CAN THE RBI SLOW INDIA'S RETAIL LENDING BINGE?

Banks are directly and indirectly giving out more and more unsecured loans

- Vivek Kaul

On 6 October, Shaktikanta Das, the governor of the Reserve Bank of India (RBI), said: “Certain components of personal loans are… recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress."

What RBI terms as personal loans are known as retail loans in common parlance. These include housing loans, advances against fixed deposits, advances to individuals against shares and bonds, credit card receivables, education loans, vehicle loans, loans against gold jewellery, consumer durables loans and what you and I refer to as personal loans.

Das’ October statement was a clear sign about the Indian central bank getting worried about banks and non-banking financial companies (NBFCs) giving out retail loans—in particular, personal loans and credit card receivables—at a pace it wasn’t comfortable with. Both personal loans and credit card receivables are unsecured loans, in the sense that there are no underlying assets against which the borrowing has been carried out, like is the case with a housing loan, where the lending is carried out against the house which is being bought using the loan. In case of a default, the house can be sold and the bank can recover the outstanding loan amount. Such a facility does not exist in case of unsecured loans. Hence, they are more risky and their rapid growth has RBI worried.

On 16 November, RBI followed up Das’ October statement and announced that it was increasing the risk weights associated with retail loans and banks would now have to allocate more capital against the retail loans they give out. From this, the central bank left out housing loans, education loans, vehicle loans and loans against gold jewellery.