In a bid to encourage the flow of credit to consumers, the Reserve Bank of India on Wednesday announced its decision to reduce the risk weight on unsecured consumer credit, including personal loans, to 100% from 125% earlier. The proposal, however, leaves risk weight on credit card receivables unchanged.
The central bank will release guidelines for the same by the month-end. This move will help banks with capital conservation. Even though these loans are unsecured, banks usually give these loans against salary or to pensioners or customers known well to banks. The likelihood of delinquencies for such loans is the lowest, said the head of a public sector bank.
IBA chairman Sunil Mehta said, "To give further impetus to the retail segment, reduction in the risk weight for consumer credit would encourage banks to take more exposure to this sector. Up to June 2019, the retail credit growth of 16.6% year-on-year is far higher than the overall credit growth of 11.1%. By the time the festive season sets in, the lower lending rate would help boost the domestic demand."
At face value, participants have largely opined the move will help free up capital, providing more room for banks to lend. However, some analysts have suggested the announcement is neutral at best, indicating that more conservative banks may not necessarily funnel capital back into the retail lending, instead choosing to make higher contingent provisions.
The move is largely expected to benefit some mid-sized public sector banks and small finance banks that are eager to increase their retail portfolio, but are starved for capital.