BackReserve Bank of India's tightening of lending norms for riskier unsecured retail loans is credit positive- Moody's
RBI norms tweak-The RBI decision to tighten norms on riskier unsecured personal loans as per Moody's Investor Services is credit positive as lenders will need to allocate higher capitals for such loans improving their loss-absorbing buffers and may dampen their growth appetite
Premium"The tightening of underwriting norms by Reserve Bank of India through higher risk-weighted assets is credit positive because lenders will need to allocate higher capitals for such loans improving their loss-absorbing buffers and may dampen their growth appetite", said Moody’s Investor Services in a statement on Monday.
During the last week, on 16 November 2023, the Reserve Bank of India (RBI) raised risk weights on riskier unsecured retail loans and credit cards by banks and non-bank finance companies (NBFCs) by 25 percentage points.
Also Read-Mankind Pharma share price hits all-time high after FTSE Global inclusion
The unsecured segment has been growing very 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 said Moody’s Investor Services.
Over the past few years, India’s unsecured lending segment has become very competitive with banks, NBFCs and financial technology (fintech) companies, including several new entrants, aggressively growing loans in this category, said Moody's
In the past two years, personal loans grew around 24% and credit card loans grew 28% on average compared with overall banking sector's credit growth of around 15%, as per Moody's
Several NBFCs, which until now focused on secured lending categories such as infrastructure, real estate and vehicle loans, as per Moody’s have also pivoted to these riskier segments. The net interest margins for such loans are also declining because of steep competition.
Also read- NSE SME stock hits 20% upper circuit after incorporation of Singapore subsidiary
Several banks and NBFCs are sourcing unsecured loans through fintech companies' apps. However, fintechs' loan origination and collection models are largely untested and could expose the NBFCs and banks to asset quality volatility, said Moody’s.
Moody’s expect banks to be able to absorb higher risk weights on their capital because the overall banking sector’s exposure to unsecured retail credit is small at around 10% of loans as of September 2023 and the sector’s overall capitalization is at historically high levels with a Common Equity Tier 1 ratio of 13.9% as of March 2023.
However, the impact of the new underwriting rules could vary among individual lenders depending on their exposure to unsecured loans, said Moody’s
The regulator has also increased risk weights on banks' exposure to NBFCs by 25 percentage points on a selective basis. The higher risk weights will be applicable to NBFCs which until now benefitted from risk weights below 100% because of their higher domestic ratings", said Moody’s.
However, the strain from higher risk weights will be moderate as per Moody’s because it will not be applicable to loans extended for housing finance and priority sectors such as agriculture and micro, small and medium enterprises, among others.
Milestone Alert!Livemint tops charts as the fastest growing news website in the world 🌏 Click here to know more.
