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RBI increases risk weightings on consumer credit, banks brace for impact

EditorPollock Mondal
Published 2023/11/24, 12:28
© Reuters.

In response to the rapid expansion of unsecured consumer credit in India, the Reserve Bank of India (RBI) has enacted regulatory measures aimed at fortifying financial stability. Fitch Ratings reports that these changes include heightened risk weightings for banks and non-banking financial institutions (NBFIs) on consumer credit, particularly credit card lending.

The RBI's actions come after a significant surge in unsecured consumer credit, with credit card loans and personal loans witnessing growth of 29.9% and 25.5% respectively during the first half of this financial year. This growth has outpaced the total loan growth rate of 20%, signaling a robust appetite for consumer credit.

Under the new regulations, NBFIs will face a 125% risk weighting for credit-card lending while banks will be subject to a higher 150% weighting. This move is anticipated to slow down the expansion of the loan segment and address systemic risks intensified by stiff competition for secured retail lending.

The banking sector, including major players like State Bank of India (SBI) and Canara Bank, is projected to see a decline in its Common Equity Tier 1 (CET1) ratio by approximately 30 basis points overall due to these revisions. For NBFIs, the expected increase in risk weights could be around 34 basis points, with an approximate 5 basis point rise related to credit card risk weights.

Fitch Ratings has acknowledged the benefits of these regulatory adjustments for the credit markets. However, microfinance institutions remain exempt from these increased NBFI risk weights. Large NBFIs like Shriram Finance Limited may also be somewhat insulated from the full impact due to their priority sector classification.

The phased implementation of these regulatory changes underscores the RBI's commitment to maintaining a balance between consumer credit growth and systemic risk management. As these measures take effect, the banking community, which encompasses millions of professionals worldwide, is closely monitoring the potential implications on financial stability.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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