17-Nov-2023
2 mins read
In response to growing concerns over the soaring levels of unsecured loans, particularly in the realms of personal loans and credit cards, the Reserve Bank of India (RBI) has implemented stringent measures to curb potential risks in the lending portfolios of banks and non-banking financial companies (NBFCs). This move comes amidst a substantial growth in unsecured loans, outpacing the overall credit growth of 15% approximately, observed over the past year.
Increased Risk Weights: A Shield Against Abnormal Growth
To address these concerns, the RBI has decided to amplify the risk weights for both banks and NBFCs by 25 percentage points, reaching a total of 125% on retail loans. Risk weights signify the capital that financial institutions must set aside for each loan, serving as a buffer against potential losses. This elevated risk weight applies specifically to personal loans for banks and retail loans for NBFCs.
Exclusions and Inclusions: Defining the Scope
However, the new risk weight does not extend to certain loan categories, namely housing loans, education loans, vehicle loans, and gold-backed loans. This strategic exclusion is aimed at safeguarding essential and relatively secure lending domains.
Credit Cards Under Scrutiny: A Further Layer of Regulation
Recognizing the distinct risks associated with credit cards, the RBI has chosen to heighten risk weights on credit card exposures. For banks, this increase amounts to 25 percentage points, resulting in a 150% risk weight, while NBFCs will now bear a 125% risk weight. This additional layer of regulation aims to ensure responsible lending practices in the realm of credit cards.
Implementation Deadline and Prudential Limits
In a bid to enforce these measures promptly, the RBI has set a deadline for implementation. All regulated entities, including banks and NBFCs, are required to establish board-approved limits for unsecured consumer credit exposures. The implementation must be completed by February 29, 2024.
Attention to Detail: Treating Top-Up Loans
The RBI has also shed light on top-up loans extended against movable assets, particularly those subject to depreciation like vehicles. Such loans will be treated as unsecured loans for credit appraisal, prudential limits, and exposure purposes, reinforcing a meticulous approach to risk assessment.
Governor’s Cautionary Note
RBI Governor Shaktikanta Das, in a statement last month, emphasized the central bank’s vigilant monitoring of rapidly growing personal loan categories. This proactive approach reflects the RBI’s commitment to identifying and addressing potential stress in the financial system.
In conclusion, these measures underscore the RBI’s commitment to maintaining financial stability by addressing vulnerabilities arising from unbridled growth in unsecured lending, ensuring that lending practices align with prudent risk management principles.