RBI’s reduction in risk weight on consumer loans is negative in terms of credit: Moody’s
The Reserve Bank’s (RBI) decision to reduce the risk weight on consumer lending, including personal loans, is negative for credit as it will encourage banks to increase their exposure to this segment of lending at one time. when credit risks are already increasing, according to a report by Moody’s Investors. Service.
On September 12, the Reserve Bank of India reduced the risk weight on consumer loans such as personal loans to 100 percent from 125 percent.
“The reduction is negative for credit as it will encourage banks to increase their exposure to this lending segment at a time when credit risks are already increasing due to a downturn in the economy,” he said. .
“The reduction in risk weights is negative in terms of credit for the banks because it will lower the capital requirements and therefore the loss absorption cushion on these loans. It will also encourage banks to further increase their exposure to this cyclical segment at a time when the macro economy is slowing. “
According to Moody’s, recent data showed a sharp deceleration in economic growth and consumption in the first quarter of fiscal 2020, when real GDP growth fell to a multi-year low of 5 percent, within which private consumption grew only 3.1 percent. hundred. This increases the risk that the asset risk on non-seasonal personal loans increases due to a potential deterioration in household financial conditions.
He said that personal loans have seen strong growth in India in recent years. The segment’s compound annual growth rate (CAGR) of approximately 22% in fiscal year 2013-2019 significantly exceeded the 11% growth rate of all banking system loans during this period. Growth in personal loans has been particularly strong among large private sector banks, the report notes.
The strong growth of personal loans in recent years has been supported by the returns offered by these unsecured loans which were among the highest in credit to individuals. A favorable credit environment, characterized by relatively low costs of credit in all key segments of personal lending, has been a key driver of this growth as it has prompted banks to focus on personal loans for their higher yields. .