The Reserve Bank of India on Thursday increased the risk weights on personal loans and credit card lending for commercial banks and non-bank financial companies, or NBFCs.
Risk weight refers to the capital that lenders have to set aside in order to cover any loan defaults. A higher risk weight makes it more expensive for lenders to offer certain kinds of loans as they have to set aside more capital for them.
According to a notification by the central bank, the risk weight on consumer credits, excluding housing, education, vehicle loans and loans secured through gold, has been increased to 125% from 100%.
Credit card receivables of commercial banks currently attract a risk weight of 125% while those of NBFCs attract a risk weight of 100%. The RBI has decided to increase the risk weights on both these categories by 25% each.
The new risk weights will apply to personal loans for banks and to retail loans for NBFCs.
This came a month after RBI Governor Shaktikanta Das said that the central bank was closely monitoring “very high growth” in certain components of personal loans, reported Livemint. He also urged lenders to strengthen their internal surveillance mechanisms and address the build-up of risks.
The hike in the risk weights is expected to slow the growth of lending, Reuters quoted Dhananjay Sinha, the co-head of equities at brokerage firm Systematix Research, as saying.
Sinha said that the higher risk weight will make personal loans and credit cards more expensive if lenders pass on the cost to consumers.
“If lenders choose not to pass on the cost, higher capital requirements will reduce margins and make such lending less attractive,” he said. “The central bank was clearly seeing a build-up of risk and has decided to ask banks to build counter-cyclical buffers.”