The Reserve Bank of India clarified on Tuesday that risk weights for microfinance institution loans by banks will be excluded from higher risk weights under consumer credit.
In November 2023, the RBI had increased risk weights on consumer credit, including personal loans and bank credit to non-banking financial services, to 125% from 100%. This increase in risk weights had excluded housing loans, education loans, vehicle loans and loans secured by gold and gold jewelry.
In a review, the central bank said that microfinance loans in the nature of consumer credit would be exempted from the applicability of higher risk weights of 100%, according to a release.
This is a relief for banks, as after the circular in November 2023, several lenders had increased internal risk weights on such loans, five people told NDTV Profit.
Last month, banks met with the RBI and put forth their recommendations. Based on this, the RBI has decided to clarify on exclusion of MFI loans from higher risk weights under consumer credit.
With this move, banks will now be able to normalise their MFI loan risk weights and parameters, people said.
Additionally, the RBI clarified that microfinance loans that are not in the nature of consumer credit might be classified under the regulatory retail portfolio, provided that the banks put in place appropriate policies and standard operating procedures to ensure fulfilment of the qualifying criteria.
The RBI also said that all microfinance loans extended by rural regional banks and local area banks would also attract a risk weight of 100%.
Loan disbursements by microfinance institutions touched over a two-year low in the December quarter at Rs 220.9 crore, 36% lower on year, a report by the Microfinance Industry Network released on Tuesday said.
Watch LIVE TV, Get Stock Market Updates, Top Business, IPO and Latest News on NDTV Profit.
