RBI tightening of unsecured loans: Banks may need Rs.84,000 crore excess capital

• The Reserve Bank of India’s (RBI) has decided to increase the risk weight on the exposure of banks to
• Consumer credit,
• Credit card receivables
• Non-banking finance companies (NBFCs).

Why tightening of Unsecured Loans by the RBI?

• These measures are in continuity with
  • The tilt towards an Expected Loss (EL) driven stress recognition system for regulated entities
  • RBI’s recent move to subject 15 Upper Layer NBFCs to greater regulatory scrutiny.
• The move has been apparently taken to counter financial stability risks.

Impact of the RBI Directive on Banks and Consumers

• The banking industry will likely require Rs 84,000 crore of excess capital —
  • Or a five per cent increase over the Rs 15.2 lakh crore capital requirement to follow the directive.
• This will increase the cost of borrowing for consumers.
• There is an expectation of a 55-60 basis point increase in CRAR (capital to risk-weighted assets ratio).
• These unsecured loans affected by the RBI move (Rs 14.8 lakh crore) make up only around 9.8 per cent of total outstanding loans (Rs 151.5 lakh crore) as of September 2023.
• The move might favourably affect the non-bank credit.
• The impact of the move will also be felt on the Corporate Bonds.
• Higher capital requirements are expected to moderate the growth of loans.

Other Incidental Impacts of the Move

• A material increase in the rates charged on unsecured loans by banks and NBFCs Higher cost of borrowings for large and small NBFCs (including fintechs)
• A high proportion of unsecured retail loans in their assets under management.
• Higher mobilisation of capital by NBFCs into unsecured lending to cater to the additional capital requirements.
• Sudden withdrawal of banks and NBFCs from the consumer loan market

Exclusions from the RBI Directives

• The RBI circular affects consumer loans in general but excludes
  • Housing loans
  • Education loans
  • Vehicle loans
  • Loans secured by gold and gold jewellery.

Countercyclical Measures of RBI

• The current regulatory steps taken by the RBI may be called countercyclical measures.
• These types of actions refer to the measures both monetary and fiscal.
• These measures stabilise the business cycle by reining in economic activity during booms and bolstering it during downturns.

Prelims Takeaway

• Non-banking Finance Companies
• CRAR