Unsecured personal loans and credit cards have seen significant growth over the last three years. As of Sept. 30, unsecured personal loans extended by banks were at Rs 12.4 lakh crore, up nearly 26% year-on-year. Credit card outstanding loans were at Rs 2.17 lakh crore, up 30%.
Apart from raising risk weights for unsecured loans, the central bank said that bank loans to retail NBFCs will also attract higher risk weights. In the case of NBFCs, where the loan extended carries a risk weight lower than 100%, the RBI said that the new risk weights will be 25% higher. This will exclude housing finance companies and NBFCs doing priority sector lending.
“The increase in risk weights for consumer loans is in line with expectations, though an increase in risk weight for lending by banks to non-banks was unexpected,” according to Karthik Srinivasan of ICRA Ltd.
These announcements are expected to result in higher capital requirements for the lenders and, hence, an increase in the lending rate for the borrowers, he said.
“These higher lending rates by banks to non-banks could also spill over to corporate bonds by way of higher yields and a widening of credit spreads for non-banks,” Srinivasan said.
The RBI has also taken measures to curb any excessive lending towards a specific segment of unsecured credit. According to the latest circular, the regulator requires banks and NBFCs to define their exposure limits for unsecured loans. These limits will not only be at the segment level but even at the sub-segment level, the RBI said.
“The REs (regulated entities) shall 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,” the regulator said in its circular.
Such sub-segment level limits will impact growth strategies at banks, as they will have to be careful about where they are growing and by how much.