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Recently, the risk weights for unsecured loans—such as credit cards, consumer durable loans, and personal loans—were increased by the Reserve Bank of India (RBI). Bank lending risk weights to non-banking finance companies (NBFCs) that cater to this market were raised from 100% to 125%.
What are Risk Weights?
- Capital Implication: A bank’s capital position is impacted by each rupee it lends.
- Attribution to Risk: Loans and assets are given risk weights according to their characteristics and related risks.
- Capital Coverage: Banks need to make sure they have enough capital to cover these assets with varying degrees of risk.
- Differing Risk Weights: The risk weights of various asset types differ. For instance, risk weights for house loans might vary from 50% to 75%, whereas corporate loans have a risk weight of 100%.
How does it impact Borrowers?
- Interest Rates: Borrowers that have lower risk weights pay cheaper interest rates. The loan pricing is determined by this premise.
- Examples: Credit cards and personal loans have higher interest rates because of their risk profiles, but home loans often have lower interest rates because of their lower risk weights.
RBI Decision: Concerns about Consumer Loans
- Growing Share: The percentage of unsecured loans in the banking system has increased quickly, now making up 10% of the total.
- Fastest-Growing Segment: Over the past few years, this segment has grown the fastest.
- Unsecured: Because loans like as consumer durable loans don’t have assets that can generate revenue, it might be difficult to determine the actual ability of debtors to repay debt.
- Granular Nature: Despite being small-ticket items, the notable expansion of this market has prompted regulatory inquiries.
