CA Aman Rajput
The Reserve Bank of India (RBI) has announced a set of measures to address the high growth in consumer credit and the increasing dependence of NBFCs on bank borrowings.
These measures include
1. Increasing risk weights on consumer credit exposures of commercial banks and NBFCs
The risk weight for consumer credit exposures, excluding housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery, has been increased by 25 percentage points to 125%. For credit card receivables, the risk weight has been increased by 25 percentage points to 150% for scheduled commercial banks (SCBs) and 125% for NBFCs.
2. Increasing risk weights on bank credit to NBFCs
The risk weights on exposures of SCBs to NBFCs, excluding core investment companies, have been increased by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100%.
3. Strengthening credit standards
Regulated entities (REs) are required to review their extant sectoral exposure limits for consumer credit and put in place, if not already there, Board-approved limits in respect of various sub-segments under consumer credit as may be considered necessary by the Boards as part of prudent risk management. In particular, limits shall be prescribed for all unsecured consumer credit exposures. All top-up loans extended by REs against movable assets which are inherently depreciating in nature, such as vehicles, shall be treated as unsecured loans for credit appraisal, prudential limits, and exposure purposes.
Implications of the Measures
The RBI's measures are likely to have a significant impact on the consumer credit and NBFC sectors. The increase in risk weights will lead to higher capital requirements for banks and NBFCs, which could dampen lending to the consumer segment. The strengthening of credit standards is also likely to make it more difficult for borrowers to obtain credit.
Overall, the RBI's measures are aimed at promoting more prudent lending practices in the consumer credit and NBFC sectors. These measures are likely to slow the growth of consumer credit in the near term, but they could also help to reduce the risk of financial instability in the long term.
In addition to the above, the RBI's notification also highlights the importance of banks and NBFCs strengthening their internal surveillance mechanisms and addressing any build-up of risks in their consumer credit portfolios. The RBI also notes that banks and NBFCs should institute suitable safeguards in their own interest.
The RBI's concerns about the high growth in consumer credit and the increasing dependence of NBFCs on bank borrowings are valid. These trends could pose risks to financial stability if they are not managed prudently. The RBI's measures are a welcome step in addressing these risks.
It is important to note that the RBI's measures are targeted at consumer credit and bank credit to NBFCs. They do not apply to housing loans, education loans, vehicle loans, or loans secured by gold and gold jewellery. This is because these types of loans are considered to be less risky than other types of consumer credit.
The RBI's measures are likely to have a mixed impact on the economy. On the one hand, they could dampen consumer spending and economic growth in the near term. On the other hand, they could help to reduce the risk of financial instability in the long term. The overall impact of the measures will depend on a number of factors, including the response of banks, NBFCs, and consumers.
Only time will tell what the full impact of the RBI's measures will be. However, they are a necessary step in addressing the risks associated with the high growth in consumer credit and the increasing dependence of NBFCs on bank borrowings.
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Source: RBI notification number RBI/2023-24/85 DOR.STR.REC.57/21.06.001/2023-24 attached below
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