RBI Increase Of Risk Weights On Unsecured Loans Is Credit Positive, Says Moody's

With the emergence of fintechs and NBFCs, the unsecured lending segment has become very competitive.

In the last two years, personal loans grew around 24% and credit card loans grew 28% on an average, compared with overall banking sector's credit growth of 15%, Moody's said. Hence, the impact of new rules could vary among lenders, depending on their exposure to unsecured loans.

Since the fintechs' loan origination and collection models are largely untested, this move could expose the NBFCs and banks volatility in asset quality, it said.

However, Moody's expects banks to absorb these risk weights as the overall banking sector’s exposure to unsecured retail credit is only at around 10% of loans as of September.

Even the sector's overall capitalisation is historically high with a common equity tier-1 ratio of 13.9% as of March, Moody's said.

The new guidelines have also increased risk weights on banks' exposure to NBFCs by 25 percentage points. Moody's expects the strain to be moderate as it will not be applicable to loans extended for housing finance and priority sectors like agri.