RBI anounces reduction in the risk weight for consumer credit

Updated on November 17, 2023

RBI 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.
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The Reserve Bank of India today announced that on a review decided to reduce the risk weight for consumer credit, including personal loans excluding credit card receivables, to 100%. Under the extant instructions consumer credit, under the standardised approach for Credit Risk management attracts a higher risk weight of 125 percent or higher, if warranted by the external rating of the counterparty. At present, the risk weight for consumer loans measured by the banks comprises all types of retail loans including personal loans and credit card receivables but excluding educational loans which were attracting risk weight of 125%. In the communique, the banking regulator informed that the other stipulations applicable for risk-weight measurement remain the same.
The Risk Weighted Asset (RWA) is a measurement designed to estimate the element of risk involved in each asset held by the bank. For example, Cash held by the bank is an asset with zero risks, whereas other assets of the bank such as loans and advances, guarantees, etc., are vulnerable to the risk of default. Thus, such assets are called risk-weighted assets. Banks make provisions on those risk-weighted assets to meet future unforeseen losses.
The Reserve Bank of India tracks a commercial bank’s Capital to Risk (Weighted) Assets Ratio (CRAR) is also known as Capital Adequacy Ratio (CAR) to make sure that the bank can absorb a reasonable amount of loss and complies with statutory Capital requirements. A higher CRAR indicates a bank is better capitalized.
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