RBI’s timely action helped curb potential risks in unsecured consumer credit: Das

Timely action by the Reserve Bank of India last November through increase in risk weights on unsecured consumer credit and bank credit to NBFCs pre-empted build-up of potential risk, resulting in moderation in credit growth in these segments, according to Governor Shaktikanta Das.

Referring to the regulatory and macro prudential restrictions on unsecured consumer credit and bank lending to NBFCs (non-banking finance companies), Das said: “We saw that in the credit market some potential problem would have built up...the headline (credit growth) numbers were looking good, the parameters (bad loans levels) were looking good. Even now they’re alright, there is no problem. But, we thought, if left unattended, these vulnerabilities can become a bigger problem. So, we thought it is better to act in advance and slow down the credit growth which was happening in these segments.”

Unsecured credit

The Governor, in his inaugural address at the Second Global Conference on Financial Resilience organised by the College of Supervisors, observed that there was some evidence of dilution of underwriting standards, proper loan appraisal not being done, and the mentality to join the bandwagon and just go for unsecured credit.

“I cannot afford to say that we are smelling a crisis on every occasion, but it is our endeavour to smell a crisis....It’s at the back of our mind all the time to see if something is building up either at the systemic level or in an individual institution/ organisation,” Das said, adding that while pursuit of business growth is important, it should never come at the expense of taking on unacceptable risks.

Pointing out that supervision of regulated entities has become a complex task, he emphasised that RBI is trying to ensure that supervisory methods are not only in sync with times, but also see the stress before it builds up so that proactive measures can be taken.

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In his bi-monthly monetary policy statement on June 7, Das observed that in November last year, RBI had flagged certain concerns on excessive growth in the unsecured retail loans and over-reliance of NBFCs on bank funding.

Recent data suggest that there is some moderation in these loans and advances, he added.

Rise in risk weights

Consequent to the increase in risk weights, credit growth in unsecured personal loans such as ‘credit card outstanding’ declined from 34.2 per cent in November 2023 to 23.0 per cent in April 2024, while bank credit growth to NBFCs declined from 18.5 per cent in November 2023 to 14.4 per cent in April 2024.

“We are closely monitoring the incoming data to ascertain if further measures are necessary. The Boards and top management of REs (regulated entities) should ensure that risk limits and exposures for each line of business are kept well within their respective risk appetite framework,” the Governor then said.

He also observed that the persisting gap between credit and deposit growth rates warrants a rethink by the Boards of banks to re-strategise their business plans. A prudent balance between assets and liabilities has to be maintained.