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The Reserve Bank on Thursday tightened norms for unsecured personal loans for banks and non-banking financial companies.

The revised norms wherein risk weights have been increased by 25% points will not be applicable to certain consumer loans, including housing, education, and vehicle loans.

Besides, the norms will not be applicable to loans secured by gold and gold jewellery. These loans will continue to attract 100% risk weight.

Higher risk weight implies that banks have to keep aside more money as a buffer when it comes to unsecured personal loans.

In simple words, a higher risk weight restricts banks’ lending capacity.

Recently, RBI Governor Shaktikanta Das flagged the high growth in certain components of consumer credit and advised banks and Non-Banking Financial Companies (NBFCs) to strengthen their internal surveillance mechanisms, address the build-up of risks and institute suitable safeguards, in their own interest.

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The high growth seen in consumer credit and increasing dependency of NBFCs on bank borrowings were also highlighted by the governor during the interactions with MD/CEOs of major banks and large NBFCs in July and August, respectively.

“On a review, 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% points to 125%,” the RBI said in a circular.

The central bank has also increased the risk weights on credit receivables by 25% points to 150% and 125% for banks and NBFCs, respectively.