The Reserve Bank of India's move to increase risk weights on unsecured consumer loans is 'credit positive' as lenders will need to allocate higher capitals, according to Moody's Investors Service Inc.
The allocation will improve lenders' loss-absorbing buffers and may dampen their growth appetite, the credit ratings agency said.
On Nov. 16, the RBI announced that consumer loans for banks and non-banking financial companies, barring home loans, education loans, vehicle loans, microfinance and gold loans, will attract a credit risk weight of 125% as compared with the previous 100%.
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.
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