The RBI increased the risk weights for banks and NBFCs (Representational)
New Delhi:
The Reserve Bank Of India (RBI)Â strengthened norms for personal loans and credit cards on Thursday to potentially slow down loan growth.
The new regulations, involving higher capital requirements, are expected to make these loans more expensive and limit growth in these sectors, which have exceeded the overall bank credit growth of about 15% in the past year.
The RBI has raised the risk weights for banks and non-bank financial companies (NBFCs), or the capital that banks need to set aside for every loan, by 25 percentage points to 125% on retail loans, it said in a statement.
The new risk weight will apply to personal loans for banks, and to retail loans for NBFCs, the RBI said, adding that housing, education and vehicle loans as well as loans secured by gold and gold jewellery will be excluded.
On Thursday, the central bank increased risk weights on credit card exposures by 25 percentage points to 150% and 125% for banks and NBFCs, respectively.
According to Dhananjay Sinha, co-head of equities at brokerage firm Systematix Research, the higher capital requirement will increase the cost of these loans if lenders pass on the cost or reduce margins if they choose not to. “Either way, loan growth will slow.”
RBI Governor Shaktikanta Das had mentioned last month that the central bank was closely monitoring some fast-growing personal loan categories for signs of stress.
Reuters reported that the surge in small personal loans was a concern for the RBI, prompting consideration of tighter rules for such borrowings.
Unsecured personal loans increased 23% from a year ago as of Sept. 22, 2023, while outstanding amounts on credit cards jumped nearly 30%, central bank data shows.
Data released by credit bureau Transunion CIBIL earlier this month showed that delinquencies, defined as loans overdue by more than 90 days, were at 0.84% for all personal loans. However, for loans below 50,000 rupees($600.66) delinquencies were higher at 5.4%.
“The central bank was clearly seeing a build-up of risk and has decided to ask banks to build counter-cyclical buffers,” said Systematix’ Sinha.
Further, the central bank has asked banks to set aside additional capital against loans to NBFCs, where the risk weight is currently below 100%.
It has also asked lenders to put in place board approved policies for exposure to different consumer credit categories. “In particular, limits shall be prescribed for all unsecured consumer credit exposures,” the central bank said.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
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