RBI Tightens Personal Loans, Cards: New Risk Weights 2023

What the RBI changed and why it matters

The Reserve Bank of India (RBI) tightened norms for personal loans and credit cards by raising capital requirements for banks and non-banking financial companies (NBFCs). The move, effective November 16, 2023, targets the rapid growth in unsecured consumer credit and the risks it can create for financial stability. Higher risk weights mean lenders must set aside more capital for every rupee lent in these categories. That can make unsecured lending less attractive and more expensive. The RBI has framed the step as a prudential measure to contain risk build-up and keep household debt in check.

October MPC warning set the stage

The RBI governor Shaktikanta Das had flagged consumer credit risks at the October monetary policy committee (MPC) meeting. The central bank highlighted high growth in certain components of consumer credit and asked lenders to tighten internal surveillance. Banks and NBFCs were directed to address any risk build-up and add safeguards where needed. The November 16 circular follows those warnings and translates the concern into higher regulatory capital buffers. The focus is on unsecured credit, where default risks can rise quickly in a slowdown.

Risk weights on consumer credit raised to 125%

Under the circular, the risk weight on consumer credit exposure of commercial banks has been increased by 25 percentage points to 125%. The revision applies to both outstanding and new loans, and explicitly includes personal loans. For NBFCs, consumer credit loans will also see a risk weight of 125%. As explained in the source material, consumer credit in this context covers unsecured credit such as credit cards, personal loans, and certain retail loans. By raising risk weights, the RBI effectively raises the capital needed to support the same book of unsecured loans.

Credit card receivables: higher buffers for banks and NBFCs

The RBI also raised the risk weights on credit card receivables by 25 percentage points. Scheduled commercial banks (SCBs), where credit card receivables earlier attracted a 125% risk weight, will now apply 150%. NBFCs, where credit card receivables earlier attracted 100%, will now apply 125%. This is aimed at segments that have been growing quickly and where repayment stress can show up with a lag. The measures are expected to raise the cost of capital for lenders active in cards and unsecured retail lending.

What is excluded from the new norms

The circular does not bring secured loans under this risk-weight hike. For banks, the increase excludes housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery. For NBFCs, the consumer credit risk weight rise excludes housing, education and vehicle loans, loans against gold jewellery, and microfinance or Self-Help Group (SHG) loans. These exclusions keep the focus on unsecured or higher-risk retail credit. The RBI’s intent is to avoid tightening where collateral reduces loss risk.

Loans from banks to NBFCs also face a change

Beyond retail credit, the RBI revised the risk weight on exposures of SCBs to NBFCs by 25 percentage points in certain cases. The increase applies where the existing risk weight as per external rating of the NBFC is lower than 100%. The RBI noted exclusions for loans to Housing Finance Companies (HFCs) and loans to NBFCs that qualify for priority sector classification under existing instructions. This part of the circular matters for NBFC funding costs, especially where bank borrowings are a key source of liquidity. It also reinforces the RBI’s concerns about NBFC dependence on bank funding.

What lenders must do now: limits and board oversight

The RBI asked Registered Entities (REs) to review their sectoral exposure limits for consumer credit. It also directed them to introduce board-approved limits for sub-segments within consumer credit, where boards consider such limits mandatory for prudent risk management. This adds a governance layer beyond pure capital rules. In practice, it can lead to tighter underwriting, revised product caps, and slower expansion in unsecured sub-segments. It also pushes lenders to formalise monitoring frameworks for riskier loan categories.

Expected impact on borrowing costs and loan growth

Higher capital requirements typically flow into pricing, and the material provided notes that lending rates for borrowers are set to rise. The source also cites an estimate of a 0.2% to 0.5% increase in lending rates for unsecured personal loans. It further cites an estimate of about a 2% decline in bank loan growth due to the stricter rules. The same material notes unsecured loans grew 23% year-on-year, while outstanding amounts on credit cards rose nearly 30% (as of September 22, 2023, per central bank data). RBI’s action seeks to slow the sharpest parts of consumer credit growth without restricting secured retail categories.

Market and sector implications: who looks more exposed

The material notes that the market response was swift, with shares of Indian lenders stumbling amid concerns over loan growth and profits, though no specific price moves are provided. A Macquarie report cited in the text highlights CET1 impact estimates after the circular, with SBI Cards shown as most affected at -4.5% and Bajaj Finance at -2.4%. The same note says Jio Finance is not impacted, while LIC HFL and City Union Bank are among the least affected. Smaller NBFCs are expected to face greater stress because their cost of capital can rise more sharply, and access to bank funding can tighten. Larger banks with capital reserves or diversified lending mixes may see a more manageable impact.

Key numbers at a glance

CET1 impact estimates cited in the coverage

Why the RBI tightened now

The tightening comes amid concerns about lending practices in parts of the loan app ecosystem and the fast rise in personal loans and credit card usage in recent years. The material also references a shift in consumer preferences and shopping patterns post-COVID. Reports about unscrupulous loan apps harming consumers are cited as one trigger for tighter norms. RBI’s policy approach here is to force higher buffers rather than ban products, which preserves credit availability while aiming to reduce excess risk-taking. The focus remains on containing a surge in household debt and limiting potential inflationary spillovers from rapid unsecured credit expansion.

Conclusion

RBI’s November 16, 2023 risk-weight changes raise the capital cost of unsecured consumer credit for banks and NBFCs, and increase buffers for credit card receivables. The immediate effect is likely tighter underwriting and higher borrowing costs in personal loans and cards, while secured loan categories remain outside the tighter norms. The circular also pushes lenders to revisit exposure limits and put board-approved controls in place for consumer credit sub-segments. Going forward, lenders will need to communicate how they plan to manage capital adequacy, pricing, and growth under the revised framework.