The Reserve Bank of India (RBI) has recently mandated an additional 25 percentage point increase in risk weights for consumer credit and bank credit across banks and non-banking financial companies (NBFCs). This move implies a heightened capital requirement for banks, potentially resulting in increased interest rates for consumer loans.
During the October policy, Ashima Goyal, a member of the Monetary Policy Committee (MPC), subtly suggested that adjusting loan-to-value (LTV) ratios or modifying risk weights would be a more prudent approach than raising policy rates as a precautionary measure.
Akhil Mittal, Senior Fund Manager at Tata Asset Management, concurs, stating, "This aligns with the monetary policy stance aiming for a gradual reduction in easy money accessibility to mitigate the risks associated with artificial demand."
Mittal further emphasizes that the current surge in specific credit sectors poses a speculative demand risk, prompting the RBI's proactive measures to curb it. Acknowledging the limitations of relying solely on monetary policy, he adds that central banks explore alternative measures to maintain stability and achieve their objectives.
“Undoubtedly, the RBI's action signifies a deliberate change in approach. Rather than resorting to across-the-board policy rate hikes affecting all borrowers, the choice to tighten prudential standards, specifically within high-risk sectors like unsecured lending for discretionary purchases such as gadgets, showcases a more targeted strategy," explains Jaya Vaidhyanathan, CEO of BCT Digital.
Rishabh Goel, co-founder and CEO of Credgenics, observes that the RBI's measures indicate a departure from relying solely on conventional monetary policy tools like interest rate adjustments. Instead, the RBI is strategically exploring additional regulatory pathways to mitigate potential risks linked with unsecured lending.
"This step demonstrates a more nuanced method of managing inflation and demand, emphasizing the RBI’s dedication to employing a diverse array of tools to actively and effectively navigate dynamic economic challenges," Goel remarks.
Market analysts observe that the RBI is taking proactive measures by raising risk weights on unsecured loans, particularly in the small-ticket loans category. This underscores the central bank's commitment to fostering safer lending practices and promoting responsible consumer behavior through regulatory interventions.
According to Goel, the recent rise in risk weight assessment is predicted to result in a slight uptick in the pricing of unsecured loans, potentially causing a temporary slowdown in their unprecedented growth. Despite these alterations, the overall prospects for the retail lending sector remain strong due to various factors fueling consumption and growth."
"Following the Ukraine war last year, the RBI shifted its focus in April 2022, incrementally increasing the repo rate by 250 basis points between May 2022 and February 2023 to combat high inflation. Bringing inflation down to the acceptable target range of 4 percent has been the RBI's primary objective. It's important to note that raising interest rates is just one among the tools at their disposal."
"Goel emphasizes that the tightening of regulations in unsecured lending presents a strategic opportunity for lenders to reevaluate their approaches to loan disbursement and recovery. While these short-term adjustments might immediately impact operations, they are strategically positioned to generate positive and lasting effects on the lending industry's trajectory. As the industry adapts to these changes, the RBI's move creates room for innovation and underscores the significance of responsible lending practices.
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