Impact of Risk Weights raised by RBI on Bank's and NBFCs

 RBI Risk Weights decision: How Will It Impact Banks, NBFCs

17th Nov, 2023

The Reserve Bank of India (RBI) on November 16 increased the risk weights on consumer credit exposure of commercial banks and non-banking finance companies (NBFCs) by 25 per cent.

Consumer credit of commercial banks and NBFCs attracts a risk weight of 100 per cent, which now has been raised to 125 per cent.

According to the RBI circular, the increase in risk weights of consumer credit exposure of commercial banks (outstanding as well as new) includes personal loans, but excludes housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery.

For the NBFCs, the increase in risk weights extended to retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans.

The RBI also raised the risk weight credit card receivables of scheduled commercial banks and NBFCs by 25 per cent.

After this revision, credit card loans by banks will now attract a risk weight of 150 per cent, as compared with 125 per cent earlier, while those by NBFCs will attract a risk weight of 125 per cent, up from the previous 100 per cent.  

On Friday, top banking and NBFC stocks like HDFC Bank, ICICI Bank, Bajaj Finance and SBI Cards fell up to 6 per cent

Potential Impact On The Banks

According to Dr VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, “the immediate impact of the RBI action is that this will increase the capital requirements of the banks, which, in turn, will increase their cost of capital. Since the credit demand in segments like unsecured retail loans is robust banks can easily pass on the increased cost to borrowers. So, there will be a marginal increase in the cost of credit for borrowers. However, the impact on banks’ profitability will be negligible.”

From the perspective of macro financial stability this is a welcome decision, Vijayakumar added.

The RBI move is targeted to curb incipient risks building in these segments and to reduce reliance of NBFCs on bank lending. According to analysts, the higher unsecured credit risk would negatively impact capital adequacy ratio (CARs) of banks. Capital adequacy ratio gives a quick picture to whether a bank has enough funds to cover losses and remain solvent under difficult financial circumstances.

Unsecured retails loans have been surging by 20-60 per cent year-on-year across major lenders and have been a cause of concern as highlighted by the regulator in last few months.

According to Motilal Oswal Financial Services, after the revision in risk weight, lenders could increase interest rates on these products to offset the impact on profitability. The cost of borrowings for NBFCs will also go up as banks look to increase lending rates while higher risk weight leads to higher capital consumption. There have been concerns about higher delinquencies in low-ticket personal loans, but clearly the RBI has not made any such distinction and has taken measures to curb the growth across retail segments.

The financial services firm added that the RBI action is likely to have a 30-85 basis points impact on capital ratios (excluding SBI Cards). RBL Bank, HDFC Bank, and ICICI Bank are expected to have the maximum impact, while SBI Cards remains most vulnerable with a 416 basis points impact, according to estimates.