Ever since RBI governor Shaktikanta Das publicly flagged high growth in personal loans and credit card outstanding, banks have been seeking to play down the concerns, arguing that their unsecured book forms a very small portion of loan portfolio, and it was the NBFCs and fintech players that were undertaking that business.
RBI’s worry stems from bank lending to NBFCs, which then offer unsecured and personal loans. Besides, lending practices of banks have also been tracked and there appears to be discomfort with the tenure of consumer loans now stretching to five years, when they were typically extended for two-three years. RBI on Thursday increased risk weight on personal loans and credit card outstanding to slow down growth in these segments.
In the monthly bulletin, RBI said around 80% consumer durable purchases during the festival season was through consumer financing schemes “spiced up” with attractive EMI offers.
Some of the loans that are being offered are also seen to be bereft of adequate security cover. For instance, the RBI circular refers to top-up loans against vehicles, which are depreciating assets, and banks have been calling up borrowers to offer fresh loans on their cars, which are six-seven years old. Now, the rules have been changed to treat such loans as unsecured loans, which requires banks and NBFCs to set aside more capital, which will increase the borrowing cost.
Up to September 22, on a year-on-year basis, growth in bank credit to NBFCs was estimated at 26%, while credit card outstanding grew 29% and loans for consumer durables by around 11%.
The assessment is banks have sufficient capital, well above regulatory need in most cases, and there will not be any significant pressure on books. Coming at end of festival season, overall consumer demand is also unlikely to be affected but the action will send a strong message that regulator is willing to go beyond an “open mouth policy” and take “proactive steps” in areas where it believes that can create negative surprises in future, even though there may not be an imediate risk. In the past too, RBI has resorted to use of risk weights to discourage loans to segments which it deems are risky.