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This RBI move leaves more money for banks to lend to consumers ahead of festive season

The risk weight is a function of the risk perception that the apex bank has on loans for different sectors of retail loans like personal, home, car, and education loans.

Ahead of the festive season, the Reserve Bank of India’s move to reduce risk weightage requirement for consumer loans may provide a boost to consumer lending and spending. The RBI has reduced the risk weight that banks are required to keep for consumer loans to 100 per cent from 125 per cent. If the risk weight is higher, the banks have to keep aside higher amounts of money for what is lent. The relaxed requirement would not be applicable to credit card loans and dues but will be applicable on all other types of consumer loans such as that for home appliances and vehicles. The decision will leave more liquidity in the hands of banks to lend and earn more.

The move has come at a time where many sectors of the economy are struggling with a lack of demand. “On a review, it has been decided to reduce the risk weight for consumer credit, including personal loans, but excluding credit card receivables, to 100 per cent. Other stipulations remain the same,” the RBI said in a statement.

The risk weight is a function of the risk perception that the apex bank has on loans for different sectors of retail loans like personal, home, car, and education loans. It also includes corporate lending. Prior to the RBI’s decision, all unsecured consumer credit, including personal loans and credit card receivables, attracted a weight of 125 per cent or higher, if warranted by an external rating of the counterparty, according to the RBI.

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Amid the ongoing slowdown, the RBI has cut interest rates four times so far this year and the government and the central bank has not denied a possibility of further rate cuts this year as well. “With the CPI inflation recording only a mild increase in August 2019 despite the sharp uptick in the food inflation, we continue to expect the MPC to reduce the repo rate by 15-25 bps in the October 2019 policy review, given the continuing concerns related to economic growth,” said Aditi Nayar, Principal Economist, ICRA. 

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Source: Financial Express