RBI lowers risk weight on consumer microfinance loans by 25 percentage points

The Reserve Bank of India (RBI) has rolled back stricter regulations on bank loans to small borrowers and non-bank lenders, as stated in two separate circulars issued on Tuesday. On the basis of a review, the central bank determined that microfinance loans classified as consumer credit will no longer be subject to the higher risk weights outlined in the circular. The RBI reduced the risk weight requirement for banks on consumer microfinance loans by 25 percentage points, bringing down to 100%.

“In terms of circular ‘Regulatory measures towards consumer credit and bank credit to NBFCs’ dated November 16, 2023, risk weights on consumer credit, including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, was increased to 125 per cent,” the apex bank noted.

The apex bank’s rule comes after its decision to postpone proposals requiring banks to allocate more capital for new project loans and maintain higher liquidity for digital deposits.

These measures follow a leadership transition at the central bank, with Sanjay Malhotra assuming the office of governor amid slowing economic growth.

Although some categories, such as housing loans, were exempt from the higher capital requirement at the time.

All microfinance loans issued by RRBs (Regional Rural Banks) and LABs (Local Area Banks) will be subject to a risk weight of 100%, it added.

In another announcement on Tuesday, the RBI stated it is reinstating risk weights on banks’ exposure to non-bank lenders, aligning them with their credit ratings. “On a review, it has been decided to restore the risk weights applicable to such exposures and the same shall be as per the external rating.”