Introduction

In a move to address the high growth in unsecured lending, the Reserve Bank of India (RBI) has recently announced a tightening of norms for consumer loans. The central bank has instructed commercial banks and non-banking financial companies (NBFCs) to increase the risk weights for consumer credit exposure, aiming to ensure robust risk management and stronger underwriting standards. This article will delve into the details of the RBI's new regulations and their implications for the lending industry.

The Need for Stricter Regulations

Consumer credit, particularly in the form of unsecured loans, has witnessed rapid growth in recent times. The RBI has expressed concerns about the disproportionate rise in unsecured lending compared to overall credit growth. To address these concerns, the RBI Governor, Shaktikanta Das, has emphasized the importance of strengthening internal surveillance mechanisms and instituting suitable safeguards for banks and NBFCs.

Risk Weight and Capital Adequacy

Risk weight refers to the amount of capital that lenders must set aside to cover credit risk from specific loan segments. Higher risk weightage necessitates a larger capital allocation to mitigate potential risks. The RBI has decided to raise the risk weights for consumer credit exposure by 25 per cent, from 100 per cent to 125 per cent, for commercial banks. This measure aims to enhance the capital adequacy of banks and NBFCs in the face of increasing credit risks.

Exclusions from Increased Risk Weights

The hike in risk weights applies to personal loans, excluding housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery. These excluded loan categories will continue to maintain their previous risk weightage. The RBI's focus on unsecured lending and the consequent risk weight adjustments aim to curb potential vulnerabilities in the consumer credit market.