Since the Reserve Bank of India wants banks to go slow on unsecured loans, a major impact could be felt in securitization of such loans. Further with the central bank governor highlighting the potential risks to the country’s financial balance due to increased reliance on technology, industry insiders fear that banks will go slower in dealing with technology enabled NBFCs.
In a note issued today, credit rating agency ICRA said the decline in non-banking finance companies’ (NBFCs) consumer credit portfolios is expected to slow down in the current year.
Selling down is the act by which the NBFCs, which hold these unsecured assets on their books, sell them to banks or secure them against liquidity. This helps them liquidate their assets on time and free up cash for further lending.
On the same note, ICRA said that ‘off-selling’ of loans by consumer lending NBFCs stood at Rs 1,150 crore in FY2023. In the first half of the current fiscal year, the amount has already crossed Rs 800 crore, ICRA said.
On November 16, the RBI increased the risk weights of unsecured credit for NBFCs and banks to 125% from 100% earlier. This has created a massive ripple across the ecosystem as consumer loans have shot up in recent times.
RBI data shows that in the last two years, credit card outstanding has increased by 64%, while personal loans and consumer term loans have increased by 57%.
On November 22, the RBI Governor said that banks should be careful about relying heavily on technology to sign customers, thus instructing lenders to slow the disbursement of consumer credit.
“Banks and NBFCs should be careful to rely only on pre-set algorithms as assumptions based on which the models are powered,” RBI Governor Shaktikanta Das said at a conference organized by FICCI and the Indian Banking Association in Mumbai.
Das added that customer insurance models need to be calibrated multiple times to ensure they account for changing macroeconomic conditions.
“It is necessary to be careful about any undue risk accumulation in the system due to information gaps in these models,” he said.
In general, Das spoke about the interconnectedness of the banking ecosystem. Lending fintechs, NBFCs and banks all operate as part of the same value chain, and any significant risk accumulation in one part can quickly escalate across the chain.
This is not the first time the governor has asked banks to be careful. Last month, Das similarly asked financial services players to be careful while extending unsecured consumer credit.
Industry insiders told ET that there is bound to be some slowdown in the market as the cost of funds for NBFCs and fintech lenders will rise soon.
While there will be some impact in unsecured consumer loan books, the larger securities market should continue to grow as this asset class forms less than 3% of the overall space, ICRA said in the note issued today.