RBI opens taps, enables banks to lend more to consumers

Reserve Bank of India (RBI) on Thursday announced a reduction in the risk weight for banks’ consumer loans and personal loans to 100 per cent from 125 per cent, enabling banks to lend more against consumer products like mobile phones, home appliances, two-wheelers, and three-wheelers.

Currently, the risk weight requirement for consumer and personal loans is 125 per cent. This means that banks will have so set aside an amount equivalent to 125 per cent for each consumer loan. 
As per existing RBI guidelines, consumer credit, including personal loans and credit card receivables but excluding educational loans, attracts a higher risk weight of 125 per cent or higher, if warranted by the external rating of the counterparty.
RBI has now decided to reduce the risk weight for consumer credit, including personal loans, but excluding credit card receivables, to 100 per cent. Other stipulations remain the same, the central bank stated in a release. 
While credit card receivables have been excluded, a reduction in the risk weight will leave banks with more loanable funds as banks can offer consumer loans setting aside relatively lesser capital.
Also, RBI allowed banks to lend more to non-banking finance companies by harmonisation of single counterparty exposure limit to single NBFC. “As a step towards harmonisation of the counterparty exposure limit to single NBFC with that of the general limit, it has been decided to raise a bank’s exposure limit to a single NBFC to 20 per cent of Tier-I capital of the bank,” RBI stated.
Under the revised guidelines on large exposure framework (LEF) that came into effect from 1 April 2019, a bank’s exposure to a single NBFC is restricted to 15 per cent of its Tier I capital, while for entities in the other sectors the exposure limit is 20 per cent of Tier I capital of the bank, which can be extended to 25 per cent by banks’ boards under exceptional circumstances.