Banking News

RBI’s risk weight hike on consumer credit: Slowing the party, not ending it


The regulator has pulled the punch bowl from the consumer loans party. Does that mean the party has come to an end. Hardly. The music is still on and many will remain on the dance floor. What it does is that it would contain the damage whenever it happens than what it would otherwise have been. RBI has raised risk weight on consumer credit by banks and NBFCs to 125%, compared to 100% earlier. An ET explainer.

What prompted the RBI to increase risk weights on consumer credit and what are its implications for lending to the segment?

The growth in retail loans, especially unsecured ones at 25% plus, and increased lending to NBFCs at 30% prompted the RBI’s intervention. The RBI’s decision was driven by concerns about the rapid growth in retail loans and bank lending to NBFCs, which together contributed around 50% of incremental credit in the last 12 months, according to a Macquarie report. The central bank is cautious about potential risks and wants to preempt any negative consequences.During FY22-2Q24, NBFCs’ unsecured loans grew 75% vs 45% for the overall system, leading to market-share gains in the system-level personal loan portfolio, according to a Jefferies report. RBI has tried to address these concerns and regulate lending practices.

What might be the impacts of the RBI’s decision on the lending behavior and borrowing trends?

While the immediate impact might slow down the lending “party,” the long-term effect will be to contain potential damage, particularly in preventing over-leveraging. RBI is concerned about consumers taking multiple loans, and the decision is a preventive measure against possible NPAs.

How are short-term consumer loans, especially those at 0% interest rates, expected to be affected by the regulatory changes?

Short-term consumer loans with 0% interest rates, like those for consumer appliances, might see a reduction in supply. While large players like Bajaj Finance may weather the impact, other NBFCs could face challenges in both capital and cost of funds.

What strategies are NBFCs expected to employ to cope with these changes?

NBFCs are expected to scale down business and adjust to the new regulatory framework. Consumers who borrow from fintechs may end up borrowing from informal lending segment as funds will dry up from regulated entities.

How will the increase in risk weights affect NBFCs, particularly in terms of their funding costs and capital requirements?

The increase in risk weights by the RBI will elevate funding costs for NBFCs and also impact capital requirements. This move will likely affect lending partners like Paytm, and the overall financial system is expected to become more cautious in disbursing unsecured loans. The eventual impact could be higher as even select NBFC exposures will attract more risk-weights for banks along with top-up loans against movable assets, according to a Macquarie report.

What are the potential implications for banks, especially those with lower common equity tier 1 capital (CET1) in light of the RBI’s move?

Banks with lower CET1 ratios may face challenges and slow down their risk in select NBFCs. Banks and NBFCs may also look to raise capital. While credit growth for the financial system may slow down, CET 1 of banks are expected to see a decline of 30-100 basis points due to the increased risk weight.


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