Finance Min urges NBFCs to exercise caution in lending without over extending
Fin Min advises NBFCs to lend with caution, balance enthusiasm with prudent risk management to ensure stable financial practices
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Hyderabad: Finance Minister Nirmala Sitharaman on Thursday said NBFCs and small finance banks need to remain cautious while lending as suggested by the Reserve Bank.
Speaking at 'DATE with Tech' event here, Sitharaman cautioned that NBFCs and small finance banks should respect the red line and should not go too far in their enthusiasm. "Enthusiasm is good but sometimes it becomes a bit too far for people to digest. So as a measure of caution the RBI has also alerted small finance banks, NBFCs to be careful that they don't go too far too soon and face any downside risks later," she said.
Reserve Bank Governor Shaktikanta Das on Wednesday had said the central bank's tougher stance on unsecured loans earlier this month is a "preemptive" move aimed at ensuring financial stability. Following a massive rise in unsecured lending and delinquencies, the Reserve Bank on November 16 tightened the norms for unsecured consumer credit, asking banks and NBFCs to assign a higher risk weight. As a result, it has increased the risk weight on unsecured consumer loans and on credit cards by 25 percentage points to 125-150 per cent. This had analysts pegging the capital cost, on banks alone, going up by at least Rs 84,000 crore.
"It has been decided to increase the risk weights in respect of consumer credit exposure of commercial banks (outstanding as well as new), including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery, by 25 percentage points to 125 per cent," the RBI circular had said.
A higher risk weight means that lenders need to set aside more funds as a safety net for consumer loans, which could make such credit more expensive. It restricts banks' lending capacity as they have to set aside more funds for solvency. A similar raise has been effected in the case of credit card receivables, as per the circular, on regulatory measures towards consumer credit and bank credit to non-banking financial companies too. As a result, the risk weights on credit card exposures now have been increased by 25 percentage points to 150 per cent and 125 per cent for banks and NBFCs.
The bank credit outstanding to the personal loans segment was Rs 48,26,833 crore as of September 2023, up nearly 30 per cent over the same month of 2022. On bank credit to NBFCs, the circular said the risk weights on such exposures of banks have also been increased by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100 per cent.
The RBI also asked all the entities regulated by it to review their extant sectoral exposure limits for consumer credit and put in place, if not already there, board-approved limits in respect of various subsegments under consumer credit. "In particular, limits shall be prescribed for all unsecured consumer credit exposures," the circular had said.
