RBI Bids For 25% Increase In Consumer Credit Risk Weight For Certain Loans

Reserve Bank of India(RBI) has flagged the high growth in certain components of consumer credit and has advised banks and non-banking financial companies (NBFCs) to strengthen their internal surveillance mechanisms, address the build-up of risks and institute suitable safeguards.

On a review, it has been decided to increase the risk weights with respect to consumer credit exposure of commercial banks (outstanding as well as new), including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, by 25 per cent to 125 per cent which was 100 per cent earlier.

Also, for the Non-banking Financial Companies (NBFCs) it has been decided that the consumer credit exposure categorised as retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans, shall attract a risk weight of 125 per cent.

In terms of extant norms, exposures of Scheduled Commercial Banks(SCB) to NBFCs, excluding core investment companies(CIC), are risk-weighted as per the ratings assigned by accredited external credit assessment institutions (ECAI).

On a review, it has been decided to increase the risk weights on such exposures of SCBs by 25 per cent(over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per the external rating of NBFCs is below 100 per cent. For this purpose, loans to Housing Financial Companies(HFCs) and loans to NBFCs which are eligible for classification as priority sector in terms of the extant instructions shall be excluded.

Further strengthening the credit standards, the RBI has said that the Regulated Entities (RE) shall review their extant sectoral exposure limits for consumer credit and put in place, if not already there, board-approved limits in respect of various sub-segments under consumer credit as may be considered necessary by the Boards as part of prudent risk management.

In particular, limits shall be prescribed for all unsecured consumer credit exposures. The limits so fixed shall be strictly adhered to and monitored on an ongoing basis by the Risk Management Committee.

RBI has also directed that all top-up loans extended by REs against movable assets which are inherently depreciating in nature, such as vehicles, shall be treated as unsecured loans for credit appraisal, prudential limits and exposure purposes.