The recent decision by the Reserve Bank of India (RBI) to increase the risk weight on consumer loans is expected to prompt banks and non-banking financial companies (NBFCs) to raise rates in certain segments, potentially impacting their profits in the coming quarters, according to experts.
The RBI's move, implemented on 16 November, raises the risk weight on consumer loans by 25 per cent for both banks and NBFCs. Previously, banks attracted a risk weight of 125 per cent and NBFCs attracted 100 per cent. With the new adjustment, the risk weight will now be 150 per cent for banks and 125 per cent for NBFCs.
Consumer loans encompass credit cards, certain personal loans and retail loans. The increase in risk weight means that lenders must set aside higher capital against these loans, potentially affecting their profitability.
Industry experts note that profits may experience marginal pressure as exposure to consumer loans by banks and NBFCs has been on the rise in recent quarters. The action by the RBI is expected to slow down the growth in certain segments, leading to a reduction in profit. The impact on profit also depends on how much of the additional capital requirement is passed on to borrowers.
To mitigate the increased capital requirement, banks and NBFCs are likely to work on increasing lending rates for certain consumer loans. This adjustment could result in higher costs for borrowers.
The RBI's decision follows concerns raised by RBI Governor Shaktikanta Das in the October monetary policy committee meeting about the high growth in certain components of consumer credit. The central bank emphasised the need for robust risk management and stronger underwriting standards.
In the circular issued on 16 November, the RBI specified that the increase in risk weight applies to consumer credit exposure of commercial banks, including personal loans, while excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery. For NBFCs, the risk weight is extended to retail loans, excluding certain categories such as housing loans, educational loans, vehicle loans and microfinance/self-help group (SHG) loans.
The RBI's cautionary measures aim to address the rapid growth in certain loan segments, making loans a bit costlier for borrowers and ensuring a more measured lending approach.
In recent quarters, the banking sector has seen a surge in exposure to personal loans, with top banks increasing their unsecured loan portfolios. The RBI's move is seen as a preventive measure to curb aggressive lending practices and manage potential risks in the consumer credit space.