RBI pushes for retail loans to counter slowdown

Reserve Bank of India. (PTI Photo)

In a move that could spur consumer spending ahead of festive season, the Reserve Bank of India (RBI) on Thursday issued guidelines to banks to bring down risk weight for all consumer loans — barring credit cards — to 100% from the prevailing 125%.

Risk weight refers to the profile of the borrower. Risk-weighted assets are used to determine the minimum amount of capital that must be held by banks and other institutions to reduce the risk of insolvency. Conversely, a reduction in risk weight can free up capital and allow banks to lend more.

Barring credit cards from such loans would however mean that the banks would continue to charge higher on credit card loans.

The 125% risk weight is higher than Basel III and may have been set at a time when loan growth to consumers and small companies was higher.

After these guidelines, which are expected to be implemented with immediate effect, the banks will charge a lower rate on loans such as home, auto or other personal segments.

In a statement issued late Thursday evening, the central bank said, “Under the standardised approach for credit risk management, all unsecured consumer credit, including personal loans and credit card receivables, which are both unsecured lending, attract a higher risk weight of 125% or higher, if warranted by an external rating of the counter party.

“On a review, it has been decided to reduce the risk weight for consumer credit, including personal loans, but excluding credit card receivables, to 100%. Other stipulations remain the same.”

Though the RBI had expressed its intent to reduce risk weight on August 7 monetary policy review, it had said it would issue a guideline to banks on a later date.

Experts, however, said that the banks would still charge higher interest rate from borrowers having poor credit score.

The RBI also decided that a bank’s exposure to a single NBFC (excluding gold loan companies) would be restricted to 20% of that bank’s eligible capital base, from existing 15%.

“Bank finance to NBFCs predominantly engaged in lending against gold will continue to be governed by limits prescribed earlier,” said the statement.

This is the second such move by the RBI in the past couple of weeks aimed at boosting credit flow from banks to borrowers.

Last week, the central bank had made it mandatory for banks to issue loan offerings that were linked to external benchmarking.

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