Basel III Regulatory capital for Retail Portfolio: Revised Limit for Risk Weight

In the Statement on Developmental and Regulatory Policies dated October 9, 2020, broadcasted by RBI on the limit for regulatory retail portfolio, it was decided to revise the risk weight for individual exposures to reduce the cost of credit to this segment.

updated on November 17, 2023:

RBI on Thursday (November 17, 2023)increases risk weights on consumer credit exposure of banks, and NBFCs to 125% from 100%. Measures announced to contain the risk emanating from a sharp rise in unsecured loans – mostly personal loans and credit cards. It has been also decided to increase the risk weights on Credit Card exposures by 25 percentage points to 150% for SCBs and 125% for NBFCs. Learn more

In terms of RBI’s extant guidelines in respect of “Claims included in the Regulatory Retail Portfolios” on Basel III Capital Regulations, claims (including both fund-based and non-fund-based) that meet all the four criteria (Qualifying Criteria, Product Criterion, Granularity Criterion, Low value of individual exposures) may be considered as retail claims for regulatory capital purposes and included in a regulatory retail portfolio. Claims included in this portfolio shall be assigned a risk-weight of 75 percent, except Non-Performing Assets (NPAs) as provided in paragraph 5.12 of RBI Master circular No.DBR.No.BP.BC.1/21.06.201/2015-16 dated July 1, 2015, on Basel III Capital Regulations. Out of the above four criteria ‘Low value of individual exposures’ segment consists of individuals and small businesses (i.e. with a turnover of up to ₹ 50 crores). In order to reduce the cost of credit for this segment and also to harmonise with the Basel guidelines, the above threshold limit of ₹ 5 crores for aggregated retail exposure to counterparty shall stand increased to ₹ 7.5 crores from October 12, 2020 (date of RBI circular). The risk weight of 75 percent will apply to all fresh exposures and also to existing exposures where incremental exposure may be taken by the banks up to the revised limit of ₹ 7.5 crores. The other exposures shall continue to attract the normal risk weights as per the extant guidelines.

Conclusion:

Banks shall continue to provide a risk weight of 75 per cent for the threshold limit of ₹ 5 crores for aggregated retail exposure to the counterparty. From October 12, 2020 (date of RBI circular),  if the bank takes an additional exposure to a borrower up to ₹ 7.5 crore and which continues to satisfy all other eligibility criteria the entire revised exposure shall qualify for classification as ‘regulatory retail’ and attract 75% risk weight. However, if no additional exposure is taken after October 12, 2020, then the existing exposure shall continue to attract risk weight as applicable earlier.