A day after barring Bajaj Finance Ltd. from sanctioning and disbursing loans under its two lending products ‘eCOM’ and ‘Insta EMI Card’ with immediate effect, the Reserve Bank of India (RBI), which has been red flagging about the rising unsecured loan books of certain Regulated Entities (REs), on Thursday issued regulatory measures towards consumer credit and bank credit to Non Banking Financial Companies (NBFCs.) increasing risk weights by an additional 25 percentage points to 125%.
“Please refer to Governor’s Statement dated October 6, 2023 flagging the high growth in certain components of consumer credit and advising banks and NBFCs to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards, in their own interest,” the RBI said in a circular.
“The high growth seen in consumer credit and increasing dependency of NBFCs on bank borrowings were also highlighted by Governor in the interactions with MD/CEOs of major banks and large NBFCs in July and August 2023, respectively. In this context, it has been decided to effect the following measures,” it added.
Currently, the consumer credit exposure of commercial banks attracts a risk weight of 100%.
“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%” the RBI said in a circular.
In the case of the consumer credit exposure of NBFCs, loan exposures generally attract a risk weight of 100% and on a review, it has been decided that the consumer credit exposure of NBFCs (outstanding as well as new) categorised as retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans, shall attract a risk weight of 125%, the RBI circular said.
As per extant instructions, credit card receivables of scheduled commercial banks (SCBs) attract a risk weight of 125% while that of NBFCs attract a risk weight of 100%. On a review, it has been decided to increase the risk weights on such exposures by 25 percentage points to 150% and 125% for SCBs and NBFCs respectively.
In terms of extant norms, exposures of SCBs to NBFCs, excluding core investment companies, are risk weighted as per the ratings assigned by accredited external credit assessment institutions (ECAI).
On a review, it has been decided to increase the risk weights on such exposures of SCBs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100%.
For this purpose, loans to HFCs, and loans to NBFCs which are eligible for classification as priority sector in terms of the extant instructions will be excluded.
For strengthening credit standards the REs have been asked to review their extant sectoral exposure limits for consumer credit and put in place, if not already there, Board approved limits in respect of various sub-segments under consumer credit as may be considered necessary by the Boards as part of prudent risk management.
In particular, limits must be prescribed for all unsecured consumer credit exposures. The limits so fixed has to be strictly adhered to and monitored on an ongoing basis by the Risk Management Committee, the RBI said.
“All top-up loans extended by REs against movable assets which are inherently depreciating in nature, such as vehicles, shall be treated as unsecured loans for credit appraisal, prudential limits and exposure purposes,” the circular said.
The above instructions, other than the one for strengthening credit standards for board-approved limits has come into force with immediate effect.
All REs have been asked to comply with the provisions of strengthening credit standards for board-approved limits at the earliest, but in any case will have to implement them by no later than February 29, 2024.
Commenting on this Karthik Srinivasan, Senior Vice President & Group Head, Financial Sector Ratings, ICRA Ltd. said, “The increase in risk weights for consumer loans is in line with expectations, though an increase in risk weight for lending by banks to non-banks was unexpected.“
“These announcements are expected to result in higher capital requirements for the lenders and hence an increase in lending rate for the borrowers. These higher lending rates by banks to non-banks could also spill over to corporate bonds by way of higher yields and widening of credit spreads for non-banks,” he added.
