Winning Bizness Desk
Mumbai. The Reserve Bank of India (RBI) has tightened the rules for banks and non-banking financial companies (NBFCs) by increasing the credit risk weighting on consumer loans of banks and NBFCs by 25%. This includes personal loan, but does not include housing loan, education loan, vehicle loan, gold loan. Risk weight is the capital that banks have to set aside to cover loan defaults. After this decision, banks will have to make more provisioning. That is, for a loan for which earlier Rs 100 had to be kept as security, now Rs 125 will have to be kept as security. Keeping the money safe means investing it in government bonds. As the consequence of this step, banks will not have much money to give loans, which means they will not be able to give loans to many consumers freely. There may also be an increase in interest rates on these loans. Its negative impact may be seen on banking and NBFCs shares, whereas in case of high loan default, it will have less impact on bank depositors.
RBI has increased the consumer credit exposure risk weight of commercial banks by 25 percentage points to 125%. This is for both new and outstanding loans. This includes personal loan, but excludes housing loan, education loan, auto loan and gold loan. RBI has also increased the consumer credit exposure risk weight of NBFCs by 25 percentage points to 125%. This is for both new and outstanding loans. This includes retail loans, but excludes housing loans, education loans, auto loans and gold loans. Credit card receivables of Scheduled Commercial Banks (SCBs) carry a risk weight of 125% while NBFCs carry a risk weight of 100%. After review, RBI has decided to increase the risk weight by 25% to 150% and 125% respectively.
Increase in unsecured loans
Indian banks have seen a sharp increase in unsecured loans that include instruments like personal loans and credit cards. Due to this, overall bank credit growth last year was 15%. This increase has attracted the attention of RBI. Even before Covid, the risk weightage was only 125%.
