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RBI raises risk weights on consumer loans to bolster financial stability

Banking and NBFC stocks decline on regulator's move to check unfettered growth of consumer loans

RBI raises risk weights on consumer loans to bolster financial stability
[Source photo: Chetan Jha/Press Insider]

Looking to curb risks in consumer lending and apply brakes on the rapid growth of such loans, the Reserve Bank of India (RBI) on Thursday raised the risk weights on consumption loans, credit card exposures, and loans to non-bank finance companies (NBFCs) by 25 percentage points each.

RBI said the consumer credit exposure for banks and NBFCs, excluding housing, education, vehicle, and gold-backed loans, will attract a risk-weight of 125%, up from 100% earlier. The risk-weight for credit card loans by banks has been raised to 150% from 125% earlier. Credit card loans by NBFCs will see a risk-weight of 125%, up from 100%.

A higher risk weight will require banks and NBFCs to set aside a higher amount as loan provisioning, forcing them to pass on the costs to consumers by raising the interest rates on such products.

Provision is the amount that banks set aside to cover losses from a loan account. When an account turns into a non-performing asset, the provisions required will equal the full loan amount.

RBI said in a statement that governor Shaktikanta Das had cautioned against the rapid expansion in consumer credit and the growing dependence of NBFCs on bank loans in his meetings with leaders of major banks and large NBFCs in July and August.

Analysts had earlier cautioned that rising unsecured credit risk could affect lenders’ capital adequacy ratios (CARs), which are crucial indicators of a bank’s ability to absorb losses and maintain solvency in tough financial situations.

Top banking and NBFC stocks declined on Friday in response to the RBI’s move to tighten norms for personal loans and credit cards to check their unbridled growth.

Morgan Stanley warned that the Reserve Bank’s action would push up borrowing and lending rates.

“The RBI measure will naturally slow down the growth in specific banking segments, subsequently diminishing profits. The extent of profit also hinges on the degree to which banks transfer the cost of this heightened capital requirement to borrowers,” R. Gandhi, former deputy governor of RBI, said.

RBI data showed bank exposure to personal loans rose to ₹48.26 trillion in September, up from ₹37.02 trillion in the year-ago period.

In the July-September quarter, leading Indian banks, including HDFC Bank, ICICI Bank, and Kotak Mahindra Bank, saw unsecured loan portfolios expand by up to 30%.

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