look news india
Some of the country's leading private banks have increased the risk weightage on microfinance (MFI) loans in the last ten days, following directions from banking regulator Reserve Bank of India (RBI).
Recently, RBI has established dialogue with five major private banks of the country. In which the regulator forced the lenders to increase the risk weight of microfinance loans from 75 percent to 125 percent. Consider this loan as an unsecured loan. RBI's directive has come into effect with immediate effect. RBI's directive will have an impact on banks, which will require them to set aside more capital to deal with loan losses. There is a possibility of reduction in the earnings of banks. RBI's order to increase the risk weightage directly means that the loans given to microfinance will come under the category of unsecured loans.
The change puts microfinance loans in the same high-risk category as unsecured loans, while lower-risk loans such as affordable housing have a risk weight of 35 per cent. According to experts, the move is to ensure that banks' capital position reflects the risk profile of the assets on their balance sheets. Also, there are plans to tighten rules on microfinance loans in the coming months.
On the other hand, experts believe that if concerns about the MFI sector persist, the increase in risk weight may be applicable to all banks.
