RBI Tightens Consumer Lending Rules To Counter Rising Risk

The Reserve Bank of India has made consumer lending costlier for banks and non-bank lenders, and also asked them to limit exposure to such loans amid growing risk concerns.

Consumer loans will attract a credit risk weight of 125% as compared with 100% earlier, the regulator said in a circular issued on its website on Thursday. For NBFCs, too, consumer loans will attract a risk weight of 125%.

This effectively means that banks will have to set aside Rs 125 in provisions for every Rs 100 of consumer credit. Such lending includes personal loans, but excludes home, education, vehicle, gold and microfinance loans.

Credit card receivables will attract a risk weight of 150% for banks and 125% for NBFCs as against 125% and 100% previously.

The RBI had brought down risk weights in 2019 to the existing levels. It has now raised them by 25 percentage points across categories.

The regulator has tightened rules amid concerns about rising risk in consumer lending. On Oct. 6, while delivering the monetary policy statement, RBI Governor Shaktikanta Das flagged high growth in certain components of consumer credit, advising banks and NBFCs to strengthen their internal surveillance mechanisms to address risk build-up.

The RBI has also raised the risk weights for bank loans to NBFCs by 25 percentage points in all cases where the present risk weight is lower than 100%. For this purpose, loans to housing finance companies and NBFCs, which are eligible for classification as priority sectors, shall be excluded.

The RBI called for renewed risk measures at all lenders, asking them to introduce sectoral exposure limits for consumer credit and board-approved limits for various sub-segments, especially unsecured consumer loans.

"The limits so fixed shall be strictly adhered to and monitored on an ongoing basis by the Risk Management Committee," the RBI circular said.

All top-up loans extended against movable assets that are inherently depreciating in nature, such as vehicles, shall be treated as unsecured loans for credit appraisal, prudential limits and exposure purposes.