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RBI’s Regulatory Measures to Increase Risk Weights

By Amigos IAS

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.

 

Standard & Poor’s (S&P)

·       Standard & Poor’s (S&P) is globally recognized for creating financial market indices, serving as a prominent data source, and providing credit ratings for companies and debt obligations, making it a key player in the financial services industry.

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