Moody’s Investors Service on Monday said the RBI’s decision to tighten norms for personal loans is right. Last week, the Reserve Bank of India tightened rules for banks and non-banking finance companies (NBFCs) for loans such as personal loans and credit cards that are considered unsecured. In the revised criteria, the risk weighting was increased by 25 percent. Moody’s said unsecured loans have grown rapidly over the past few years, leaving financial institutions exposed to potential increases in borrowing costs in the event of a sudden economic or interest rate shock.
“Tightening underwriting norms for high risk-weighted assets is a credit-wise move, as lenders will need to allocate higher capital to better position themselves against losses,” Moody’s said in a statement. The unsecured loan segment has become very competitive over the past few years. Many new entrants including banks, NBFCs and finance technology (fintech) companies are aggressively expanding loans in this category.
According to Moody’s, personal loans have grown by an average of 24 per cent and ‘credit card’ loans by an average of 28 per cent in the last two years, while overall banking sector credit growth has hovered around 15 per cent. Credit rating agency S&P Global Ratings said last week that the Reserve Bank’s decision to tighten consumer lending standards by increasing risk weighting for personal loans considered unsecured is likely to reduce banks’ capital adequacy by 0.6 percent. This move will reduce risky bank lending to customers. Also, there is likely to be pressure on the non-bank sector in particular. S&P Global Ratings said this would increase interest rates on loans, reduce credit growth and increase the need to raise capital for weaker financial institutions. On the other hand, a higher risk weight will ultimately lead to better asset quality.