New Delhi, Nov 17: In a significant development, the Reserve Bank on Thursday tightened norms for consumer credit as it asked banks and NBFCs to assign a higher risk weight for unsecured personal loans, a move aimed at making the lenders more cautious on such advances.

 

 

The RBI, in a circular, announced the decision, attributing it to raising risk weights for consumer credit exposure of commercial banks, including personal loans.

 

Under the revised norms, risk weights have been increased by 25 percentage points reaching 150% for banks and 125% for NBFCs. Further, credit card receivables of scheduled commercial banks, which attract a risk weight of 125%, has been hiked to 150% while NBFCs' risk weights have been hiked to 125%.

 

 

 

Consumer loans related to housing, education, and vehicle financing are exempted from the increased risk weights. Additionally, loans secured by gold and gold jewellery will continue to have a risk weight of 100%.

 

 

A higher risk weight means that lenders need to set aside more funds as a safety net for consumer loans, which could make such credit more expensive. In simple words, the higher the risk weightage, the more capital needs to be set aside by lenders for the loans restricting banks' lending capacity.

 

 

Recently, RBI Governor Shaktikanta Das had flagged the high growth in certain components of consumer credit and advised banks and Non-Banking Financial Companies (NBFCs) to strengthen their internal surveillance mechanisms, address the build-up of risks and institute suitable safeguards, in their own interest.

 

The central bank's move is in line with Governor Das's call to address risk accumulation and implement safeguards in consumer credit operations to protect the interests of banks and NBFCs.

 

According to the RBI data, bank credit growth has been around 20 per cent, growth in loans on the credit card around 30 per cent, and personal loans around 25 per cent.