{"id":38371,"date":"2023-11-29T07:59:13","date_gmt":"2023-11-29T02:29:13","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=38371"},"modified":"2025-04-23T10:25:11","modified_gmt":"2025-04-23T04:55:11","slug":"rbi","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/rbi\/","title":{"rendered":"RBI\u2019s Move to Increase Risk Weight for Lending"},"content":{"rendered":"<h2>Why in the News?<\/h2>\n<ul>\n<li>The Reserve Bank of India (RBI) has directed banks and non-banking financial companies (NBFCs) to reserve more capital for risk weights.<\/li>\n<\/ul>\n<h2>What\u2019s in Today\u2019s Article?<\/h2>\n<ul>\n<li>Why in the News?<\/li>\n<li>Background<\/li>\n<li>What are \u2018Risk Weights&#8217;?<\/li>\n<li>Why were the Changes Deemed Necessary?<\/li>\n<li>What are the Chief Concerns?<\/li>\n<li>How It will Impact Consumers?<\/li>\n<li>Conclusion<\/li>\n<\/ul>\n<h2>Background<\/h2>\n<ul>\n<li>The RBI has raised the risk weight for consumer loan, credit card exposures, and loans to NBFCs by 25 per cent (now standing at 125 per cent).\n<ul>\n<li>This would apply to personal loans, excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery.<\/li>\n<\/ul>\n<\/li>\n<li>The central bank has expressed worries about the rapid expansion of these types of consumer loans.<\/li>\n<li>This adjustment will result in higher costs for both banks and non-banking lenders engaged in consumer lending.<\/li>\n<\/ul>\n<h2>What are \u2018Risk Weights&#8217;?<\/h2>\n<ul>\n<li>The central idea behind the RBI\u2019s action is to address the notion of \u2018credit risk.\u2019<\/li>\n<li>It refers to the risk entailed by a borrower being unable to meet their obligations or defaulting on commitments.<\/li>\n<li>\u2018Risk weights\u2019 are an essential tool for banks to manage this risk.<\/li>\n<li>This metric, in percentage factors, adjusts for the risk associated with a certain asset type.<\/li>\n<li>In other words, it is an indicator of the essential holding the lender should ideally have to adjust the associated risk. This is what the RBI has directed be increased.<\/li>\n<\/ul>\n<h2>Why were the Changes Deemed Necessary?<\/h2>\n<ul>\n<li>While presenting the\u00a0monetary policy statement\u00a0in October this year, Governor Shaktikanta Das had flagged concerns about the \u201chigh growth\u201d in \u201ccertain components of consumer credit.\u201d<\/li>\n<li>He advised banks and NBFCs to \u201cstrengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards, in their own interest.\u201d<\/li>\n<li>The governor said these were being closely monitored by the apex banking regulator for \u201cany signs of incipient stress.\u201d<\/li>\n<li>Ratings agency Moody\u2019s also put forth that higher risk weights are intended to \u201cdampen lenders\u2019 consumer loan growth appetite.\u201d\n<ul>\n<li>The unsecured segment, it adds, has grown rapidly in the past few years, exposing financial institutions to a potential spike in credit costs in the event of a sudden economic or interest rate shock.<\/li>\n<\/ul>\n<\/li>\n<li>RBI\u2019s latest figures stipulate that unsecured personal loans have increased approximately 23% on a year-over-year basis, as on September 22 this year.<\/li>\n<li>Outstanding loans from credit cards increased by about 30% during the same period.<\/li>\n<li>Major concerns emerge for loans below Rs 50,000 \u2013 these carry the utmost default risk.\n<ul>\n<li>Delinquencies in this segment stood at 5.4% as of June this year.<\/li>\n<li>Ratings agency S&amp;P in their assessment held that borrowers in this segment are often highly leveraged and may have other lending products.<\/li>\n<\/ul>\n<\/li>\n<li>According to Moody\u2019s, several NBFCs that until now focused on secured lending categories (such as infrastructure, real estate and vehicle loans) have pivoted to riskier segments.<\/li>\n<\/ul>\n<h2>What are the Chief Concerns?<\/h2>\n<ul>\n<li>The primary concerns relate to the impact on capital adequacy and the bank\u2019s overall profitability.<\/li>\n<li>The latter ensures that banks have sufficient capital to absorb losses arising out of unanticipated events or risks within the business.<\/li>\n<li>S&amp;P\u2019s latest report states that slower loan growth and an increased emphasis on risk management will likely support better asset quality in the Indian banking system.\n<ul>\n<li>It estimates that Tier-1 capital adequacy will decline by about 60 basis points.<\/li>\n<li>Tier-1 capital adequacy represents banks\u2019 highest quality of capital as it helps banks absorb losses immediately as and when they occur.<\/li>\n<\/ul>\n<\/li>\n<li>According to S&amp;P, the drop may prompt lenders with weaker capital adequacy to raise capital.<\/li>\n<li>Unrelatedly, it observed that public sector banks generally have lower capital adequacy than large private sector banks.<\/li>\n<li>However, the worst-affected might be finance companies, as their incremental bank borrowing might surge, besides the impact on their capital adequacy, S&amp;P states.<\/li>\n<\/ul>\n<h2>How It will Impact Consumers?<\/h2>\n<ul>\n<li>As risk weightage increases, banks may become more cautious in extending credit to consumers, especially those with a higher perceived risk.<\/li>\n<li>This could result in some individuals finding it more challenging to obtain credit cards or personal loans.\n<ul>\n<li>Those who are still eligible for credit might face stricter terms and conditions.<\/li>\n<\/ul>\n<\/li>\n<li>According to experts, by increasing risk weightage, the RBI aims to manage the growing defaults and risks linked to unsecured loans.<\/li>\n<li>Lenders will now need to account for higher credit risk in this loan category, thus making lending pricier.<\/li>\n<li>This adjustment will also result in higher costs for borrowers taking out these loans.<\/li>\n<\/ul>\n<h2>Conclusion<\/h2>\n<ul>\n<li>Unsecured loans, i.e., personal loans, consumer durables, and credit card dues, are growing rapidly.<\/li>\n<li>Due to higher risk provisioning, these segments of loans may get marginally costly. The interest rate impact would vary from lender to lender.<\/li>\n<li>On the whole, both banks and NBFCs will have to raise funds in a manner that helps them to calibrate their priorities to the new risk weights, while controlling profit margins and risks from non-performing assets (NPAs).<\/li>\n<\/ul>\n<hr \/>\n<h3>Q1) What is SLR in banking terms?\u00a0<\/h3>\n<p>Statutory Liquidity Ratio is basically the reserve requirement that banks are expected to keep before offering credit to customers. The SLR is fixed by the RBI and is a form of control over the credit growth in India. The government uses the SLR to regulate inflation and fuel growth.<\/p>\n<h3>Q2) What is CRR and its impact on the Indian Economy?<\/h3>\n<p>CRR or Cash Reserve Ratio, is the percentage of a bank&#8217;s total deposits that it needs to maintain as liquid cash. This is an RBI requirement, and the cash reserve is with the RBI. A bank does not earn interest on this liquid cash maintained with the RBI and neither can it use this for investing and lending purposes.<\/p>\n<hr \/>\n<p><strong>Source: <\/strong><a href=\"https:\/\/www.thehindu.com\/business\/Industry\/what-is-rbis-latest-move-to-increase-risk-weight-for-lending-about-explained\/article67553551.ece\" target=\"_blank\" rel=\"nofollow noopener\"><u>What is RBI\u2019s latest move to increase risk weight for lending about? | Explained\u00a0<\/u><\/a><u> | <\/u><a href=\"https:\/\/business.outlookindia.com\/banking\/rbi-raises-risk-weight-for-consumer-loans-will-it-lead-to-increased-interest-rates-for-borrowers\" target=\"_blank\" rel=\"nofollow noopener\"><u>Outlook India<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>RBI has directed banks and NBFCs to reserve more capital for risk weights.<\/p>\n","protected":false},"author":5,"featured_media":38372,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[],"class_list":{"0":"post-38371","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/38371","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=38371"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/38371\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/38372"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=38371"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=38371"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=38371"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}