RBI’s Decision To Enforce Higher Risk Weight On Unsecured Personal Loans Is Credit Positive: Moody’s

The rating firm termed the revised rules as credit-positive and said lenders will now need to allot increased capital for such loans, in turn, improving their loss-absorbing buffers. 

The Reserve Bank of India’s decision to enforce stricter norms for unsecured personal loans is credit positive, Moody’s Investors Service said on Monday. The rating firm termed the revised rules as credit-positive and said lenders will now need to allot increased capital for such loans, in turn, improving their loss-absorbing buffers. 

Last week, the banking regulator, RBI, increased risk weights on unsecured retail loans, credit cards, and lending to non-banking finance companies (NBFCs) by 25 percentage points. The rating agency noted that unsecured loans have been on the rise over the last few years, and as such, have exposed financial institutions to a possibility of a jump in credit costs in the event of a sudden economic or interest rate shock, reported PTI. 

In its statement, Moody’s noted, “The tightening of underwriting norms through higher risk-weighted assets is credit positive because lenders will need to allocate higher capitals for such loans improving their loss-absorbing buffers and may dampen their growth appetite.”

The credit rating agency stated that over the last few years, the unsecured lending space has become increasingly competitive in India, and banks, NBFCs, and fintech (financial technology) companies have been actively boosting loans in the segment. Over the last two years, personal loans jumped about 24 per cent, while credit card loans increased 28 per cent on average, against the credit growth of 15 per cent observed by the overall banking sector. 

“We expect banks would be able to absorb higher risk weights on their capital because the overall banking sector's exposure to unsecured retail credit is small at around 10 per cent of loans as of September 2023 and the sector's overall capitalization is at historically high levels with a Common Equity Tier 1 ratio of 13.9 per cent as of March 2023,” Moody’s noted. 

At the same time, the agency stated that the impact of the new rules could differ among individual lenders on the basis of their exposure to unsecured loans. Last week itself, S&P Global Ratings said that the decision from the banking regulator is expected to affect banks’ capital adequacy by 60 basis points. This decision could result in increased lending rates, reduced credit growth, and raise the need for fundraising among weak lenders.