Higher risk weights for bank loans to consumers address a systemic vulnerability that RBI has warned about and has now acted on. Consumer credit took some of the slack in industrial lending after banks were required to clean up their balance sheets. Shadow lending to infrastructure has also come under greater scrutiny, prompting NBFCs to redirect credit to consumers. Consumption remains the main driver of India’s growth, and has been instrumental in the post-pandemic economic recovery. But the associated concentration of consumer credit in the banking system requires macroprudential measures that are now in place. The proactivity of the central bank is guided by the stress generated in the banking system due to an earlier concentration of industrial credit.
The timing of the RBI move also suggests that it is now bullish on consumer recovery and industrial credit revival. Its monetary tightening cycle has been particularly susceptible to sacrificing growth, and the pressure on consumer credit is being applied when its impact is unlikely to be felt acutely. Banks are in good health and can absorb a slowdown in personal loans. The system-wide exposure to unsecured credit is within manageable limits. This may be the most opportune time to improve signing. RBI’s preventive action now stands in stark contrast to the lending freeze it had to subject banks to as a cure for their bad loans a decade ago. Credit is one of the supports for consumption. And the others, like prices and incomes, remain in place. These are needed more to boost consumption further down the pyramid. Credit typically flows to the most consuming segments, which makes for uneven and slow growth. GoI is signaling its intention to extend welfare commitments, and RBI has taken its signal to curb systemic instability.