In response to the recent tightening of consumer credit norms by the Reserve Bank of India (RBI), SBI Card announced on Friday that its capital adequacy ratio is expected to decrease by 4%. The RBI's move involves assigning a higher risk weight to unsecured personal loans, prompting banks and non-banking financial companies (NBFCs) to exercise greater caution in extending such credit.

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The capital adequacy ratio is defined as a set of standards for banks by looking at a bank's ability to pay liabilities and respond to credit and operational risks. A higher percentage indicates financial strength, offering a buffer against unexpected losses and ensuring the safety of depositors' funds.

“As of now, we are well capitalised and well above the regulatory guideline of 15%. If required, we will augment tier 2 capital. There is no need for us to raise equity. We are a profitable company, and our profits are sufficient to fund growth,” the statement read.

The RBI's revised regulations involve a 25-percentage-point increase in the risk weight on unsecured consumer loans. However, the impact will not apply to housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery, as clarified by the RBI in a circular. The higher risk weight necessitates banks to set aside more funds as a safety net for consumer loans, potentially increasing the cost of such credit and limiting lending capacity.

The circular from the RBI stated, "It has been decided to increase the 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, by 25 percentage points to 125%."

A parallel adjustment has been implemented for credit card receivables, according to the circular titled 'Regulatory measures towards consumer credit and bank credit to NBFCs (non-banking financial companies).'

Also Read: RBI's new norms on unsecured lending to hit bank loan growth, squeeze NBFCs: S&P

(Edited by : Ajay Vaishnav)