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DAILY NEWS ANALYSIS

  • 22 November, 2023

  • 2 Min Read

Risk Weights

Reserve Bank of India (RBI) has increased the risk weight of commercial banks and non-banking financial companies’ (NBFC) unsecured loans from 100% to 125% as a preventive measure against possible NPAs.

  • Risk Weights – It is the risk associated with every rupee lent by the bank on its capital position.
  • Risk Asset Ratio System – It was introduced by RBI in 1992 for banks including foreign banks as a capital adequacy measure in line with the Capital Adequacy Norms prescribed by Basel Committee

Capital Adequacy Ratio, known as Capital to Risk (Weighted) Assets Ratio (CRAR) is the proportion of a bank’s capital to its current and risk-weighted liabilities.

  • Calculation – It depends on the nature of the loan and the inherent risk associated with it.
  • Role in loan pricing - Lower the risk, lower the rate of interest on the loans provided.
    • For instance, home loans have the lowest interest rate among retail products while personal loans and credit cards have the highest interest rate based on their risk profile.
  • In case of higher risk weights, the lenders must set aside more capital when making loans, thereby lowering their growth potential.
  • Impact of RBI’s move – The increase in risk weights by the RBI will elevate funding costs for NBFCs and impact capital requirements.
  • The immediate impact will likely affect lending partners like Paytm.
  • In the long run, the overall financial system is expected to become more cautious in disbursing unsecured loans thus preventing over-leveraging.

Unsecured loan is a loan provided without any collateral which include credit cards, consumer durable loans and personal loans.

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