RBI Busts The Personal Loan Party

The RBI Governor has been trying to get the banks and NBFCs to go slow on personal loans but in vain.

<div class="paragraphs"><p>Indian rupee bank notes. (Source: Usha Kunji/BQ Prime)</p></div>
Indian rupee bank notes. (Source: Usha Kunji/BQ Prime)

When caution and warning fail, action is needed. That’s what the RBI has done with the measures announced on Thursday evening to curb the relentless rise in consumer loans. The central bank has asked banks and NBFCs to make higher provisions to ring-fence the risk arising from unsecured personal loans and credit card loans. This measure is likely to have a system-wide impact.

But first, let’s take a look at the timing.

  1. The announcement comes soon after the Diwali festivities have ended. It appears that the RBI did not want to disrupt the festive cheer.

  2. The RBI did not wait for the monetary policy announcement on Dec. 8 to announce this measure. To that extent, there seems to be a sense of urgency.

  3. There have been apprehensions that such personal loans are being diverted to speculative trading in the equities market, though the terms of the loans do not allow for it.

  4. It’s the wedding season. Spending will rise in different forms.

  5. It’s election season, too. The season of loan waivers and freebies arising from competitive populism.

The RBI Governor has been trying to get the banks and NBFCs to go slow on personal loans, but in vain. The only option was to make recalcitrant institutions fall in line. But the measures are so sweeping that they could have a considerable impact, both directly and indirectly, on the financial markets.

Now, for the impact on banks. Since the rules apply to new and old loans, banks have to set aside a substantial amount against such loans. Banks will be reluctant to lend more and rework their growth strategies.

One of the worst hits from this move will be unsecured retail-focused non-banks. Not only will they have to set aside higher capital for the lending they did, but bank lending towards these shadow lenders will attract a higher risk weight, pushing up their borrowing cost.

So, is the RBI shutting down the tap and the main water line?

The other thing the central bank did was introduce sub-segment limits for unsecured loans. This will force lenders to think about how they have been growing their unsecured book. Balance is of the essence.

It is unclear why the regulator felt the need to do this. If prudence were the guiding factor, every banker worth their salt would say that they were more prudent than the next guy.

The bigger question then is: Are lenders already facing huge defaults and hiding bad loans in a way that escapes scrutiny?

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