RBI Pushes Measures To Improve Retail Credit Flow

The Reserve Bank of India announced measures to improve the flow of credit to consumers and small businesses.

Risk weight on unsecured consumer credit, including personal loans, has been cut from 125 percent to 100 percent, according to its statement on developmental and regulatory policies. Outstanding amount on credit cards is excluded from this relaxation. The RBI said the final guidelines would be released by the end of this month.

Typically, such loans attract a higher risk weight owing to the perceived risk involved in unsecured loans. Lower risk weights help banks reduce capital allocation for such lending, allowing them to extend more loans.

“The 125 percent risk weight is much higher than what Basel framework requires us to make,” said NS Vishwanathan, deputy governor, RBI. “Moreover, the higher risk weights were placed at a time when the credit growth in the sector was really heating up excessively in 2004.”

According to Morgan Stanley, the move should release capital for banks and encourage incremental lending. “This could be positive for consumption demand. We believe the benefit should apply prima facie to unsecured loans—we await clarity on other categories.”

Gautam Chhugani, analyst at Bernstein, however, cautioned that the move may not be prudent.

The banking sector regulator also increased the exposure that banks take to large NBFCs and changed the priority sector lending guidelines to ensure that credit extended by non-banking finance companies to weaker segments qualifies for this status.

The exposure-limit for single NBFCs has been raised to 20 percent of tier-1 capital from 15 percent earlier. This is intended to ensure that bank funds continue to flow to large NBFCs at a time when debt markets remain risk-averse.

In addition, the RBI said bank credit to NBFCs for on-lending as agriculture loans up to Rs 10 lakh, small and medium enterprise loans up to Rs 20 lakh and housing loans up to Rs 20 lakh is covered under the priority sector. Loans extended by all NBFCs can qualify as opposed to only by microfinance companies earlier, the regulator said.

Morgan Stanley said the decision should improve the flow of credit to both large and small NBFCs in these segments, where banks are comfortable taking balance sheet risk.

The RBI’s easier norms for consumer credit come as banks have been pushing retail loans to grow their balance sheet amid stress in large corporate loans. While they prefer secured lending such as housing and auto loans, credit card and personal loans have shown rapid growth too.

Bank lending through credit cards rose 27.5 percent year-on-year in June to Rs 94,900 crore, according to monthly data collated by the RBI. Other personal loans, including unsecured loans, rose 23.2 percent to Rs 6,25,600 crore. Overall retail loans for the banking system rose to Rs 22,53,800 crore in June, up 16.6 percent from a year ago.

After the global financial crisis in 2008, the Indian banking system had faced a crisis in its retail loan book owing to rapid growth in unsecured lending. Since then, the banking system has tightened its credit assessment process by involving credit bureaus to verify a customer’s repayment capability.

While there have been no serious red flags in the consumer credit space, certain specific indicators point to a shift. According to data released by TransUnion CIBIL in June, individual debt as a percentage of the gross domestic product rose to 27 percent as of March 2019 compared with 19 percent four years ago. Earlier this month, BloombergQuint reported that while household debt jumped to 3.94 percent of the GDP after falling for four straight years, household savings remain at a multi-year low of 17 percent of the GDP in 2017-18.