RBI strengthens regulations on personal loans for banks and NBFCs

The Reserve Bank on Thursday implemented stricter regulations for unsecured personal loans provided by both banks and non-banking financial companies (NBFCs). The updated guidelines involve a 25-percentage-point increase in risk weights, although certain consumer loans, such as those for housing, education, and vehicles, are exempt.

Notably, loans secured by gold and gold jewelry will maintain a 100% risk weight, indicating that these loans will not be affected by the tightened norms. A higher risk weight necessitates banks to set aside a larger capital buffer for unsecured personal loans, thereby limiting their lending capacity.

Governor's Caution on consumer credit:

RBI Governor Shaktikanta Das had previously expressed concerns about the rapid growth in specific segments of consumer credit. He advised banks and NBFCs to enhance their internal surveillance mechanisms, address risk accumulation, and implement safeguards.

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Consumer Credit in Focus:

In response to these concerns, the RBI has decided to raise the risk weights for consumer credit exposure, including personal loans (excluding housing, education, vehicle loans, and loans secured by gold and gold jewelry), by 25 percentage points to 125%.

Additionally, the central bank has increased the risk weights on credit receivables by 25 percentage points to 150% for banks and 125% for NBFCs. These measures aim to mitigate risks associated with the high growth in consumer credit and the increasing reliance of NBFCs on bank borrowings, as highlighted by the RBI Governor in discussions with major banks and large NBFCs in July and August.