On November 16, 2023, the Reserve Bank of India (“RBI”) issued a notification, on ‘Regulatory measures towards consumer credit and bank credit to NBFCs’ (“Notification”), to commercial banks, including small finance banks, local area banks and regional rural banks, and non-banking financial companies (“NBFCs”), including housing finance companies (“HFCs”).

Pursuant to the Notification, the following measures have been notified by the RBI:

Consumer credit exposure:

1. Consumer credit exposure of commercial banks:
   The risk weight allocated to consumer credit exposure of commercial banks, including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, has been increased from 100% (one hundred percent) to 125% (one hundred twenty five percent).  

2. Consumer credit exposure of NBFCs:
   The risk weight allocated to consumer credit exposure of NBFCs categorised as retail loans, but excluding housing loans, education loans, vehicle loans, loans secured by gold and gold jewellery and microfinance/ self-help group loans, has been increased from 100% (one hundred percent) to 125% (one hundred twenty five percent).  

3. Credit card receivables:
   The risk weight allocated to credit card receivables of scheduled commercial banks (“SCBs”) has been increased from 125% (one hundred twenty five percent) to 150% (one hundred fifty percent) and the risk weight allocated to NBFCs has been increased from 100% (one hundred percent) to 125% (one hundred twenty five percent).

Bank credit to NBFCs: 

Under the extant norms, exposure of SCBs to NBFCs, excluding core investment companies, was risk weighted as per the ratings assigned by accredited external credit assessment institutions. The Notification prescribes that in all cases where the extant risk weight as per external rating of NBFCs is below 100% (one hundred percent), the risk weight allocated on exposure of SCBs shall be increased by 25 (twenty five) percentage points over and above the risk weight associated with the given external rating. Loans to HFCs and loans to NBFCs which are eligible for classification as priority sector in terms of the extant instructions shall be excluded.

Strengthening credit standards: 

1. The Notification prescribes that regulated entities (“REs”) shall review their extant sectoral exposure limits for consumer credit and ensure limits approved by the board of directors of the company (“Board”), in respect of various sub-segments under consumer credit as may be considered necessary by the Board as part of prudent risk management, are put in place. Particularly limits shall be prescribed for all unsecured consumer credit exposures. The risk management committee shall monitor the limits on an ongoing basis and ensure that the limits so fixed are strictly adhered to. 
2. 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.

REs are required to comply with the provisions of paragraph 3(i) above at the earliest, but not later than February 24, 2024. All other instructions in the Notification as discussed above shall come into force with immediate effect.

Please find a copy of the Notification, here.

This update has been contributed by Aastha (Partner) and Tweesha Gosar (Associate).

Argus Knowledge Centre is now on WhatsApp! Send us a message on +91 8433523504 to receive updates from our Knowledge Centre.