The Reserve Bank of India’s (RBI) recent decision to roll back higher risk weights on bank lending to non-banking financial companies (NBFCs) and microfinance institutions (MFIs) has raised speculation about whether similar relief will be extended to credit cards and personal loans.

While the central bank has signaled a pro-growth stance with its latest measures, it has yet to relax risk weights on unsecured retail loans, which remain a key area of concern for banks.

In its latest move, RBI reversed the risk weight on NBFC loans from 125% to 100% and clarified that MFI loans would attract a 100% risk weight, with further reductions for qualifying regulatory retail loans.

Analysts suggest that this shift in policy could pave the way for easing restrictions on consumer credit, particularly as the central bank focuses on mitigating funding pressures and supporting economic growth.

Capital crunch

Despite the relief provided to NBFCs and MFIs, banks continue to grapple with higher capital requirements for unsecured retail lending, which includes credit cards and personal loans.

These segments saw an increase in risk weights in November 2023, making them more capital-intensive for banks. A potential reversal could free up capital and spur loan growth, benefiting lenders that have been constrained by the regulatory tightening.

Another key area under watch is the credit-deposit (CD) ratio restrictions, which have been limiting loan expansion for some large private banks facing slower deposit growth. Analysts believe that further easing of regulatory norms could help support credit flow, particularly in segments with strong consumer demand.

With RBI already postponing key regulatory measures such as Expected Credit Loss (ECL) norms and project finance guidelines, the possibility of risk weight revisions on unsecured retail loans remains open. However, concerns over asset quality in the personal loan and credit card segments could influence the central bank’s decision-making process in the coming months.