Stepping in to address the build-up of risks and institute safeguards to stave off stress in the banking system, the Reserve Bank of India (RBI) Thursday increased the risk weights on the exposure of banks to consumer credit, credit card receivables and non-banking finance companies (NBFCs) by 25 percentage points up to 150 per cent.
Indian banks have seen a sharp rise in unsecured loans — mostly personal loans and credit cards — that has outpaced the overall bank credit growth of about 15 per cent over the past year, catching the Reserve Bank of India’s (RBI) attention.
Risk weight refers to the capital banks keep aside as provisioning to cover any loan defaults. The latest RBI move is expected to dissuade banks from targeting high growth in these sectors as it will become costlier for banks to maintain high credit growth.
On October 6, RBI Governor Shaktikanta Das cautioned banks and NBFCs about the high growth in the personal loan segments. It said certain components of personal loans are recording very high growth.
The RBI increased the risk weights for consumer credit exposure of commercial banks and NBFCs (outstanding as well as new), including personal loans, by 25 percentage points to 125 per cent. Housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery are excluded from this hike.
The central bank increased the risk weights on credit card receivables by 25 percentage points to 150 per cent and 125 per cent for commercial banks and NBFCs respectively.
Credit card outstanding of banks had shot up by 29.9 per cent on a year-on-year basis to Rs 2.17 lakh crore as of September 2023.
The RBI also increased the risk weights on banks’ exposures to NBFCs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100 per cent. For this purpose, loans to HFCs, and loans to NBFCs which are eligible for classification as priority sector in terms of the extant instructions will be excluded, the RBI said.
In another significant move, the RBI said all top-up loans extended by banks and NBFCs against movable assets which are inherently depreciating in nature, such as vehicles, should be treated as unsecured loans for credit appraisal, prudential limits and exposure purposes.
Das had advised banks and NBFCs to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest. The governor had said: “The need of the hour is robust risk management and stronger underwriting standards.”
The high growth seen in consumer credit and increasing dependency of NBFCs on bank borrowings were also highlighted by the RBI governor in the interactions with MDs and CEOs of major banks and large NBFCs in July and August 2023, respectively, the RBI said Thursday.
According to the RBI, banks and NBFCs should 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. In particular, limits should be prescribed for all unsecured consumer credit exposures. The limits so fixed should be strictly adhered to and monitored on an ongoing basis by the Risk Management Committee, the RBI said.
On November 7, the Centre for Advanced Financial Research and Learning (CAFRAL), set up by the RBI, had raised concern over the rise in the bank financing for non-banking finance companies. Following the market correction prompted by the IL&FS default and a brief pause due to the Covid-19 pandemic, bank financing for NBFCs has begun to rise again, it said. “This raises concerns about systemic contagion and underscores the need for tighter preventive measures to mitigate potential systemic fallout,” CAFRAL said.
Outlier growth, warning signs
– On October 6, while unveiling the monetary policy, RBI Dy Governor J Swaminathan said over the last couple of years, growth in retail credit has been close to 30 per cent in most institutions and unsecured retail credit has grown by 23 per cent on an average. In comparison to a 12-14 per cent credit growth in the other segments, growth in unsecured retail credit looks to be an outlier.
– Defaults in the credit card segment are rising. Gross non-performing assets in the credit card segment of banks rose by `951 crore to `4,073 crore in FY23 from `3,122 crore in FY22, according to the latest data obtained from the RBI under the RTI Act.