In a recent move, the Reserve Bank of India (RBI) announced a 25% increase in risk weight on consumer credit exposure for both commercial banks and non-banking finance companies (NBFCs). This decision comes in response to the high growth observed in certain components of consumer credit, as highlighted by RBI Governor Shaktikanta Das during the October monetary policy review.

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Consumer credit, which includes personal loans but excludes housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery, previously attracted a risk weight of 100 percent. With the revision, this risk weight has been increased to 125 percent.

For NBFCs, the increased risk weight extends to retail loans, excluding specific categories such as housing loans, educational loans, vehicle loans, loans against gold jewellery, and microfinance/SHG loans. Additionally, the risk weight on credit card receivables of scheduled commercial banks and NBFCs has also been raised by 25 percent.

Prior to the revision, scheduled commercial banks (SCBs) carried a risk weight of 125 percent, while NBFCs had a risk weight of 100 percent. After the adjustment, SCBs will now bear a risk weight of 150 percent, and NBFCs will have a risk weight of 125 percent.

The RBI has also increased the risk weight on exposures of SCBs to NBFCs by 25 percent. This decision applies to cases where the existing risk weight, based on the external rating of NBFCs, is below 100 percent. However, loans to Housing Finance Companies (HFCs) and loans to NBFCs eligible for classification as a priority sector will be excluded from this adjustment.

The central bank emphasizes the need for registered entities to review their sectoral exposure limits for consumer credit. It encourages the implementation of Board-approved limits for various subsegments under consumer credit, aligning with prudent risk management practices.

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This move by the RBI signals a proactive approach to address the potential risks associated with the growing consumer credit landscape, underlining the importance of robust internal surveillance mechanisms for banks and NBFCs.