The Reserve Bank of India (RBI) on 16th November increased the risk weighting for unsecured loans like personal loans and those on the credit card, from 100 per cent to 125 per cent.
Key points
The risk weighting for bank loans to higher-rated NBFCs too has been increased by 25 percentage points.
The new norms are applicable for new as well as outstanding loans. As the increase in risk weighting will mean banks have to set aside more capital while extending such loans, the lenders in turn could increase the lending rates on such products.
Unsecured Loan
An Unsecured Loan is a loan that does not require a customer to provide any collateral to avail them. It is issued by the lender on customer’s creditworthiness as a borrower. And hence, having an excellent credit score is a prerequisite for the approval of an Unsecured Loan.
Examples of unsecured loans: Personal loans, Credit card, Payday loan, Line of Creedit, Medical loans.
Risk weightage
Risk weightage is a measure used in the banking industry to assess the risk associated with different types of assets, including loans.
The risk weight assigned to a particular asset influences the amount of capital a bank is required to hold as a buffer against potential losses.
In the context of credit cards and personal loans, an increase in risk weightage can lead to an increase in interest rates.
Banks are required to maintain a certain level of capital adequacy to ensure they have enough capital to cover potential losses.
The risk weight assigned to different types of loans is a key factor in determining the amount of capital a bank must hold.
