RBI rules out risk weight reduction on unsecured loans

The Reserve Bank of India (RBI) Wednesday effectively ruled out incentivizing uncollateralized loans in the broader pursuit of boosting credit offtake and undergirding consumption demand, underscoring that risk weights restored about 18 months ago on unsecured advances merely reflect a return to pre-Covid prudential norms.“The RBI’s decision to raise the risk weights on personal loans should not be viewed as an increase,” said Sanjay Malhotra, RBI Governor. “We have merely returned the risk weights to their original level, where they were prior to the COVID era. During COVID, they were temporarily reduced to support loan growth.” The risk weights on such exposure were restored, in November 2023, to 125 basis points of advances following a skewed rise in unsecured loans.Malhotra also noted that despite numerous requests since then for a reassessment, the regulator believes there should be a distinction in risk weights between various types of loans.“There needs to be a clear difference between the risk weights of secured and unsecured loans,” Malhotra explained. “We have maintained a 25 basis point difference between the two categories.”RBI data on sectoral bank credit deployment indicates that since November 2023, there has been a notable increase in growth in other collateral-backed segments, such as loans against fixed deposits, shares, and gold jewelry loans that are perceived as lower-risk from a bank’s asset quality perspective. By contrast, growth in credit card dues and unsecured loans has slowed.For instance, growth in loans against fixed deposits, which was 6.7% in December 2023, increased to 11.9% by February 2025. Similarly, loans against shares and bonds, though from a smaller base, grew from 8.5% in December 2023 to 16.7% in February 2025. Even loans against gold jewelry saw a sharp rise, growing from 18.6% to 87.4% over the same period.During this time, the growth rate of credit card dues fell from 32.6% to 11.2%, and the growth of unsecured loans decreased from 22.9% to 7.9%.