Shares of banks and NBFCs (non-banking finance companies) slumped up to 7% on 17 November after the Reserve Bank of India (RBI) tightened the norms for consumer credit.

The bank regulator tightened the norms for consumer credit as it asked banks and NBFCs to assign a higher risk weight for unsecured loans. This move has been taken with the aim of making lenders more cautious about such advances.

The central bank has increased the risk-weights on banks’ unsecured personal loans and consumer durable loans from 100% to 125%, and on credit cards, it has been increased to 150% from 125%.

The risk-weights on NBFCs credit cards, unsecured personal loans, and consumer durable loans have been increased to 125% from 100%.

The RBI said, “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 jewelry, by 25% points to 125%.”

A higher risk weight means that the banks and NBFCs have to set aside more funds as a safety net for consumer loans that would make such credit more expensive.

RBI Governor Shaktikanta Das said that while the credit growth for the overall banking system remains stable and healthy, certain components of personal loans are recording significant growth.

At 3:30 pm, the shares of State Bank of India closed 3.72% lower at Rs 562.90 on NSE. The shares of Axis Bank closed 3.28% lower at Rs 992.65 on NSE. The shares of ICICI Bank closed 1.62% lower at Rs 920.80 on NSE.