In the October monetary policy committee (MPC) meeting, RBI Governor Shaktikanta Das flagged the high growth in certain components of consumer credit and had cautioned banks and NBFCs against it.
The Reserve Bank of India’s (RBI) latest decision on consumer loans will likely make banks and non-banking financial companies (NBFCs) raise rates in certain segments, experts said.

This will eventually lead to some pressure on the profit of banks and NBFCs in the coming quarters, they said.

The central bank raised the risk weight on consumer loans of banks and NBFCs by 25 percent on November 16.

Earlier, banks attracted a risk weight of 125 percent and NBFCs 100 percent. After RBI’s latest move, the same will stand at 150 percent and 125 percent for banks and NBFCs, respectively.

Consumer loans include credit cards, some personal and retail loans. A jump in risk weight means lenders have to set aside higher capital against these loans.

Industry experts said that profits will face a marginal pressure as exposure to consumer loans by banks and NBFCs has been increasing for the past few quarters.

“The action will automatically reduce the pace at which banks are growing certain segments and this will reduce profit as well. The profit also depends on whether banks will pass on how much they pass on to the borrower, the cost of this additional requirement for capital,” said R Gandhi, former deputy governor, RBI.

had previously reported about the rising exposure of banks and NBFCs to unsecured and consumer loans.

Additionally, to slow down the growth on certain consumer loans mentioned by the RBI, banks and NBFCs would work on increasing their lending rates.

“The announcement by the central bank is expected to lead to higher capital requirement for the lenders, and, hence, an increase in lending rate for the borrowers,” said Karthik Srinivasan, Senior Vice President and Group Head, Financial Sector Ratings, ICRA.

In the October monetary policy committee (MPC) meeting, RBI Governor Shaktikanta Das flagged the high growth in certain components of consumer credit and had cautioned banks and NBFCs against it.

“The need of the hour is robust risk management and stronger underwriting standards,” Das said in October’s MPC.

Additionally, Das said that there is a need to strengthen internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards, in their own interest.

In the circular on November 16, the RBI said that the increase in the risk weight of consumer credit exposure of commercial banks (outstanding as well as new), includes personal loans. Others, like housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, have been excluded.

For NBFCs, the risk weight is extended to retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/ self-help group (SHG) loans.

Gandhi said that the central bank has been cautioning banks.

“Naturally, anything that grows very fast will attract attention. This is the reason why the RBI has put this restriction to make certain loans a little costlier for the borrowers,” Gandhi said.

Aggressive lending

The latest sector credit data showed that banks’ exposure to personal loans grew to Rs 48.26 lakh crore in September 2023 versus Rs 37.02 lakh crore in September 2022.

In the July-September FY24 quarter, some top Indian banks, including HDFC Bank, ICICI Bank, and Kotak Mahindra Bank, increased their unsecured loan portfolios by as much as 30 percent.

HDFC reported a growth of 15.5 percent in its personal loans to Rs 1.78 lakh crore from Rs 1.54 lakh crore in the corresponding quarter last year. ICICI Bank’s personal loan portfolio grew 40 percent to Rs 1.04 lakh crore from Rs 74,355 crore. Kotak Mahindra Bank’s unsecured portfolio stood at Rs 38,311 crore in the July-September quarter, compared to Rs 25,580 crore a year earlier, registering growth of 49.76 percent.

By bemaad

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