RBI introduces new rules to curb rising consumer credit risk

MUMBAI – The Reserve Bank of India (RBI) has implemented new regulations aimed at controlling the surge in consumer credit usage and bank lending to Non-Banking Financial Companies (NBFCs). In a move to mitigate risks stemming from rapid credit growth, the central bank has adjusted risk weights, which could lead to more stringent lending standards.

Under the new guidelines, risk weights for non-housing, education, vehicle, and gold loan consumer credits have been increased by 25 percentage points to a new level of 125%. Additionally, banks’ credit card receivables will now carry a higher risk weight of 150%, while exposures to NBFCs have been set at 125%.

The RBI’s measures also target banks’ exposures to non-core investment company NBFCs with ratings under a risk weight of 100%, raising their weight by an additional 25 percentage points. To further safeguard financial stability, regulated entities are required to implement board-approved limits on sectoral exposures. There is a particular emphasis on monitoring unsecured consumer credits and treating top-up loans against depreciating assets as unsecured.

These regulatory adjustments are designed to ensure long-term financial stability by curtailing the risks associated with the swift expansion of consumer credit and the dependence of NBFCs on bank borrowings. The RBI has highlighted the necessity for financial institutions to enhance their internal surveillance mechanisms.

While these changes may impact short-term economic growth by potentially reducing consumer spending, the RBI’s actions are focused on maintaining financial equilibrium over time. The central bank’s initiative underscores its commitment to preemptively addressing financial vulnerabilities in the Indian economy.

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