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RBI tightens norms for consumer loans amid rise in unsecured lending.

Date: 17-11-2023
Subject: RBI tightens norms for consumer loans amid rise in unsecured lending
The Reserve Bank of India has asked institutions to increase the risk weights with respect to consumer credit exposure of commercial banks by 25 per cent to 125 per cent, merely a month after flagging the high growth in certain components of consumer credit and asking NBFCS, banks to strengthen internal surveillance mechanisms.

This hike includes personal loans but excludes housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery.

Risk weights mean the amount of capital lenders have to keep aside to cover credit risk from a particular loan segment. The higher a risk weightage, the more amount of capital needed to be set aside by lenders for the loans

Credit growth in unsecured loans has been an outlier at about 23 per cent as compared with an average of 12-14 per cent of credit growth in the country, according to the RBI. It has even outpaced the overall bank credit growth of about 15 per cent seen over the last year.

"Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest. The need of the hour is robust risk management and stronger underwriting standards," RBI Governor Shaktikanta Das said on October 6, 2023.

RBI has also decided that the consumer credit exposure of NBFCs, which are categorised as retail loans, will now attract a risk weight of 125 per cent, up from 100 per cent before. This excludes housing loans, educational loans, vehicle loans and loans against gold jewellery and microfinance/SHG loans.

Further, credit card receivables of scheduled commercial banks, which attract a risk weight of 125 per cent, has been hiked to 150 per cent while NBFCs' risk weights have been hiked by 25 per cent to 125 per cent.

Regulated entities (REs) have been asked to review their extant sectoral exposure limits for consumer credit and put in place board-approved limits in respect of various subsegments under consumer credit as may be considered necessary.

RBI Governor Das said last month the central bank was closely monitoring some fast-growing personal loan categories for signs of nascent stress. Subsequently, Reuters reported that the RBI was particularly concerned with the surge in tiny personal loans of up to 10,000 rupees, taken for three to four months.

Source Name : Economic Times


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