Consumer credit is a powerful financial tool which provides individuals with the means to fulfill personal aspirations and manage unforeseen expenses. From credit cards to personal loans, auto loans, and mortgages, consumer credit comes in various forms, offering financial flexibility to navigate life’s complexities. The Reserve Bank of India (RBI) on Thursday announced measures towards consumer credit and bank credit to NBFCs, which can make personal loan and credit cards costlier.
The measures have been announced considering the high growth in certain components of consumer credit and advising banks and non-banking financial companies (NBFCs) to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards, in their own interest.
The high growth seen in consumer credit and increasing dependency of NBFCs on bank borrowings were also highlighted by Governor Shaktikanta Das in the interactions with MD/CEOs of major banks and large NBFCs in July and August 2023, respectively. Here are the measures that RBI has announced:
Consumer Credit Exposure
As per extant instructions applicable to commercial banks, consumer credit attracts a risk weight of 100%. 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%.
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, will now also attract a risk weight of 125%.
It has also been decided to increase the risk weights on credit card receivables of scheduled commercial banks (SCBs) and NBFCs by 25 percentage points to 150% and 125% respectively.
Bank credit to NBFCs
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)5. 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.
Strengthening credit standards
The bank further stated that the REs shall review their extant sectoral exposure limits for consumer credit and put in place, if not already there, Board approved limits in respect of various sub-segments under consumer credit as may be considered necessary by the Boards as part of prudent risk management. In particular, limits shall be prescribed for all unsecured consumer credit exposures. The limits so fixed shall be strictly adhered to and monitored on an ongoing basis by the Risk Management Committee.
All top-up loans extended by REs against movable assets which are inherently depreciating in nature, such as vehicles, shall be treated as unsecured loans for credit appraisal, prudential limits and exposure purposes.