Timely intervention?

In a bid to avert potential risks stemming from the soaring growth in certain segments of retail credit, Reserve Bank of India (RBI) Governor Shaktikanta Das recently sounded cautionary notes in his bi-monthly monetary policy statement. The central bank, in its policy document following the statement, has implemented measures to address these concerns by increasing the risk weight of consumer loans and bank credit to non-banking finance companies (NBFCs). While the move appears to be a step in the right direction, questions linger about its timeliness and efficacy. The RBI's decision to raise the risk weights for consumer credit exposure of commercial banks and NBFCs from 100 per cent to 125 per cent is a response to the escalating growth of credit in these sectors. Specifically, for bank credit card loans, the risk weights have been hiked from 125 per cent to 150 per cent, and for NBFCs, from 100 per cent to 125 per cent. Additionally, risk weights for loans to NBFCs with lower credit ratings have been increased. The rationale behind the RBI's intervention is clear – to curb the potential build-up of disproportionate credit that could lead to financial instability. The recent history of financial crises, both globally and in India, serves as a stark reminder of the dangers associated with unchecked lending in specific segments. The subprime mortgage crisis of 2008 is a testament to the havoc that can be wreaked when financial institutions engage in excessive and imprudent lending practices. However, the pertinent question arises – has the RBI's move come at the right time? The share of unsecured loans, which are often riskier, has already surged to over 30 per cent of total retail loans, a significant jump from sub-20 per cent just five years ago. The efficacy of the RBI's intervention at this juncture remains uncertain, raising concerns about whether it will be sufficient to reverse the negative trends. It's crucial to acknowledge the historical context of such interventions. The aftermath of the 2008 financial crisis witnessed a paradigm shift in the perception of personal loans. Pre-crisis, there was a prevailing belief that personal loans were relatively safer and carried low levels of risk. However, the crisis unfolded a different narrative as the US housing market collapse triggered a global financial meltdown. In the Indian context, a similar pattern emerged before 2013 when the banking sector excessively lent to the industrial sector, contributing to the looming non-performing asset (NPA) crisis. The scars of that period are still evident, underscoring the importance of vigilant oversight to prevent a recurrence of such financial distress. The present scenario echoes past trends in the personal loans segment. Although the share of personal loans decreased from 25 per cent in 2007 to 17 per cent in 2013, it has experienced a resurgence since then. Banks, possibly learning from the industrial sector debacle, shifted their portfolios towards personal loan categories, resulting in the share doubling to touch 32 per cent. While the RBI's recent measures are a commendable effort to address the looming risks, they may be seen by some as reactive rather than proactive. The challenge lies not only in addressing the current trends but also in preventing the reoccurrence of financial crises in the future. Additional measures, both by the RBI and the government, are imperative to fortify the financial system and ensure a robust defence against potential distress. To sum up, the RBI's decision to increase risk weights for certain types of credit is a necessary step, given the historical precedents and the current trajectory of credit growth. However, the timeliness of this intervention is questionable, and it remains to be seen whether it will be sufficient to mitigate the risks associated with the escalating trend in personal loans. A more comprehensive and proactive approach is needed to safeguard the financial system from potential crises, emphasising the importance of continuous vigilance and pre-emptive action.