RBI may increase risk weight on personal loans if they start looking shaky: Experts

Reserve Bank of India

The Reserve Bank of India (RBI) may increase the risk weights on the personal loans if the risk on these assets increases, banking experts and economists told Moneycontrol on October 9.

The risk on these assets came under the spotlight after RBI Governor Shaktikanta Das, during the monetary policy announcement, said the central bank was monitoring signs of risk on these assets after very high growth.

According to RBI data, personal loans grew 30.8 percent on-year as on August 25, 2023, as compared to 19.4 percent on-year as on August 26, 2022.

Higher risk will restrict banks’ lending capacity in the personal loan segment as the capital charge will go up. As per the RBI, the risk weight for consumer credit, including personal loans, but excluding credit card receivables, is 100 percent.

“The RBI advised banks and NBFCs to strengthen internal surveillance, address risk build-up and implement suitable safeguards to ensure robust risk management and stronger underwriting standards. We note that if risks increase, regulatory actions such as higher-risk weights cannot be ruled out,” said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.

Further, Sanjay Agarwal, Senior Director, Care Ratings said banks and NBFCs will perhaps make norms stricter after this caution.

Also read: RBI is on active liquidity management mode

What the RBI Governor said

During the monetary policy announcement, RBI Governor Shaktikanta Das said certain components of personal loans have been recording very high growth. These were being closely monitored by the Reserve Bank for any signs of incipient stress.

“Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest. The need of the hour is robust risk management and stronger underwriting standards,” Das said.

Further, Das said the global financial landscape is rapidly changing and potential stress may emerge from unanticipated corners.

“The Reserve Bank is closely monitoring the evolving situation and will act proactively to maintain financial stability,” Das added.

In the post policy press conference Das said in certain segments of retail credit, the RBI saw high credit growth. So, the move was only to caution banks to strengthen their internal surveillance systems, watch trends and take whatever measures are required.

“As far as the Reserve Bank is concerned, the Reserve Bank Supervision Department monitors it very intensively. But the first line of defence is the bank,” Das added.

Also read: Interview: Shaktikanta Das good at short-term fixes, says ex-finance secy Subhash Garg

Policy action

On October 6, the Monetary Policy Committee (MPC) of the RBI, as expected, left the repo rate—the rate at which the central bank lends short-term funds to banks—unchanged at 6.5 percent.

“The MPC voted unanimously to leave the repo rate unchanged at 6.5 percent,” Das said while announcing the MPC’s decision.

Further, the MPC also decided to leave the Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) rates unchanged at 6.25 percent and 6.75 percent, respectively.

Das also “emphatically” reiterated that the MPC’s inflation target was 4 percent and not 2 to 6 percent. “Our aim is to align the inflation target to a durable basis, while supporting growth,” he noted.