Unsecured consumer loans like personal loans and outstanding dues on credit cards are likely to become costly.
The reason: the Reserve Bank of India has raised the risk weightage for banks and non-banking finance companies (NBFCs) on such credit exposures by 25 percentage points.
As a result, banks will have to set aside more capital against these loans. The banks are likely to pass on the cost to their customers in the form of higher interest rates.
To put it simply, if a bank lends Rs 100 as a personal loan, they earlier had to set aside Rs 8 (which is the minimum ratio of capital to risk-weighted assets). This will now go up to Rs 10.
The change will not apply to housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery in the case of commercial banks.
In the case of NBFCs, the tightening will also exclude microfinance/self help group loans in addition to the exclusions granted to banks.
Last month, RBI governor Shaktikanta Das had expressed deep concern over the personal loans and other unsecured consumer credit and had warned banks about the perils they face from such exposures.
In a notification, the RBI said it had been decided to raise the risk weight for unsecured consumer credit from 100 per cent to 125 per cent for both commercial banks and NBFCs after a recent review.
More importantly, the banking regulator said the change would apply to both outstanding as well as new loans.
Risk weight vis-à-vis banks’ credit card exposure was also increased. Currently, credit card receivables of scheduled commercial banks (SCBs) attract a risk weight of 125 per cent, while it is 100 per cent in the case of NBFCs. This has now been increased to 150 per cent and 125 per cent, respectively.
There was more bad news for NBFCs as the RBI increased the risk weight on bank credit to non-banks by 25 per cent. Currently, exposures of commercial banks to NBFCs, excluding core investment companies, are risk weighted under the ratings assigned by accredited external credit assessment institutions.
The RBI has now increased the risk weights on such exposures by 25 percentage points. This will apply in all cases where the extant risk weight under the external rating of the NBFC is below 100 per cent.
However, loans to housing finance companies and those to NBFCs which are eligible for classification as priority sector credit in terms of the current instructions shall be excluded.
“The increase in risk weights for consumer loans is in line with expectations, though an increase in risk weight for lending by banks to non-banks was unexpected. These announcements are expected to result in higher capital requirements for the lenders and, hence, an increase in the lending rate for the borrowers,” said Karthik Srinivasan, senior vice-president and group head — financial sector ratings at Icra Ltd.