The story so far: Seeking to rein in an observed rise in unsecured personal loans and credit cards, the Reserve Bank of India (RBI) directed banks and non-banking financial companies (NBFCs) to reserve more capital for risk weights. The mandatory risk weight requirement has been increased by 25 percentage points. This would be applicable to unsecured personal loans, credit cards and lending to NBFCs. The directions are expected to result in higher capital requirements for lenders and thereby, an increase in lending rates for consumers. They come into force with immediate effect, with mandatory adherence being sought before February-end next year.
What has the RBI proposed?
The idea is to address the notion of ‘credit risk.’ It refers to the risk entailed by a borrower being unable to meet their obligations or defaulting on commitments. ‘Risk weights’ are an essential tool for banks to manage this risk.This metric, in percentage factors, adjusts for the risk associated with a certain asset type. In other words, it is an indicator of the essential holding the lender should ideally have to adjust the associated risk. This is what the RBI has directed be increased.
