Reduction Of Risk Weight On Consumer Loans Credit Negative, Says Moody’s
The Reserve Bank of India (RBI) logo is displayed inside the central bank building in Mumbai, India. (Photographer: Karen Dias/Bloomberg)

Reduction Of Risk Weight On Consumer Loans Credit Negative, Says Moody’s

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Reduction in the risk weight on consumer credit by the Reserve Bank of India is credit negative as it may lead to increased exposure by lenders to this loan segment, says a Moody’s report.

The Central bank on Sept. 12 announced the reduction in the risk weight for consumer credit, including personal loans, but excluding credit card receivables, to 100 percent from 125 percent.

“The reduction in the risk weight on consumer credit is credit negative as it will encourage banks to increase their exposure to this loan segment at a time when credit risks are already increasing from a slowing economy,” global rating agency Moody’s said in a note.

It will lower the capital requirements and thus the loss-absorbing buffer on these loans, the agency said.

Recent data has pointed to a sharp deceleration in economic and consumption growth in the first quarter of fiscal 2020, when real gross domestic product growth slipped to a multi-year low of 5 percent, within which private consumption grew only 3.1 percent.

“This raises the risk that asset risk on unseasoned personal loans will rise as a result of potential deterioration in household financial conditions,” it said.

Between fiscal 2013-2019, personal loans reported a strong compound annual growth rate of around 20 percent, much higher than 11 percent in overall banking system loans in the period.

Personal loan growth has been particularly strong among large private sector banks.

A benign credit environment, characterised by relatively low credit costs across all key retail loan segments, was a key driver of this growth as it prompted banks to focus on personal loans for their higher yields, the note said.

The agency said within its rated banks, HDFC Bank Ltd. has higher exposure to the personal loans segment and are thus more vulnerable to the potential rise in asset risk as a result of this development.

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