RBI Circular – NBFC – Bank and Consumer Credit

Regulatory Measures Towards Consumer Credit and Bank Credit to NBFCs

On October 6, 2023, the Governor highlighted the high growth in certain components of consumer credit and advised banks and non-banking financial companies (NBFCs) to strengthen their internal surveillance mechanisms, address any build-up of risks, and institute suitable safeguards in their own interest. This concern was also communicated during interactions with MDs and CEOs of major banks and large NBFCs in July and August 2023, respectively, emphasizing the increasing dependency of NBFCs on bank borrowings.

In response to these concerns, the following regulatory measures have been decided:

1. Consumer Credit Exposure

1. Consumer Credit Exposure of Commercial Banks: According to existing instructions, consumer credit attracts a risk weight of 100%. Following a review, it has been decided to increase the risk weights for consumer credit exposure of commercial banks (both outstanding and new), including personal loans but excluding housing loans, education loans, vehicle loans, and loans secured by gold and gold jewelry, by 25 percentage points to 125%.
2. Consumer Credit Exposure of NBFCs: NBFCs’ loan exposures generally attract a risk weight of 100%. Upon review, it has been decided that the consumer credit exposure of NBFCs (both outstanding and new) categorized as retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewelry, and microfinance/SHG loans, shall attract a risk weight of 125%.
3. Credit Card Receivables: Currently, credit card receivables of scheduled commercial banks (SCBs) attract a risk weight of 125%, while those of NBFCs attract a risk weight of 100%. Following a review, it has been decided to increase the risk weights on such exposures by 25 percentage points to 150% for SCBs and 125% for NBFCs.

1. Bank Credit to NBFCs

Under current norms, exposures of SCBs to NBFCs, excluding core investment companies, are risk-weighted as per the ratings assigned by accredited external credit assessment institutions (ECAIs). It has been decided to increase the risk weights on such exposures of SCBs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the current risk weight as per the external rating of NBFCs is below 100%. Loans to housing finance companies (HFCs) and loans to NBFCs that qualify for classification as priority sector lending are excluded from this increase.

1. Strengthening Credit Standards

1. REs are required to review their existing sectoral exposure limits for consumer credit and establish Board-approved limits for various sub-segments under consumer credit as part of prudent risk management. Limits must be set for all unsecured consumer credit exposures, adhered to, and monitored on an ongoing basis by the Risk Management Committee.
2. All top-up loans extended by REs against depreciating movable assets, such as vehicles, shall be treated as unsecured loans for credit appraisal, prudential limits, and exposure purposes.

These instructions are issued under the powers conferred by the Banking Regulation Act, 1949; Chapter IIIB of the Reserve Bank of India Act, 1934; and the National Housing Bank Act, 1987. They take immediate effect, except for the provisions at paragraph 2C(a), which must be implemented no later than February 29, 2024.