The Reserve Bank of India has announced new regulations regarding unsecured personal loans for both banks and non-banking financial companies. Under the revised norms, risk weights have been increased 25 percentage points, impacting the lending capacity of financial institutions. However, these changes will not apply to specific consumer loans, including housing, education, and vehicle loans, as well as those secured gold and gold jewelry.
RBI Governor Shaktikanta Das had previously expressed concern over the rapid growth in certain consumer credit components and advised banks and NBFCs to strengthen internal surveillance mechanisms to mitigate risks. Following these concerns, the central bank has decided to increase the risk weights for consumer credit exposure of commercial banks and NBFCs.
In a circular, the RBI stated, “On 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 gold and gold jewellery, 25 percentage points to 125 per cent.” In addition, the central bank has raised the risk weights on credit receivables 25 percentage points to 150 percent for banks and 125 percent for NBFCs. These measures aim to address the high growth in consumer credit and the increasing dependency of NBFCs on bank borrowings, as highlighted Governor Das.
The new regulations will necessitate banks and NBFCs to set aside more money as a buffer for unsecured personal loans, ultimately impacting their lending capacity. As a result, financial institutions will need to adapt and create suitable safeguards in their own interest.