A few days after the Reserve Bank of India (RBI) tightened norms on unsecured lending, Governor Shaktikanta Das emphasized that the recent move is preventive, and targeted and is in the interest of sustainability.
“We have also recently announced some macro prudential measures in the general interest of sustainability. These measures are premature in nature. They are calibrated and targeted,” he said.
“We continue to focus on strengthening governance and assurance functions, ensuring effective risk management and robust lending practices,” he said.
Last week, in a circular, the central bank said that in a review, it has been decided that the consumer credit exposure of NBFCs – outstanding as well as new – is categorized as retail loans, excluding housing loans, education loans, vehicle loans, loans against gold jewelery and microfinance/SHG loans, will attract a risk weight of 125%. The loan exposures of NBFCs generally attract a risk weight of 100%.
Another key announcement that the RBI has made in terms of credit exposure is to increase the risk weights on exposures of SCBs to NBFCs by 25% points, above the risk weight associated with the given external rating, in all cases where the existing risk weightage in terms of external rating of NBFCs is below 100%.
Industry players believed that the increase in risk weights will affect the capital adequacy of lenders, thereby making them set aside more capital for such loans.
Since majority of online loan programs cater to consumer loans, the overall demand for such loans could decrease as they are non-essential in nature.
Also Read: RBI increases risk weight on consumer credit, bank credit to NBFCs
Precautionary measures advised by the Governor
In his speech, Das advised banks and NBFCs to take some precautionary measures.
Banks and NBFCs can take care to ensure that credit growth at the aggregate, sectoral and sub-sector levels remains sustainable and all forms of gaiety are avoided.
NBFCs are large net borrowers of funds from the financial system, where their exposure from the banks is the highest. They maintain loan relationships with several banks at the same time.
“It goes without saying that such concentrated linkages can create contagion risk. Although the banks are well capitalized, they must constantly assess their exposure to NBFCs and the exposure of individual NBFCs to multiple banks,” he said.
He further advised the MFIs to keep in mind the solvency and repayment capacity of the borrowers.
It is indeed for microfinance lenders to ensure that the flexibility provided to them in setting interest rates is used judiciously. They are expected to ensure that interest rates are transparent and not usurious, the Governor said.