RBI Raises Risk Weights
Source: PIB
GS III: Economics
Overview
- News in Brief
- What are the new tightened norms under RBI Raises Risk Weights?
- What are Risk Weights for Banks?
Why in the News?
After cautioning banks and non-banking financial companies (NBFCs) on surging unsecured loans like personal loans and those on credit cards, the Reserve Bank of India (RBI) increased the risk weighting for such loans from 100 per cent to 125 per cent.
News in Brief
- The risk weighting for bank loans to higher-rated NBFCs has also increased by 25 percentage points.
- The new norms, which take immediate effect, apply to new and outstanding loans.
- As the increase in risk weighting will mean banks have to set aside more capital while extending such loans, the lenders could increase the lending rates on such products.
- Bank credit growth has been around 20 per cent
- Growth in loans on credit cards around 30 per cent
- Personal loans around 25 per cent
What are the new tightened norms under RBI Raises Risk Weights?
- Banks’ risk weight on personal loans for outstanding and new loans increased by 25 percentage points to 125%.
- The risk weight of NBFC’s consumer credit exposure for outstanding as well as new increased to 125% from 100%.
- The risk weight of banks’ credit card receivables increased to 150% from 125%; for NBFC 125% from 100%.
- Risk weights on bank loans to AAA, AA, and A-rated NBFCs increased by 25 percentage points.
- Bank board to decide exposure limits for consumer credit, in particular unsecured loans.
- All top-up loans for movable assets are to be treated as unsecured.
- This excludes housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery,
What are Risk Weights for Banks?
- The minimum amount of capital that banks must have, with the risk profile of the bank’s lending activities (and other assets).
- This means if the bank takes high risk bank needs higher capital to protect the depositors.
- When handling our money, the three largest risks banks take are credit risk, market risk, liquidity risk and operational risk.
What is the reason for raising Risk Weights for Banks?
- There was relatively high growth in consumer credit and unsecured loans in the recent past.
- Increasing the risk weighting is one way to enhance the sensitivity of banks and NBFCs to strengthen the situation.
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