Higher risk weights not tantamount to turning off credit tap: RBI

The Reserve Bank of India on Friday said the decision to increase risk weights for certain segments of consumer loans is not akin to turning off the credit tap but only a prudential measure to calibrate growth in certain segments of unsecured lending.

“It is not tantamount to turning off the tap, the tap is open but only maybe the pressure has been reduced a bit. So, I don’t think that is really the intention and unlikely to be the outcome of the measure which we have announced,” Deputy Governor Rajeshwar Rao said in the post policy press meet.

Governor Shaktikanta Das said the central bank is proactive in monitoring the financial sector and individual financial institutions, and remain up to date.

“Our endeavor is also to try to use the smell test. Whenever we smell any stress building up anywhere at the system level or at individual entity level, we deal with it in the appropriate way,” he said, adding these are precautionary measures taken before “the bubble bursts or the stress builds up”. 

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Deputy Governor Swaminathan J said that RBI had made efforts over the last 3-4 months by sensitising lenders to put in place adequate internal control measures to ensure that risk buildup is avoided, to bring certain prudence and end any sort of exuberance exhibited by certain lenders.

“As the market was not responding enough to that, there was necessity for…we watched the data and basis that we have taken certain measure to strengthen the prudential measures that regulated entities have to put in place,” he said.

Swaminathan reiterated that the intention is not to curtail growth, which is why growth driver segments such as home, vehicle or SHG loans have been excluded.  However, the central bank does expect that lenders conduct themselves and draw their business models in a manner in where any avoidable risk buildup can be mitigated.

These measures were intended to “address the inter-connectedness that was building up within the financial system” given that unsecured loans were growing that 24-25 per cent yoy as against overall system credit growth of 12-14 per cent, and there was outlier growth by NBFCs in some segments. “It is not to deny liquidity, it is not to ration the lending.”

Slow ticket loans

On concerns regarding a slowdown in small ticket loans of less than ₹50,000 due to the higher risk weights, Swaminathan said that segment comprises less than 0.5 per cent of total loans outstanding and thus does not pose great risk on its own.

“Whatever lending that was taking place for which a clear end use was not visible or were completely unsecured without a clear purpose, is what will get curtailed. Basis this, there will be some recalibration of business models and also the growth numbers. That is what is the intended effect of the regulation so if it is playing, it is only giving the intended results,” he said.

He added that the higher risk weights have only brought them back to levels that were prevalent pre-Covid but were relaxed during the pandemic to facilitate the “very unusual situation”.