Significant regulatory actions have been taken by the Reserve Bank of India (RBI) recently, with the goal of influencing the consumer credit market and expanding bank lending to Non-Banking Financial Companies (NBFCs). Ensuring responsible lending practices, preserving financial stability, and promoting a robust credit ecosystem all depend heavily on these rules. The benefits and ramifications of these recent RBI directives are examined vide Notification dated November 26, 2023- (RBI/2023-24/85).
The RBI has been proactive in safeguarding the interests of consumers by implementing guidelines to regulate the consumer credit sector. This includes measures to enhance transparency, ensure fair practices, and protect consumers from predatory lending.
The aforementioned directives have been promulgated in the execution of the authority vested by Sections 21 and 35A of the Banking Regulation Act, 1949; Chapter IIIB of the Reserve Bank of India Act, 1934; and Sections 30A, 32, and 33 of the National Housing Bank Act, 1987
In accordance with existing directives applicable to commercial banks, consumer credit currently carries a risk weight of 100%. Following a comprehensive review, it has been determined to augment the risk weights associated with consumer credit exposure for commercial banks, both outstanding and new. This includes personal loans, excluding housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery. The revised risk weight is set at 125%, marking a 25-percentage point increase.
As per extant norms, NBFCs' loan exposures generally attract a risk weight of 100%. However, upon careful review, it has been decided that consumer credit exposure of NBFCs, categorized as retail loans shall now attract a risk weight of 125%.
Under current instructions, credit card receivables for scheduled commercial banks (SCBs) carry a risk weight of 125%, while for NBFCs, the risk weight is 100%. Post-review, it has been determined to raise the risk weights for these exposures by 25 percentage points. Accordingly, SCBs and NBFCs will now bear risk weights of 150% and 125%, respectively.
Exposures of scheduled commercial banks (SCBs) to NBFCs, excluding core investment companies, are currently risk-weighted based on ratings from accredited external credit assessment institutions (ECAI). After a recent review, it has been resolved to increase the risk weights for SCBs by an additional 25 percentage points in cases where the existing risk weight, as per the external rating of NBFCs, is below 100%. This adjustment excludes loans to Housing Finance Companies (HFCs) and loans to NBFCs eligible for priority sector classification.
Notwithstanding the aforementioned adjustments in risk weights for consumer credit exposure, it is hereby clarified that certain loan categories shall be exempt from the stipulated revisions. Specifically, home loans, vehicle loans, and loans secured by the mortgage of gold and gold jewellery shall be regarded as exceptions to the prescribed risk weight enhancements. Therefore, these loan types shall maintain their original risk weights as per extant instructions, and the revised percentages shall not be applicable to them. This exemption is in recognition of the unique risk profiles and collateralization features associated with home loans, vehicle loans, and loans secured by the mortgage of gold and gold jewellery.