RBI raises risk weights on consumer credit, making loans more expensive

MUMBAI – The Reserve Bank of India (RBI) has announced an increase in risk weights for consumer credit, including personal loans and credit card receivables. This move comes as a measure to curb the rapid growth in certain consumer credit sectors and manage the escalating risks associated with them.

As per the latest circular issued by the RBI today, the risk weight for consumer and retail loans, excluding home, education, vehicle, gold loans, and lending against gold jewelry, will now be 125%. The central bank has also specified that banks will have a higher risk weight of 150% for credit card receivables. Non-bank finance companies (NBFCs) will face a risk weight of 125% for the same.

This regulatory adjustment is expected to make lending more costly for banks and NBFCs as they will now need to hold more capital against these loans. The decision follows a cautionary note from RBI Governor Shaktikanta Das on October 6, where he highlighted the swift expansion in consumer credit sectors such as personal loans and advised financial institutions to strengthen their internal surveillance mechanisms to mitigate potential risks.

In addition to this, there was a corresponding rise in the risk weight on credit card receivables of these financial institutions. This revision has escalated the risk weight on consumer credit exposure for commercial banks and NBFCs by 25%, excluding categories like housing loans, education loans, vehicle loans, and gold-secured loans.

The central bank’s action is aligned with its mandate to maintain financial stability and is a preemptive step to ensure that the banking sector remains resilient against any future financial stress that may arise from unsecured lending practices.

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