The Reserve Bank of India, on Thursday, moved to curb high growth in unsecured personal loans and credit cards. The central bank has raised credit risk weights on unsecured consumer loans, which will make lending in that segment expensive for banks and non-bank financial companies.
According to the circular, consumer loans for banks and NBFCs, barring home loans, education loans, vehicle loans, microfinance and gold loans, will attract a credit risk weight of 125%, as compared with the previous 100%.
Credit card loans by banks will now attract a risk weight of 150%, as compared with 125% previously, and those by NBFCs will attract a risk weight of 125%, up from the previous 100%.
An increase in the risk weights for lenders directly impacts their capital adequacy ratio, as they have to set aside higher capital against such loans. This will likely make the loans more expensive for borrowers.
According to an explanation by Capital Mind's Deepak Shenoy, a capital adequacy ratio of 20% for unsecured personal loans implies that for every Rs 20 held as capital, the bank is extending Rs 100 as a loan.
Now, with the regulator's latest norm, this Rs 100 will be counted as Rs 125 (owing to the higher risk weight), which will directly bring down the capital adequacy of the bank to 16%.
In effect, if a bank has 20% CAR for personal loans (unsecured) or loan against fd/stocks, then it's lent Rs. 100 for Rs. 20 in capital. Now that Rs. 100 will be counted as Rs. 125 (125% risk weight) so the CAR falls to 16%.
Banks and NBFCs will now see much lower CARs.Unsecured personal loans and credit cards have seen significant growth over the last three years. As of Sept. 30, unsecured personal loans extended by banks were at Rs 12.4 lakh crore, up nearly 26% year-on-year. Credit card outstanding loans were at Rs 2.17 lakh crore, up 30%.
Apart from raising risk weights for unsecured loans, the central bank said that bank loans to retail NBFCs will also attract higher risk weights. In the case of NBFCs, where the loan extended carries a risk weight lower than 100%, the RBI said that the new risk weights will be 25% higher. This will exclude housing finance companies and NBFCs doing priority sector lending.
"The increase in risk weights for consumer loans is in line with expectations, though an increase in risk weight for lending by banks to non-banks was unexpected," according to Karthik Srinivasan of ICRA Ltd.
These announcements are expected to result in higher capital requirements for the lenders and, hence, an increase in the lending rate for the borrowers, he said.
"These higher lending rates by banks to non-banks could also spill over to corporate bonds by way of higher yields and a widening of credit spreads for non-banks," Srinivasan said.
The RBI has also taken measures to curb any excessive lending towards a specific segment of unsecured credit. According to the latest circular, the regulator requires banks and NBFCs to define their exposure limits for unsecured loans. These limits will not only be at the segment level but even at the sub-segment level, the RBI said.
"The REs (regulated entities) shall review their extant sectoral exposure limits for consumer credit and put in place, if not already there, board approved limits in respect of various sub-segments under consumer credit as may be considered necessary by the boards as part of prudent risk management," the regulator said in its circular.
Such sub-segment level limits will impact growth strategies at banks, as they will have to be careful about where they are growing and by how much.
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