The impact of the increase of risk weights on certain segments of unsecured personal loans, credit card receivables and NBFCs (outstanding and new) by the RBI is being interpreted by experts in different ways. But much would depend upon individual outstanding exposures of regulated entities (REs) to these sectors. The risk weight has been raised from 100 to 125 for unsecured personal loans while exempting housing, vehicle, education and gold loans.

In the case of NBFCs, loans to SHGs/microfinance activities are also exempt from the new norms. All top-up loans on moveable assets which are depreciating in nature will be treated as unsecured. The risk weight for credit card receivables, which grew at close to 30 per cent during 2022-23 (over the year to September), goes up from 125 to 150. Loans to higher-rated NBFCs will go up by 25 basis points from existing risk weights.

The RBI has been flagging the risks in retail loans of regulated entities from time to time. In its Financial Stability Report (FSR) of June 2023, the RBI indicated stress in low-ticket retail loans — more importantly in unsecured personal loan segment and credit card receivables. Ten per cent of retail borrowers were found to be missing monthly repayment commitments. Though the GNPAs of retail loans were at 1.4 per cent in March 2023, special mention accounts (SMAs) were high at 7.4 per cent. In its monetary policy review of October, the RBI again alerted banks that “certain components of personal loans” were going up, with a build up of credit risk. Banks and NBFCs were advised to strengthen their internal controls to address the build-up of credit risks.

Flow of credit

Despite this, the flow of credit to retail segments continued to grow, at 18.2 per cent during March-September2023. Out of the outstanding retail loans, about a third pertains to the unsecured segment. Loans to NBFCs were growing at 20 per cent. Though the regulated entities are free to follow a business model of their choice, when the regulator observes a build-up of systemic risks through off-site surveillance, appropriate action can follow. This is the result of the inability of REs to respond to concentration of credit risk.

After factoring in the increased risk weights, the capital adequacy ratio (CAR) of banks can potentially dip. Since banks are presently comfortable with CAR, it may not adversely affect them in the near term. But going forward, REs will have to increase the interest rates and slow down the flow of credit. Retail is a sector where the mass of existing customers opens up opportunities for cross-selling non-core products. Similarly, smart customers also resort to smart cross-buying products. If they are offered non-core products — insurance and mutual funds, they may demand personal loans at competitive interest rates which will now end. The tendency to encourage transfer of existing credit card balances to new card issuers may also end. The interest rates on the rollover of credit card dues will also go up. The demand for gold loans will rise as the cost of obtaining personal loans and consumer durable loans rises.

Taking a cue from the present RBI guidelines, REs should become more sensitive towards institutionalising prudent risk management practices, failing which the central bank may have to come up with stringent regulations that could impinge upon the growth prospects. Henceforth, REs should have board-approved limits of exposure in various sub-segments under consumer credit to mitigate credit risks.

When the pricing of these loans increases, the demand and consumption of consumer goods will also come down.

Notwithstanding such adversities, the RBI move is in the larger interest of the long-term sustainability of the financial sector to avert credit risk concentration.

The writer is Adjunct Professor at the Institute of Insurance and Risk Management. Views are personal