RBI's measures aim to moderate unsecured loan growth, not halt credit flow

The Reserve Bank of India (RBI) clarified, during the post-monetary policy meeting press conference, that the tighter norms introduced for credit cards and personal loans are not intended to impede the flow of credit but rather to moderate excessive lending.

Deputy Governor M Rajeshwar Rao said that the measures are prudential, aiming to curb credit growth in specific sectors without completely shutting off the credit tap.
Rao explained during a post-policy media briefing in Mumbai that the move is about managing risk and ensuring a balanced approach to lending. "It is not tantamount to turning off the tap. The tap is open, but the only thing is that the pressure has been reduced," he added.

The central bank's concerns revolve around the soaring demand for personal loans and lending through non-bank finance companies (NBFCs), prompting the need for additional capital to cover potential risks.
Impact on unsecured lending portfolio

Macquarie, in a note, predicted that the tighter norms will likely have an impact on the loan growth in the unsecured lending portfolio of banks. This aligns with the RBI's objective to moderate credit growth and prevent the potential accumulation of risks in the financial system.

In response to the regulatory changes, Paytm has already announced plans to issue fewer loans below Rs 50,000. Reuters reported that banks and NBFCs have urged their fintech partners to reduce the issuance of tiny personal loans. 
Swaminathan Janakiraman, another Deputy Governor of the RBI, affirmed that loans below Rs 50,000 constitute less than 0.5 per cent of the total outstanding bank loans and do not pose a systemic risk.

Improved risk management practices

Swaminathan Janakiraman noted that the central bank's decision to increase the risk weight on consumer loans has led to enhancements in risk management and underwriting practices. The move, announced on November 16, involves raising the risk weight assigned to unsecured consumer loans by 25 percentage points to 125 per cent. This necessitates banks and NBFCs to set aside higher capital when extending such loans, ultimately promoting more cautious lending practices.

Janakiraman emphasised that the November measures were pre-emptive, aimed at sensitising financial entities to adopt additional controls. Early indications suggest positive outcomes, with improved risk management practices and underwriting procedures. The RBI reiterates that its intention is not to stifle loan growth but to ensure that lenders conduct their businesses with a focus on mitigating avoidable risk buildup.