The Reserve Bank of India has flagged the risk building up in retail loan portfolios of banks and NBFCs on various occasions; the latest being during the October monetary policy announcement when Governor Shaktikanta Das asked lenders to strengthen internal checks to establish safeguards. Thursday’s move by the central bank to increase risk weights on certain consumer loans and on bank lending to NBFCs appears primarily aimed at reining in the growth in unsecured consumption loans.
The credit growth in recent months has been skewed towards retail borrowers and services. Credit to industry grew just 6 per cent in August 2023, with all big industries, excluding textiles and basic metals, witnessing slow credit growth. On the other hand, retail loans grew 18 per cent in this period, with credit card loans registering a scorching 30 per cent growth. Personal loans, at ₹48-lakh crore account for 31 per cent of total bank credit now. Of this, the unsecured portion accounts for roughly ₹15-lakh crore, or around one third. Competition in retail lending is leading to sharp practices, including evergreening of the retail loan book — or hiding the stress faced by these borrowers due to the fast-paced interest rate increases since last May. The central bank is, therefore, justified in trying to arrest risky loans by increasing the cost of borrowing. While the central bank is right in checking lenders from taking excessive risks to chase profits, it needs to be mindful about the negative impact of this move on consumption. With private investments showing no signs of revival, curbing consumption by increasing financing cost may not be conducive for growth. The increase in risk weights should, therefore, be reviewed at frequent intervals. .
The increase in risk weights on unsecured consumer loans and credit card receivables of commercial banks and NBFCs by 25 per cent and the increase in the weight for loans extended to NBFCs by scheduled commercial banks by 25 per cent are expected to have a higher impact on NBFCs than banks. With most banks having comfortable capital, the impact of higher provisioning may not impact their lending ability. But the move will constrain the lending capacity of NBFCs since they will be impacted on the borrowing as well as lending side. With both banks and NBFCs likely to hike interest rates to protect their margins, cost of finance is likely to move higher, deterring borrowers of unsecured loans.
It is good that retail loans backed by collateral such as housing, vehicle or gold loans and essential loans such as education loans, micro finance and SHG loans have been kept out of the ambit of the move. But the expenditure spurred by personal loans and credit card loans such as travel, entertainment, meeting medical exigencies or to spend on family functions also contributes to economic output. These loans are needed by small borrowers to bridge income shortfall. The increase in risk-weights should, therefore, not become a lasting feature.