• UGI USER
  • Nov 29, 2023
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RBI Increases Risk Weights Impacting Lending

Why in News?

  • Reserve Bank of India (RBI) has directed banks and non-banking financial companies (NBFCs) to increase capital reserves for risk weights by 25 percentage points.
  • This move aims to address the rising trend in unsecured personal loans, credit cards, and lending to NBFCs, managing ‘credit risk.’

Understanding Risk Weights

  • Risk weights are tools banks use to manage credit risk.
  • They indicate the essential capital reserve a lender should hold based on the risk associated with specific assets.
  • The RBI’s directive increases risk weights for unsecured personal loans, credit cards, and NBFC lending to better align with the perceived credit risk.
Source:Taxhelpdesk

RBI’s Proposals

  • The central bank has raised risk weights for consumer credit exposure by 25 percentage points, affecting personal and retail loans.
  • Credit card loans for scheduled commercial banks (SCBs) and NBFCs will see increased risk weights.
  • Bank credit to NBFCs, excluding housing finance companies, will also face higher risk weights.

Necessity of Changes

  • Concerns about the rapid growth in consumer credit prompted the RBI’s move.
  • Unsecured personal loans and credit card outstanding amounts have surged, raising worries about default risks and prompting measures to dampen this growth.

Impact and Concerns

  • The changes aim to enhance risk management, but concerns linger about the impact on capital adequacy and overall bank profitability.
  • Finance companies, especially NBFCs, might be most affected, facing higher costs that could be passed on to borrowers.