RBI’s Revised Risk Weights Propel Need for Rs 84,000 Crore Excess Capital in Banking Sector

BB Desk
BB Desk

SBI Economists

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BuzzBytes 22 Nov.
In a recent revelation, economists from the State Bank of India (SBI) underscore the imperative for an additional Rs 84,000 crore in excess capital within India’s banking system. This financial demand arises from the recalibration of risk weights on unsecured loans by the Reserve Bank of India (RBI). The SBI economists, in their comprehensive analysis released on Friday, shed light on the RBI’s strategic use of liquidity and macro prudential measures to attain growth and inflation objectives, emphasizing that repo rates have now peaked.

“The immediate consequence of heightened risk weights is the augmented need for capital within banks. Based on our calculations, the banking industry necessitates Rs 84,000 crore of excess capital,” asserted the report.

In a recent policy move, the RBI increased risk weights on unsecured personal loans, credit cards, and lending to Non-Banking Financial Companies (NBFCs) by 25 percentage points.

The decision to elevate risk weights is perceived as the RBI’s proactive stance to mitigate potential financial stability risks within the system, according to the SBI economists’ report. These measures align with a shift towards an expected loss-driven stress recognition system for regulated entities, coupled with heightened regulatory scrutiny on 15 upper layer NBFCs.

The report posits that the RBI’s initiatives aim to reinstate the status quo ante of 2019, following the central bank’s reduction of the risk weight on consumer credit (excluding credit card receivables) to 100 per cent from 125 per cent in September of that year.

This development underscores the proactive measures undertaken by the banking sector to navigate evolving regulatory landscapes and sustain financial stability.