What changed
Risk weights on consumer credit (personal loans, etc.) rose from 100% to 125% for banks and NBFCs (NBFCs exclude microfinance/SHG loans). Credit card receivables risk weights increased to 150% for banks and 125% for NBFCs. Bank exposures to NBFCs (excluding HFCs and priority sector loans) with existing risk weight below 100% now get an additional 25 percentage points. Top-up loans against depreciating movable assets (e.g., vehicles) must be treated as unsecured.
What it means for you
Banks and NBFCs will need to hold more capital against consumer credit and credit card portfolios, potentially reducing profitability and slowing growth in these segments. The higher risk weight on bank loans to NBFCs raises funding costs for NBFCs, especially those with lower ratings. Boards must tighten internal limits on unsecured consumer credit, increasing compliance and monitoring requirements.
What you must do
- Review and increase capital allocation for consumer credit and credit card exposures to meet new risk weights effective immediately.
- Set Board-approved sub-segment limits for unsecured consumer credit and ensure Risk Management Committee monitors adherence by February 29, 2024.
- Reclassify top-up loans against depreciating movable assets as unsecured for credit appraisal and prudential limits.
- Assess impact on NBFC lending portfolio and adjust pricing or exposure limits for NBFCs with risk weights below 100%.
Who it affects
Commercial banks including Small Finance Banks, Local Area Banks, RRBs, NBFCs including HFCs, Credit card issuers (banks and NBFCs)
Which loans are excluded from the higher risk weight on consumer credit?
Housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery are excluded from the 125% risk weight for both banks and NBFCs.
When do the new risk weights take effect?
The risk weight changes (paragraph 2A and 2B) are effective immediately from November 16, 2023. The requirement for Board-approved limits (paragraph 2C(a)) must be implemented by February 29, 2024.
How does this affect bank lending to NBFCs?
Bank loans to NBFCs (excluding HFCs and priority sector loans) with an existing risk weight below 100% now attract an additional 25 percentage points, increasing capital requirements for such exposures.