The Reserve Bank of India, through Circular No. RBI/2023-24/85 dated 16 November 2023, directed an increase of 25 percentage points in risk weights applicable to consumer credit exposure of scheduled commercial banks and Non-Banking Financial Companies, with immediate effect. The regulatory measure represents one of the most significant macroprudential interventions by the RBI in recent years, aimed at addressing the rapid growth of unsecured personal lending across the Indian financial system.
Background
Unsecured personal loans had witnessed exceptional growth in the Indian financial system, with the segment comprising nearly one-third of total personal loan credit of approximately Rs 41 lakh crore as of March 2023. NBFC lending in the unsecured category had expanded at 28.1 per cent, more than double the 11.5 per cent growth recorded for secured loans during the same period. The RBI Governor had flagged concerns about this trajectory in multiple public statements, noting the potential for systemic risk if unsecured credit growth continued outpacing the capacity of lenders to absorb losses.
The circular was issued in the context of the RBI's broader financial stability mandate under the Reserve Bank of India Act, 1934, reflecting the regulator's assessment that capital adequacy buffers needed strengthening to account for the elevated risk profile of consumer credit portfolios.
Key Provisions
The circular prescribed the following regulatory changes:
Risk weight increase for banks: The risk weight on consumer credit exposure of scheduled commercial banks was raised from 100 per cent to 125 per cent. Housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery were excluded from the higher risk weight.
Risk weight increase for NBFCs: For NBFCs, the risk weight on retail loans was similarly increased from 100 per cent to 125 per cent. The exclusions mirrored those for banks — housing loans, education loans, vehicle loans, loans against gold jewellery, and microfinance or self-help group loans were exempted.
Bank lending to NBFCs: Risk weights on exposures of scheduled commercial banks to NBFCs were increased by 25 percentage points over and above the risk weight associated with the external rating, in cases where the existing risk weight was below 100 per cent. Loans to housing finance companies and priority sector-eligible NBFC loans were excluded.
Board-level oversight mandate: Regulated entities were directed to review their sectoral exposure limits for consumer credit and establish Board-approved exposure limits, to be monitored by the Risk Management Committee. Compliance was required by 29 February 2024.
Implications for Practitioners
This regulatory action carries immediate and material consequences for the banking and NBFC sectors. The 25 percentage point increase in risk weights directly reduces the capital efficiency of unsecured lending, effectively requiring banks and NBFCs to allocate more capital against their consumer credit portfolios. For institutions operating near minimum capital adequacy thresholds, this creates an incentive to either raise additional capital or moderate the growth of unsecured lending.
Practitioners advising NBFCs should pay particular attention to the dual impact — the increased risk weight on retail loan portfolios and the elevated cost of wholesale borrowing from banks, both of which compress the profitability of the unsecured lending business model.
The exclusion of secured product categories (housing, education, vehicle, gold) indicates a calibrated approach rather than a blanket tightening, suggesting that the RBI's concern is specifically directed at the growth trajectory of unsecured and non-collateralised lending. This distinction should guide portfolio strategy and product mix decisions for regulated entities in the near term.