| | NOVEMBER 20238The Reserve Bank of India has mandated a 25 percent increase in risk weights for commercial banks regarding consumer credit exposure. This decision comes shortly after the RBI raised concerns about the rapid growth in specific consumer credit sectors and urged NBFCs and banks to reinforce internal monitoring systems. The increase applies to personal loans but excludes housing, education and vehicle loans, as well as loans backed by gold or gold jewelry. Risk weights indicate the capital lenders must reserve to mitigate credit risk from a specific loan category. Higher risk-weights necessitate lenders to set aside more capital for these loans.According to the RBI, the growth rate in unsecured loans stands at approximately 23 percent, surpassing the country's average credit growth of 12-14 percent. This growth has even exceeded the overall bank credit growth of around 15 percent observed in the past year. RBI Governor Shaktikanta Das, on October 6, 2023, emphasized the importance for banks and NBFCs to reinforce their internal monitoring mechanisms, address potential risk accumulations, and establish appropriate safeguards. He stressed the critical need for robust risk management and stronger underwriting standards.The RBI's recent decision dictates that consumer credit exposure for NBFCs categorized as retail loans will now carry a risk weight of 125 percent, previously at 100 percent. This adjustment excludes housing, educational, vehicle loans, loans secured by gold and microfinance/SHG loans. Furthermore, credit card receivables of scheduled commercial banks, initially attracting a risk weight of 125 percent, have been increased to 150 percent. Similarly, NBFCs' risk weights have been raised by 25 percent to 125 percent.Regulated entities (REs) have been instructed to reassess their existing sectoral exposure limits for consumer credit and establish board-approved limits for various subsegments within consumer credit, as deemed necessary. REs are required to set limits for all unsecured consumer credit exposure. Moreover, REs are directed to consider all top-up loans granted against depreciating movable assets as unsecured loans for credit evaluation. Governor Das previously mentioned the RBI's vigilant monitoring of rapidly growing personal loan categories, particularly focusing on early signs of stress. RBI TIGHTENS NORMS FOR CONSUMER LOANS AMID RISE IN UNSECURED LENDINGIN FOCUS
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