Risk Weighted Assets: RBI raises risk weights on consumer credit exposure of banks, NBFCs to 125%

Source: The post is based on the article “Risk Weighted Assets: RBI raises risk weights on consumer credit exposure of banks, NBFCs to 125%” published in “The Hindu” on 17th November 2023

Why in the News?

Reserve Bank of India(RBI) has increased the risk weights of assets for the unsecured lending issued by banks and non-banking financial companies (NBFCs).

What are Risk Weighted Assets(RWA)?

1)Risk-weighted assets are used to determine the minimum amount of capital a bank must hold in relation to the risk profile of its lending activities and other assets.

2)This is done in order to reduce the risk of insolvency and protect depositors. The more risk a bank has, the more capital it needs on hand.

3)The capital requirement is based on a risk assessment for each type of bank asset. For example, a loan that is secured by a letter of credit is considered to be riskier than a mortgage loan that is secured with collateral and thus requires more capital.

Why has RBI increased the Risk Weighted Assets(RWA) on unsecured loans?

Indian Banks are experiencing a significant increase in unsecured loans, particularly in personal loans and credit cards. This increase is happening faster than the overall growth of bank credit.

That’s why, RBI has increased the risk weighted assets on unsecured loans.

Impact of this move: Loans may become a bit expensive.

UPSC Syllabus: Economy