R.S. Gandhi, the former deputy governor of the Reserve Bank of India (RBI), said banks and non-banking finance companies (NBFCs) needed to have a policy on unsecured lending with a clear cap on loans following last week’s decision by the regulator to raise the risk weights in the segment.
In an interaction organised by Motilal Oswal, Gandhi said the tightening by the RBI was not a sudden move, and it was forced to intervene because banks and shadow lenders had not heeded its repeated cautions issued in the past.
Last Thursday, the RBI hiked the risk weightage against unsecured consumer loans to 125 per cent from 100 per cent. The risk weight against credit cards of banks was also increased 25 percentage points to 150 per cent.
According to RBI data, the personal loan & credit card segments have reported a CAGR (compounded annual growth rate) of 22 per cent over the past two years.
The apex bank, as a mark of caution, asks lenders to moderate exposure if it is concerned by very high growth rates in any particular segment.
In retail loans, the RBI did not flag off home and car loans as they have strong collateral, which is not the case in consumer credit where the collateral tends to be weak.
Gandhi said this made the RBI grow more worried about the rising risks of delinquencies in the consumer loan segments which could hamper profitability.
The central bank may not look at any particular targeted growth in the segment, but would closely observe the spirit and the intention of the board to implement the new RBI norms.
Gandhi said if the growth continues even after the implementation of the revised risk-weight measures, the RBI may use other levers such as putting an upper cap on growth in certain segments.
Moody’s Investors Service on Monday said the RBI's decision to increase the risk weight against unsecured consumer loans is credit positive. Lenders will now need to allocate higher capital for these loans, thereby improving their loss-absorbing buffers.
The rating agency said in a statement that unsecured loans have been growing rapidly in the past few years, exposing financial institutions to a potential spike in credit costs in case of sudden economic or interest rate shocks.
The benchmark Sensex shed more than 139 points on Monday amid an IPO rush this week that will see five companies looking to raise more than Rs 7,300 crore.
Indian Renewable Energy Development Agency Ltd (IREDA), a PSU enterprise will kick off the action on Tuesday. It will be followed by Tata Technologies, Flair Writing Industries, Gandhar Oil Refinery (India) Ltd and Fedbank Financial Services Ltd — all of them will open for subscription between November 22 and November 24.
Market experts said that since liquidity is limited and there are multiple issues, retail investors should pick their choice after considering factors such as valuations and chances of allotment.