**Executive Summary:**
This RBI directive, issued on November 16, 2023, addresses concerns regarding the high growth in consumer credit and increasing reliance of NBFCs on bank borrowings. It mandates increased risk weights for certain consumer credit exposures for Commercial Banks and NBFCs, as well as bank credit to NBFCs. REs must comply with paragraph 2Ca by February 29, 2024, and other instructions are effective immediately.
**Key Points / Main Content:**
* **Consumer Credit Exposure:**
* Risk weights for consumer credit exposure of commercial banks (excluding housing, education, vehicle loans, and gold-backed loans) increased by 25 percentage points to 125.
* Risk weights for consumer credit exposure of NBFCs (excluding housing, education, vehicle loans, gold-backed loans, and microfinance/SHG loans) categorized as retail loans increased to 125.
* Risk weights for credit card receivables increased to 150 for SCBs and 125 for NBFCs.
* **Bank Credit to NBFCs:**
* Risk weights on SCB exposures to NBFCs (excluding core investment companies) increased by 25 percentage points above the risk weight associated with the external rating, but only where the extant risk weight as per external rating of NBFCs is below 100.
* Loans to HFCs and NBFCs eligible for priority sector classification are excluded from this increase.
* **Strengthening Credit Standards:**
* REs shall review sectoral exposure limits for consumer credit and establish Board-approved limits for consumer credit sub-segments, especially unsecured consumer credit exposures.
* Top-up loans against movable assets depreciating in nature (e.g., vehicles) must be treated as unsecured loans.
**Impact Analysis:**
* **Commercial Banks (including Small Finance Banks, Local Area Banks, and Regional Rural Banks):**
* *Impact:* Higher risk weights for consumer credit and NBFC exposures may require increased capital provisioning, potentially impacting profitability and lending strategies.
* *Action Required:* Implement increased risk weights immediately. Review and establish Board-approved limits for consumer credit sub-segments, ensuring compliance by February 29, 2024.
* **Non-Banking Financial Companies (including HFCs):**
* *Impact:* Increased risk weights for consumer credit exposures may affect capital adequacy and potentially increase borrowing costs.
* *Action Required:* Implement increased risk weights immediately.
* **Regulated Entities (REs):**
* *Impact:* REs will need to revise their credit appraisal processes, prudential limits, and exposure calculations for top-up loans on depreciating movable assets.
* *Action Required:* Implement new guidelines for top-up loans immediately, and ensure compliance with paragraph 2Ca by February 29, 2024.
Key Entities Referenced
Non-Banking Financial Companies: Financial institutions that provide banking services without meeting the legal definition of a bank.
Housing Finance Companies: Companies that specialize in providing loans for the purchase or construction of homes.
Banking Regulation Act, 1949: An act of the Parliament of India to regulate the banking companies in India.
National Housing Bank Act, 1987: An act to establish a National Housing Bank to operate as a principal agency to promote housing finance institutions in India.
Reserve Bank of India: The central bank of India, responsible for regulating the banking sector.
Small Finance Banks: A type of banking institution in India focused on providing financial services to underserved populations.
Local Area Banks: A type of banking institution in India operating in a specific geographical area.
Regional Rural Banks: Regional Rural Banks are financial institutions in India aimed at providing credit and banking services to the rural population.
RBI/2023-24/85
DOR.STR.REC.57/21.06.001/2023-24 November 16, 2023
Commercial Banks (including Small Finance Banks, Local Area Banks and Regional
Rural Banks)
Non-Banking Financial Companies (including HFCs)
Madam/Dear Sir,
Regulatory measures towards consumer credit and bank credit to NBFCs
Please refer to Governor’s Statement dated October 6, 2023 flagging the high growth
in certain components of consumer credit and advising banks and non-banking
financial companies (NBFCs) to strengthen their internal surveillance mechanisms,
address the build-up of risks, if any, and institute suitable safeguards, in their own
interest. The high growth seen in consumer credit and increasing dependency of
NBFCs on bank borrowings were also highlighted by Governor in the interactions with
MD/CEOs of major banks and large NBFCs in July and August 2023, respectively.
2. In this context, it has been decided to effect the following measures as under:
A. Consumer credit exposure
(a) Consumer credit exposure of commercial banks
As per extant instructions applicable to commercial banks1, consumer credit attracts
a risk weight of 100%. On a review, it has been decided to increase the risk weights
in respect of consumer credit exposure of commercial banks (outstanding as well as
new), including personal loans, but excluding housing loans, education loans, vehicle
loans and loans secured by gold and gold jewellery, by 25 percentage points to 125%.
1 Para 5.13.3 of ‘Master Circular – Basel III Capital Regulations' and circular ‘Risk Weight for Consumer Credit
except credit card receivables’ dated September 12, 2019(b) Consumer credit exposure of NBFCs
In terms of extant norms, NBFCs’ loan exposures generally attract a risk weight of
100%2. On a review, it has been decided that the consumer credit exposure of NBFCs
(outstanding as well as new) 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%.
(c) Credit card receivables
As per extant instructions, credit card receivables of scheduled commercial banks
(SCBs) attract a risk weight of 125%3 while that of NBFCs attract a risk weight of
100%4. On 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.
B. Bank credit to NBFCs
In terms of extant norms, exposures of SCBs to NBFCs, excluding core investment
companies, are risk weighted as per the ratings assigned by accredited external credit
assessment institutions (ECAI)5. On a review, 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 extant risk
weight as per external rating of NBFCs is below 100%. For this purpose, loans to
HFCs, and loans to NBFCs which are eligible for classification as priority sector in
terms of the extant instructions shall be excluded.
C. Strengthening credit standards
(a) The REs shall review their extant sectoral exposure limits for consumer credit and
put in place, if not already there, Board approved limits in respect of various sub-
segments under consumer credit as may be considered necessary by the Boards as
part of prudent risk management. In particular, limits shall be prescribed for all
2 Paragraph 84 of the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based
Regulation) Directions, 2023 dated October 19, 2023
3 Para 5.13.3 of ‘Master Circular – Basel III Capital Regulations'
4 Applicable to two NBFCs permitted to issue credit cards , viz. SBI Cards and Payment Services Private
Limited and BOB Financial Solutions Limited
5 Para 5.8.1 of the ‘Master Circular – Basel III Capital Regulations’ dated May 12, 2023, read with the circular
‘Risk Weights for exposures to NBFCs’ dated February 22, 2019unsecured consumer credit exposures. The limits so fixed shall be strictly adhered to
and monitored on an ongoing basis by the Risk Management Committee.
(b) All top-up loans extended by REs against movable assets which are inherently
depreciating in nature, such as vehicles, shall be treated as unsecured loans for credit
appraisal, prudential limits and exposure purposes.
3. The above instructions have been issued in exercise of the powers conferred by the
Sections 21 and 35A of the Banking Regulation Act, 1949; Chapter IIIB of the Reserve
Bank of India Act, 1934 and Sections 30A, 32 and 33 of the National Housing Bank
Act, 1987.
4. The above instructions, other than paragraph 2C(a), shall come into force with
immediate effect. All REs shall endeavour to comply with the provisions at paragraph
2C(a) at the earliest, but in any case shall implement them by no later than February
29, 2024.
Yours faithfully,
(Vaibhav Chaturvedi)
Chief General Manager