RBI Tightens Consumer Credit Norms: New Regulations to Curb Credit Risk

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Apurva Dhamankar

11/26/20232 min read

The RBI came up with a change of rules in credit norms for commercial banks and non-banking Financial Institutions.

This step has been taken in response to the rapid growth in components of consumer credit for which the RBI governor previously urged banks and NBFCs to strengthen their internal surveillance mechanisms, address the build-up risk, and do anything suitable for any institute.

The RBI has increased the risk weight for the following:-

1) Consumer credit for banks and NBFC

2) Credit cards

All have seen a rise by 25% This means Commercial banks and NBFCs' risk weight will increase from 100% to 125% from here on which means Banks and NBFCs will have to set aside a higher capital buffer against the loan they sanction which will directly lead to an increase in their cost of capital. With the credit demand in segments like unsecured retail loans being robust, banks will be passing on the loans at a higher interest rate which will lead to only a "marginal increase" in the cost of credit for borrowers.

According to Financial strategists, it will be an amazing decision for the stability of the economy which is on growth as it will reduce Non-performing Asset (NPA).

In simple words, Personal loans that banks/ NBFCs offer have higher interest rates so they tend to give more and more loans, this could lead to an increase in NPA.

Therefore, RBI increased the percentage of Risk weight of personal loans so that banks/NBFC will lend less number of loans will lead to a decrease in NPA.

Instruments like personal loans will see a hike in interest but housing, education, vehicles, and loans against jewelry or microfinance will have no impact in relation to the same.

The credit cards are to see a hike of risk weight of 25% from 125% to 150% while for NBFC it will be from 100% to 125%. These 25% shifts will have an impact on the overall working of the firm but will incipient risk building in these segments and reduce the reliance of NBFC on bank lending as well. With the higher unsecured credit risk, it will attract a higher negative Capital Adequacy Ratio (CAR) of banks as the banks have seen a surge of unsecured loans from 20-60% YOY across major concerns.

Henceforth, this is a step that will surely have a hard time for banks especially NBFCs not only in the stock market but also in every manner with the lending rates increasing and CAR to be maintained at high as Credit card risk weight will also see a rise. It will be amazing to see how banks function properly with the recent RBI Instructions.

Thank you.

Regards,

Vansh Chaturvedi,

Kautilya, IBS Mumbai.

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