Can the RBI Slow India’s Retail Lending Binge?
Introduction and Background
In a recent statement, Shaktikanta Das, the governor of the Reserve Bank of India (RBI), expressed concern over the rapid growth of retail loans, particularly personal loans and credit card receivables. These types of loans are unsecured, meaning they lack underlying assets that can be sold off in case of default. As a result, they pose a higher risk to banks and non-banking financial companies (NBFCs).
To address this issue, the RBI announced an increase in the risk weights associated with retail loans, requiring banks to allocate more capital against these loans. The measure excludes housing loans, education loans, vehicle loans, and loans against gold jewelry.
Implications and Impact
Under the new norms, banks will need to set aside ₹10 as capital for every ₹100 they lend as personal loans, up from the previous requirement of ₹8. This additional capital requirement applies not only to new loans but also to existing ones. Furthermore, banks and NBFCs will also need to allocate more capital for credit card receivables and loans given to NBFCs.
The increase in capital requirements means that banks and NBFCs will need to generate higher returns to maintain their margins. Achieving this may involve raising interest rates, which could deter potential borrowers and in turn slow down loan growth. The RBI hopes that this measure will bring retail loan growth to a level that is more comfortable for the central bank.
Factors Leading to the Lending Binge
The growth of retail loans, especially credit card receivables and personal loans, has outpaced overall loan growth. This can be attributed to various factors, including the aggressive lending practices of fintech companies that form alliances with banks and NBFCs. These collaborations have resulted in a surge in small-ticket personal loans.
Furthermore, the post-pandemic weak financial situation of the less well-off may have compelled them to rely on small personal loans. On the other hand, the well-to-do individuals may be engaging in revenge consumption, leading to increased demand for larger personal and retail loans.
Long-Term Trends
Over the past decade, Indian banks have shifted their focus from lending primarily to industries to providing retail loans. This shift is evident in the decline of bank lending to industries from over 46% of non-food credit in early 2013 to 22.9% in September 2023. In contrast, retail lending by banks has steadily increased and now stands at 31.9%.
Public sector banks (PSBs) have shown considerable growth in retail lending, with a 19.1% increase in the year ending March 2023. Private banks have also witnessed significant growth, with a 21.8% increase in retail lending in the same period. This preference for retail loans is driven by the perception that they are less risky compared to loans to industries.
Potential Risks and Future Outlook
The lending binge in retail loans raises concerns about potential risks for banks and NBFCs. Credit card receivables and personal loans represent approximately 9.6% of non-food credit. However, the highest risk seems to lie in small-ticket personal loans, which form a negligible portion of overall bank loans.
Additionally, banks’ loans to NBFCs account for around 9.4% of non-food credit, with a significant proportion likely dedicated to personal loans. This makes NBFCs more exposed to the risks associated with these types of loans.
Nevertheless, retail borrowers face greater enforcement measures in case of default, which may discourage them from defaulting on loans.
It remains to be seen how the RBI’s capital requirement adjustments will impact interest rates and loan growth. The ultimate outcome will depend on various factors and is difficult to predict with certainty.
Conclusion
The RBI’s concerns over India’s retail lending binge have prompted the implementation of measures to address the risks associated with personal loans and credit card receivables. The increased capital requirements aim to ensure financial stability and bring loan growth to a more sustainable level. The long-term shift towards retail lending reflects banks’ perceptions of lower risks in this segment. However, the lending binge also poses potential risks for banks and NBFCs. The future impact will depend on various factors, including interest rates and borrower behavior.
Disclaimer:
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