Personal Loans Will Now Get Expensive: RBI Increases Risk Weight On Consumer Credit


Sheetal Bhalerao

Sheetal Bhalerao

Nov 18, 2023


On Wednesday, the Reserve Bank of India made it costlier for banks and non-banks to lend to the unsecured personal loan segment by requiring them to set aside more capital.

Personal Loans Will Now Get Expensive: RBI Increases Risk Weight On Consumer Credit

Personal Loan May Get Costlier

This latest move by RBI comes after cautioning lenders over the surge in unsecured personal loans for several weeks.

Under this implementation, the RBI increased the risk weight on consumer credit by a fourth, from 100% to 125% on Thursday.

In simple words, earlier banks needed to maintain capital of Rs 9 for every Rs 100 they loaned, but now they will now have to keep Rs 11.25.

Besides this, RBI also increased the risk weight on credit card receivables and bank loans to NBFCs, whose risk weight is below 100%. 

How Does This Affect?

With implementation of this directive, it will increase the cost of bank borrowing for top-rated finance companies.

Although, it will exclude NBFCs that lend to priority sectors like housing and small and medium enterprises. 

Please note here that this move will not affect home, auto or education loans.

But be warned that the tighter loan norms may hit NBFCs more, say bankers.

As NBFCs do not see an across-the-board increase in retail lending rates despite RBI increasing risk weightage for unsecured personal loans, as the regulator has made several exclusions.

According to IIFL Finance group CFO Kapish Jain, “The guidelines apply to loans on the consumer side. Gold, home loans, loans to MSMEs for business, MFI & others are excluded. Initial reading suggests that the increase in risk weightage does not apply to loans to housing finance companies and NBFCs which are eligible for classification as priority sector”

He said, “We will have to wait and see what impact the circular will have on interest rates as we interpret the same.” 

NBFCs will face a bigger impact as per the suggestions by bankers.

The MD & CEO, Bank of Maharashtra, A S Rajeev said, “Consumer credit does not constitute a substantial portion of our bank’s retail portfolio, nor is it a significant component for most other banks. It is primarily within the NBFCs segment that lenders allocate a significant part of their portfolio to consumer credit.” 


Sheetal Bhalerao
Sheetal Bhalerao
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