The Reserve Bank of India (RBI) on Thursday tightened its guidelines for unsecured personal loans for banks and non-banking financial companies (NBFCs). According to a release by the central bank, the revised norms wherein risk weights have been increased by 25 percentage points will not be applicable on certain consumer loans, including housing, education, and vehicle loans.
The new norms, however, will not be applicable on loans secured by gold and gold jewellery, as per the RBI release. These loans will continue to attract 100 per cent risk weight. Higher risk weight implies that banks have to keep aside more money as buffer when it comes to unsecured personal loans. In simple words, a higher risk weight restricts banks' lending capacity.
Shaktikanta Das, governor of RBI, earlier had flagged the high growth in certain components of consumer credit and advised banks and NBFCs to strengthen their internal surveillance mechanisms, address the build-up of risks and institute suitable safeguards, in their own interest. The high growth seen in consumer credit and increasing dependency of NBFCs on bank borrowings were also highlighted by the governor in the interactions with MD/CEOs of major banks and large NBFCs in July and August 2023, respectively.
Following the RBI guideline, shares of banks and NBFCs plunged up to 7 per cent in morning trade on Friday because of heavy selling pressure.
The high growth seen in consumer credit and increasing dependency of NBFCs on bank borrowings were also highlighted by the governor during the interactions with MD/CEOs of major banks and large NBFCs in July and August, respectively. "On a review, it has been decided to increase the risk weights in respect of consumer credit exposure of commercial banks (outstanding as well as new), including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, by 25 percentage points to 125 per cent," the RBI said in a circular.
The central bank has also increased the risk weights on credit receivables by 25 percentage points to 150 per cent and 125 per cent for banks and NBFCs, respectively.