Due to strong selling pressure following the Reserve Bank’s tightening of consumer credit standards, shares of bank and non-bank financial companies fell as much as 7% during Friday’s morning trading session.
Shares of State Bank of India, Axis Bank, Canara Bank, and Bank of Baroda all saw decreases of 3.34 percent, 3%, and 2.67 percent, respectively. Aside from Federal Bank, other banks that saw declines on the BSE were HDFC Bank, ICICI Bank, Federal Bank, and IndusInd Bank.
In an effort to encourage lenders to be more cautious when issuing such advances, the Reserve Bank tightened standards for consumer lending on Thursday by requesting that banks and non-bank financial institutions (NBFCs) apply a greater risk weight for unsecured personal loans. A 25 percentage point increase has been made to the risk weight of unsecured consumer loans.
The Reserve Bank stated in a circular that the new rules will not, however, apply to loans for housing, education, vehicles, or loans secured by gold or gold Jewellery . A greater risk weight may result in higher lending costs for consumers since lenders will need to reserve more money as a safety net. Put simply, banks’ ability to lend money is limited by greater risk weights.
“Risk weights in respect of consumer credit exposure of commercial banks (outstanding as well as new), including personal loans, but excluding housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery, have been decided to increase by 25 percentage points to 125 per cent,” the RBI stated in the circular.
According to the circular on “Regulatory measures towards consumer credit and bank credit to NBFCs (non-banking financial companies),” a similar increase has been made in the case of credit card receivables.