Private Banks Increase Risk Weights On Microfinance Loans Following Regulatory Directive

New Delhi, Aug 14 (KNN) In a recent development, several large private banks have raised the risk weights on their microfinance loans from 75 per cent to 125 per cent over the past ten days.

This adjustment comes in response to a directive from the Reserve Bank of India (RBI), according to sources familiar with the matter, reported Moneycontrol.

The RBI has reportedly communicated this mandate to at least five major private banks, effectively placing microfinance loans in the same risk category as unsecured loans.

A senior official from one of the affected banks, speaking on condition of anonymity, confirmed that this change has been implemented with immediate effect.

This increase in risk weights will require banks to allocate more capital to cover potential loan losses, which could impact their profitability.

The move stands in contrast to lower-risk loans such as affordable housing, which carry a risk weight of only 35 per cent.

Industry insiders suggest that this regulatory action aims to ensure bank capital positions accurately reflect the risk profile of their assets.

Some in the sector anticipate further tightening of regulations on microfinance loans in the coming months.

Sources cite concerns over lapses in determining household incomes, overall borrower exposure, and the number of loans availed by individual borrowers.

These practices have reportedly led to signs of overheating in the microfinance sector. There are indications that if these concerns persist, risk weight increases may be extended to all banks.

The lack of adequate end-use monitoring for microloans is another factor believed to have prompted regulatory action.

Some industry executives argue that microfinance loans, originally intended to improve borrower productivity, are increasingly being treated similarly to unsecured loans due to reduced lender scrutiny.

Bandhan Bank, in its recent quarterly earnings report, disclosed that it had increased risk weights on its microfinance loans (classified internally as emerging entrepreneurs' business) to 125 per cent from 75 per cent.

The bank's management stated that this conservative approach impacts their overall capital adequacy ratio by approximately 362 basis points.

However, some bankers have expressed concerns about the potential conflict between this regulatory intervention and directives to increase priority sector lending, of which microfinance is a crucial component.

They argue that higher risk weights could discourage significant exposure to microfinance loans.

This development follows the RBI's November 2023 decision to raise risk weights on unsecured loans to 125 per cent from 100 per cent and on credit card loans to 150 per cent, amid rising risks in the unsecured lending sector.

The RBI has not yet responded to requests for comment on this matter.

(KNN Bureau)