Impact of Higher Risk-Weighted Assets

The cover story in the latest issue gave me some good insights on banks and the road ahead. However, with the RBI raising a red flag concerning unsecured retail loan growth, what could be the impact? - Hetal R

Editor Responds: We appreciate your kind words of encouragement. The Reserve Bank of India’s (RBI) tightening of underwriting norms by imposing higher risk-weighted assets is a positive development for credit. This is because financial institutions will be required to set aside more capital for loans, enhancing their ability to absorb losses and potentially curbing their eagerness for aggressive expansion. While banks are anticipated to bear the brunt of increased risk weights on their capital, the impact is expected to be moderate.

This is primarily due to the fact that the banking sector’s exposure to unsecured retail credit stands at a relatively low 10 per cent of loans as of September 2023. Additionally, the sector maintains historically high levels of capitalisation, boasting a common equity Tier 1 ratio of 13.9 per cent as of March 2023. Notably, the higher risk weights will not apply to loans extended for housing finance and priority sectors, such as agriculture and micro, small and medium enterprises. Keep writing us with your queries.