RBI ups consumer loans’ risk weights

Bankers and financial sector experts said this would mean borrowers of such loans would have to shell out more as lenders try to compensate for the increase in capital requirement.

Personal loans at India’s largest private lender HDFC Bank are currently available at interest rates ranging from 10.5% to 25% for salaried employees, showed data on its website.

Graphic: Mint

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Graphic: Mint

“The cost of borrowing and cost of lending will go up a little. Banks will either try to shift from unsecured towards more secured loans or reduce the volume of unsecured loans,” a senior private sector banker said on the condition of anonymity.

Macquarie said in a report on Thursday that HDFC Bank and SBI Cards & Payment Services are among the most impacted in terms of contraction in common equity tier one (CET 1) ratios.

The high growth in consumer credit and increasing reliance of non-banking financial companies (NBFCs) on bank loans, RBI said in a statement, were also highlighted by governor Shaktikanta Das in interactions with heads of major banks and large NBFCs in July and August 2023, respectively.

The growth in some unsecured loans—loans not backed by collateral—has outstripped total credit growth by a wide margin. For instance, credit card outstanding increased 30% year-on-year (y-o-y) in September, other personal loans grew 25% and consumer durable loans rose 11%. Overall bank credit growth was 20% in the same period, showed RBI data.

Before Thursday’s increase, consumer credit by banks and NBFCs attracted a risk weight of 100%. While bank credit card dues had a risk weight of 125%, those from non-banks had 100%. That apart, bank loans to NBFCs, excluding the category of core investment firms, are risk-weighted as per ratings assigned by external credit assessment institutions. For consumer loans, the rise will be effective on outstanding as well as new loans.

On Thursday, RBI said the risk weights to NBFCs will now have an additional 25 percentage points over and above the risk weight assigned by the external rating. This will apply in cases where the current risk weight of NBFCs is below 100% and excludes loans to mortgage lenders and NBFCs that are eligible for classification as priority sector.

Categories like housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery would not be affected by RBI’s measure.

Karthik Srinivasan, group head of financial sector ratings at Icra said although the increase in risk weights for consumer loans is in line with expectations, an increase in risk weight for lending by banks to non-banks was unexpected. “These higher lending rates by banks to non-banks could also spill over to corporate bonds by way of higher yields and widening of credit spreads for non-banks,” Srinivasan said in a statement.

The regulator also directed banks and non-bank financiers to review their existing sectoral exposure limits for consumer credit. In case they do not have such internal guardrails, RBI said lenders should put in place board-approved limits on various sub-segments under consumer credit. RBI specifically wants them to have limits for all unsecured consumer credit exposures.

Mint reported on 29 June that RBI was likely to raise risk weights on unsecured loans by 10-25 percentage points to caution banks against unfettered lending in this category. The higher the perceived risk, the greater the risk weight assigned to a particular loan category.

Meanwhile, banks and NBFCs have been taking preemptive steps to safeguard their balance sheets against any distress among borrowers of personal loans. Given that these are unsecured loans, it makes it difficult for lenders to recover their dues if they sour. Lenders have sounded caution on some personal loans, especially those below 50,000.

Aditya Birla Finance, which has a personal and consumer loan portfolio of 19,326 crore, said it is calibrating its growth, tightening its underwriting processes and keeping a close watch on this portfolio. According to the company, the unsecured personal and consumer loans with ticket size less than 50,000 and tenure less than 30 days, which comprises Buy-Now-Pay-Later credit through partners, is 2% of its overall loan book. “Our portfolio looks very stable, but we have been monitoring this portfolio closely in terms of taking decisions. So, to give an example, of customers who are onboarded nine months ago, 12% now have leverage, which is one-and-a-half times of what they had nine months ago,” Rakesh Singh, managing director and chief executive of Aditya Birla Finance Ltd told analysts after announcing the second-quarter earnings.

Paytm believes growth in personal loans will gradually start but not at the pace seen earlier. It saw a near-doubling of its personal loan book to 4,062 crore between the quarters ended September 2022 and June 2023.

However, the momentum slowed down as the personal loan book shrank to 3,927 crore at the end of September quarter.

Another fintech non-bank Mcapital, the lending arm of Mswipe Technologies Ltd, has decided to stop fresh unsecured loans for the next six months. The company, which had assets under management of 100 crore at the end of fiscal year 2023, had plans to expand AUM to 1,000 crore by FY24. Ketal Patel, chief executive officer, Mswipe told Mint that the focus is on customer profitability.

“We don’t want to lend for the next six months. We will continue to run down the book. This will ensure my capital is safe. We want to keep NPA at less than 2%,” said Patel.

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Updated: 17 Nov 2023, 12:00 AM IST

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