Outlier growth in personal loans and exposure to non-banking finance companies (NBFCs) were among the prominent issues that RBI top brass discussed with the chiefs of public sector banks and select private sector banks in a meeting on Wednesday.

The discussion on the aforementioned issues came about three months after the RBI raised the risk weights on consumer credit exposure of banks and NBFCs, and also on bank credit to NBFCs by 25 percentage points, in view of concerns regarding exuberance and the potential build-up of stress in this segment.

The RBI, in its latest financial stability report, cautioned that notwithstanding the low level of delinquencies, there are some signs of risk build up in the consumer credit segment.

“First, the transition matrix for consumer loans and personal loans showed an increase in their risk profiling, with downgrades exceeding upgrades. Second, relatively high vintage delinquency of personal loans (8.2 per cent) indicates declining standards of underwriting,” said the report.

Third, 42.7 per cent of customers availing consumption loans already had three live loans at the time of origination and 30.4 per cent of customers have availed more than three loans in the last six months. Fourth, 7.3 per cent of customers availing a personal loan below ₹50,000 had at least one overdue personal loan.

Bank credit to the NBFC sector grew at a slower clip of 15.1 per cent year-on-year (y-o-y) as on December 29, 2023, against 34 per cent as on December 30, 2022, per RBI data.

Single and group exposure limits are probably preventing banks’ from taking more exposure to NBFCs. Further, the increase in risk weight on Banks’ exposure to NBFCs (excluding loans to housing finance companies/HFCs, and loans to NBFCs which are eligible for classification as priority sector) is prompting the latter to tap debt market for raising resources. 

“Going forward, the recent increase in risk weights of select retail loan categories may have implications for NBFC credit growth at the overall, sectoral and sub-sectoral level,” said the FSR.

Liquidity

The discussion on liquidity risk management came in the context of the RBI having to infuse liquidity (via variable rate repo/VRR auction) or absorb liquidity (via variable rate reverse repo/VRRR auction) twice on some days to address deficit/surplus liquidity in the banking system in the last fortnight or so.

Usually, the RBI conducts one VRR or VRRR auction in a day based on its assessment of liquidity situation in the banking system.

While noting the resilience of the domestic financial system with healthy balance sheets of banks, RBI Governor Shaktikanta Das told top bankers that there is no scope for any complacency and they should continue to maintain their vigil around build-up of risks, if any.

Some of the other issues that Das highlighted related to Business Model viability; adherence to co-lending guidelines; IT and Cyber security preparedness, operational resilience, digital frauds; and strengthening of the internal rating framework.

The Governor stressed that customer grievance redress mechanism and protection of customers’ interests are of paramount importance for the safety and stability of the financial system and that of individual financial institutions.

He also encouraged the banks to actively participate in RBI’s FinTech initiatives and give a further push to the Digital Banking Units (DBUs).

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