The Reserve Bank of India’s decision to increase the risk weight of unsecured retail loans was expected. The country’s central bank had hinted at tighter norms as it made obvious on several occasions its discomfort with the high pace of unsecured retail credit growth in banks as well as non-banking financial companies (NBFCs).
Unsecured retail loans have been growing at over 20 per cent in many banks and NBFCs for a very long time. The banking regulator was alarmed by the unnecessary exuberance witnessed in this space. The heightened growth in personal loans for the purchase of goods used for instant gratification was seen both as a precursor of delinquencies as well as a trigger for high inflation. With its latest move, RBI has put a leash on both, without being too ‘extravagant’.
The banking regulator has increased the risk weight of unsecured personal loans from 100 per cent to 125 per cent for banks and NBFCs. For credit card loans, the risk weight has been increased from 125 per cent to 150 per cent in the case of banks and from 100 per cent to 125 per cent for NBFCs. This means that against every Rs 100 lent in unsecured loans, banks will have to maintain ₹125 in capital.
This will not only dissuade banks from lending against no security but in a way also apply the brakes on discretionary consumption that may lead to inflationary pressures. The central bank wants to achieve this without resorting to an unceremonious hike in interest rates, a move that would create unnecessary panic.
This newspaper had in the past highlighted how banks and NBFCs expanded their unsecured loan books despite RBI’s discomfort with high double-digit growth in retail loans. It also highlighted a recent RBI report that said loans to young borrowers through fintech NBFCs have gone up 100 times from 2015 to 2021. Clearly, RBI had seen the cracks and tried to fix them before they grew into a bigger problem.
The unsecured retail loan, especially in the fintech space, is seeing a lot of dynamism—not all of which is good. The unchecked growth of this space has also exposed it to ‘unscrupulous’ activities. Timely action was needed even if it would later cause a temporary momentum loss in credit growth.