Dual Strike from RBI: Increased Risk Weight!

RBI’s decision to increase risk weight for unsecured loans – explore its effects on loan seekers, banks, and NBFCs.

The Reserve Bank of India (RBI) recently made a significant move by increasing the risk weight for unsecured loans, particularly focusing on personal and credit card loans. To comprehend the significance of this decision, it is crucial to understand what risk weight is and how it can serve as a valuable tool to control the demand for loans.?

Additionally, we will delve into the potential impacts on loan seekers and the entities providing loans, namely banks and Non-Banking Financial Companies (NBFCs).

Let’s get started.

What’s Happening?

A few days ago, the RBI issued a circular, altering the risk weight concerning unsecured loans. This means that the risk weight for unsecured personal loans and even those non-banking financial companies (NBFCs) lending money will now be 125%, up from the previous 100%. Simultaneously, the risk weight for credit card loans has been increased to 150%.

Consumer Loans, including housing, vehicle, education, and gold loans, have been exempted. However, in the recent announcement, these have been treated differently. This reflects growing concerns in RBI about the continuous surge in unsecured personal loans and their potential associated risks. The number of unsecured loans given by banks and NBFCs is on the rise, posing a potential threat to the country’s economy.

Significance of Risk Weight

Risk weight is a crucial component of the regulatory framework employed by central banks to ensure the financial system’s stability. It assigns different categories of loans based on their estimated levels of associated risk. These weights function as a system to calculate the capital required to cover potential losses from these loans, ensuring the banking system’s stability.

With the increase in risk weights, banks will need more capital, leading to an increase in their costs. Now, banks might raise their interest rates due to this heightened cost. Consequently, there’s a possibility that interest rates on your personal loans may increase. According to the RBI, the increased risk weight will also be applicable to new loans.

Impact on Banks and NBFCs

The increase in risk weight will not only affect banks but also NBFCs. This is because NBFCs borrow money from banks and later repay it. Now, with banks lending money to NBFCs, they will have to set aside more capital due to the higher risk weight.

In addition, when NBFCs distribute personal loans, they will also need to reserve more capital to comply with the new risk weight rul

What’s Next?

According to the Indian Express, the banking industry might require an additional capital of approximately Rs 84,000 crores.?

This indicates that obtaining loans might become more expensive for the public, and the RBI anticipates that if people have to pay higher interest rates, it might slow down the demand for loans. This decision seems to be a two-pronged approach – while RBI has not directly increased interest rates, the rules following this change might lead to a natural rise in interest rates.

In conclusion, while RBI aims to manage the impact of increased risk weight, it is evident that borrowing and loan servicing will become costlier. The central bank hopes that if people have to pay higher interest rates, it might curb the demand for loans, thereby balancing the potential risks associated with unsecured lending.

That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!

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