Banks seek clarity from RBI on realty risk weight hike

Some banks have approached the Reserve Bank of India ( RBI) after being directed to raise risk weights to 150% on some of their commercial real estate (CRE) exposures against the regular 100%. The observations to raise risk weights on certain CRE accounts were made during the third quarter inspection, said two executives aware of the developments.

Risk weights determine the capital that banks have to set aside to cover credit risk; a higher risk weight leads to more capital requirement for a loan.

"This issue was discussed in an internal meeting of banks last month, and it was decided to seek clarification from the RBI," said one of the executives, who did not wish to be identified.

Some banks have also individually approached the regulator since more capital towards risk weights will impact their lending and they plan to formally raise this issue through the Indian Banks' Association (IBA), he said.

As per the RBI's 2009 guidelines, CRE exposures backed by collateral are subject to 100% provisioning, while any unsecured portion is assigned a higher risk weight.

"During the annual inspection, banks were told that as per the April 2024 Basel guidelines issued by the banking regulator, risk weights were to be 150% for cases even if the aggregate exposure of the banking system is less than Rs 100 crore for accounts which were rated earlier and subsequently have become unrated," said the executive.

Queries emailed to the RBI did not elicit any response till press time.