Regulatory updates

The Reserve Bank of India (RBI) observed a high growth in consumer credit and increasing dependency of Non-Banking Financial Companies (NBFCs) on bank borrowings. In this context, recently, RBI, vide a notification dated 16 November 2023 introduced certain important measures to increase the risk weights of banks’ exposure to retail loans and loans given to NBFCs. Similar amendments have been made for NBFCs, where the risk weights of their exposure to retail loans has been increased. The details of the increase have been given below:

• Strengthening credit standards: RBI has stated that:

• Regulated Entities (REs)⁸ REs include commercial banks (including small finance banks, local area banks and regional rural banks), NBFCs (including HFCs) should review their existing sectoral exposure limits for consumer credit and put in place, if not there already, board approved limits in respect of various sub-segments under consumer credit as part of prudent risk management. In particular, limits must be prescribed for all unsecured consumer credit exposures. These limits need to be monitored on an ongoing basis by the Risk Management Committee
• All top-up loans extended by REs against movable assets which are inherently depreciating in nature, such as vehicles, should be treated as unsecured loans for credit appraisal, prudential limits and exposure purposes.

Effective Date: All the aforementioned provisions, except point (c)(i) came into force with immediate effect, i.e., 16 November 2023. With respect to point (c)(i), all REs should ensure compliance with the provisions at the earliest, but not later than 29 February 2024.

To access the text of the notification, please click here