RBI's new norms on unsecured lending to hit bank loan growth, squeeze NBFCs: S&P

In response to the Reserve Bank of India's (RBI) introduction of new norms pertaining to unsecured lending, Standard & Poor's (S&P) highlighted potential effects on the Indian banking landscape. S&P's evaluation suggests that the adjustment in risk weights could constrain bank loan growth and exert pressure on non-banking financial companies (NBFCs).

Despite these challenges, S&P offered a silver lining by anticipating that the heightened risk weights could ultimately support the asset quality within the banking sector.  It further clarified that while these changes are anticipated to influence the financial sector, the immediate impact on credit ratings for Indian financial entities is not expected.

However, brokerages have expressed apprehension about the impact of these new norms, predicting that personal loans and credit cards may become costlier as a result. The RBI's stringent regulations involve a substantial increase in risk weights for banks and NBFCs, necessitating a higher capital requirement for each loan issued.

Specifically, the risk weight for retail loans, encompassing personal loans and credit card loans, has been elevated to 125%, up from the previous 100%. Certain loan categories such as housing, education, vehicle loans, and loans secured by gold and gold jewellery will be excluded from this adjustment, as clarified by the RBI.

RBI Governor Shaktikanta Das had previously raised concerns about the rapid growth in unsecured personal loans during the bi-monthly monetary policy review in October. Although no immediate steps to restrict such lending were announced, the RBI's discomfort with the surge in unsecured personal loans was evident.

While these loans have been lucrative for lenders due to higher interest rates, concerns regarding potential defaults and write-offs during economic downturns have been voiced within the financial industry. Senior figures from Fitch Ratings, Piramal Capital and Housing Finance, as well as ICRA, echoed these apprehensions, emphasising the risk of higher defaults on unsecured loans.

Governor Das also highlighted measures to enhance stability, such as permitting smaller NBFCs to utilize credit risk mitigation instruments and allowing urban cooperative banks to increase the ticket sizes of bullet gold loans, aiming to stimulate economic activity.