Moody's applauds RBI's move to tighten norms on unsecured loans as credit positive

Moody's Investors Service has lauded the Reserve Bank of India's (RBI) recent move to tighten norms for unsecured personal loans, citing it as credit positive. The decision involves a 25 percentage point increase in risk weights on unsecured retail loans, credit cards, and lending to non-banking finance companies (NBFCs). Moody's emphasises that this move is advantageous as it compels lenders to allocate higher capital for such loans, thereby enhancing their loss-absorbing buffers.

The rating agency points out that unsecured loans have experienced rapid growth in recent years, posing a potential risk to financial institutions in the event of sudden economic or interest rate shocks. The heightened risk weights, in conjunction with stricter underwriting norms, are deemed credit positive as they not only improve lenders' loss-absorbing capacity but also have the potential to curb their growth appetite.

In the highly competitive landscape of India's unsecured lending segment, which includes banks, NBFCs, and fintech companies, personal loans have surged by around 24 per cent and credit card loans by 28 per cent over the past two years. Moody's notes that the RBI's move is likely to impact individual lenders differently based on their exposure to unsecured loans.

While acknowledging that banks should be able to absorb higher risk weights given the sector's modest exposure to unsecured retail credit (around 10 per cent of loans as of September 2023), Moody's also highlights the historically high levels of the sector's overall capitalisation. The Common Equity Tier 1 ratio stood at 13.9 per cent as of March 2023.

This perspective contrasts with the recent analysis by S&P Global Ratings, which suggested that the RBI's decision could potentially impact banks' capital adequacy by 60 basis points. S&P Global Ratings also anticipated potential consequences such as higher lending rates, diminished credit growth, and increased capital-raising needs for weaker lenders.