In light of the Reserve Bank of India’s (RBI) more stringent attitude on unsecured loans, Finance Minister Nirmala Sitharaman issued a warning on Thursday, advising small finance banks and non-bank financing firms (NBFCs) to respect the red line and to temper their exuberance.
Speaking at the ‘DATE with Tech’ event in New Delhi, Ms. Sitharaman issued a warning, asking NBFCs and small financing institutions to tread carefully and not overdo their enthusiasm.
“Enthusiasm is good but sometimes it becomes a bit too far for people to digest. So as a measure of caution the RBI has also alerted small finance banks, NBFCs to be careful that they don’t go too far too soon and face any downside risks later,” Sitharaman said in a statement.
Recently, the RBI increased the risk weight on unsecured personal and credit card loans from lenders by 25%. As of the end of June, credit card loans were INR 2.10 trillion, while personal loans from banks stood at INR 10.25 trillion, according to Jefferies.
Shaktikanta Das, the governor of the Reserve Bank of India, stated on Wednesday that the bank’s earlier this month harsher stance on unsecured loans was a preventative measure meant to ensure financial stability.
The most recent announcement by the RBI to raise the risk weights for consumer credit exposure (primarily on unsecured asset classes) of banks and non-banking financial companies (NBFCs) by 25%, according to rating agency ICRA, is expected to have an effect on the loan sell-downs of retail personal loan pools, which had been gaining traction in recent years. Personal loan NBFCs engaged in loan sell-down (direct assignment transactions) of around INR 1,150 crore in FY23 and surpassing INR 800 crore in H1 FY24.
According to the circular on regulatory actions towards consumer credit and bank lending to non-banking financial enterprises, a similar increase has also been made in the case of credit card receivables.
Consequently, banks and NBFCs now have risk weights on credit card exposures that are 25 percentage points higher at 150% and 125%, respectively.