RBI’s new rules for risk weighting will allow banks in India to carry

Mumbai: Banks in India will be able to withstand the RBI’s increase in risk weights as unsecured loans constitute about 10 per cent of their total loans and the overall capitalization of the banking sector remains historically high, a Moody’s report said.

RBI’s own credit score is positive as banks have to allocate more capital for such loans.

Through a decision on November 16, the RBI increased the risk weight for consumer loans for banks and NBFCs in the country.

The risk weight which was till now 100 percent, has been increased to 125 percent. The volume of unsecured loans stood at around 10 per cent at the end of September 2023. However, the impact of this decision of the Reserve Bank will be different on each borrower according to his unsecured exposure.

The risk weight of banks lending to NBFCs has also been increased.

Reserve Bank Governor Shaktikanta Das recently expressed concern over the rising proportion of certain components of consumer credit and directed banks to remain vigilant against rising unsecured loans, especially personal and credit card payments.

The proportion of unsecured loans has increased significantly over the years due to competition in loan issuance among the country’s banks and financial institutions.

Overall credit growth in the banking sector has averaged 15 per cent in the last two years, but personal loans have grown by 24 per cent and loans on credit cards have grown by an average of 28 per cent.