Moody’s Investors Service on Monday said the Reserve Bank of India’s decision to impose stricter norms for unsecured personal loans is positive. The rating firm described the revised rules as credit-positive and said lenders will now be required to allocate increased capital to such loans, thereby improving their loss-absorbing buffers.
Last week, the banking regulator, RBI, had increased the risk weight on unsecured retail loans, credit cards and lending to non-banking finance companies (NBFCs) by 25 percentage points. The rating agency said unsecured loans have been rising over the past few years and as such, financial institutions face the possibility of a surge in credit costs in the event of a sudden economic or interest rate shock, PTI reported.
“Tightening of underwriting norms through higher risk-weighted assets is credit positive as lenders will need to allocate higher capital to such loans, thereby improving their loss-absorbing buffers and their leverage,” Moody’s said in its statement. “The appetite for development may diminish.”
The credit rating agency said that over the past few years, the unsecured lending space in India has become increasingly competitive, and banks, NBFCs and fintech (financial technology) companies are actively promoting loans in this space. Over the past two years, personal loans grew by about 24 per cent, while credit card loans grew by an average of 28 per cent, while the overall banking sector saw credit growth of 15 per cent.
“We expect banks to be able to absorb the higher risk load on their capital as the overall banking sector exposure to unsecured retail loans is small at around 10 per cent of loans by September 2023 and the overall capitalization of the sector remains at historically high levels. Is. The common equity Tier 1 ratio by March 2023 was 13.9 percent, Moody’s said.
Also, the agency said the impact of the new rules may vary between lenders depending on the riskiness of the unsecured loan. Only last week, S&P Global Ratings had said that the banking regulator’s decision is expected to have an impact of 60 basis points on the capital adequacy of banks. This decision may result in an increase in lending rates, reducing credit growth and increasing the need for fundraising among weaker lenders.
Also read: Edtech start-up Physics Wala may lay off 120 employees