RBI: Governor of the Reserve Bank of India (RBI), Shaktikanta Das, stated on Thursday that the expansion of unsecured loans has been restrained by the central bank’s prompt action. The Reserve Bank of India increased the risk weights on bank loans to non-banking financial organizations (NBFCs) and unsecured credit in November 2023.
At a College of Supervisors (CoS) conference, Shaktikanta Das also cautioned banks against the “mindless pursuit of bottom lines,” pointing out that certain profit-driven business models might have undiscovered weaknesses and emphasizing that risk management shouldn’t be sacrificed for profitability.
According to Das, bank loans to NBFCs have moderated from a 30% level to 18% since the shift to unsecured loans, and credit card outstanding loan growth has decreased from 30% year-over-year (y-o-y) in November to 25% level.
The central bank increased the risk weight for bank loans towards consumer credit, including personal loans, from 100% to 125%; for consumer loans from NBFCs, the risk weight increased from 100% to 125%; and for credit card receivables, the risk weight increased from 125% to 150% and from 100% to 125% for NBFCs.
In all circumstances where the risk weight according to the NBFCs’ external rating is less than 100%, the risk weight for bank lending to NBFCs has been enhanced by 25% above and beyond the risk weight connected with the specified external rating.
We observed that the built-up may have been a potential issue in the lending market. The headline figures and other metrics were looking fantastic, and they continue to do so. Nevertheless, we believed that these weaknesses might have grown into more serious issues if neglected,” Das added. In light of the possibility of dilution of underwriting criteria and improper assessment, he continued, “it is better to act in advance and slow down credit growth in these segments.”
Furthermore, the implementation of cutting-edge technology like big data analysis and AI/ML can greatly enhance banks’ and NBFCs’ capacity to withstand and respond to a variety of risks as the financial industry becomes more digitally integrated. But it’s important to make sure these technologies are trustworthy, safe, and in line with the institution’s overarching strategic objectives.
The operations and customer service of the regulated company may be directly impacted by a vendor’s incapacity to provide services on a consistent basis. As a result, choosing third-party contractors requires careful due diligence,” the governor stated.
