Decoding RBI’s Regulatory Norms for Consumer Credit and Bank Credit to NBFCs

Background

The Reserve Bank of India (RBI) Governor in his statement on October 6, 2023, while taking note of the high growth in certain components of personal loans, highlighted the need to institute mechanisms in order to monitor this growth and address potential stress. Following his statement, the RBI by way of its notification dated November 16, 2023, implemented certain regulatory measures imposing stricter norms for entities having exposure to consumer and bank credit (Revised Norms).

RBI Guidelines: Brief Overview

Consumer Credit Exposure:

The RBI has revised risk weights for consumer credit exposures and credit card receivables for both scheduled commercial banks and NBFCs, barring certain categories of retain loans.

Bank Credit to NBFCs:

With regard to exposures of scheduled commercial banks to NBFCs (excluding core investment companies), RBI has increased risk weights by 25% in cases where the extant risk weight as per the external rating of NBFCs is below 100%, other than in case of lending to NBFCs for the purpose of on-lending to priority sectors and to housing finance companies.

Strengthening Credit Standards:

Under the Revised Norms, all regulated entities are required to review extant sectoral exposure limits for consumer credit and establish Board-approved limits for various sub-segments under consumer credit, particularly for unsecured consumer credit exposures. The Revised Norms further clarify that top-up loans against inherently depreciating movable assets, such as vehicles, are to be treated as unsecured loans for credit appraisal and exposure purposes.

Impact

The Revised Norms are likely to have a mixed impact on the Indian economy. While banks and NBFCs are required to implement these measures by February 29, 2024, the Revised Norms are effectively retrospective as they are applicable to outstanding consumer credit as well. Consequently, availing consumer credit from banks and NBFCs will become more expensive. However, the Revised Norms also reaffirm the RBI’s cautionary stance on unsecured lending, especially given the recent action undertaken by the RBI against Bajaj Finance Limited on account of non-adherence of the company to the RBI’s digital lending guidelines. This will lead to regulated entities becoming more cautious in their lending practices, which may help to reduce systemic risk.