“The strengthening of underwriting standards by the Reserve Bank of India with higher risk-weighted assets is credit positive as lenders will have to allocate higher capital for such loans improving their loss-absorbing buffers and may dampen their growth appetite,” Moody’s Investor Services said in a statement on Monday. .
During the last week, on 16 November 2023, the Reserve Bank of India (RBI) raised risk weights on riskier unsecured retail loans and credit cards from banks and non-banking finance companies (NBFCs) by 25 percentage points.
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The unsecured segment has grown very rapidly in recent years exposing financial institutions to a potential spike in credit costs in the event of sudden economic or interest rate shocks, Moody’s Investor Services said.
Over the past few years, India’s unsecured loan segment has become highly competitive with banks, NBFCs and financial technology (fintech) companies, including several new entrants, aggressively growing loans in this category, Moody’s said.
In the past two years, personal loans have grown about 24% and credit card loans have grown by an average of 28% compared to the general banking sector’s credit growth of about 15%, according to Moody’s.
Several NBFCs, which till now focused on secured lending categories like infrastructure, real estate and vehicles, according to Moody’s, have also pivoted to these riskier segments. The net interest margins for such loans are also shrinking due to steep competition.
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Several banks and NBFCs are raising unsecured loans through fintech firms. However, fintechs’ lending and collection models are largely untested and could expose the NBFCs and banks to quality volatility, Moody’s said.
Moody’s expects that banks will be able to absorb higher risk weights on their capital because the exposure of the total banking sector to unsecured retail credit is small at approximately 10% of loans in September 2023 and the total capitalization of the sector is at historically high levels with Common Equity . Tier 1 ratio of 13.9% in March 2023.
However, the impact of the new underwriting rules could vary among individual lenders depending on their exposure to unsecured loans, Moody’s said.
The regulator also increased risk weights on banks’ exposure to NBFCs by 25 percentage points on a selective basis. The higher risk weights will be applicable to NBFCs, which have so far benefited from risk weights below 100% due to their higher domestic ratings,” Moody’s said.
However, the stress of higher risk weights will be moderate according to Moody’s because it will not be applicable to loans extended for housing finance and priority sectors such as agriculture and micro, small and medium enterprises, among others.
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Updated: 20 Nov 2023, 16:45 IST
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