RBI Tightens Regulatory measures towards Consumer Credit and Bank Credit to NBFCs

The Reserve Bank of India (RBI) has strengthened the rules for consumer credit and bank credit to non-banking financial companies (NBFCs), as stated in its notification issued on November 16, 2023.

To address the increase in specific areas of consumer credit, the RBI has advised banks and NBFCs to improve their internal monitoring systems. They are encouraged to actively manage any identified risks and put in place appropriate safeguards for their own benefit. The Governor highlighted the rapid growth of consumer credit and the increasing dependence of NBFCs on bank borrowings during discussions with the leaders of major banks and large NBFCs in July and August 2023.

For consumer credit exposure of banks, NBFCs, and credit card receivables, the RBI has increased the risk weightage by 25%.

The RBI stated,"NBFCs' loan exposures generally attract a risk weight of 100%. After a review, it has been decided that consumer credit exposure of NBFCs, categorised as retail loans (excluding housing loans, educational loans, vehicle loans, loans against gold jewellery, and microfinance/SHG loans), shall attract a risk weight of 125%."

Regarding credit card receivables, the RBI mentioned that the Credit card receivables of scheduled commercial banks (SCBs) attract a risk weight of 125%, while those of NBFCs attract a risk weight of 100%. After a review, it has been decided to increase the risk weights on such exposures by 25 percentage points to 150% and 125% for SCBs and NBFCs, respectively.

For exposures/bank credit of SCBs to NBFCs, excluding core investment companies, the risk weights will be increased by 25 percentage points in cases where the existing risk weight, as per external rating of NBFCs, is below 100%. Loans to housing finance companies (HFCs) and loans to NBFCs eligible for classification as priority sector shall be excluded.

Concerning credit card strengthening, the RBI advised that regulated entities (REs) should review their existing sectoral exposure limits for consumer credit. They are also instructed to establish Board-approved limits for various subsegments under consumer credit, particularly for unsecured consumer credit exposures. These limits should be strictly adhered to and monitored continuously by the Risk Management Committee.

Additionally, all top-up loans extended by REs against depreciating movable assets, such as vehicles, will be treated as unsecured loans for credit appraisal, prudential limits, and exposure purposes.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates