Raising risk weight on unsecured bank loans right step: Moody’s

New Delhi: Moody’s Investors Service on Monday said the RBI’s decision to tighten rules for personal loans is right. The Reserve Bank of India last week tightened the rules for banks and non-banking finance companies (NBFCs) related to loans like personal loans and credit cards considered unsecured. The risk weight in the revised criteria was increased by 25 percent. Moody’s said unsecured loans have been rising rapidly over the past few years, leaving financial institutions facing a potential increase in borrowing costs in the event of a sudden economic or interest rate shock.

“Tightening underwriting norms for high risk-weighted assets is the right move for credit as lenders will need to allocate higher capital to better position themselves against losses,” Moody’s said in a statement. ‘ India’s unsecured loan segment has become very competitive over the last few years, the statement said. Many new entrants including banks, NBFCs, and finance technology (FinTech) companies are aggressively expanding lending in this category.

According to Moody’s, personal loans have grown by an average of about 24 percent and ‘credit card’ loans by an average of 28 percent in the last two years, while overall banking sector credit growth has been around 15 percent. Credit rating agency S&P Global Ratings had last week said the Reserve Bank of India’s decision to tighten consumer lending norms by increasing the risk weight for personal loans considered unsecured is likely to reduce banks’ capital adequacy by 0.6 percent. This move will reduce risky bank lending to consumers. Also, there is a possibility of pressure especially on the non-bank sector. 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, higher risk weighting will ultimately lead to better asset quality.