Money & Banking

Reduction of risk weights on consumer loans is credit negative: Moody’s

Our Bureau Mumbai | Updated on September 18, 2019 Published on September 18, 2019

The recent reduction in risk weighting on banks' consumer loans is credit negative as it will encourage them to increase their exposure to this loan segment at a time when credit risks are already increasing from a slowing economy, cautioned Moody's Investors Service.

On 12 September, the RBI reduced risk weighting on consume loans such as personal loans to 100 from 125 per cent.

The global credit rating agency said within rated banks, HDFC Bank Limited has a higher exposure to the personal loans segment and are thus more vulnerable to the potential rise in asset risk as a result of this development.

The agency assessed that reduction of risk weights is credit negative for banks because it will lower the capital requirements and thus the loss absorbing buffer on these loans. It will also encourage banks to further increase their exposure to this cyclical segment at a time when the macroeconomy is slowing.

According to Moody's, recent data has pointed to a sharp deceleration in economic and consumption growth in the first quarter of fiscal 2020, when real GDP growth slipped to a multi-year low of 5 per cent, within which private consumption grew only 3.1per cent.

This raises the risk that asset risk on unseasoned personal loans will rise as a result of potential deterioration in household financial conditions, it added.

The agency said personal loans have been reporting strong growth in India over the last few years. The segment's compounded annual growth rate (CAGR) of around 22 per cent over fiscal 2013-2019 far exceeded that of 11 per centin overall banking system loans over this period.

The agency observed that personal loan growth has been particularly strong among large private sector banks.

Private sector banks (IndusInd Bank, Kotak Mahindra Bank, Axis Bank, ICICI Bank and HDFC Bank) reported the strongest growth in personal loans six year CAGR of personal loans segment across Indian Banks

Moody's said strong growth of personal loans in recent years were supported by the yields offered by these unsecured loans which were amongst the highest within retail lending. A benign credit environment, characterized by relatively low credit costs across all key retail loan segments, was a key driver of this growth as it prompted banks to focus on personal loans for their higher yields.

Published on September 18, 2019
This article is closed for comments.
Please Email the Editor