governor Shaktikanta Das, who highlighted the substantial growth observed in specific consumer credit segments. Governor Das urged banks and NBFCs to fortify their internal surveillance mechanisms, address the mounting risks, and implement suitable safeguards. The central bank’s move is a proactive step in line with Governor Das’s call to mitigate risk accumulation and instate protective measures in consumer credit operations, ultimately safeguarding the interests of banks and NBFCs.

The surge in unsecured loans has been a notable trend, with credit growth in this category reaching an impressive 23%, outpacing the average credit growth of 12-14% observed in the country. This growth is attributed to both banks and NBFCs, with the latter leveraging fintech collaborations. Fintechs reportedly hold nearly half the market share by value, contributing to the unprecedented expansion in unsecured loan portfolios.

RBI’s decision to tighten norms reflects a proactive approach to address the evolving landscape of consumer credit and ensure the stability and resilience of the financial sector.