The October monetary policy committee (MPC) meeting had a flag raised by the RBI Governor Shaktikanta Das – addressing consumer credit and bringing it into the spotlight.
On November 16th, the RBI took a stance to increase the risk weights for banks and NBFCs. The changes announced in the circular are as follows:
Increase the risk weights of consumer credit exposure of commercial banks by 25% to 125%.
Consumer credit for commercial banks: The risk weight has been increased to 125% and this includes personal loans pertaining to outstanding as well as new loans.
NBFC loans will also see a risk weight of 125%. This will affect personal loans through lending apps provided by fintechs, etc.
Credit card receivables: Earlier, credit card receivables of scheduled commercial banks (SCBs) attracted a risk weight of 125% while that of NBFCs attracted a risk weight of 100%. This has been increased by 25 percentage points to 150% and 125% for SCBs and NBFCs respectively.
Consumer credit are loans which are unsecured credit cards, personal and retail loans.
Other kinds of loans such as housing, gold and vehicle loans which come under secured asset loans do not fall under the purview of this circular.
This will weigh heavily on the banks and would lead to increased deployment of liquidity.
The Impact:
Banks/NBFCs need to allocate more capital (around 25%) for such loans and hence capital adequacy for banks might be affected.
Small NBFCs will face more challenges as the cost of capital will rise, especially for NBFCs.
This rule will not have a major impact on larger banks with capital reserves or ones with diverse lending portfolios. The Macquarie report on CET1 impact on banks and NBFCs after this circular shows SBI cards being most affected at -4.5 % and Bajaj Finance at -2.4%. A relatively new player, Jio Finance, is not impacted by the same. The report reads LIC HFL and City Union Bank being the least affected as well.
There have been concerns about the lending practices of loan apps and the increase in credit card as well as personal loans in the last few years. COVID has had an impact but there has been a shift in consumer preferences and shopping patterns. Recent news about unscrupulous loan apps causing consumers harm has been one of the triggers towards tightening the norms.
