Reserve Bank of India sets 100% risk weight for microfinance consumer credit loans and clarifies 75% retail portfolio treatment

The Reserve Bank of India (RBI) has revised regulatory capital risk weights for banks’ microfinance loan exposures, setting a 100% risk weight for microfinance loans in the nature of consumer credit and clarifying when other microfinance loans may be treated as retail exposures. For commercial banks (including small finance banks, but excluding regional rural banks and local area banks), microfinance loans classified as consumer credit are excluded from the higher 125% risk weights introduced for consumer credit in the 16 November 2023 measures and will instead attract a 100% risk weight. Microfinance loans that are not in the nature of consumer credit and meet all four qualifying criteria under paragraph 5.9.3 of the RBI’s Basel III capital regulations may be included in a regulatory retail portfolio and attract a 75% risk weight, provided banks have appropriate policies and standard operating procedures to ensure the criteria are met. For regional rural banks and local area banks, all microfinance loans will attract a 100% risk weight. The instructions apply from the date of issuance to both outstanding and new microfinance loans, with other provisions of the referenced circulars remaining unchanged.