RBI Raises Risk Weights on Personal Loans, NBFC Loans, and Credit Cards

Strategic Insights -

The Reserve Bank of India (RBI) has increased risk weights on personal loans, loans to non-banking finance companies (NBFCs), and credit cards, a move expected to lead to higher lending rates and slow down growth in these segments. The decision excludes home mortgages, loans for education and cars, and debt backed by gold. The RBI has hiked risk weight for bank lending towards consumer credit, including personal loans, from 100% to 125%; NBFCs' consumer loans from 100% to 125%; credit card receivables risk weight from 125% to 150%; and for NBFCs' credit card receivable, from 100% to 125%. These changes will be implemented by lenders on an immediate basis.

Key Takeaways:

  • The RBI has raised risk weights on personal loans, loans to NBFCs, and credit cards to 125%, 125%, and 150%, respectively.
  • The decision excludes home mortgages, loans for education and cars, and debt backed by gold.
  • Lenders will have to review their extant sectoral exposure limits for consumer credit and put in place Board-approved limits in respect of various sub-segments under consumer credit.
  • Top-up loans extended by lenders against movable assets, such as vehicles, will be treated as unsecured loans for credit appraisal, prudential limits, and exposure purposes.
  • The RBI has instructed lenders to implement these changes immediately.
  • Banks may face a 50-bps to 100-bps impact on CRAR (Capital to Risk-Weighted Assets Ratio) due to increased risk weights.
  • The moderation in capital cushion will depend on the exposure each bank has to consumer loans and NBFC segments.
  • Lending rates for NBFCs will increase due to the higher risk weight.
  • The RBI's decision signals caution and dictates banks to hold a cushion against such unsecured book, as a matter of precaution.

Statistics:

  • 100%: Current risk weight for bank lending towards consumer credit, including personal loans
  • 125%: Increased risk weight for bank lending towards consumer credit, including personal loans
  • 100%: Current risk weight for NBFCs' consumer loans
  • 125%: Increased risk weight for NBFCs' consumer loans
  • 125%: Current risk weight for credit card receivables
  • 150%: Increased risk weight for credit card receivables
  • 11.5%: Regulatory requirement for CRAR
  • 50 bps to 100 bps: Estimated impact on CRAR due to increased risk weights
  • 70 bps: Expected impact on private bank's CRAR due to increased credit card exposure

Sources:

  • RBI Circular (no date provided)
  • Anil Gupta, senior VP and Co Group head of financial sector ratings at ICRA (no date provided)
  • Suresh Khatanhar, deputy MD at IDBI Bank (no date provided)
  • An official at a large public sector bank (no date provided)
  • A senior official at a private bank (no date provided)