RBI Tightens Grip: Elevated Risk Weights for Unsecured Retail Loans

The RBI has implemented measures to regulate the swift expansion of consumer loans. This comes after the RBI warned that the unprecedented growth in the retail unsecured loan segment can pose a significant risk to the financial stability of the country. RBI Governor Shaktikanta Das mentioned that specific segments within personal loans have been exhibiting exceedingly high growth rates. He highlighted that the RBI would intervene, if banks, NBFCs, and fintech firms neglect to implement appropriate internal controls. Deputy Governor J. Swaminathan stated that over the last two years, unsecured retail credit has expanded by 23%, which exceeds the overall credit growth rate of 12–14% in the system. The substantial surge in growth can be largely credited to the significant expansion of fintech firms and lenders' newfound capability to access customers without bank accounts.

Subsequently, as indicated, the RBI decided to take matters into their own hands. On November 16, the RBI revealed a hike in risk weights applied to consumer loans from banks, NBFCs, and credit card providers. What this means is that the lender will have to set aside more money against the loans to cover the credit risk from the loans issued within that specific segment. This in turn will increase the cost for lenders to issue such loans, inevitably resulting in higher interest rates for borrowers. Additionally, the risk weights applied to loans from banks to NBFCs have also been increased. RBI has declared an increase in risk weight from 100% to 125% on consumer credit from both banks and NBFCs. Additionally, credit cards' risk weight has surged to 150% for banks and 125% for NBFCs.

These measures are aimed at slowing down the lending pace in this segment, consequently reducing the associated risk, which has been an ongoing concern for the RBI.

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