Why is it in the news?

• RBI issued regulatory measures to increase risk weights for consumer credit and bank credit.

More about the news

• Increased Risk Weights: Mandatory risk weight requirement increased by 25 percentage points to 125% for all commercial banks and NBFCs.
• Credit Card Loans: Credit card loans for scheduled commercial banks currently have a risk weight of 125%, while NBFCs attract 100%. RBI increased the risk weight by 25 percentage points, making it 150% for SCBs and 125% for NBFCs.
• Bank Credit to NBFCs: Risk weights for bank credit to NBFCs, excluding core investment companies, increased by 25 percentage points.
• Applicable in cases where external rating risk weight is below 100%, excluding housing finance companies and loans to NBFCs in the priority sector.
• Applicability of Changes: Applies to personal loans (excluding housing, education, vehicle, and gold-secured loans). Exemptions for SHG loans and microfinance which currently have a risk weight of 100%.

Need for Regulations

• Rise in unsecured loans, particularly personal loans and credit cards, outpacing overall bank credit growth.
• Unsecured personal loans increased by approximately 23% yearly; outstanding credit card loans rose by about 30%.
• Rapid growth in the unsecured segment exposes financial institutions to potential credit cost spikes in economic or interest rate shocks.

Significance of RBI’s Move

• Aimed at addressing credit risk, reflecting the risk associated with a borrower’s inability to meet obligations.
• Risk weights, expressed in percentage factors, serve as a tool for banks to manage risk associated with different asset types.
• S&P’s report predicts higher interest rates for borrowers, slower loan growth, reduced capital adequacy, and a potential hit on profits.