In a decisive move to stabilize the financial market, the Reserve Bank of India has introduced new regulatory measures focusing on consumer credit and bank credit to NBFCs.
The RBI has revised the risk weight framework for consumer credit exposure. As per extant instructions applicable to commercial banks, consumer credit attracts a risk weight of 100%. In 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%.
In terms of extant norms, NBFCs’ loan exposures generally attract a risk weight of 100%. 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%.
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%. In 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 shall be excluded.
To further safeguard the financial ecosystem, the RBI mandates that regulated entities (REs) reassess their sectoral exposure limits for consumer credit. This includes setting board-approved limits for various sub-segments and treating top-up loans against depreciating movable assets, like vehicles, as unsecured loans for credit appraisal.
Implementation Timeline
While most instructions take effect immediately, regulated entities are given time until February 29, 2024, to comply fully with the provisions concerning sectoral exposure limits. These measures, derived from the Banking Regulation Act, 1949, the RBI Act, 1934, and the National Housing Bank Act, 1987, represent a significant step by the RBI in strengthening the financial sector’s resilience against potential risks
