In November, the Reserve Bank of India (RBI) raised the risk weights that lenders apply to unsecured retail loans and bank loans to non-banking financial institutions (NBFCs). The objective was to check the rapid growth in unsecured lending in recent years. These are loans that are not backed by collateral. Hence, in case of a repayment default, the lender must bear the full loss. Higher risk weights translate into lenders needing more funds to maintain their capital adequacy ratios so that defaults can be absorbed with less impact on their balance sheets. However, higher risk weights lower banks’ net returns on such loans. In turn, banks tend to lower lending in such segments or charge higher interest rates.
In November, the Reserve Bank of India (RBI) raised the risk weights that lenders apply to unsecured retail loans and bank loans to non-banking financial institutions (NBFCs). The objective was to check the rapid growth in unsecured lending in recent years. These are loans that are not backed by collateral. Hence, in case of a repayment default, the lender must bear the full loss. Higher risk weights translate into lenders needing more funds to…
